The Telegraph
Since 1st March, 1999
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PSU revival key left in bank hands

New Delhi, Jan. 14: The Congress-led government has decided to try and revive only those state-run firms whose turnaround is considered viable by banks and financial institutions in their role as lenders. This year's budget will set aside money for equity injections in these firms.

Among the first batch of PSUs that could gain from the decision are the two state-run airlines ' Air-India and Indian Airlines. They will get equity injections before going in for IPOs.

Other firms like Calcutta-based Bridge and Roof Corporation and Burn Standard are also likely to benefit. But in these cases, the government will decide whether to induct a private partner or not.

The list of beneficiaries to be covered by this policy will be finalised after the government receives the recommendations from the newly established Board for Reconstruction of Public Enterprises, headed by Prahlad Kumar Basu.

The budget for 2005-06 will have provisions for recapitalisation of sick PSUs and waiver of past government loans and taxes, but actual turnarounds will be funded by banks and financial institutions.

Thus, the government will pass on the real task of funding revival to bankers, who would have to assess the risks in loans they advance. The government will not be extending any sovereign guarantees to these PSUs; bankers will have to be ready for all pitfalls in these revival packages.

All state-run companies whose revival packages are not considered viable and, hence are not being funded by banks and financial institutions, will face either the auctioneers' hammer or a shut down.

In case the government decides to rope in a private partner while reviving a PSU, it would have two options. One, it can induct a firm that would bring in technical or financial expertise but will not have management control. Alternatively, if the firm's revival is risky, a majority partner could be brought on board with management control.

The decision to induct a private partner would depend solely on the need to gain technical, managerial and commercial expertise.

A note prepared on the issue states 'the norm in developing the financial package must be that the government takes the responsibility for strengthening the equity base, while the FIs provide the loans (without the need for government guarantee).'

The note goes on to state that the government may, however, have to bear the burden of waiver of interest and even the principal amount of outstanding loans, penalties and taxes, but in all cases, 'bankability must be a pre-requisite before rehabilitation proposal for a PSU can go forward.'

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