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.
