MMTC, STC, PEC resurrection: There is only one way to make this rewarding; how to make it happen

By: |
Published: August 25, 2017 4:39:32 AM

The resurrection of MMTC, STC and PEC will be rewarding if they are empowered to “trade” in the real sense

To upgrade the performance of three PSUs—MMTC, STC and PEC—the government is reportedly considering their restructuring and future role, with the aid of a consulting firm.

To upgrade the performance of three PSUs—MMTC, STC and PEC—the government is reportedly considering their restructuring and future role, with the aid of a consulting firm. Similar attempts were made earlier too, in 2002-03, yet status quo was maintained. In 1989-90, these three companies were put under the umbrella of an outfit called the Bharat Business International Ltd (BBIL)—to prevent cross-competition. Under this dispensation, the chairman of BBIL reported to the ministry of commerce, and the heads of the three PSUs were responsible to the chairman of BBIL. This arrangement was discontinued in less than two years as it created dual centres of responsibility, as to who will be accountable for the performance of PSUs, the chairman of the PSU or BBIL’s chief?

These three PSUs—STC, MMTC and PEC—were established in 1956, 1963 and 1971, respectively, and acted as canalising agencies to cater to the needs of socialist policy regime in India that lasted till 1990. The Director General of Foreign Trade, earlier called the Chief Controller of Imports and Exports, issued licences for import/export of canalised items to the three companies as per the quota or trade plan provisions of East European countries. Their primary task was to import from GCA (general currency area) or RPA (rupee payment area) against such licences, and then to distribute imported items to actual users as per the directions of a specified ministry. Canalisation meant monopoly of a particular business and, therefore, the PSUs were not exposed to any competition. They were virtually government departments dependent upon work assigned by different ministries and earned about 1-2% service charge.

When the Soviet Union ceased to exist around 1990, Eastern European trade was disrupted. Simultaneously, the Indian economy got liberalised. These three companies had to survive in open market environment, and the distinction in commodities to be dealt amongst them disappeared. MMTC and PEC started business in agro commodities, which was the forte of STC. Similarly, STC entered the business of fertilisers, which was handled by MMTC. Likewise, the import of bullion (gold/silver) and coal, earlier done only by MMTC, was also undertaken by STC and PEC. Export of engineering and allied items under the aegis of PEC was also picked up by the other too. Canalised export of railway rolling stock through PEC ended. MMTC diversified into six or more joint ventures and has been able to create a niche in mineral exports and a brand name in bullion business.

PSUs as NBFCs

The total export of agro, minerals and other commodities of these three PSUs in the three years of FY 2014, 2015 and 2016 is Rs 14,935 crore, while bullion imports are Rs 50,671 crore. The overall business is import-intensive, while efforts are made to generate export with the assistance of other private or public companies, called “associates”. Since in-house expertise in commodities is not comparable to what the market demands, PSUs rely upon costings and technical parameters provided by associates, especially for export. Associates seek financial help—called pre-shipment credit from these PSUs—for the execution of export business and “letter of credit facility” (LC) for import business against 10-20% margin money. PSUs from mid-1990s were actively acting like NBFCs (non-banking financial companies). Associates indemnify PSUs against any risks or losses. With zero risk to PSUs on paper, service charges are minimal—not more than 1-2%. Experience reveals that in the process of de-risking, these very associates become the risk by creating counter liabilities for PSUs. Either due to failure or mismanagement or hyper-speculation of associates or even market volatility, the businesses, exports and imports financed by PSUs resulted in partial or full defaults, especially after the economic meltdown of 2008. Just as NPAs of PSU banks have created a problem of twin balance sheet, likewise such defaults have substantively eroded profits and net worth of MMTC, STC and PEC.

Intervention business

In the last 15 years, PSUs are frequently carrying out “buy and sell” operations of export or import as an interventionist business for the government. For example, the export of wheat and rice for FCI; import and distribution of pulses for the Department of Consumer Affairs. Any loss incurred on such imports/exports is to the government’s account—thus it is 100% de-risked. The official guidelines mandate that buying/selling be done through tendering—which is time-consuming and imperfect too. Such tenders inflate international prices. The Chinese do such trades quietly. A bidder with weak credentials can quote attractive price but may renege from the contract.

Trading as distinct from buying/selling

Trading involves cultivating buyers or sellers in India or abroad, taking logical market risk, hedging in future markets to mitigate risk, positioning for purchase or sale by going long or short. In the absence of these activities, it will be erroneous to call them “trading” enterprises. All businesses entail profit and loss. But in a governmental set-up, loss is an unpardonable sin. Profit is shared by all; loss is meant to punish a few who handled the deal. Officials saddled with such a rulebook of fear cannot do trading. If ethos of business is not geared for trading, then merging or any other permutation may not improve the performance of any newer entity. The ratio of export to turnover is dismal currently (see chart). Imports, especially of gold and silver, have a much higher percentage in turnover—the upside being 76% in STC in 2013-14. Bullion is sold at a nominal margin but has a very high risk probability. The continuation of bullion imports through PSUs can be reviewed, though MMTC is a dominant national player. The issue being whether bullion imports can be privatised to curtail it? The speed of communication has jumped in the last decade, where real-time information is available to all and sundry on various commodity exchanges and on Google. What is the “extra input” that PSUs can provide these days. With financial muscle dwindling, why would a private party engage with a PSU? The resurrection of these PSUs will be rewarding if they are empowered to “trade” in the real sense, allowed to take reasoned risk, develop competence in select commodities, demonstrate significant export performance, reduce dependency on associates/private parties and government-gifted business, given freedom to trade with or without tender depending upon circumstances and offer something “extra” to counter parties. Restructuring, though a laudable idea, but devoid of the above element, may not be meaningful.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.