The Bank Board Bureau (BBB) has come out with a convoluted proposal to the finance ministry. BBB suspects that wily company promoters prop up dummy or pliable buyers to whom properties of their companies are sold at an undervalued figure which hurts both banks to whom money is owed by such companies and their shareholders. It has hence said that such sales must be done in consultation with the public sector banks concerned. But this suggestion could prove counterproductive.

The housing precedent

Undervaluation is a chronic and vexed problem in India. The income tax law dealt with it in a seemingly clever way under what came to be known as pre-emptive purchase of immovable properties scheme. A threshold limit was prescribed which for Delhi was ₹75 lakh.

Anyone wanting to sell a property for more than ₹75 lakh was required to give the income tax department a notice. The I-T department would make up its mind to buy it out at the price stated in the notice.

For example if the stated price was ₹1 crore, the department would smugly issue a cheque for that amount and thus frustrate attempts at collecting the remaining amount on the sly in black. If ₹60 lakh of this amount was arranged to be paid in cash, the buyer had to kiss it goodbye if he had already paid it or the seller would have had to settle only for the white portion, as it were, paid by the department, in case the buyer had not paid the black portion in haste in advance.

It was a brilliant scheme while it lasted but in 2002 it was given up when the department perforce had to nurse a huge unsold stock following a slump in the real estate market. It thus in retrospect proved to be a double-edged weapon, cutting both ways. While it sometimes hurt the wily tax evader, it sometimes hurt the department as well — a price which appeared to be cheap in course of time might turn out to be exaggerated given the fragility and volatility of the market.

Open bidding

BBB is repeating the mistake committed by the income tax department. Open, competitive bidding is what the doctor has ordered.

The income tax department could have ordered open competitive bidding wherever it suspected undervaluation in a private deal. Likewise, the BBB should have suggested open competitive bidding when a company wanted to sell its immovable properties. It is dangerously disingenuous to ask a public sector company to throw its hat in the ring even if the underlying objective is to frustrate sweetheart deals. Most public sector companies are listed and it would be foolish to expose public shareholders to the risk of these companies straying into reckless adventures.

To be sure, the wily promoter may be humbled, but for the public sector company that has forked out the money, it could in hindsight turn out to be an unprofitable investment.

Governments have in the past used public sector companies to do their biddings with LIC being used as the knight-in-the-shining-armour to rescue floundering public issues of other state owned enterprises. The ministry of finance must dismiss the BBB proposal without much ado.

The writer is a Delhi-based chartered accountant

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