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.
