Three years ago when Nasser Munjee, managing director and chief executive, Infrastructure Development Finance Company (IDFC), told domain-b that he would like to retire in two or three years, he certainly couldn't have dreamt that he would be compelled to resign on a matter of principle.

In mid-March, Munjee along with four of his lieutenants - A K T Chari, chief operations officer, Dr. Urjit R Patel, chief policy officer, L K Narayan, chief risk officer and Luis Miranda, CEO, IDFC - decided to call it quits.

The reason? The government, a 20-per cent shareholder in the Rs.1,000 crore equity and a major lender (Rs.300 crore subordinated debt), purportedly unhappy with IDFC's performance voiced its decision to merge it with State Bank of India (SBI) which currently holds a six per cent stake in the beleaguered institution.

The other shareholders of IDFC are Reserve Bank of India (RBI), which holds a 15 per cent stake, Industrial Development Bank of India (IDBI) with 5 per cent, ICICI Bank with 6 per cent, HDFC and UTI with 3 per cent each, IFCI 2 per cent and nine foreign investors who hold 40 per cent.

The mutiny by the five IDFC officials is the second war of autonomy being waged by an institution in recent times. The first is being fought by the Indian Institutes of Management (IIM) with the government, which decided to reduce their tuition fees.

The point the five IDFC professional managers wanted to make was simple - do not tamper / tinker with IDFC's autonomy. If the shareholders are unhappy with its performance, then it is the top team that has to be removed.

Further, a sizeable number of IDFC professionals also started contemplating quitting the company. According to one official, around 30 of the 85 employees were serious about quitting the company that would soon become another government company.

The resignations took the finance ministry mandarins entirely by surprise as they were not accustomed to such 'effrontery' by mere officials of companies in which the government holds a sizeable equity - just as the HRD ministry officials earlier had been shocked at representatives of the IIMs standing up to them.

So, from merger with SBI, the finance ministry officials changed their stance to making IDFC a subsidiary of SBI while retaining its private sector character or even floating a new outfit for funding core sector activities. The government also announced that it was not averse to buying out the stake of the other shareholders if they were not happy with its decision.

IDFC shining

Be that as it may, is there any strength in the government's argument that IDFC's performance is not up to the mark? Not really, going by the facts.

First, IDFC is confined by its mandate to lead private capital to commercially viable infrastructure projects in India. As the mandate is to attract private investors, IDFC cannot be compared to other financial institutions on the basis of sanctions and disbursements.

Given the policy confusion that the core sector suffers from, the private sector will hardly ever risk its money unless 'policy considerations' are first sorted out and made transparent. A classic case is the Dabhol power project where the domestic financial institutions have risked the tax payers' money without realising the real issues.

Hence the only way out for IDFC is to use the brains of its officials in paving the way for private investments in core sectors. Undeniably whatever is happening in the infrastructure sectors like ports, energy, telecom, roads and others at the state and national level now is mainly due to IDFC's intellectual pool consisting of professionals from varied fields like accountancy, engineering, management, some of whom are highly-qualified PhD-holders.

It was IDFC that had first declared that the country was caught on the wrong end of the stick in power sector reforms by focusing on generation instead of distribution. It has acted as the secretariat for the Prime Minister's Task Force on roads. It also helped to untangle the telecom issue and assisted the ministry of surface transport in charting out the corporatisation of Ennore port, and formulated the entry and evaluation criteria and model documents for private sector projects in major ports among several others.

Of late, the company had even ventured into financing tourism and essential sectors like education and healthcare projects. In short, IDFC became the final word in infrastructure financing.

According to an IDFC official, sanctions and disbursements are growing at a rapid pace. And fiscal 2003-04 would have seen see the highest disbursals since it came into existence - Rs 6, 903 crore while gross sanctions will be Rs 17,798 crore.  were it not for cancellation of sanctions worth Rs 6,711 crore.

With increasing competition, IDFC's rivals, quoting lower rates, often hijacked the projects that had received its financial sanctions, well-aware that the corporation would have done a through job of analysing the project. This is one of the reasons why IDFC cancelled its own sanctions.

The net sanctions and disbursements for FY 2004 will now be around Rs.11, 087 crore and Rs. 5,284 crore respectively. Indeed an impressive performance given the private sector investment mandate and the severe competition.

According to IDFC officials, 2003 was a weak year for infrastructure financiers. Nevertheless IDFC's disbursals were higher than those of many of its peers. Similarly the share of IDFC in financing telecom projects stands at an impressive 18 per cent as against other financial institutions.

In 2003, IDFC's infrastructure loans as a percentage of total assets were 71 per cent and the figure for FY 2004 would be 80 per cent.

The thoroughness of IDFC's financial sanctions / guarantee can be gauged from its zero non-performing assets (NPAs) portfolio in the last seven years of its existence, where the Indian financial system is burdened with NPAs of around 80,000 crore. Its solitary loan account of Rs.30 crore that turned sour has been adequately provided for.

IDFC's total income in the current fiscal is expected to be in the region of Rs.615 crore with an after tax profit of Rs.225 crore. IDFC's dividend track record is also improving after the delinking of the interest rate on its subordinated debt with shareholder returns. Last fiscal IDFC declared a dividend of 10 per cent and this year it is expected to be higher by 2 per cent.

The criticism that IDFC earns most of its income from treasury operations is completely wrong, retort officials. According to them the operating income this fiscal will be 85 per cent up from 77 per cent in 2003.

With a return on equity of 12 per cent, book value of its share at Rs.19 (including the Rs.196 crore unrealised profits on its equity investments), a debt : equity of 2.4, net worth of Rs.1,700 crore and profit per employee of around Rs.1.84 crore, any rational shareholder would have been happy with the corporation's financial performance and its IPO would have been a great hit.

Certainly Munjee and his team have a strong case before the bar of informed public opinion.

But the government turns deaf

However, the government, accustomed to hearing bad stories - Indian Bank, IDBI, IFCI and others - seems to be immune to this shining story. One need not search for reasons, say industry watchers. In recent times the government's core sector funding initiatives like the Rs.1, 000 crore Infrastructure Equity Fund / India Development Fund are routed through IDFC. The government had also announced IDFC as the coordinating agency for debt financing by major financial institutions and banks for infrastructure projects larger than Rs.250 crore.

In the recent budget, the finance minister announced a whopping Rs.50,000 crore core sector investment package with IDFC as the nodal agency / secretariat. With IDFC maintaining its independence, the government apparently would like to bring the organisation under its direct control.

Given the sad state of affairs that other financial institutions are finding themselves, the government seems to have chosen IDFC, a zero NPA company, to channelise investments in core sectors - though finance ministry officials strongly deny this.

The finance ministry's final decision, as it now stands, is that the government will acquire RBI's 15 per cent stake to take its tally in IDFC to 35 per cent. Combined with the 16 per cent stake held by SBI, UTI, IFCI and IDBI, the government will effectively have a controlling interest of 51 per cent in IDFC.

The future

The immediate casualty of this unnecessary imbroglio seems to be IDFC's plans for an initial public offer (IPO), providing an exit route to its shareholders. As per plans all the shareholders would offer 20 per cent of their holdings to the public through a premium public issue.

With the major shareholder expressing its unhappiness about IDFC's performance and the en-masse resignation of the top management, would any prudent investor put his money at this juncture into this high performer?

IDFC's internal revamp plan will also be delayed. The company wanted to strengthen its top management by inducting new people with special skill sets.

While the future course is hazy, what is clear, however, is that the row has sowed seeds of uncertainty in the minds of IDFC professionals who had come to IDFC giving up lucrative careers elsewhere.

With the issue settling down at least for now, is Munjee reconsidering his decision to quit? According to the contract his term comes to an end only in 2006. "I have submitted my resignation and now it is for the board to decide," he answers.

IDFC's board is slated to meet on April 20, 2004 where the en-masse resignation of the top management will be discussed and decided upon. Whether Munjee survives the government's whims and completes his full term, only time will tell.

All that can be said for now is that he has offered his head on a platter.