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The mega mergers

Finance Minister Arun Jaitley has been advocating the merger of several public-sector undertakings in different sectors to build institutions of large sizes. This plan was given shape last year merging the subsidiaries of State Bank of India with the parent bank. In the budget for 2017-18, he proposed the merger of oil marketing and oil exploring companies in the public sector to form a large, integrated energy giant.
Looking at the efficiencies and profitability of building the scale of operations exemplified by Reliance Industries, such a measure appears logical. But such a move demands synthesing the work cultures and practices of the entities involved in building a mega corporation. Such a step taken by the UPA government in merging Indian Airlines with Air – India was not a success. The opening up of civil aviation also inducted new players with much better management capabilities. Look at the speed with which initially, Jet Airways and subsequently Indigo, have succeeded in expanding their market shares!
Such difficulties are also seen in the slow pace of synthesis after the merger of State Bank and its subsidiaries. The parent bank, which managed its burden of NPAs adroitly and maintained profitability for years, has reported, for the first time in 20 quarters, a loss of Rs. 2416 crore for October – December 2017.
The underlying principle of such mergers is the rationalisation of workforce and elimination of duplication of operations. Look at the current scene when State Bank and its former subsidiaries operate simultaneously in the same parts of cities, towns and rural areas and compete for custom. A lot of economies can be brought about by closing down several branches. With strong trade unions politically affiliated, this becomes difficult and time-consuming.
The problem is bound to crop up in the case of the mega-merger of oil companies as well. HPCL has merged with ONGC. HPCL, formed in the wake of the nationalisation of Esso and Caltex in the early 1970s, has a strong culture of proven American practices of management, compensation, perks… ONGC, evolved mainly as a swadeshi venture in a protected monopolistic milieu, has more of a bureaucratic culture. The merger is bound to take time and energies for synthesis. Till the perfection of the modalities of integration are worked to the minutest detail, accrual of anticipated results will take time.
The merger of the three general insurance companies – National Insurance, Oriental Insurance and United India – will also call for adroit handling. These companies were the result of consolidation and nationalisation of a large number of regional insurance companies with different work practices and cultures. For 30 years, these companies had grown under protected conditions. They enjoyed specific strengths in the regions in which they operated. The position changed dramatically after the opening of the insurance sector when several reputed foreign insurance companies entered India. The three companies were competing not just with the new entrants but also among themselves. The merger would eliminate such competition among the three.
These companies have an adverse claims ratio, especially in the dominant segments of motor and health insurance. The profits they have been showing for several years have been due to the handsome income from investments made over decades. Several private insurers like Shriram General Insurance Company have been able to show profits on their premium incomes. The immediate task for the new public sector merged entity is to rationalise their operations and focus on economising costs. The scope here is rich: in just one stretch of Nungambakkam High Road there are eight offices of the three pubic sector general insurance companies including regional offices. These could be reduced to one or two and the surplus staff could be deployed in new branch offices in under-insured regions, observed a leading insurer.
United India Insurance Company is the largest of the three and is presently building a multi-storey corporate office in Chennai. It has long years of efficient functioning. There is a strong case for locating the headquarters of the newly merged entity in Chennai and not crowd an already crowded Delhi. With the pollution and congestion of Delhi, there is urgent need to shift several corporate head offices of PSUs to outside the national capital. Chennai with its rich infrastructure should be an ideal metro for such a shift. With excellent communication networks, distance shouldn’t matter.

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