Given the government cant possibly fund even a part of the
R6 lakh crore of capital PSU banks need over the next four years, and the inability of most to raise this money on their own, chances are the government will move towards implementing the suggestions made by the PJ Nayak committee. If the government is to put all its holdings of banks into a Bank Investment Company (BIC) which will have its own governance structure, the impact will be electrifying. For one, with investors now certain the banks are truly independent of the government, the banks will be able to raise money on much easier terms. Two, with dual control of the finance ministry and RBI no longer an issue, banks will be a lot more independent than they are right now. If the government is to reduce its stake in the BIC to below 50% as Nayak has recommendedsuitable clauses can be put in place to ensure no other single shareholder is allowed to buy more than a 5% or 10% stake to allay fears that the government will lose control of the banksthis achieves another major objective. The banks get outside the purview of the CBI/CAG/CVC and will then be able to take commercial decisions without fear of being hauled up 10 years later for what was just a bad commercial decision. The flip side, of course, is that RBI needs to strengthen its supervision, which has been found wanting on various occasions.
Indeed, if the government is keen to professionalise PSUs, the same PJ Nayak format should be extended to all of them. Transfer government shareholdings in them to a Temasek-type fund where the government stake is at 50% and have the fund run by a professional board. Immediately, there can be no interference by parent ministries that is so common today. Apart from the fact that the CAG/CBI/CVC dont get to harass PSUs, since they will no longer be considered instrumentality of state, the L-1 rules that prevent them from working efficiently will also be side-stepped. The move will be opposed by ministries on grounds that, as long as the PSUs are under their charge, they will look after their interestsso a telecom ministry, for instance, will bat for BSNL and MTNL. Apart from the fact that there is no reason why the fund cannot bat for the PSU, in todays day and age, the telecom