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THE SOMEWHAT LUKEWARM response to the Government's announcement of buyback of high-coupon, relatively illiquid dated securities suggests, on the face of it, one of two things. The development lends credence to the official line that no pressure would be put on public financial institutions to support it. The relative lack of success in mobilising sums anywhere near the amount on offer would seem to indicate that indeed is the case. Alternatively, there had indeed been some pressure, overt or otherwise, but that the managements in these institutions had resisted all such attempts and, thus, the modest response. If this were indeed so, then the managements need to be complimented for striking a blow for better corporate governance. After all, if the scheme was not in the interest of shareholders, its rejection implied certain sensitivity to the interests of non-governmental shareholders.

But the jury on this question is still out. Much would depend on whether the Government persists with the scheme. It is entirely possible that the Government, despite its keenness to ensure the success of the scheme, baulked at exerting any pressure on the financial institutions in the face of heightened public focus on the nature of response. But it might well do so in the subsequent tranche of offering. The Finance Secretary did make an oblique reference to this when he spoke of how goods in a department store do not get sold all in one day. Such an outcome is entirely plausible, as the Government has staked far too much on the success of this scheme to let go of it now merely because the first round elicited only a lukewarm response. A clear strategic purpose at dressing up fiscal numbers is clearly evident in the exercise. The scheme basically trades off a one-time increase in fiscal deficit for successive years of lower interest payouts and thereby lower fiscal deficits.

True, there is a flip side to the arrangement in that redemption at a premium followed up by fresh issue of securities pushes up the value of outstanding public debt. But, then, this parameter is not as much in public focus as those holding a mirror to the annual fiscal situation. The premium paid today on buy-back is also not much of a sacrifice as the potential loss of income-tax on such surplus is impounded upfront, by the Government insisting on a discount to the current market value of these instruments. It is no coincidence that the minimum discount to the market price of 7.5 per cent insisted upon by the Government roughly corresponds to the quantum of taxes that would have accrued on the surplus at the current rates of corporate income-tax and surcharge. The whole exercise is, thus, nothing more than an attempt at some clever financial engineering that one associates with chief financial officers in the corporate sector. The Government can indulge in it again if it thinks there is some public purpose to be achieved by it. But it must resist any temptation to force it down the throats of the public financial institutions.

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