process, argues Subir Gokarn
Last week, Essar Steel became the first Indian corporate to default
on its foreign obligations. Until the last moment, there seemed to be some
hope that the default might be averted by a last-minute bailout by Indian
financial institutions. A few days before the deadline, they decided to pass up the opportunity. This article explores some implications of that decision.
The most obvious one is really a non-issue. This may be the first time, but it certainly isn't going to be the last. And, even after the default, the sky hasn't fallen on anyone's head. A major argument in favour of a bailout was that it would damage the prospects of other Indian corporates who have raised, or are going to raise, money abroad -- the negative externaility argument. This argument is premised on a certain naivete
among foreign lenders; that they do not bother to evaluate Indian corporates as individual business entities. Given the presence of foreign
financial services companies in India, it is highly unlikely that detailed
analysis of the business prospects of major corporates is not disseminated
through the global financial grapevine. After all, information and analysis are the competitive tools of the financial services industry.
The fact is that, despite the most sophisticated use of information and
analysis, borrowers default all the time. This is why prudential regulations exist in the first place. In the global scheme of things, Essar Steel is just one of many mid-sized corporates who have hit upon bad times; the fact that it is an Indian company is more a matter of pride for us than of any great commercial significance to the world financial community. The important thing, from the latter's point of view, is that the borrower has a financial restructuring plan in place, which it has already started implementing.
In my view, the most significant implications of the bailout that wasn't have to do with the evolving relationship between the financial system and the corporate sector. It must be viewed in the context of two major forces that are shaping the Indian corporate scene. One is the virtually complete
freedom on the part of the corporate to choose its lines of business. The
other is the persistence of a financial system that was designed to serve the interests of the previous industrial policy regime. Are there inherent
contradictions between the two forces, which prevent the emergence of
sound business entities?
