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February 16, 1999


The sacking of Guruswamy

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It was a letter from former prime minister H D Deve Gowda in early January 1999, which set alarm bells ringing in the finance ministry. Was it true, Deve Gowda wrote to ask Finance Minister Yashwant Sinha, that the finance ministry had been pressurising financial institutions to help a company called Essar Steel Limited?

Deve Gowda said he had seen news reports that this business house, which was promoted by the Bombay-based Ruias and had considerable interests in steel and telecommunications, was going to be the recipient of a bail-out package. When the entire steel sector was facing a crisis, why were favours being shown only to one business house? If it was true, it was utterly brazen. There were no words strong enough to express outrage, et cetera, et cetera...

Sinha's reply was soothing. He explained to Deve Gowda that it has been his position all along that financial institutions must be given autonomy to take the decisions they felt made commercial sense. No one was forcing them to help out any individual. The entire steel sector was reeling from the effects of worldwide recession.

In fact, the finance ministry had set up a committee headed by special secretary (banking), C M Vasudev, to recommend measures which could revive the steel sector. These measures would help the steel sector across the board, whether private or public sector. So Deve Gowda should lay his misgivings to rest. However, it was Sinha who began having misgivings.

The fact was that steel industries had reported miserable mid-year results. Sales seemed to be up but profits were down (Steel Authority of India Limited reported a net loss of Rs 1.67 billion in the first half of 1998, though its sales amounted to Rs 67.94 billion. Essar itself announced that it was facing a net mid-year loss of Rs 1.06 billion, as opposed to a profit of Rs 165.3 million during the same period last year.

Tisco, India's biggest private sector steel company, had also posted losses and had announced a five-year restructuring plan which employees feared was a euphemism for lay-offs. Things were clearly in a bad way in the steel sector.

There were several reasons for this. One was the trend in the industry to diversify to areas like telecom, which needed capital and had high returns. So it was sensible to divert capital into sunshine sectors rather than let it stagnate in steel for which demand was sluggish anyway because of a generally sluggish economic environment.

But there was also a problem, which had nothing to do with the domestic steel sector. Countries in the CIS region and steel dealers in some South-East Asian nations (like Indonesia and Malaysia) were taking advantage of Indian duties on scrap to dump first grade steel as seconds, or defective steel, in the Indian market. Obviously, the price of this steel was low because these countries got the benefit of low duty. Indian steel, which was costlier, was suddenly finding no takers.

Delegation after delegation met the finance minister to point out the problem to him. Something needed to be done and fast.

Sinha told them all that he knew all this. The Vasudev Committee Report had some solutions. Officials of the commerce, steel and finance ministries believed it would resolve a part of the problem.

However, there was the matter of finance. SAIL's finances were in disarray. There were several individual companies which had exposed themselves to financial institutions which needed help, that is, in an era of scarce capital, steel industries were turning financially unhealthy.

To correct this part of the problem, Sinha asked his officer on special duty Mohan Guruswamy to study how the sector could be nursed back to financial health. Maybe with the help of institutions like the Industrial Development Bank of India, Industrial Credit and Investment Corporation of India and Unit Trust of India which had capital at their command?

On January 4, Guruswamy told Sinha that a package was ready, and that the representatives of FIs -- like P S Subhrahamanyam of UTI, K V Kamath of ICICI and G P Gupta of IDBI -- wanted to meet the minister informally. Sure, said Sinha, bring them across to my room.

As they all trooped in, the chiefs of FIs noted that though they were out in full strength, the steel industry, which was alleged to be facing serious problems, apparently had only one representative: the Ruias. Surely, either all the representatives of the steel sector -- the Jindals, the Mittals, etc should have been present, or none of them. Why only the Ruias? No one seemed to know. It was as if the flavour of the exercise had been decided by the Ruias, who, the FI chiefs noted, looked pleased as punch.

Apparently the minister noted this too, for he separated the Ruias from the FI officials, had tea brought in for them and bid them farewell, before getting down to business -- only with the FIs.

Soon after this, reports began appearing in newspapers that the finance ministry was bailing out Essar. The last straw was a report, attributed to the finance ministry, confirming that a financial package for the Ruias had been cleared. The Rs 25 billion package included proposed new investments of Rs 17 billion by FIs.

This was, reports said, because the FIs together had a total exposure of Rs 80 billion in the company.

FI chiefs told each other that the minister was in danger of ending up looking like a fool. Time and again, in Parliament, in public speeches, at every possible forum, Sinha had repeated that FIs were not going to be pressured to take any decision they felt was not in their commercial interest. The Prime Minister had said financial institutions must reduce their non-performing a. What were NPAs? Loans to companies which were unable to pay them back.

Now the finance ministry itself was proposing to dump a package on them -- for just one company -- to which the FIs were allegedly party and which they knew nothing about.

So what was going on?

Part II

Part III

Courtesy: Sunday magazine

Mystery shrouds Guruswamy's exit from finance ministry


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