In an unusual move, the National Company Law Tribunal (NCLT) dismissed the board of real estate firm Unitech Ltd, and allowed the government to take control of the firm by nominating 10 new directors. While Unitech has approached the Supreme Court against the move, corporate India isn't sure how to interpret it. Some, of course, have concluded this to be a warning for all mismanaged consumer-facing companies.
The key point here is the difference between fraud and mismanagement. In aftermath of the Satyam fraud in 2009 too, the government had moved the NCLT. At that point, some suggested the government should "take over" the company or nationalise it. But, good sense prevailed, and the government just replaced the board and appointed independent people who could fix things. While it's not a bad model, it has to be used carefully and in exceptional circumstances. Satyam was a large scale financial fraud and involved the livelihood of more than 40,000 employees.
The Unitech case mostly pertains to mismanagement - there are 19,000 homebuyers waiting for possession of incomplete apartments. One isn't sure yet if this involves fraud. Although there are stories of fund diversion doing the rounds, we will have to wait and watch.
The government clearly wants to protect the interest of homebuyers, many of whom may have invested their life savings. But, there is a larger point. The Unitech case shouldn't become a precedent - India is full of mismanaged companies and the government can't be intervening in a job shareholders must execute. Corporate luminaries such as Kiran Karnik, however, have been saying that because the real estate business involves a lot of public money, there is no reason why some of these companies should be treated any differently from deposit-taking companies like NBFCs or banks. Home buyers pay a large deposit while booking an apartment. May be the financial regulator can step in directly. Certainly, there is a case for better regulation.