Deciphering disinvestment

Offloading matrix: There is nothing wrong in selling small number of PSU shares to public

Deciphering disinvestment

A lot has been written about the Centre’s plan to sell shares of profitable PSUs to the public. Ever since the new UPA (United Progressive Alliance) government came to power at the centre in May, ‘PSU disinvestment’ has been a hotly debated subject in the media and political circles.

The disinvestment process, which came to a virtual halt in the last four years due to the opposition from the Left parties, may now pick up speed because the government has been formed without Left support this time. The government has also thrown enough hints that it is now serious about lowering its stake in PSUs. The Economic Survey — the pre-budget government document that provides a status report on the economy — clearly said that the government should mobilise at least Rs 25,000 crore through disinvestment. The Union Budget for 2009-10 also referred to the government’s intention to work towards that objective.

In fact the process of PSU disinvestment has already started with the empowered committee fixing the price band of Rs 30 to Rs 36 for National Hydro Power Corporation’s (NHPC) public issue. NHPC will issue fresh equity equal to 10 per cent of the post-issue capital and the government will offer for sale 5 per cent. The issue size, therefore, is expected to be around Rs 2,500 crore. Next in line is Oil India Ltd (OIL), which is expected to hit the market by the end of august. According to sources the government is studying another 15 PSUs for disinvestment. (See table Disinvestment Candidates).

Not for fundraising

The opposition parties and some self-styled socialist economists have criticised the government’s plan to sell shares in PSU’s. They argued that such an act is similar to selling family jewels for meeting household expenses. But nothing can be farther from the truth. The primary objective of selling PSU shares should never be seen as a desperate bid to close the budget deficit, the gap between the government’s expenses and income. As the government’s borrowings in 2009-10 is expected to touch Rs 450,000 crore, selling PSU shares may, at best, plug around 10 per cent of the short fall.
Moreover, the Finance Minister has announced in Parliament that money from PSU share sales will not come under general income of the government. It will be kept in National Investment Fund, a special fund created two years ago for modernising weak PSU’s and for rehabilitating workers who have lost their jobs due to closures of sick PSUs, he said.

Don’t time the market

There is no need to give too much credence to the opinions of some market experts that the government should sell PSU shares at the most opportune moment to get the highest price. First, in the highly volatile Indian stock markets it is virtually impossible to time the market to sail with bullish sentiments. Secondly, the government’s objective is not maximising valuation but to offer retail investors opportunities to participate in the future gains of a PSU.

Begin small

Ideally, the government should come out with small public issues of shares so that post-IPO public holding is five to ten per cent of the total equity capital. The offer for sale in the issue can be reserved only for retail investors if the size is not too big. But for large issues institutional investors should be allowed to participate.

The purpose of small initial dilution is somewhat similar to market seeding by consumer goods companies before the launch of important new products. After a PSU’s shares get listed on the market, its share price is determined by market forces. This in turn works as a real life price-discovery useful for future shares issues in larger quantities. At the time of the IPO, shares must also be offered to employees of the company and, once listed, a company can use its shares as a talent retention tool by offering employee stock options (ESOP). 

Benefits to investors

Investors might wonder is this the right time to buy PSU shares? Such apprehensions cannot be ruled out given the post-January 2008 crash in market indices leading to the current bearish mood. But it can be said with a reasonable amount of certainty that over the long-term investors can earn fairly modest returns from PSU shares. In a recent article, Prime Database Chairman & Managing Director Prithvi Haldea, pointed out that the in case of four large PSU disinvestments in the last five years, the combined market valuation went up nearly three times.

Perform or perish

Will the PSU companies benefit by listing their shares? The answer is a definite ‘yes’. With the listing of shares, every quarter companies will have to disclose data on physical and financial performance. All major price-sensitive developments in the company will also be made public through announcements to stock exchanges.

Every move of the company and its financial results will be constantly monitored and scrutinised by the media, investors, analysts and stock brokers and this in turn will keep management on their toes to perform.

Currently, although unlisted PSUs do prepare balance sheets, it is an annual affair and financial reports are not available for public scrutiny. So listing of PSUs will make management decisions much more transparent and managers will be made more accountable. By making PSUs more efficient the government too will benefit as PSUs will depend less on government financial support. The icing on the cake is that with stronger balance sheets the government will be able to raise more money from subsequent sale of PSU shares.

But mere disinvestment will not make PSUs more efficient. The government will have to entrust the job of running these companies to professional managers and give them complete managerial freedom. The government may retain 51 per cent or more stake in profitable PSUs to technically maintain majority ownership, but it should stop interfering with the management. It should also desist from taking populist policy decisions that could be harmful for some PSUs. A good example of how the government’s policy can ruin PSUs is the decision not to decontrol oil prices. Government-owned oil marketing companies like HPCL, BPCL, Oil India etc, have incurred huge losses in the last two years by selling petrol, diesel, LPG and kerosene below their cost price. If the government wants PSUs to compete with their private sector counterparts, it must create a level playing field. Or else, investors will avoid PSU stocks.  

Divestment candidates

National Hydro Power Corp*
Oil India*
Minerals and Metals Trading Corp
State Trading Corporation
Coal India
Bharat Sanchar Nigam
Engineers India
National Mineral Development Corp
Hindustan Copper
Manganese Ore India
Kudremukh Iron Corp
* Confirmed, others are still only tentative

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