A booster dose

The Government announces a package of measures aimed at reviving the economy, but there are doubts about their effectiveness.

SUDHA MAHALINGAM
in New Delhi

THE Bharatiya Janata Party-led Government's demonstrated preference for taking recourse to promulgation of ordinances in order to introduce important legislation appears to have acquired a sense of urgency in the run-up to the Assembly elections in three States and Delhi.

On October 24, addressing the 71st annual session of the Federation of Indian Chambers of Commerce and Industry, Prime Minister Atal Behari Vajpayee announced a sweeping package aimed at the revival of the economy. This was followed a day later by the announcement of further measures by Finance Minister Yashwant Sinha.

One of the controversial proposals in the package - the proposal to allow corporates to buy back their own shares from the market - and the proposed changes to the rules governing inter-corporate loans and investments are to be introduced in the form of an ordinance which, according to reports, has been cleared by the Cabinet and sent to the President for his signature.

Slightly different versions of the buyback and related proposals are already part of the Companies Bill that was introduced by the United Front Government last year (it is now before the Rajya Sabha). In the light of this, the reasons for rushing through select provisions of this bill by issuing an ordinance are apparent.

Ever since the new corporate takeover code was introduced, companies have been lobbying for the introduction of the share buyback option. The reason cited was the fear among promoters with a minority shareholding that well-managed companies would be taken over. Buyback can prevent such takeovers. The move will also enable companies to streamline their capital base to targeted levels and improve the earnings per share; this in turn is expected to push up share values and perk up the market. The stock market's immediate reaction was positive: the Bombay Stock Exchange Sensitive Index (Sensex) rose 105 points on October 26.

Also on October 24, the Securities and Exchange Board of India (SEBI) announced that the limit on creeping acquisition by promotors holding 15 to 75 per cent of the shares would be hiked from 2 per cent a year to 5 per cent a year, subject to SEBI's prudential guidelines. The trigger-level for open public offer, which is now 10 per cent of the capital, is proposed to be raised to 15 per cent.

N. BALAJI
Union Finance Minister Yashwant Sinha.

IN anticipation of the introduction of the share buyback option, over 150 corporate firms are learnt to have secured their shareholders' approval for buyback. However, SEBI may introduce a clause which will require the companies to get specific approval from shareholders for the buyback in addition to the enabling approval they may have already obtained. However, not all corporates appear to be overly enthusiastic about the introduction of buyback option; many companies are strapped for liquidity and therefore cannot exercise this option.

How many companies will buy back their own shares even if they have the cash is a moot question. In any case, only profit-making companies will consider the option, and their buyback decision will be influenced by economic considerations. Promoters of potentially profitable companies, who now have a minority stake in their concerns and where the rest of the equity is widely dispersed or held by institutional sleeping partners, are likely to avail themselves of the buyback option, especially at this juncture when prices are depressed. One other category that is likely to exercise the option is the promoters of not-so-profitable companies which have idle assets, including real estate, which can be stripped once they gain adequate control.

Some analysts believe that certain companies are already resorting to share buyback through investment companies and front companies and that the Government is only legitimising this practice. They also point out that the buyback measures provide scope for malpractices. For example, while provisions for the imposition of penalty can be introduced in the law to prevent companies from trading in shares that have been bought back (and which should therefore have been "extinguished"), their enforcement will prove to be tricky; the small investor is likely to be the worst hit by such malpractices.

There have been press reports that cash-rich public sector undertakings such as Videsh Sanchar Nigam Limited and oil companies may buy back Government shares. Such a move will certainly help the Government achieve its disinvestment target, but its implications for the investment and expansion prospects of these companies, which will be ploughing back their reserves into buying back their shares, need to be considered.

Ceilings on inter-corporate loans and investments, which are both pegged at 30 per cent of the paid-up capital, are proposed to be raised to 60 per cent of the paid-up capital or 100 per cent of reserves, whichever is higher; they will no longer require Government approval under Sections 370 and 372 of the Companies Act. This move is expected to release several hundred crores of rupees of inter-corporate investment proposals, which are pending approval by the Department of Company Affairs.

The Government also announced a proposal to set up a six-lane highway corridor, north to south and east to west, at a cost of Rs.28,000 crores. The highway is to be built with cement - which will boost the cement industry - and work is to start in 20 different locations by next year. However, the sources of finances for this mammoth project have not been clearly specified - except to say that it will have maximum private sector participation. If the Government expects funds released from share buybacks - if it takes place in significant quantities - to flow into this sector, it will have to ensure that the returns will be attractive enough. There are reports that the funds raised by the Resurgent India Bonds are likely to be deployed in the highway corridor project.

THE economic policy package unveiled by the Government was followed on October 30 by a mid-year review of the credit and monetary policy by the Reserve Bank of India. In an attempt to address structural issues, the RBI credit policy left untouched the bank rate, the cash reserve ratio and the repo rate. Growth estimates for 1998-99 have been revised downwards from 6.5 per cent to 6 per cent. In an attempt to introduce tighter prudential norms for the banking system, the capital adequacy ratio is to be increased to 9 per cent from March 31, 2000. The income recognition and provisioning norms for advances guaranteed by the Government have been brought on a par with those for other loans. The RBI has also prescribed new risk-weight and exposure norms for securities floated by public financial institutions. It has prescribed that foreign exchange open positions carry 100 per cent risk weight from March 31, 1999.

On the monetary policy front, the RBI advocates a significant reduction in the fiscal deficit over the next two or three years as a matter of national priority. Expressing concern over the gloomy prospect for industrial growth coupled with a high rate of inflation at 8 per cent and the volatility of the external sector, RBI Governor Bimal Jalan warned that further monetary tightening would be resorted to if there was greater inflationary pressure. The primary reasons for the money supply growth were a sharp increase in aggregate deposits (11 per cent this year as against 7.5 per cent in the previous year) and higher RBI lending to the Government (up by Rs.11,010 crores this year compared to a decline of Rs.8,947 crores last year); the RBI has therefore had very little leeway to manage the monetary system, given the Government's borrowing programme. It said that the Government's net borrowing is "undoubtedly high".

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