The Hindu Business Line : The IDFC imbroglio

IN A LOW-INTEREST regime, can Infrastructure Development Finance Company Ltd operate without the access to cheap deposits that banks have? Is there space for development institutions such as IDFC or Nabard? These issues remain unanswered even as the Managing Director and CEO of IDFC, Mr Nasser Munjee, and a few others, have resigned, rather hastily, in protest against a Government plan to alter the ownership structure of IDFC. In a quick response, the Government has promised foreign shareholders, which hold a 40 per cent stake in IDFC, that the company will not be merged with State Bank of India and that no decision will be taken on the issue till a new government takes office.

The Government, going by the original proposal, is keen on the Reserve Bank of India unloading its 15 per cent stake in favour of SBI. That sounds reasonable, as the RBI does perceive a clash of interest in being a regulator and a stakeholder. For SBI, it will be a valuable addition with the non-performing assets of IDFC at just one per cent. The RBI Governor, Dr Y. V. Reddy, has promised help in restructuring public sector financial entities if government so desires. But it is one thing for the RBI to exit from IDFC and quite another for it to divest in favour of a commercial bank such as SBI. The latter might well raise the issue of whether there at all exist strategic and operational synergies in the arrangement. IDFC's contention that its functioning cannot be slotted under the traditional roles of a financial institution is not without merit. After all, it not only does a bit of development, commercial and investment banking but has also been in the forefront of identifying deficiencies in the existing models of delivery of infrastructural services and, more important, coming up with alternative mechanisms with greater viability. Of course, one can also argue that such inputs are not unique to IDFC. Also, IDFC may not have exactly fuelled a boom in infrastructure-creation. But to conclude from this that it is an anachronism ignores the institutional environmental constraints under which it has had to operate. In any case, having sold the concept of uniqueness of the IDFC model to foreign investors and got them on board, it does not seem right for the Government to now claim that its original premise was flawed — at least not without their acquiescence to the alternative model or giving them a satisfactory exit option.

In the circumstances, it would be in the fitness of things if IDFC were allowed to raise capital in the retail market. The market may well believe that IDFC's current business model is viable and that its incumbent management is capable of adding value and subscribe to the issue of capital. Should the Government or the RBI decide to exit in favour of the SBI — which they are well entitled to — then the market offers a fair pricing mechanism for the foreign investors to exit from IDFC in favour of whoever is acquiring the Government's stake. If, on the other hand, the issue fails for want of investor support, then the Government can go back to the overseas investors armed with market evidence to force them to accept the SBI alternative or whatever else it may have in mind. In the light of the Government's clarification, the IDFC's top management must withdraw the resignations and work to consolidate the institution.extant conditions, IDFC is a luxury the financial system cannot afford.

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