It’s important to set the backdrop to the government’s disinvestment policy. When history, that great examiner of human performance, sits in judgment over the doings of this BJP-led NDA government, the verdict will be unsparing, harsh and strident.
Conflict-ridden disinvestment in Public Sector Undertakings (PSUs) and knee-jerk measures do not constitute economic reform. It’s foolish to adopt a policy of blindly decrying the public sector simply because it may be the de nouveau thing to do. The public sector was set up by our founding fathers as the temples of modern India. At that time, only the government had the resources to start the ‘industrial revolution’. After years of nurturing, the private sector has come of age. It has become dynamic, energetic and full of confidence. Yet, we have many PSU jewels in our fold.
BHEL has beaten world leaders such as ABB, Siemens and GEC Alstom. IOC is the premier ‘Fortune 500’ company from India. GAIL has been ahead of British Gas in many dimensions. NTPC is the recipient of the largest loan in the world from the World Bank.
The truth is that today, the private sector is turning to the public sector in its search for talent. Why are the public sector stalwarts being ignored? How come not even one of the PSU CEOs is on the Prime Minister’s Council on Trade and Industry? This is prejudice, not a policy stance. Who is responsible for the inefficiency? Is there only one solution and that is to sell? The lack of governance in the PSUs is evident from the fact that ITDC had no full time CEO for four years!
There are several key issues in the current sell-off:
* INTERPRETATION: Is it to meet targets or maximise value? The government is considering an equity sell-off in NTPC, the largest thermal power generating company in India (19,435 MW) and the sixth largest in the world. It’s the second-most efficient company in terms of capacity utilisation among thermal utilities in the world. The Rs 20,415 crore company contributed 25.83 per cent of the total power generation of the country. The company’s net profit in 2002 was Rs 3,917 crore. Why is there such a rush to divest this concern?
The government’s total equity in PSUs is Rs 82,434 crore; including debt, it is Rs 250,000 crore. What will be done with the loss-making units? We have to evolve a balanced perspective and also concentrate on restructuring. What is needed is to look at the quantum of capital raised and not P/E (price earnings) ratios. We have raised $ 1.5 billion through disinvestments of 17 companies while China has raised $ 20 billion through disinvesting five State-owned companies. Therein lies the low valuation issue!
* TIMING: The world over, disinvestment has yielded the best dividends in a booming market. In our case, it’s the reverse. The global markets have been reeling under a bear onslaught. Dow Jones has lost over 25 per cent of the peak reached post-9/11, Nasdaq has fallen to a record low. The Indian market has traded in the low 3,000s range for over a year. This is obviously the worst time to sell.
Basic common sense implies that one doesn’t sell when there is panic in the markets. One doesn’t sell when there is a glut of equity in the market. But for reasons best known to this government, it has accelerated the sale of PSU shares. The government is selecting the PSUs for sale in an ad hoc manner — that is, as soon as the tussle between the ministries are resolved! Who decides the road-map and timing of divestment of a particular asset? All the ITDC hotels have been sold in an environment when the tourism industry is in a severe recession. And telecom companies are being targeted when the industry globally is suffering from over-investment.
* TRANSPARENCY: The lack of transparency is demonstrated by the absence of global players who prefer not to deal with red-tape in the Indian establishment. The absence of global interests has led to selling PSUs at local valuation benchmarks, thereby creating monopolies, a possibility shunned by earlier governments.
* CONSENSUS: In most cases, the ‘concerned’ ministry and the ministry of disinvestment indulge in public arguments on methodology and timing. This unnerves serious investors and scares away bidders. In listed PSUs, it enhances the volatility in their stock prices. Take the following cases:
The Centre’s divestment of 51 per cent equity in the National Fertilisers Limited hinges on the finalisation of a long-term fertiliser policy. The government wanted to go ahead with the NFL sell-off before the policy is framed, which would either jeopardise the sell-off process or compel it to be sold cheaply.
As for VSNL, there was no coordination between the disinvestment and the telecom ministry. The dividend stripping (Rs 2,000 crore) was an afterthought. Had bidders known that the potential transaction size would be lower, there was a possibility of more bidders joining in to make the bid more competitive. Besides, post-investment, the norms of ‘corporate governance’ in terms of the government’s role changing from owner to shareholder were not followed. The fracas between the ministries sent adverse signals to future investors.
* RESERVE PRICE: There are four methods the government uses to value companies — discounted cash flow, asset valuation, comparable analysis and P/E multiples. For hotels, there were wide variations in value among these methodologies. The government could not extract the full value of the Qutab and Lodhi hotels’ land in Delhi. Sold at market value, these hotels would surely have fetched a better price. As for VSNL, including the two dividends totalling Rs 150, the company was sold for Rs 353, 50 per cent of the Rs 611 high reached in February 2000.
* DISINVESTMENT OR NATIONALISATION?: In the case of the IOC purchasing IBP, the IOC bid Rs 1,153 crore for 33.58 per cent equity stake, almost two times its closest rival, Shell’s price. Certainly, one public sector company acquiring another public sector company is not divestment. In order to build a broad consensus, the government should take Parliament into confidence and present a White Paper that lists the companies proposed for disinvestment or restructuring, the rationale and action plan. This would lead to a more productive debate.
* India must hire a reputed global privatisation advisor and conduct a strategic road-map exercise. The reputation of the advisor will send a strong signal. An informed decision should be taken — vis-à-vis capital markets, a restructuring or a divestiture transaction. This could be handled by an investment-banking firm. It’s important to separate areas of core competence and evolve a consensus among stakeholders. There should be no dissonance within the government.
* We should execute this plan with the assistance of an international marketing effort — which is lacking today — to facilitate the best price for the companies. In Latin America and the Caribbean region, as much as 55 per cent of the proceeds from privatisation came from foreign investors, 24 per cent in eastern Europe and Central Asia, 15 per cent in East Asia and the Pacific. In India, the tally is nil till date.
* We should provide flexibility to companies to raise funds and grow, rather than sell them off so cheaply. The government can’t throttle companies with the dilution argument and then blame them for inefficiency. This is grossly unfair. Air-India, Indian Airlines, the telecom sector and oil and gas companies have been waiting for eight years to raise funds. China has completed divestment via the equity issuance route, piggybacking on the strategic sale route and raising US $ 20 billion in 2000-01.
* Moreover, the employees’ interests should be protected in terms of retrenchment clauses and by granting them stock options on a favourable basis, as the Congress government did in the Nineties. The participation of employees in the upside of these companies is crucial to the success of the process.
With all these hurried sell-offs, what is the use of proceeds? Capital receipts disappear into the black hole of revenue expenditure! There is no transparency, no accountability, no disclosure. The proceeds should be used to increase gross capital formation by investment in healthcare facilities, infrastructure and education. As Arun Shourie’s father H.D. Shourie said: “Privatise, but wisely.”
The writer is a Lok Sabha MP