Why in news?
The government is considering the restructuring and future role of three state-owned trading firms.
What is the background?
- Metals & Minerals Trading Corporation of India(MMTC), State Trading Corporation (STC), Project & Equipment Corporation of India(PEC) are firms under the administrative control of the commerce ministry.
- These state-owned firms have incurred heavy losses for quite some time, after the post liberalisation phase.
- Government is now considering measures with the help of Crisil, a consulting firm, to close or restructure them by merging.
What are the reasons?
- Liberalisation - These firms worked as government designated canalising agencies facilitating import and export of various items.
- The import and export of canalised items can take place only with certain licensing and regulatory restrictions as directed by the government.
- Canalisation made them as virtual government departments, gave them monopoly and meant no competition.
- However, post-liberalisation the government de-canalised various items, as a result of which these state-owned firms lost their relevance.
- Dependence - Currently, these firms are engaged in exports and imports of items such as agro commodities like pulses.
- The overall business is more import-intensive.
- However, the firms generate export with the assistance of other private or public companies, called “associates”.
- Associates seek financial help called pre-shipment credit from these PSUs for export business and “letter of credit facility” (LC) for import business.
- Thus, the PSUs are now acting more like NBFCs (non-banking financial companies) and associates ensure that PSUs don't get into any risks or losses.
- However , the very process of de-risking by these associates are risking by creating counter liabilities for the PSUs.
- Factors like failure or mismanagement or hyper-speculation of associates, market volatility, etc drive the businesses financed by PSUs to partial or full defaults.
- These shortfalls have substantively eroded profits and net worth of MMTC, STC and PEC.
What should be done?
- Reducing dependency on associates or private parties would empower the PSUs to “trade” in the real sense.
- So, government must take measures to ensure a safe and rewarding environment to trade without the fear of loss.
- Merging or any other restructuring of firms would materialise into better performance only after such governance measures.
Source: Financial Express
