A V Rajwade: Foreign investors and crony patriotism

WORLD MONEY

While Italy has had more than its share of political scandals, it is not lagging behind in financial matters. If there was a couple of decades of lull after the Banco Ambrosiano affair, Parmalat and the more recent case of the take-over battle for Banca Antonveneta (BA) have put Italy back in the headlines.

As the Parmalat affair continues to reverberate in the courts with the new management suing a number of banks, the BA affair has gone to the heart of Italy's financial establishment and led to the resignation of the finance minister. Banca Popolare Italiana (BPI), the rival bidder for BA, has recently withdrawn from the battle.

It seems that the prospects of foreign take-overs are like magnets for politicians in patriotic defence of "strategic assets" and "family silver". This was the case recently in the US when a Chinese oil giant, CNNOC, made a bid for buying Unocal, and faced such strong political opposition in the US Congress that it withdrew from the bid.

The hollowness of the rationale for the opposition would be obvious if one notes that CNNOC had pledged to sell back Unocal's US operations! Recently, French Prime Minister Villespin also indulged in "patriotic" opposition to Pepsi's attempt to take-over Danone, a maker of biscuits and mineral water, which itself operates in dozens of countries and has larger sales abroad than in France.

We in India are, of course, no strangers to the phenomenon. To quote a current debate, even as we glorify our metal companies in the Birla, Tata or Sterlite groups taking over foreign mines to secure supplies, POSCO's proposal to export iron-ore rouses our patriotic opposition "" in the name of the environment, domestic value addition and so on, even as there is no objection to long-standing domestic exporters of iron-ore.

But to come back to Italy, one notable feature of the case is that the governor of Bank of Italy was himself in the eye of the storm. The second is that the European Union, of which Italy is a founder member, is supposed to have a single, integrated market in financial services, with no discrimination against any EU member country.

BA is the ninth-largest bank in Italy, and ABN Amro Bank of the Netherlands, another EU founder member, has had a minority stake in it since long. When ABN tried to take control earlier in the year, BPI made a rival bid. BPI is a third of the size of its target, and does not boast of a strong balance sheet or surplus capital.

What it did have, however, was the support of the only person who counted in the Bank of Italy, the central bank "" namely its Governor Antonio Fazio. Fazio and BPI's CEO were, and, perhaps still are, cronies.

Fazio is also well-known for not allowing foreign take-over of any Italian bank during his watch, whatever the spirit of European Union laws and regulations. (Indeed, even as the BPI case was making headlines, a Spanish bank lost its bid for another Italian bank to an Italian insurance company).

Given its size and capital resources, BPI had to take resort to questionable transactions and some creative accounting to stay in compliance of at least the letter of the capital adequacy rules. For one thing, it sold assets to a group of banks in order to free capital. But it seems these were not "true" sales, and had hidden buyback commitments.

Second, after it had acquired 29.5 per cent of BA's equity, it financed a clutch of businessmen (more cronies!) to buy BA shares, without declaring that it was acting in concert with the businessmen as the stock market regulations required.

The money lent to buy the shares remained a loan, and not investment, which would have attracted a higher capital charge. Again, its holdings remained below 30 per cent, obviating the need for an open offer for all the shares according to the stock market regulations.

It would seem that Fazio ignored these and other questionable transactions indulged by BPI, and approved the bid overruling his own inspectors. Unfortunately, the stock market regulator and the Milan legal authorities were not as patriotic as Fazio.

They hauled up BPI for violation of rules, attached BPI's holdings in BA and suspended the CEO. Recently, BPI offered to sell its holdings to ABN and an agreement was signed last week.

But Fazio's blatantly partisan behaviour has attracted a lot of criticism. The finance minister called on him to resign (he cannot be sacked "" it is a lifetime appointment).

When Fazio did not, and the prime minister did not support his FM, the latter resigned, "scandalised" at the "immobility" of the government, leaving Fazio to lead the Italian delegation to the G7 meeting last week. Reward for patriotic cronyism?

Email: avrajwade@gmail.com