Column: Business Revival

BUSINESS REVIVAL
Time For A Wake-Up Call

The paradox is that FIs and banks have always been empowered to play the role of watchdog for companies they have loaned money too.

By Pradip Chanda

Pradip Chanda, Turnaround Consultant

The balance sheets of a large number of Indian companies, at the end of a decade of reforms and deregulation, have little to show in terms of sustainable competitive advantage. A reality check would actually show an acceleration in performance decline. In fact, more companies have registered with the Board for Industrial and Financial Reconstruction in the last four years than the previous seven years. It would also show that creditors-largely Financial Institutions (FIs) and banks-have funded the loss made by such companies.

There is no denying that while many of these companies failed to build a sound foundation, most of these businesses did not make it as a result of inept management. This is not entirely unexpected. As Peter Drucker observes: ''any government, whether that of a company or a nation, degenerates into mediocrity and malperformance if it is not accountable to someone for its results.'' As we all know, very few Indian companies are actually accountable to anyone.

Unfortunately, there is yet to be a class of shareholder-rights activist group that can put pressure on company boards to change the way they function. We do, however, have FIs and nationalised banks, which own a large blocks of shares in such companies. Despite holding a sizeable number of shares, these institutions have shied away from taking a vigorous approach to their portfolio, unlike what their international counterparts have done with pension and mutual funds. In the process they have not only abused the trust of small investors, but also jeopardised their own health and reputation.

The paradox is that FIs and banks have always been empowered to play the role of the watchdog for companies they have invested in or lent money to. Picking up equity or giving substantial term loans almost automatically makes the financial institution a part of the board of the company. Unfortunately, these institutions have not taken their responsibilities seriously. The post of nominee director, most often, is a sinecure, and is awarded for their contacts than their business acumen.

I am sure that most often these institutions have 'genuine' excuses to offer. ''We are not in the business of running companies-what will we do by taking over the management?'' ''Where can we get people with the right calibre to serve on boards when the remuneration is so low?'', and so on. Some of these arguments may have been valid some years ago. For example, the Director's fees, by Company Law Board dictates, were pegged at such low levels that it was been difficult to attract the right profile of experts to serve on the board of a company. Those available did not find it worthwhile to insist on the formation of a management committee to track the company's performance and chair them.

In the last decade most of the extraneous constraints in finding the right people have been removed. Offering rewarding opportunities to senior managers to join a group of elite part-time directors could also have enlarged this pool.

FIs must change the way they work. If it is true that FIs (holding a 44 per cent equity in Modi Rubber as against 24 per cent by the promoter) have mounted a bid to oust the Modis from the company due to serious lapses in management and corporate governance practices, then it is a definite indication of change.

It is indeed encouraging to note that ICICI has initiated a strategy to take over some under-performing companies and is actively scouting around for company doctors to run them. I hope that the move gathers momentum and ICICI shows the way to other members of the consortium. Meanwhile, let us all unite to support the late awakening of the FIs. After all, it is our money they are playing with.

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