Time is ripe for 'golden shares' to debut in India

As the new government – to be formed by June 1, 2014 – is faced with the daunting task of providing a few trillion rupees of capital to recapitalise PSU banks over the next 2-3 years, experts in the banking circles say that finally time may have come for the introduction of “golden shares” in India.

It has been mooted a couple of times in the past without ever becoming a reality in the country but that should not put off prospective government (of any hues) from trying it out now. Initially, this concept was implemented by the UK in the early 80’s when it had privatised many state-owned companies. At that time, the rationale was to prevent a takeover of the newly privatised companies.

By this device, the UK government has one special right redeemable preference share held by itself or its nominee in the privatised company. The company’s articles of association there specified that certain issues are deemed to be a variation of rights of the special share and can only be effective with the written consent of the special shareholder. In France, after the widespread nationalisations in the early 1980’s, the government of Jaques Chirac introduced a major programme of privatisation in 1986. As a part of that policy, the control over foreign participation in privatised companies was placed in legislation.

Other EC member countries also adopted their own versions of ‘golden shares’ or imposed limits on foreign ownership in privatised industries. So much so, the Republic of Kazakhastan introduced the concept of golden share into the current legislation about joint stock companies on May 13, 2003. If India has to have the golden share, to begin with, the government can hold less than 51 per cent in state-owned banks, but still retain control as it has the power to veto changes to the company’s charter.

According to the proposal mooted by the Planning Commission in 2009, the golden share-holder will have the right to veto any board resolution aimed at following: altering the memorandum and articles of association, changing the name of the company, issuing sweat equity shares, purchasing the company’s own shares or specified securities, reducing the share capital, entering any new business, and applying for winding up the company, among others.

This is certainly attractive from the government’s perspective as it can exercise significant controlling rights over infrastructure companies without investing money and taking the economic risk on the project. But, this also gives rise to the important questions of whether this can be achieved contractually or if this requires legislative changes to corporate law.

Government’s advantages

The golden share would also help the government counter the arguments of the anti-privatisation lobby, which has been saying that PSUs are national property, family silver etc and that the government is “selling family silver to pay the grocers’ bill.” This also helps permit the government to intervene in the PSUs which are privatised.
Some critics see it (golden share) as a premature arrangement, arguing when the government is finding it difficult to sell even up to 74 per cent shares in PSUs, why go for a provision for 100 per cent sales? However, top brass of PSUs maintain that the provision is required right from the beginning. Otherwise, it might be difficult for the government to further offload its equity, as it has to sign a shareholders’ agreement with the strategic partner when the deal is sealed.

For instance, Modern Foods has been taken over by Hindustan Unilever Ltd (HUL) and the government retains 26 per cent shares. Now, if the government wants to sell off its residual stake, HUL may not agree on obliging the government with a golden share, since it was not in the shareholders’ agreement. The golden share concept will help in divestments of companies like Air India and Indian Airlines.

Let’s face it, the golden share concept will help takeover of state-run banks too but is not likely to happen now nor in the immediate future. All the same, any move by the government to reduce stake below 51 per cent is likely to face stiff resistance from banking unions and opposition parties.

Yet, there is no denying that PSU banks are in dire need of capital because of the rising pile of bad loans which entail higher provisions. “You are talking on a recapitalisation of the banking system ranged between Rs 3.5-4 lakh crore in the next three years,” says Kotak Mahindra Bank’s executive vice-chairman and managing director Uday Kotak and points out: “… the new govt will be challenged on what to do with 51 per cent ownership in public sector banks.”

According to npasource.com, a portal which tracks non-performing assets (NPAs) of banks and other entities across the country says gross-NPAs in the banking system stood at Rs 2.43 lakh crore at the end of December 31, 2013. Of this, ten out of the 40 listed banks accounted for nearly 70 per cent of the total gross NPAs.

The government is in a bind. Firstly, it does not have that kind of money to provide banks. Secondly, even if were to do so, it would end up owning 70-80 per cent or even more, in PSU banks, which is clearly undesirable. A practical solution would be to allow banks to raise capital from the market. But, if a big chunk of the capital comes from the market, the government’s stake would come down considerably.

So a golden share would be the best bet for the government to achieve its twin objectives of recapitalisation of PSU banks without losing control over them. The proposal was mooted by BJP leader Yashwant Sinha when he was the finance minister.

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