Ensure accountability
The term market economy is gaining currency these days. As the forces of demand and supply play a crucial role in shaping investment-decisions of corporate entities, it is essential that the domestic FIs use the emerging M&A opportunities to bring about an efficient play of market forces to reward shareholders and punish non-performing promoter groups.

Against the backdrop of the ongoing efforts to integrate Indian financial markets both domestically and internationally, the FIs need to change their mindset and break away from the conservative past. It is a very competitive world out there and the FIs need to encourage M&A deals among companies assisted and unassisted by them.

To begin with, FIs need to look at M&A possibilities in their own backyard. To be able to face rising competition, FIs need to look at the options of restructuring themselves. Sure, a few FIs have sounded out management consultants to work on restructuring programmes with an eye on improving their efficiency and productivity levels. Several FIs are seriously looking at downsizing their staff strength which is why they are working out attractive voluntary retirement schemes and retirement plans. They are even willing to offer monetary incentives and stock options. This should infuse new blood among the domestic FIs.

Operational bottlenecks
A look at the FIs should tell anyone that though they have plans and programmes, they are hamstrung by the discretionary powers of the government. That is why the autonomy debate has been going on for years. True, with entry barriers crumbling, the domestic FIs are facing stiffer competition from private sector players and the dividing line between them stands blurred. Yet, the FIs do not have total decision-making powers.

Such absence of decision-making powers makes the FIs very reactive and not proactive. FIs need to be proactive because they hold substantial stakes in companies assisted by them and have significant presence on the boards of these companies. If the FIs turn proactive, they can create enough wealth for the shareholders by encouraging M&A deals among corporate entities.

Market for control
What the FIs need to do is this: by virtue of holding substantial stakes in companies, these FIs can create a market for corporate control. By virtue of being pioneers in term-lending and thanks to the now controversial convertibility clauses, FIs had managed to acquire substantial stakes in India Inc. Not only in some industries, but across industries and across companies within an industry.

So, the FIs are better placed to create a market for corporate control, where interested suitors can approach the FIs with their bids and offers and the FIs can divest their stakes to such bidders if the price is right.

Such a market for corporate control is essential for the healthy development of the M&A industry. Controlling stakes in companies should be available for the asking. There should be a strong secondary market for corporate control. And only FIs can create such a market, thanks to their widely distributed shareholding.

FIs need to send strong messages that they would not hesitate to put their stakes on the block and invite acquirers who can deliver the goods if the incumbent managements of companies fail to perform. And the FIs should carry out this threat, if the managements continue to show non-performance.

The ground realities, however, are different. FIs do not have the freedom to be proactive. More often than not, FIs shield corrupt managements and continue to condone non-performance. All in the name of not destabilising the management of companies. What is the point in supporting corrupt and non-performing managements and how relevant is stability in such a scenario?

Such a lackadaisical attitude of the FIs show them as entities acting not in the larger interests of shareholders. Instances of non-performance and misgovernance are aplenty in the Indian corporate sector. But, hardly has been there instances where errant managements have been threatened with ouster by the FIs. Naturally, such an inaction reflects in FIs’ inability to hammer out investor-friendly mergers and acquisitions.

Not being able to make M&A decisions, the FIs have become veritable antithesis of the market economy, liberalisation and reforms. Why should the FIs act as proxies of the government? Why should they act as some extension of the government? Why cannot they become autonomous bodies working in tandem with the market forces? Had the FIs been market-driven, they would have allowed the Essar-Marathon deal to go through. And Essar group's FRN imbroglio would have been long sorted out.

Over the years, the FIs have managed to acquire a huge inventory of stakes in corporate India. Some of the companies, where the FIs hold substantial stakes, might not be delivering the goods. But, the FIs lack the enthusiasm and the spirit to take the bold decision of offloading their stakes and making the managements answerable and accountable for non-performance.

Dogs in the manger
So, the refrain is that the FIs are acting more often as dogs in the manger when it comes to encouraging M&A deals among corporate entities. India Inc needs to move in tandem with the global trends and work their hearts out in exploring all avenues to create shareholder value and wealth. If the FIs have not been able to do this so far it is solely because they lack the spirit, the drive and to a certain extent freedom to take bold decisions on the M&A front. Perhaps, the FIs feel that M&A is risky turf and they should go slow.

That is a warped notion with strong socialistic overtones. If the FIs are pro-active and the managements know well that the FIs will not tolerate non-performance, quite a few BIFR cases could have been avoided. And the Indian M&A scene would have been more vibrant.

So, the FIs ought to understand that there is no alternative to M&As when it comes to creating shareholder value and performing corporate entities. Only M&As can bring about efficient allocation of the scarce economic resources. All these FIs, which are into project funding, should realise that M&As have a vital role to play in project planning and financing.

For, quite a few corporate entities with expansion plans prefer to take the M&A route. They find M&As the best option to grow rather than go through the pains of setting up a greenfield project. But, they need some co-operation from the all-mighty FIs. Alas, the FIs have failed miserably in supporting acquisitions.

This is leading to a Catch-22 situation. Players in the Indian corporate world do not have necessary finance to fund greenfield projects and the funds-flush FIs are not willing to finance M&As. That brings the debate around another issue: why should not the FIs play an active role in encouraging M&As by funding them? Why should not they pioneer leveraged buyouts (LBOs) in India?

They should. But, first of all, they need to become market-driven in their outlook, more aggressive in their approach and more strategic in their planning.

Diluted roles
So, FIs should cease being defensive. They should leverage whatever powers they have in the larger interests of their fellow shareholders in companies where they hold substantial stakes. To an extent, the FIs need co-operation and support from the apex bank too. As long as the FIs remain second fiddles to the government and refrain from encouraging value-adding M&A deals, their roles would continue to remain diluted. In such a scenario, the FIs will be seen only as purveyors of project finance and not as cornerstones of the economy.