Unwise move

Govt action in Unitech case defies logic

The affairs of real estate giant Unitech have taken a new and disturbing turn. The company is in trouble essentially because it has failed to honour its contracts; it is supposed to return Rs 2,000 crore to various customers after it did not deliver around 19,000 flats, although it had already accepted Rs 7,800 crore as payment. In addition, it needs to return Rs 723 crore to 51,000 holders of corporate fixed deposits. The company, naturally, says it does not have the money. Where the story takes a truly disturbing turn is in the recent decisions by the government and the National Company Law Tribunal, or NCLT.

The government, in particular, the corporate affairs ministry, has declared that it should take over the management of Unitech in the public interest. The NCLT agreed with the government and, in order to ensure that this takeover was carried out, asked it to submit a list of 10 nominee directors by December 20. Meanwhile, Unitech’s directors were suspended, and prevented from selling any assets. It was not a surprise that the Supreme Court, which is examining the matter, expressed its unhappiness over the NCLT order, which, the court said, put at risk the court’s efforts to provide relief to homebuyers. 

Unitech has pointed out that some orders appear contradictory; if no assets can be sold and accounts are frozen, then how is the company to refund Rs 700-plus crore? This is a reasonable question. Certainly, there appears to be a confused and ad hoc approach to how this is being managed. The government’s decision to step in does not seem to be wise. This is not a sector that the government should be becoming involved in — it does not have the skills to run a real estate company. But more than that, there is a fear that before all is said and done taxpayer money will be used to resolve a problem created by a private company.

Although in the Satyam case a government takeover worked well, it was clear that on that occasion what was salvageable: The intellectual capacity of the company and its existing contracts. In this case, there are multiple competing stakeholders — the debt-holders, the government, the promoters, and all the various flat buyers. Balancing these multiple requirements will not be easy, and the government will be vulnerable to lobbying and worse. One set of flat-owners may find themselves disadvantaged as opposed to another set of flat-owners who happen to be politically connected. Moreover, those who lost their money to Unitech might be privileged over those who lost their money to other unscrupulous real-estate magnates. Why should they be privileged in this manner? In other words, how can the government arbitrarily decide that certain companies deserve to be taken over in the public interest and others do not? How can it decide to protect certain consumers and not others? This is executive action at its most arbitrary. Judicial action, scrupulously fair, is what is needed here. Justice apart, there are also incentives to consider: Such actions by the government hardly encourage companies to run their affairs efficiently.