As Data Inc focusses on the banking, finance and insurance areas, the acquisition was expected to be a strategic fit. This would have strengthened Polaris Software's expertise in banking aimed at the global markets. Besides, Data Inc has a good client base and a geographical reach spanning the US, UK and India.

The price for the acquisition was $21 million, to be paid through a composite stock-cum-cash offer. To finance the acquisition, Polaris was likely to make an ADR offer or go for private placement of equity.

The repercussions of the refusal could be serious. Not only will this damage the reputation of Polaris, but also the general perception towards Indian software companies.

If the plaintiff or Data Inc could win the case, which looks most likely based on the facts of the case, the Indian company might have to shell out a huge sum as compensation.

It seems that Polaris has taken the decision to cancel the memorandum of understanding (MoU) based on a leading consultancy firm. The said firm has gone on record saying that the cash outflow due to acquisition would have stretched the company's resources. However, the company always had the option of increasing the ADR issue or private placement issue size to reduce outflow of internal cash.

The possibility of either issue failing was reasonably low as the stock is one of the favourite software stocks. So it is rather surprising to have cancelled the MoU before gauging the response. Perhaps, it has discovered something unknown about Data Inc, which has prompted the cancellation move. But then, it should have carried on due diligence before entering into the MoU.

The company is testing a network management system (NMS) software, called Cygnet. The software, when installed in local area networks (LANs) and wide area networks (WANs), is designed to manage voice and data traffic, and manage bandwidth within the network.

It is also planning to set up another software development centre at Chennai, in addition to its existing five across the country. All these positive developments were improving the image of the company on the bourses.

This incident may make Indian corporates think twice before announcing acquisitions and tie-ups. The share, of Rs 5 face value, is quoting at Rs 600. There has been a steep fall from the high of Rs 1,600, although part of it can be attributed to the bearish market in general.

Government borrowings
There is a flurry of data to indicate the impending signs of a slowdown in the economy. The CSO data on the GDP for the first quarter (April - June) of the present fiscal confirms the slowdown.The GDP figures have witnessed a negative growth of 1.1 percentage points to 5.8 per cent. The CII-Ascon study and the NCAER survey on the business optimism survey only underline the fact.

To add to the gloomy picture, the government's borrowing programme for the year 2000-2001 too seems to be slower in the first half. The normal practice is to complete as much borrowing as possible in the first half of the financial year as commercial credit picked up in the second half, which is traditionally the busy season.

The government's borrowing programme for 2000-01 is on schedule, according to a senior Reserve Bank of India (RBI) official. However, the data released by the RBI give a contrasting picture. By the end of July the government had completed borrowings to the tune of Rs 42,183 crore as against Rs 46,630 crore in the comparable period in the previous year.

The aggregate amount seems quite steady and in line with the previous year figures. However, it must be considered that the gross borrowings for the fiscal 2000-01 are pegged higher at Rs 1,20,000 crore as compared to the previous year.

Although, this year there have been lower devolvements or private placements as compared to the last year. These figures stood at Rs 1,961 crore as compared to Rs 23,500 crore in the previous comparable period. This is also reflected in the open market operations of the RBI, which were substantially lower than last year's figures.

This in effect means that the bulk of the government borrowings would have to be completed in the busy season.

Hence the central bank will be more active in the second half of the present fiscal. The government and the industry would be competing with each other for larger funds. This could result in a crowding-out effect.

Although, the liquidity position in the system seems easy, as for now, the interest rates are bound northwards. Also, considering the larger import bill, on account of the recent hike in petroleum and related goods prices, an inflationary spiral can not be ruled out. The chasm in the current account is wider and no solace is expected from the busy season credit policy. Definitely, all this does not augur well for the industry.

Manish Joshi and Sachchidanand Shukla