Tuesday, January 27, 2009

Sickness is bliss

Being a sick company is more healthy option here…

Bailouts are not a new phenomenon in Indian context, though, the Indian version of bailout may not be exactly same as practiced world over. Many a time, governments have taken over sick private companies and helped them with fi nancial aid. And, while in US it is the long term impact on the economy that is taken into consideration before deciding over a bailout, in the case of India being sick itself is a suffi cient condition to get a decent bailout.

Since the inception of Board for Industrial & Financial Reconstruction (BIFR), almost 5,400 companies have been registered for consideration to be given sick status. In the last one decade alone, BIFR has seen more than 3,600 cases being registered with similar pleas. Th ough most of them are small scale, one oft en fi nds large private companies as well. And most of the time they go sick not because of market condition, but, due to bad management, over-staffi ng or other such avoidable practices. Being a sick company gives them a freedom of not paying pending loans and additionally receiving fi nancial support from the listed banks. Big companies like LML, ABCL, the Modi group have taken shelter of BIFR and saved huge money through tax and loan exemption. And not surprisingly, almost all the owners of these companies are leading lavish lifestyles aft er destroying the investors’ wealth. Th e burden, however, is suff ered by the taxpayers of the country. It is very rare that a corporate or promoter is put behind bars or even fi ned for mismanagement or corporate fraud. More than 50,000 cases related to crimes committed under the Companies Act, 1956, are pending in India’s courts but less than 5-6 per cent are convicted. Ironically, in India, companies become sick but not their promoters. So, while the employees' wages might not get cleared for months, the vendors and creditors might be forced to feel happy with only a part settlement of receivables and the promoters of such sick and trash companies would continue to travel in big sedans. Contrast this with what happens in the US. One might argue that even US gives huge bailouts, the way the massive bailout of the banking system happened, but over there one would hardly fi nd a promoter benefi ciary of the bailout packages. On the contrary, if a corporate is found guilty of fraud, not only the company is allowed to sink under its own burden, but, the promoter or the CEO becomes the fi rst person to get punished for the wrong doings. Since 2002, more than 1,200 corporates have been convicted for corporate crimes in US, including top offi cials of companies. While Kenneth Lay of Enron was convicted for 24 years, Ronald Ferguson of AIG was convicted for 2 years, Bernard Ebbers of WorldCom for 25 years and John Rigas of Adelphia Communication for 15 years. Also, in case of auto bailout, Bush made sure that in exchange of $17.4 billion rescue loans the government has the option of becoming a stockholder in the companies. Additionally, if the auto company fails to prove viability in future, they will have no option but to pay back the loans and they will have to do away with executive heft y pay packages and perks.

India desperately needs a vigilant and effi cient system that penalises corporate wrong-doing and not just help them by tagging them as sick companies (even if they aren’t). Th ere have been several Indian versions of Enron or WorldCom like bankruptcy, but we didn't have US versions of conviction here. Don’t be surprised if Raju eventually ends up being a MP and fi nally the Finance Minister. Strange things happen in India and Raju would surely take forward the legacy.

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