The BJP-led NDA government is pursuing disinvestment not to vacate the public sector, but to increase its efficiency
Although the moratorium that the United Progressive Alliance government had placed on strategic sales in 2009 has been lifted, it is quite evident that Prime Minister Narendra Modi is not planning to emulate British Prime Minister Margaret Thatcher. With the conviction that government has no business to be in business, she had led the United Kingdom, in the 1980s, to privatise 670 of its public sector companies.
If Thatcherite privatisation was about exiting business through a transfer of state assets and companies to private ownership, the new disinvestment policy Mr. Modi’s cabinet approved in February is bound to increase government control over public sector companies.
The intention of the policy is not to shrink the public sector but to rejig it so that assets, including land and cash balances, of government companies can be hived off and used for investment in new projects. The renaming of the Department of Disinvestment as the “Department of Investment and Public Asset Management” reflects the new thinking.
To increase efficiency
The BJP-led NDA government is pursuing disinvestment, NITI (National Institution for Transforming India) Aayog member Bibek Debroy told The Hindu, not to vacate the public sector, but to increase its efficiency. If a government company is profitable without subsidies while competing with private firms, then why should government exit, he argues. According to him, the new disinvestment mantra is to reduce interference, allow public sector enterprises to function along commercial principles by granting managerial independence in decision-making, such as in appointments.
He makes an “important pedantic” distinction between privatisation and disinvestment: “While sales of stakes greater than 50 per cent, perhaps even 100 per cent, is privatisation, any tinkering here and there is disinvestment”.
The government set a new record in “tinkering” with disinvestment in the last financial year, 2015-16, by raising Rs.32,148.80 crore.
No government companies were sold to private sector owners. The government did not give up its control over a single public sector company. It merely offloaded a few shares in a handful of companies, mainly through the stock market, where many of the buyers picking up the divested shares were from the public sector — public sector banks, the Life Insurance Corporation of India or other government companies. The divested companies remain state-owned and government control over them undiluted.
In fact, since 1991, over 90 per cent of disinvestment receipts, of over Rs.2 lakh crore, have come from such piecemeal disinvestment.
All privatisations so far, except Modern Foods, happened during the tenure of Arun Shourie as Disinvestment Minister in the Atal Bihari Vajpayee’s National Democratic Alliance government.
Bureaucracy unenthusiastic
Not all of these are controversy-free. In 2006, the Comptroller and Auditor General of India — in more than one report — pointed to serious shortcomings in the sales processes. Two years ago, the Central Bureau of Investigation (CBI) registered a case against, among others, former Disinvestment Secretary Pradip Baijal for the sale of the Indian Tourism Development Corporation’s Laxmi Vilas Palace hotel in Udaipur.
Whatever the final outcome of the probe, the damage has been done. Bureaucrats have got cold feet over strategic sales. In a corrective step, Mr. Modi’s new disinvestment policy provides for land to be valued at market price for inclusion in sales. NITI Aayog is set to bring out fresh recommendations about loss-making units that can be sold, their assets valued and disposed of, and possible strategic sales.
That the task of identifying candidates for strategic sales and of reframing of the policy objective itself got farmed out to NITI Aayog, the government’s think tank confirms that bureaucrats have little stomach for outright sales.
Adding to their discomfort is a potential legal hurdle. In January, the Supreme Court gave directions to the government to put on hold plans to offload its residual 29 per cent share in Hindustan Zinc Ltd., an erstwhile public sector company and a subsidiary of Vedanta since 2003 and advised the government against proceeding on the sale without seeking parliamentary sanction. Officials are worried that this can apply to past and future disinvestments of all companies that were nationalised under legislation of Parliament.
Fiscal pressures
The disinvestment targets too suggest that it is a government caught between caution and the pressures of fiscal goals; not one striving to exit business. Of the disinvestment target of Rs.56,500 crore for this year, Rs.36,000 crore is to be raised from small sales, which are safer, but which do not dilute government control.
Financial parameters of government companies, such as borrowings and operating profits, are being closely monitored to identify possibilities of share buybacks, a new kind of disinvestment officials have recently come up with.
In the first of these, on March 30, the CMD of Hindustan Aeronautics Ltd. handed a cheque for Rs.4,284.37 crore to Defence Minister Manohar Parrikar. On the same day, the government received Rs.198.85 crore from Bharat Dynamics Ltd.
Money changed hands — it went from the two public sector units to the government. The government companies bought some of their shares from their owner, the government. The only effective change is that money which was on the companies’ books is now in the government’s account under the head “Disinvestment Receipts”.
According to one estimate, the top 30 public sector companies hold more than Rs.1.5 lakh crore in cash and bank balances, which the government has realised is sitting idle. Government companies are being prodded to dip into their reserves — either to invest in growth-generating projects or to float shares buybacks. The buybacks are a bit like the left hand buying what the right hand is selling, Mr. Debroy says.
The government is taking money out of one pocket and putting it in another—and getting richer. It’s not magic. It’s not privatisation. It’s disinvestment.
puja.mehra@thehindu.co.in
Buyback
The Central government has set a very ambitious disinvestment target for the current financial year. The Union Budget 2016 has set a target to raise Rs 56,500 crore through direct stake sales this fiscal — Rs 36,000 crore from sale of minority stakes in Public Sector Undertakings (PSUs) and Rs 20,500 crore from strategic disinvestment. The progress has been quite encouraging as the Modi government wants to make state-owned companies efficient and sell the loss-making ones.
In fact, the first six months of this fiscal (April to September FY17), the government has managed to raise Rs 21,000 crore by nudging five state-owned companies to go for share buyback and stake sales. Of these, Rs 16,500 crore came from buybacks in five state-owned companies. This achievement is highest ever half-yearly mop up by any government (previous high was Rs 13,000 crore FY 16) and the proceeds are already at 38% of the combined target and 58% of the minority stake sale and buyback target.
Share buyback: The preferred route
The tested option of buyback will be the white knight this year when it comes to disinvestment. The government is effectively tapping share buybacks by cash-rich PSUs for divestment if its stake. In other words, money will be transferred from the company to the promoter /r the government. Given the poor response to the government’s divestment issues in the past and maybe not right valuation, where state-owned Life Insurance Corporation of India had to bail the government out in most cases, it is relying more on buybacks this time.
The government is effectively tapping share buybacks by cash-rich PSUs for divestment and the results are very encouraging.
The five state-owned companies, whose boards had approved the buybacks earlier and have successfully carried them are Coal India, NDMC, Nalco, Manganese Ore (India) and Bharat Electronics. The five-stake sales (offer for sale) which the government carried successfully to raise Rs 4,500 crore were NHPC, Hindustan Copper, NTPC, Indian Oil and Engineers India (the last three companies’ OFS were for employees).
One of the reasons for the stellar performance in disinvestment this year is because of the fact that the Department of Investment and Public Asset Management had come out with new guidelines in June on the capital restructuring of state-owned companies. The new guidelines underlined the fact that every central public sector enterprise with a net worth of at least Rs 2,000 crore, cash and bank balance of Rs 1,000 crore, will have to exercise the option of buyback of shares. As a result, more is expected to come from this route by the time the financial year ends. In fact, a total of 34 central PSUs hold about Rs 1.8 trillion in cash and equivalents – a cash pile that will be handy in case government wants more buybacks this fiscal. So, when the markets are volatile and there is a low appetite for government stocks, the government would look more into buybacks.
Why buybacks
The state-owned companies have been asked to buy back shares to the extent they can by the amount equivalent to 25% of the aggregate of their fully paid up share capital. Buybacks help improve financial parameters of the firms. This, in turn, improves investor’s interest in the firms, which enables companies to tap the equities market for funds when needed. Public sector companies look at buyback when share prices are low. Buyback reduces capital and improves earnings per share and even return on equity of the company.
The government prefers buyback because the transaction cost is low and can be done quickly. It is also suitable for those companies which are cash rich and have no capex plans. The downside with buyback is that it has a lock-in period as Securities and Exchange Board of India has made a regulation which does not allow the company to access capital for six months after a buyback is done.
Strategic sales
In order to cut back losses, the Cabinet Committee on Economic Affairs has given the approval to sell loss-making state-owned companies and subsidiaries to strategic buyers. This decision will roll the ball for privatization, which would help turnaround the loss-making companies and run efficiently. It will be strategic sales through a two-stage auction process, in which bidders will have to place technical and financial bids. Strategic sale refers to transfer of management control and ownership. Some of the companies approved for strategic sales include Scooters India, Pawan Hans, Bharat Pumps & Compressors, Central Electronics Ltd, Hindustan Newsprint and units of Cement Corporation of India.
In fact, Bharat Pumps is the first case of a strategic sale in 12 years as successive governments had put the process on the backburner due to the fear of triggering a controversy over valuations and backlash from trade unions and political parties. However, the Modi-government had unveiled the move to resume the strategic sale programme in last year’s budget. The government has identified the companies that are profitable and some that aren’t but have big asset bases. The key criterion is that none of them are engaged in areas that are strategically critical for India. In all the cases the valuation and the process will be sorted out by the core group of secretaries on disinvestment and the valuation will take into account immovable property and other assets. Valuations would typically take 2-3 months and various approvals have to be taken before some of the sick PSUs will be sold to buyers.
In the case of unlisted companies such as Certification Engineers International Ltd, which offers third-party consultancy, the government will exit completely, offering 100% equity. In the case of listed companies, the government will lower its holding to less than 49% to free them from state control. In fact, the government aims at delivering substantial progress by the end of this financial year. Selling off the three loss-making plants of Steel Authority of India will help improve the valuation of the profitable company. Similarly, Container Corporation is a zero-debt company worth over Rs 25,000 crore in market cap and is profit making. Also, companies like Air India will also be in the list of stake sale, but the government will wait for some time because it had announced a revival package and now wants to see its result.
The NDA government had in its previous term during the Prime Ministership of Atal Behari Vajpayee followed a privatisation strategy and sold off companies such as Maruti, VSNL, Balco and Hindustan Zinc. However, the Manmohan Singh government could not further privatise because of pressure from the Left parties. That the Narendra Modi government will follow the footsteps of the Atal Bihari Vajpayee government in embarking on the path of privatization was hardly surprising. Apart from looking at divestment, the government must chalk out a plan to improve the working of the country’s public companies and make them profitable.
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