It is not at all surprising that the IFCI Ltd share collapsed in the stock market on Thursday. It had been pushed up in a bidding frenzy that had little connection to the company’s tattered financials.
Speculators had taken the share price from Rs10 to Rs121 in the course of the past year, not because of strong cash flows or future profits, but because they hoped to benefit from the proposed sale of IFCI Ltd to some strategic investor or the other. That was a fair trading call—and those who got in early must have made a killing.
But many latecomers to the party must have got hurt, as the share fell by 24% in Thursday’s trading. Investors who risked capital and clambered on for a ride do not deserve any sympathy. They should know it’s all part of the trading game.
But the IFCI sale saga is not just about unthinking stock market investors and their subsequent woes. The sale of the government-controlled financial institution could have been a test case to show the world that privatization is not completely dead in India. A successful sale would have been a useful signal to the outside world. It was not to be, sadly.
What went wrong? IFCI is short of capital and it has a balance sheet ridden with bad loans. So, the company needs both money and expertise— something that a strategic rather than a pure financial investor can get in. And that seemed to be what the IFCI board, too, was looking for. So, it is unfortunate that the deal with the consortium of Sterlite Industries and Morgan Stanley was unexpectedly called off at the last minute.
The IFCI board was completely justified in being very careful that the investors who come on board have a long-term vision for the company, rather than being keen on quick profits from asset stripping. (IFCI owns prime real estate in New Delhi and Mumbai.) But it is hard to understand how the board, and the government that controls it, came to believe that an outside investor would put close to $1 billion on the table and settle for anything less than management control.
It’s now almost eight months since IFCI started looking for outside help. These months saw several investor groups show interest and then walk away. More important deals get done in half that time elsewhere in the world. Look at the urgency with which troubled foreign banks such as Citigroup Inc. and Morgan Stanley Inc. sold large stakes in recent weeks to the Abu Dhabi and Chinese sovereign wealth funds, to raise capital and soften the impact of the subprime bombs exploding in their respective balance sheets.
In contrast, IFCI’s long eight-month sale saga helped some arbitrageurs in the stock market, rather than the company itself.
The lessons from the IFCI fiasco are two-fold. First, there is the need to design clear contracts that do not lead to frequent changes in bidding rules. Second, the government has to move fast once it has decided to sell stakes in one of its companies.
What now? IFCI surely needs money to bolster its capital and thus have the firepower to take part in India’s investment boom. Two immediate possibilities are selling off its real estate and its stakes in certain companies. For example, IFCI earned $160 million for its 5% stake in the National Stock Exchange earlier this year. More such deals could be pursued.
Or else there is the unfortunate third option—to apply to the government for capital injection. It’s been done before. We see no reason why taxpayers should pay for a financial institution that is struggling in the midst of an era of huge financial-sector profits.
IFCI needs to move fast if it wants to be an active player in India’s development, which was the reason it was originally set up in 1948.
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