Will IFCI be better off as a PSU? Its boss doesn't think so

By R Jagannathan

After having brought so many public sector companies in so many sectors to their knees - oil companies Indian Oil, BPCL, and HPCL, Air India, Bharat Sanchar Nigam and MTNL, to name just a few - one would have thought the government’s passion for running (or is it ruining?) commercial entities would have dimmed.

But no. Last Friday (24 August), the government announced that the Industrial Finance Corporation of India (IFCI) would be brought back under government control through the conversion of debentures worth Rs 923 crore into equity. This will take the government’s stake to 55.5 percent , up from a level below 50 percent right now.

From being a company with a large government holding, IFCI will become a full-fledged public sector company again.

The markets have given the government’s re-entry in the driver’s seat a solid thumbs-down, with the share crashing by over 20 percent in two trading sessions (Monday’s close: Rs 27.65).Worse, the conversion of Rs 923 crore of debentures into equity will be at par (Rs 10), which will lead to a major dilution of minority interest in the company. The Rs 923 crore government investment came in two tranches of Rs 400 crore and Rs 523 crore in 2001 and 2002.

One man who is on the war-path is IFCI’s CEO and Managing Director Atul Kumar Rai, who has proposed that he will repay one of the loans to avoid taking IFCI back to the government’s stable. But he is also clear that as the sovereign the government can do anything.

He told CNBC TV-18 in an interview : “The government as a sovereign, of course, can do whatever it likes. I think that is the distinction - whether government is trying to act as a sovereign with us and is trying to treat IFCI in the same way, or government is actually willing to respect the right of IFCI as a corporate citizen.”

There’s little doubt that IFCI, when it was earlier under government control, had made a mess of its mandate. After 60 years in existence, it managed to rack up losses of Rs 5,000 crore in the early part of the last decade. It took long years of professional management to bring it back to a measure of profitability.

This rescue effort was, of course, helped by government bailouts that included loans that could be converted to equity.

Says Rai: “IFCI, as a government entity, existed there for 60 years; it ended up with accumulated losses of about Rs 5,000 crore. From there until today, we have covered that ground; now our net worth is positive in the range of Rs 4,500 crore.”

Rai will try his best to talk the government out of its folly, but he adds with a tinge of realism: “Legally, I am very certain that IFCI is on very firm ground (on its right to return the loan and avoid conversion) but it can always be undone by the might of the sovereign power of the state - like another entity can be undone.”

To be sure, IFCI’s future as a government company will put it in the same category as banks, which can then hope to stay afloat on the basis of frequent government-injected capital.

The issue is one of moral hazard. As a government company, IFCI could well slink back to sloth on the certainty that if it gets into trouble, government will bail it out.