Monday, December 7, 2015


From Business World of 22 April 2005.

Messy compromises

MTNL was created by the Department of  Telecommunications (DoT) in 1986 to fob off Rajiv Gandhi. He wanted to corporatize the government’s telephone business and eventually to privatize it. DoT offered him a sop – that it would corporatize its business in Bombay and Delhi to start with. Soon he was mired in such trouble that he had no time for DoT. Meanwhile, MTNL had a lucrative monopoly in India’s two richest cities, and DoT milked it for all it was worth. As a government department, DoT could not borrow. So it got MTNL to borrow from banks and financial institutions and siphoned off the money. It pretended that MTNL’s staff were on leave from itself and gave them huge deputation allowances. Altogether, it used Rajiv Gandhi’s “reform” to have a whale of a time.
Now the party is over. MTNL faces competition from potent private companies. They are taking away its customers; its business is shrinking.  It is the end of the road for it.
In the meanwhile a government has been elected that is proto-Rajivian in its outlook. It would never privatize or sell off a government company. So there is no easy way out for MTNL.
In the circumstances, the simplest solution would be to go back to how things were before Rajiv and to merge MTNL with BSNL, as the corporatized DoT is called. The daughter can neither support herself nor be married  off, so she might as well be given shelter in the parental home.
But the finance ministry, the stingy father, does not like the pecuniary implications. If the two companies are merged, huge stamp duty will have to be paid on the acquired assets. And the DoT deputationists would come home to roost. The indecent salaries they were given on deputation cannot continue if the two companies are merged and deputation ceases.
So the government is looking for a merger which is not a merger. In theory, MTNL belongs to the government; it is looking to selling MTNL to BSNL, its younger but fatter daughter. It sounds like incest and invitation to sodomy, but such considerations never stopped a government.
But where the government fears to tread, there many private companies have been before.  Stamp duties are as big a threat to private as to government companies. Eight years ago, when there was an industrial downturn and many loss-making companies had to be rescued, their promoters faced the same problem: how to avoid ruinous stamp duties? And they worked out the solution. Show that the loss-making Company has taken over the profitable one. That way, not only can stamp duty be avoided, but the losses of the first company can be written off against the profits of the latter.
So the best way for the government is first to ensure that MTNL makes losses, and then to make it take over BSNL. That may take some time; MTNL is not yet in such dire straits. It may be a decade or two before its losses are big enough. How is it to be kept alive till then?
Again, the answer is simple: as MTNL begins to run out of money, it should borrow from BSNL. One of a promoter’s companies lending to another may be bad corporate practice for the private sector; but when did such niceties stop the government? Once MTNL has accumulated large enough losses, it may not even need to take over BSNL. BSNL can then be declared to be a bank; then it can take over MTNL under the Securitization Act..
If neither solution – takeover of BSNL by MTNL or conversion of BSNL into a bank – appeals to the government, there is still an alternative left: abolish stamp duty. The obstacle it places to mergers is the least of its evils. Stamp duty on real estate transactions is one cause of rampant undervaluation – the only cause now that the central government has more or less abolished tax on capital gains.
However, stamp duty is a tax assigned to states by the Constitution; how can the center abolish it? In the same way as it abolished state sales taxes – by replacing it with something more rational. The substitute is obvious; instead of taxing occasional property sales, state governments should levy an annual property tax. Recently a number of cities have begun to levy tax on the basis of the average market value of properties in a locality. Such a tax, which is independent of the value of an individual property, is the right substitute for stamp duty.
In the case of companies too, the tax on corporate asset transfers should be replaced by an annual tax on companies’ real assets. State governments are loath to tax company property because they want to attract industrial capital. But experience all over the country shows that attempts to attract industry by tax concessions do not work. Industrial enterprises stay while their tax holiday lasts; then they migrate or change their business. The country is strewn with defunct industrial establishments as well as estates.
Even the center can learn from the states’ blunders. Transactions taxes are uniformly bad. They are universally evaded; and where they are not, they make markets narrower and less liquid. That goes for the centre’s tax on security transactions, and the proposed tax on cash withdrawals.