International consultants provide more comfort than just advice

By C. R. L. Narasimhan

The Global Trust Bank (GTB)-UTI Bank merger which should have been consummated but for the share market turmoil is throwing up some entirely unintended messages. The circumstances leading to the proposed merger, which was announced towards the close of January, are well known.

However, in the wake of the unexpected controversy, certain aspects which would normally have passed off as technical details bear repetition.

Following a valuation exercise undertaken by SBI Capital Markets (SBI Caps), the merchant banking subsidiary of SBI, a swap ratio of 2.25:1 in favour of GTB was decided upon after which the shareholders of the two banks gave their approval.

Before the Reserve Bank of India could give its final approval, the stock market controversies involving GTB and its allegedly close and mutual relationship with today's big bull, Mr. Ketan Parekh, surfaced. Allegedly Mr. Ketan Parekh rigged the GTB stock just before the merger decision.

Long suspected of having close links with the GTB, he is already a significant shareholder besides being a borrower.

xAt the time of writing this, both the Securities and Exchange Board of India (SEBI) and the RBI are looking into some of these aspects and specifically to find out whether the alleged playing up of the GTB share in fact contributed to a favourable swap ratio. What happens next and indeed the whole GTB-UTI imbroglio merits a dedicated column but that would be later.

A new umpire

For now, what matters is that the authorities called for a second valuation report on the swap, this time from an international consulting firm, Deloitte, Haskins and Sells. Recent reports say that they have concurred with the outcome of SBI Caps' earlier exercise.

Whether the swap of 2.25:1 will stick in the end is moot but that is not the issue now. The point is that in calling for a second report on the relative share valuation, the authorities have opted for an international firm rather than a domestic one.

Is there special comfort in seeking the professional help of international consultants?

The work involved is something that a commerce student of average ability can do. Of course, in exercises such as these it is not the individual effort so much as the stamp of the institution that matters. Here again, India is full of top notch accountants and accountancy/ consultancy firms.

Any one could have worked out the swap formula in a jiffy. The GTB-UTI Bank swap was first arrived at by SBI Caps and announced amidst lot of fanfare. While seeking a second report the authorities must have been surely concerned with the unseemly controversy involving the GTB-broker nexus.

Betting on the outcome of a fresh report from an international firm they were hoping to muffle one aspect though obviously not the entire problem. There is another, the latest, example to prove that in India it is the advice of foreign firms that is preferred over that of domestic ones. More so if as in the present case the domestic company is of the public sector variety.

Consider the disinvestment programme. That the valuation of Balco was done by Jardine Fleming has somehow been projected as a decisive advantage. Your neighbourhood chartered accountants could not have valued Balco very differently.

However, it is certain that the post-sale controversy would have been more strident if the valuation was done by an Indian institution. But even a foreign investment bank's valuation report has not been able to overcome Mr. Ajit Jogi's recalcitrance.

Several high profile public sector enterprises are up for sale - Air India, Indian Airlines, VSNL among them. As a rule, all the mandates for global advisers have gone to foreign investment banks. (Only in the case of VSNL the public sector SBI Caps is the joint mandate holder). Agreed, global advisers are selected on the basis of pre-set criteria.

There need not be a special preference for domestic entities. Yet so consistently are foreigners preferred - in disinvestment as well in most other areas - that there is reason to think that either something is wrong with domestic talent or that foreigners have access to special skills and wisdom.

In house talent there could be in plenty, domestic expertise might cost only a fraction of what international consultants charge, yet foreigners win hands down.

Comfort from outside

The reason lies in the peculiar but entirely justified desire of government organisations to seek refuge in overseas experts' recommendation. State Bank of India carried out a massive reorganisation in 1972 on the recommendations of Professors Iswar Dayal and S. K. Bhattacharya. The next major one was on the recommendations of McKinsey & Co., by which time the outside environment had decisively tilted in favour of foreigners. There could be a glamour element but more importantly it is easier to hold the overseas consultant's report as a shield against any possible controversy. Again, SBI has appointed an international consultancy firm to prepare a charter for its long-delayed IT initiatives.

Even the stupendous fees foreign firms charge is not a deterrent. The logic is higher the fee the more valuable the advice. A much lower bill for identical work from a domestic entity might not satisfy government auditors including the CAG. Then of course accusations of favouritism, nepotism and the like will be levelled against the PSE or the government department. In the recent past, even Cabinet Ministers have not been spared. Half truths and anonymous complaints are enough for the Central Vigilance Commission to get into the act. The foreign consultancy firm or the merchant bank is spared all this. For them it is a win-win situation always.

What is true of consutancy firms vis-a-vis the Indian public sector might be relevant for the private sector as well. Maybe there is a more valid explanation in the latter case. For the Government and its undertakings in the reform era the advice from foreigners is most welcome though not always for the immediate purpose sought.

Send this article to Friends by E-Mail

Section  : Business
Previous : Selling pressure on Lyons Range
Next     : RBI reduces ways and means advances limit