Make MSMEs earn profit, sell them off

Among myriad announcements, the equity fund of Rs 50,000 crore for MSMEs has the potential to be a winner

The COVID-19 shock has been massive. Aggregate supply and demand have shifted inwardly causing huge loss of output and staggering unemployment. Businesses must be supported because instead of flattening the COVID curve, the GDP growth curve has got flattened, as industrialist Rajiv Bajaj has said. The GDP is expected to go into a tailspin making it a very tough year going forward with bankruptcies becoming the norm, sparing neither big companies nor micro, small and medium enterprises (MSMEs).

The government, with its Rs 20 lakh crore package, is focused on preventing companies from bankruptcies. The Reserve Bank of India has become a lender of last resort, injecting liquidity, enforcing moratoriums, and along with the government, guaranteeing different types of loans besides strengthening financial systems.

Among myriad announcements, the equity infusion fund of Rs 50,000 crore for MSMEs has the potential to be a winner. Equity infusion through a “Fund of Funds”, operated via a mother fund and few daughter funds, will enable firms to survive, develop business scale and increase employment, encouraging them to get listed on the stock exchanges.

Equity infusion and taking over the boards of defaulting companies is not new to India. In early 2001, when the Unit Trust of India (UTI) had sunk into a crisis, the government created the Specified Undertaking of UTI (SU-UTI) to take over UTI’s large corporate shareholdings, including blue-chip companies like L&T, ITC and Axis Bank.

In 2009, during the Satyam saga, the government superseded the company board. The new board organised a strategic sale stake resulting in Tech Mahindra acquiring control. The Yes Bank Limited story—where the RBI took control and reconstructed the board—is a recent example of government intervention in times of crisis.

With a terrible year ahead, with rating agencies predicting a negative 5% GDP growth, the mega-recession will surely sink thousands of MSMEs, possibly even corporate giants. Banks cannot keep rescuing these companies with loans that will never get repaid — the banks themselves will get compromised. The right option will be to take over the boards of these companies akin to UTI, Satyam or Yes Bank through equity infusion, at low prices, nursing them through the crisis period and selling them back into the private ecosystem at a profit.

There are two problems with this approach. Firstly, as Prof Jeremy Stein of Harvard University puts it, the government, acting as a lender of last resort, in this environment of high uncertainty, will no doubt provide aid for firms to stay alive for a few months but will be risking significant losses if the business turns sour. Naturally, there are very few safe loans to be offered in this period.

Family silver

Secondly, government takeovers in India are mainly one way, reselling a company once purchased and turned profitable, is akin to selling the family silver. Once the government owns an asset, politicians and other vested interests will cry hoarse and prevent privatisation. Think of the privatisation of PSUs — BPCL, SCI or BEML — and of the vested interests doing everything possible to thwart their sale.

Although the government has rarely resold the turned-around companies, this path has proved rewarding as in the case of the price of SU-UTI shares which rose considerably (only a small proportion of SU-UTI shares has been sold so far - the government is reluctant to sell the balance).

Yes Bank has been kept alive through equity infusion from the State Bank of India and other PSU banks with new management working towards profitability. In a mega recessionary environment, flooding the financial system with money to revive companies suffering from illiquidity, may not be sufficient.

This is why the government’s equity infusion fund of Rs 50,000 crore for MSMEs is a momentous first step. This will be a significant step towards stemming mass bankruptcies. Not only deep pockets, but the government will also need sufficient patience and willingness to inject further massive amounts of equity to save the firms and put them on the path to profitability.

What next? How does the government compulsorily resell and put the MSME back into the private ecosystem? The government funding of the rescued MSMEs should not make politicians feel that they own these assets and thwart eventual re-privatisation. One solution would be for the RBI to form an independent entity to be entrusted with takeovers and given sufficient leeway for ensuring a hitch-free subsequent sale.

We know that the mega-recession is going to kill many enterprises. The government should freely nationalise ailing MSMEs through an injection of fresh equity and allot shares at ultra-low prices. We must follow the route of equity infusion— what we need is for the government to buy MSMEs like it was done for UTI, Satyam, YES Bank, and then compulsorily selling them later. Our politicians and the business ecosystem must get used to this process of reprivatisation of entities picked up during the Covid turmoil. Difficult times call for difficult solutions.

(The writer is a former director on the Board of BEML)