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Disinvestment is back on track

The stock markets are in for swinging times as they can look forward to 20 fresh public offers from state-owned firms. Gaurav Choudhury tells more.

business Updated: Oct 20, 2009 00:31 IST
Gaurav Choudhury

When Finance Minister Pranab Mukherjee unveiled the annual budget in July, the stock market was disappointed because the proposals did not include a timetable for disinvestment.

Cut to October, the government’s plan to offload stake in public sector companies is turning out to be the next trigger for an extended bull run on Dalal Street.

Monday’s decision by the Cabinet to clear 5 per cent stake sale in National Thermal Power Corporation and another 10 percent in Satluj Jal Vidyut Nigam Ltd is being seen as the revival of the disinvestment programme that would only get bigger in the months to come.

Plans to divest government stake in state-run companies were grounded during the United Progressive Alliance (UPA) government of 2004-09 because of opposition from powerful leftist allies.

The scenario changed as the UPA returned to power without the support of the communist parties and optimism gained ground that the UPA government in its second term would be proactive on market-friendly measures.

Already two PSUs — National Hydro Power Corp and Oil India — have been listed on the stock exchanges, and Prime Minister Manmohan Singh said last week that the government is keen on encouraging them to raise resources by listing on the bourses.
Though no target has been set for disinvestments this year, the government can generate upwards of Rs 25,000 crore (Rs 250
billion) — enought to set up a 5,000 MW power plant — annually through minority stake sales.

The Economic Survey has said it in as many words and it is not difficult to understand why.

There are 214 centrally owned PSUs, of which 160 are profit-making. Of these, only 44 are listed on the stock exchanges, accounting for 24 per cent of the Bombay Stock Exchange’s market cap. Of the top 10 listed companies on the exchange, five are state-owned.

“First, it goes to show that the government is serious about the disinvestment of public sector undertakings,” said N.R. Bhanumurthy, professor, National Institute of Public Finance and Policy. “Also, it would attract private investment, thus increasing profit generating activities...”

Public listing of companies could also help improve efficiency. A tighter scrutiny of market players, both local and global, imposes a higher discipline in boardrooms and makes political interference a shade less pervasive.

“To make it inclusive and participatory, part of the government shares would be offered to the employees of the state-run firms,” Commerce and Industry Minister Anand Sharma said.

This time around, the government is armed with a stronger mandate to enable companies to raise capital without affecting the shareholding pattern of majority state-ownership.

There are several PSUs which despite posting operational profits, have failed to execute salary revisions recommended by the Justice Jagannadha Rao pay panel.

Operating many of these companies through annual budgetary support would be a drain on the exchequer.

“There is a shipping company whose order book is full and growing. It is a profit-making company, but is in dire need of capital to fulfil its order book obligations. What is the harm in allowing this company to raise capital from the market through fresh equity,” said a government official.

Besides follow-on public offers of already listed companies, if the government goes ahead with its plans to list profitable central government-owned public sector companies each with a net worth of over Rs 200 crore, the stock markets can look forward to at fresh public offers of at least 20 such companies.

As and when the government unveils a disinvestment roadmap, it would effectively mean reverting to January 2005, when the government decided, in principle, to list large, profitable public sector companies and to selectively sell a minority stake in listed, profitable firms while not disturbing the public sector character of the companies.