Prime Minister Narendra Modi showed the global financial community on 8 November 2016 that he was prepared to implement the most radical of measures to deal with the economic problems bedevilling India for decades. The Prime Minister himself announced that 86% of India’s currency would turn into waste paper by midnight the same day. Financial analysts in London were told that top officials in the Union government recommended the move to the Prime Minister. These officials calculated that a third of the currency made valueless by Modi’s bold move would not get returned to the banking system as they would be wholly “unaccounted”, i.e. hidden from the tax authorities. This would have provided a saving of nearly $75 billion to the banking system, thereby enabling India’s banks to wipe away as much as 70% of the bad debts accumulated because of lending to the politically well-connected (but who refused to repay their loans).

Instead, Indians being masters of the arts of concealment of income, almost the entire amount that got “demonetised” (i.e. made illegal) got returned to the banking system. So, it was either back to the drawing board or to make a huge hole in the country’s finances by replenishing the cash reserves of the banking system, which was largely nationalised in 1969 and remains so to this day. Financial circles in London have noted that Team Modi now seems to have come up with yet another innovative idea designed to fill the Non-Performing Assets (NPA) chasm facing India’s banks. This is by making private promoters pay rather than the taxpayer. Financial circles in London and elsewhere are examining the likely fallout, as the move involved nothing less than the elimination of the concept of “limited liability” in the private sector.

A few months ago, the Ministry of Company Affairs of the Government of India, a department headed by the Finance Minister himself, ordered the forcible merger of two separate limited liability companies: NSEL, the National Stock Exchange Limited (which was in deficit to the tune of three quarters of a billion dollars) and FTIL-63 Moons, a highly profitable technology company run by the same individual who had launched NSEL, Jignesh Shah. Although such a move tore to shreds the concept of limited liability of a privately owned corporate entity, it was upheld subsequently by the Bombay High Court in a landmark judgment.

Analysts in the city have noted that in response to separate PILs, the Punjab High Court and later the Bombay High Court indicated to the Government of India to examine the possibility of forcibly merging several other pairs of private companies, each pair of which had many common shareholders and directors, and where one of the paired companies was in the red to an extent that could be made up by the surpluses of the second company. A retired official of the Ministry of Finance calculated that there were “at least 300 such pairs of companies in India, and that merging even half of them would free taxpayers from having to pay at least $55 billion to fill the hole in the finances of India’s banks as a consequence of loans deliberately not repaid by those with political clout”. There are more than a few well-connected business persons in India who have walked away from repaying billions of dollars in debt to banks, and who have used that cash to launch other businesses, the latter with healthy balance sheets.

City of London analysts expect that the forced merger of FTIL with 63 Moons despite the objection of the latter’s shareholders and directors may be an opening salvo in a series of similar moves by Team Modi to make those heading profitable enterprises pay (out of their profits) to another company that has huge bad debts, with which they were associated. Those working in the City calculate that likely contenders for such amalgamations during the coming months may be Kingfisher Airlines founded by Vijay Mallya and the profitable United Breweries, for long controlled by Mallya before being sold to a multinational. They say that other targets could include GMR, GVK, Lavasa and Jaypee Enterprises, each of which has promoters with pairs of companies—one of which owes huge amounts to the banks and another that has large cash reserves. The bold move (despite the fact that the elimination of limited liability may dampen some international appetite to invest in India) could represent an effort by the Modi government through the Department of Company Affairs, to plug the holes in bank finances without recourse to the exchequer, according to some analysts in the City of London. Certainly, any move to forcibly merge large numbers of companies will prove popular with voters, as otherwise, taxpayers would need to pay the costs of NPAs accumulated by crony capitalists during the decade when the UPA was in office.

A senior official from the Ministry of Finance told this reporter: “Corruption during the Manmohan Singh years was systemic, conducted in a very savvy and sophisticated manner from the top, so that underlings were unaware what was going on.” However, even with a change in government, almost all these people remain out of harm’s way, and this has been noted by the global financial community. Former Union Finance Minister P. Chidambaram’s family has been accused of scams galore, but so far, the Modi government has treated Chidambaram and his son Karti with extreme consideration and no prosecutions have been launched against them. Those close to the former minister refute claims that the National Stock Exchange was this Indian politician’s favourite. They say that Karti Chidambaram made his billions through great skill in understanding the dynamics of the Indian stock market.

In response, City of London experts point out that the instrument of Participatory Notes (P-Notes) through a favoured stock exchange may have made it easy for some operators to conjure black money into legitimate money. P-Notes are a means of converting unaccounted income into tax-free money that can be converted into any currency. P-Notes only detail the issuer and the sum and can easily be swopped into any currency. Then via an overseas route, the P-Note can be claimed in India and used to play the stock market to advantage. Theoretically, if that money was invested through a friendly stock exchange and then encashed, no capital gains would have been payable, and the investor can choose to keep the profit in rupees or reconvert it to the original currency.

The era of limited liability in the private sector in India has ended with Team Modi’s order to forcibly merge FTIL-63 Moons and NSEL. After the High Court verdict okaying the merger, the path is open for large-scale mergers of private companies designed to make one pay for the bad debts of the other. The many innovative ideas of Prime Minister Modi are unique in India’s business history, although the City of London acknowledges that some have been controversial. The Modi government will need to go at speed along the path mapped out by the Ministry of Corporate Affairs in the matter of the forcible merger of the impoverished FTIL with the profitable 63 Moons by doing the same to several more companies. Global financial analysts are watching this space with interest, and say that Prime Minister Modi and his team have shown the same boldness as during demonetisation in going ahead with a government order as radical as abolishing limited liability in private companies. Large scale use of such a remedy can remove the systemic risks to the banking system caused by crony capitalism and its culture of easy loans that are meant never to be repaid, and it is expected that several more private companies will go the way of NSEL-FTIL 63 Moons in the coming months, as the latter case is hardly unique among Indian corporates.”The door abolishing limited liability has been opened by the Modi government, and we expect many more companies to pass through it,” a City source forecast.

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