India’s Uniquely ‘Socialist’ State, Random And Whimsical!
What explains a government’s astonishing success with Satyam in 2009 being completely forgotten a decade later, asks Raghav Bahl.
Imagine you are just one answer away from a million dollars on Kaun Banega Crorepati (Indian TV’s version of Who Wants To Be A Millionaire). The towering show host asks in a soft baritone, amplified by electronic reverb, using intriguing pauses, creating tantalising tension:
Q: Bharat sarkar (the Indian government) is staring at three failed companies. Which one will it bail out?
A: The sarkari (publicly owned) company? Or,
B: The private but systemically critical company? Or,
C: The merely private company? Or,
D: None of the above.
You suddenly relax, a million dollars gleaming in your eyes. Heck, what an incredibly easy question for a million bucks. You lean forward, supremely confident, and answer in a measured tone: “A, the sarkari or publicly-owned company”.
Host (hissing his response): “Afsos, galat jawab! (Sorry, wrong answer). C, the merely private company, is the sahi jawab (correct answer).”
You slump, disbelieving. It must be a clerical mistake. Then you spring upright, determined to challenge the Anchor: “No sir, you’ve got it wrong. Our statist policymakers will never rescue a “merely” private company and allow a sarkari (publicly owned) one to go bust. It’s just not possible. I dare you to name these three companies”.
Host (amused): A is IL&FS; B is Yes Bank Ltd.; and C, the correct answer, is Satyam Computer Services Ltd., now part of Tech Mahindra Ltd. If you still don’t believe me, perhaps I should tell you their stories?
Here, listen (the soft baritone took on a harder tone)…
Nearly two years back, on a fateful day in September 2018, the government pulled the plug on Infrastructure Leasing & Financial Services Ltd., which was groaning under a debt of over Rs 90,000 crore. Bureaucrats asserted “it’s a private entity; the government should not back-stop its defaults; let the bankruptcy system work itself out”.
That was sheer folly. IL&FS was considered a quasi-sovereign entity, owned and controlled by a clutch of public sector giants, including State Bank of India and Life Insurance Corporation of India. It had already defaulted several times in the weeks leading up to the crash. It needed to repay a relatively paltry Rs 34,000 crore until March 31, 2019.
Its operating cash flow was negative, but it needed to be saved – otherwise, the contagion would be devastating. And it was.
The markets wiped out over Rs 10 lakh crore ($150 billion) of investors’ wealth. The credit economy gummed up. Public sector banks had to provide for direct exposure of Rs 40,000 crore in term-debt. Provident and pension/insurance funds saw an additional Rs 30,000 crore evaporate. Non bank finance companies, mutual funds, and others were forced to write off the balance Rs 20,000 crore.
(The baritone softened again) Afsos, galat decision (tragic, it was the wrong call).
And now, two years out, we also know that Rs 57,000 crore out of the Rs 99,000 crore of debt is being recovered. If only the government had infused those Rs 34,000 crore upfront instead of pulling the plug…
Yes Bank’s ‘Creative Destruction’
Anyway, let me jump straight to Yes Bank. Once upon a time, it was a poster boy of India’s private banks - until it imploded upon the alleged avarice and crimes of its suave co-founder. Forensic enquiries showed a frightening erosion of the loan book. Over Rs 2 lakh crore ($30 billion, or 1 percent of India’s GDP) in bank deposits were at risk. The government faced a Hobson’s choice – if it intervened, after having let IL&FS, a quasi-sovereign entity, go belly-up, it would be accused of ‘selection bias’ and nepotism; if it stood still, a fragile financial system could crack to smithereens.
Mercifully, the government marshalled its majority-owned battle-scarred titan, SBI – ahem, the same guy who had looked away as IL&FS blew up even though SBI was a principal shareholder of the defunct company – to jump in and rescue Yes Bank. SBI shoveled in a billion dollars, vowing to stay invested with a minimum 26 percent stake to calm nerves. A clutch of other punters put in more cash, ending with a couple of billion dollars raised from a public offer.
And lo behold, this week Yes Bank posted a tiny profit, signaling it was off the ventilator.
(Softening his baritone, the host said): Aur is tarah (in this manner), B, the private but systemically critical company was saved. However, now I will take you back ten years, to the story of C, the ‘merely’ private company, but one that was rescued even more aggressively.
Satyam (i.e. Truth) Was A Billion-Dollar Rip-Off
Satyam Computer Services was a multi-billion-dollar company spanning sixty-seven countries and six continents (it served over 650 global companies, 185 of which were Fortune 500 corporations). On Jan. 7, 2009, its founder, Ramalinga Raju, faxed a shocking confession to the stock exchanges:
“The Balance Sheet carries as of September 30, 2008
a. Inflated (non-existent) cash and bank balances of Rs 5,040 crore [then over $1 billion]...
The gap in the Balance Sheet has arisen purely on account of inflated profits over a period of last several years...
I am now prepared to subject myself to the laws of the land and face the consequences thereof.”
All hell broke loose. The Satyam stock tanked 78% and Indian markets fell over 7% before the stock was swiftly removed from the Sensex. Later that evening (India time), the New York Stock Exchange halted trading in Satyam. Broking firm CLSA called it ‘India’s Enron, an accounting fraud beyond imagination (and) an embarrassing and shocking episode in Indian corporate governance’.
On the third day, India’s Company Law Board used its exigent powers to sack the entire board of Satyam Computer Services; but unlike in the past, the government did not nationalise the company or take direct charge. ‘The current board has failed to do what they are supposed to do. The credibility of India’s IT sector should not be allowed to suffer,’ saying this, the Manmohan Singh government appointed a bunch of private-sector professionals with unimpeachable integrity and global credibility.
It was simply impossible to sell Satyam under the Securities and Exchange Board of India’s rigid pricing guidelines. To everybody’s surprise, SEBI took less than five weeks to notify new, flexible rules to handle abnormal situations.
On April 13, 2009, just three months after that fateful Jan. 7, Satyam Computer Services was sold to a joint venture of British Telecom and India’s Mahindra Group at Rs 58 per share. The Satyam stock more than doubled after it was re-christened Mahindra Satyam. Incidentally, this week, Tech Mahindra posted a handsome profit!
Epilogue
A good government is supposed to thrive on institutional memory. As it experiments, it accumulates wisdom, learning from successes and failures alike.
But our own government often behaves randomly, whimsically.
What else can explain its astonishing success with Satyam in 2009, which was completely forgotten a decade later, leading to the tragic failure of IL&FS in 2018?
And then, magically, one-and-a-half years later, the same government re-discovered its shining armour when it salvaged Yes Bank.
Why?
Why was IL&FS, a quasi-sovereign, and systemically critical operation, not saved? So much pain and destruction could have been avoided.
But then, inscrutable are the ways of the Mandarins of Raisina Hill…
Raghav Bahl is the co-founder and chairman of Quintillion Media, including BloombergQuint. He is the author of three books, viz ‘Superpower?: The Amazing Race Between China’s Hare and India’s Tortoise’, ‘Super Economies: America, India, China & The Future Of The World’, and ‘Super Century: What India Must Do to Rise by 2050’.