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Nationalise, Dont Bailout Fraud and Crisis Ridden Private Firms

India’s Satyam Episode

by Rajindar Sachar, 11 March 2009

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The Tribune

The Satyam fiasco: Nationalisation is the right course

The Satyam scandal, which has been described by our Prime Minister as a "blot on our corporate image", gets murkier every day. The larger question is: when a private management has defrauded the company, should the government bail it out by pumping money in it to let it continue in private ownership? The question arises especially when it is done by ignoring the mandate of Article 39 of the Constitution, which directs that the State shall, in particular, direct its policy towards securing “that the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment….”

The government is trying to find an alternative private investor to Satyam who would be given favourable terms, including bank facilities, to run it. The persistent query being asked by the poor is as to why when the government itself is putting forward its prestige and taking all steps to revive Satyam and when it is obvious that many old customers and market reputation are only being somewhat restored, because of the benign backing by the State, the Central government is hesitating to follow the path of nalionalisation which it followed (1974) when private management squandered many prosperous textile mills by passing the Sick Textile Undertakings (Nationalisation) Act, 1974. That course may deny the present shareholders the benefit of revival of Satyam. And why not, when private shareholding has brought this calamity on itself by its own default?

On the contrary, by nationalising Satyam, the State will create confidence in the foreign buyer and suppliers on the prospect of revival and health of Satyam. And the takeover will not be prohibitive. It can be done by following the legally accepted principle of paying compensation to the existing shareholders on the net worth of Satyam which, in accountancy terms, means paid-up capital plus free reserves. It is no secret that at present, the net worth of Satyam is minimal. Though one may fully sympathies with some innocent small shareholding, but then in free enterprise and speculative economy, investors must take bad along with good and cannot ask their private loss to be compensated by public coffer.

By virtue of nationalisation every liability (other than the liability specifically accepted by the Central Government, say moneys / advances paid by genuine buyers and suppliers) will be the liability only of the old company (owner) and shall be enforceable against him - the properties of Raju family.

A State takeover is not revolutionary. It has a history of successful precedents. The resulting benefit will be that immediately from the takeover Satyam will be discharged from any obligation mortgage, and all other encumbrances created by old management with the result that all attachment, injunction or decree or order of any court restricting the use of such property in any manner shall be deemed to have been withdrawn. More important, it will also free Satyam’s assets from being proceeded against foreign litigation which has been filed against it. But if Satyam is merely revived and then given over to another private investor it will be under obligation for all liability that may be ordered against it by courts or a foreign court. Thus, the whole objective of revival of Satyam will be frustrated.

There is nothing inequitable about such a course. It is obvious that the old Satyam management is totally incapable of running the company on its own and the only manner in which it can continue to function is because of extensive support (already over Rs 600 crore by the banks at the instance of the Central Government). Thus, a situation has developed where the very rationale for the existence of private management has failed. The much vaunted claim of the private entrepreneur like Satyam that its existence is necessary to raise untapped resources in the market by his initiative and risk-bearing capacity for the purposes of rapid and efficient industrialisation is sadly found wanting.

If the only manner in which Satyam can now be kept above water is by relying on the prestige and full guarantee of the Central Government, there would seem to be no reason whatsoever why the government should not directly take over the company.

Obviously, it is not in the public interest that the State should invest large sums of public money in Satyam with a view to bringing it back to health and then return it back to the private management. It makes no difference that there will be a new private investor. If in spite of this fraud, another private investor is to be trusted, it may only justify Marx’s taunt that “the State is the Executive Committee of the bourgeois class”. Thus, a policy decision of nationalising Satyam on the pattern of sick textile mills is the only viable alternative, especially when the Preamble of our Constitution reminds us that “We the people of India have resolved to constitute India into a - Socialist Republic”.

I know the shareholders may suffer but then why government money should be spent to benefit a few. The smaller shareholders may be compensated later on when the company revives. After all, the private shareholder took chance and also participated in the profitability of the company in the past — surely equity is not hurt if now they take the consequences of having ignored the fraudulent activities of the old management controlled by the Rajus.

The most surprising aspect is that with all this fraud and meltdown in the economy, the government is still running away from nationalising Satyam. It is a paradox that in this country where the nationalisation of oil companies and banks has shown far better results than private companies (the ONGC, the nationalised banks and the L.I.C.), the government should resist it, while the US, with its undiluted privatisation thinking, is suggesting nationalisation of some of the biggest banks (even though for a short time) as the only method of recovery of banking institutions.

Even the former Ferderal Reserve Chairman of the US Allan Greenspan, a staunch defender of free market, has had to concede ungrudgingly: “It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring.

An average person may justifiably ask that if the diehard capitalist US is advocating nationalisation of banks, why our Central Government is reluctant regarding Satyam. The query needs an answer.

The writer is a retired Chief Justice of the High Court of Delhi.