Login Register
Follow Us

Importing a public sector malaise

A rare instance of serious unethical practices, plain old corruption if you like, in the private sector has been highlighted with the CBI filing an FIR against Chanda Kochhar, former managing director and CEO of ICICI Bank Ltd, and others.

Show comments

Subir Roy
Senior Economic Analyst

A rare instance of serious unethical practices, plain old corruption if you like, in the private sector has been highlighted with the CBI filing an FIR against Chanda Kochhar, former managing director and CEO of ICICI Bank Ltd, and others. If what has been alleged by the investigating agency is upheld by the courts, it will be an instance of the highest echelons of the professional private sector engaging in conspiracies which more commonly happen in the public sector.

First, a qualification. These are early stages, incriminating evidence against some people appears to have been found and a trial and its conclusion are a long way off. Till then, guilt on the part of those accused must not be assumed.

In simple terms, this is what could have happened. ICICI Bank, the second largest private sector bank in the country, under the leadership of Kochhar, gave substantial loans to companies associated with the Videocon group led by Venugopal Dhoot. This was quickly followed by Videocon transferring a substantial amount to a firm. Through a circuitous route, the beneficial ownership of this sum came to rest with Deepak Kochhar, Chanda’s husband. Thereafter, and this is the most serious part, a good part of the loans turned bad, needing write-offs eating into shareholders’ funds. Thus, at the end of the day, Kochhar and family and Videocon gained and shareholders of the bank lost.

This is so similar to what routinely happens with public sector banks. Substantial loans are given to a company. Over time these turn non-performing and then through a process of restructuring and partial write-offs in stages, the bank ends up losing a substantial amount of money. The beneficiaries are the original borrowers and the senior bank officials involved in the decision-making. This is one important way in which public sector banks have come to bear the huge burden of non-performing assets (NPAs) that they do now. The two routes, public and private, eventually meet at a common point, the doorsteps of the CBI, followed by trial in court.

It is useful to note some of the reasons popularly given for the bad debts of public sector banks: poor pay and answerability to politicians and ministers. A public sector banker who does not please these centres of power can say goodbye to chances of further promotion.

The nexus many a time begins much earlier. Powerful business groups lobby with the government of the day for individual officials for topmost positions in public sector banks. When such officials get to the exalted positions, they naturally have a debt to repay to those business houses which helped them get there. This is why there is an oft-repeated argument among those who have a strong faith in private ownership that the end of public ownership will automatically lead to a more ethical world of business. The ICICI Bank case carries the caution that while this may be largely true, there are clear instances of the opposite also.

Unethical practices in the private sector more often take a different route. The promoter group of a publicly listed company, often with less than majority shareholding, runs it for all practical purposes like a proprietorship. There is a board, independent directors, committees for remuneration and appointments and external auditors. Despite this elaborate structure, the fall guys are the minority shareholders.

Two developments have taken place in recent times which seek to address this. One is the rise of proxy advisory firms which make a big noise publicly when they see the interest of minority shareholders, or for that matter any stakeholder, being undermined. They have had a degree of salutary effect on the way various stakeholder interests in listed firms are taken care of. But perhaps the most potent is the role of whistleblowers. They are insiders who ring alarm bells when they see wrongdoing taking place. The persistent action by an articulate whistleblower plunged Infosys, till then a model of good governance, into turmoil. Most recently, India’s foremost pharmaceutical company, Sun Pharma, has seen its share price severely beaten down as a result of a complaint by a whistleblower.

Overall, the interests of all stakeholders of a company are best taken care of when there is no clear promoter group in a company and it is run by professionals. But there are instances where some of these individuals fall down. ICICI Bank could become one such example. The charismatic former head of Nissan and Renault, Carlos Ghosn, who is now in jail in Japan on charges of under-reporting of earnings and misuse of company assets, is another.

In India, even a structure of trusteeship to discharge the functions of promoters has not prevented unseemly controversies from erupting in public, as in the case of the Tatas versus Cyrus Mistry. Though here also, there was no allegation of wrongdoing for personal gain, more a case of clash of egos over policy in which the image of the best governed business group in the country took a beating.

At the end of the day, the key attribute that protects the interests of all stakeholders in businesses is a strong sense of personal ethics among those who hold responsible positions. The final sobering thought is that the ICICI Bank case is one in which it all came out in the open. There are many more hiding in the woodwork, waiting for someone to blow the whistle and seek justice.

Show comments
Show comments

Top News

Most Read In 24 Hours