A Different Direction Seems Okay, But Why Now

Updated: Mar 26 2004, 05:30am hrs
To assess the appropriateness of the IDFC-SBI mer-ger move, it is necessary to gloss over some facts.

IDFC was set up in January 1997 as a specialised financial intermediary for infrastructure. It was started with the initial paid-up capital of Rs 10,000 million. The share of domestic investors (20 per cent) in the total paid-up capital was as follows: ICICI and SBI hold 6 per cent of paid-up capital each, HDFC and UTI account for 3 per cent of paid-up capital each and IFCI accounts for 2 per cent of IDFCs total paid-up capital. The government accounts for 40 per cent of paid-up capital (government of India 20 per cent, Reserve Bank of India 15 per cent and IDBI 5 per cent). The remaining paid-up capital (40 per cent) has been subscribed by the foreign institutional investors (FIIs).

IDFC later received subordinated debt from the government of India (GoI) and the RBI of Rs 3,000 and Rs 3,500 million. In brief, IDFCs total capitalisation is, at present, Rs 16,500 million and a substantial proportion of it. Hence RBI, SBI and GoI account for almost 65 per cent of the capitalisation of IDFC. The substantial proportion of capitalisation can be regarded as one of the reasons for GoI wanting to give direction to the way the institution needs to operate. However, it needs to be seen if the need for a different direction is justified or not. Select facts pertaining to the operations of IDFC, as on December 31, 2003, are given in the table.

As can be seen from the table, the IDFC has focused on power, roads, telecom and urban infrastructure. The priority areas focused by it are no different than those reflected in the policy announcement of the GoI. Hence, the question of giving a different direction to the operation of the company does not seem to be justified.

The gross approvals and gross disbursements have been rising of late. In view of this again, there hardly seems to be a case for enforcing a merger. Another argument in favour of merger is that the bigness of the FIs enables them to manage risks better. If this is so, then it should have been the IDFC which should have sought the merger rather than such a merger being thrust upon it.

Last, but not the least, if the GoI and RBI wish to withdraw their resources which have contributed to the capital base of the company, there is also a need for them to justify why in the initial place they had done so and whether conditions have changed so drastically that they need to reverse their past decisions.

The writer is professor, HSS Department, Indian Institute of Technology, Bombay.