A push is needed to list more public sector companies on bourses and reap the dividends
Jasleen Kaur | January 25, 2014
If the stock market is the ultimate symbol of capitalism, it is an irony that the shares of public sector enterprises (PSEs) contribute to about one-fifth of the total market capitalisation. That is what they call state capitalism.
However, experts and policymakers have long argued that there is a lot of scope for more PSEs to be listed on the bourse – a move that would also earn them rich benefits. Now president Pranab Mukherjee has also joined their ranks.
Addressing a global PSE summit in Delhi in mid-December, Mukherjee said much more needs to be done to provide a level-playing field between the public and private sectors in terms of flexibility of operation and speed of decision-making,
and a measure that can help in this process is the listing of PSE stocks on stock exchanges.
Of course, the UPA government has also shown keen interest in unlocking the value of PSEs. It has advised them to go for listing in order to improve corporate governance and reduce their dependence on government finance for their capital
requirement. Moreover, the planning commission committee on reforms in central PSEs (CPSEs), headed by former SAIL chairman SK Roongta, recommended in January 2013 that 50 state-owned companies should be listed on the stock markets in
the next five years, and at least 30 of them in three years.
But in reality despite the right noises, most CPSEs are not traded on the market. As per the disinvestment policy, all unlisted CPSEs which have no accumulated losses and have earned net profits in the last three years can get listed on
a stock exchange.
Now, the number of profit-making CPSEs has increased steadily in the last few years, rising to 161 (based on the public enterprises survey of 2011-12), but only 50 of them are listed on the various stock exchanges – 46 of them on the
Bombay Stock Exchange (BSE) alone. Yet, these 46 public sector firms contribute 19 percent of the total market capitalisation at BSE. There are total 5,116 companies listed on BSE as on November, 2013. (Market capitalisation is a
notional figure of all shares of all listed firms, multiplied by their market prices.)
From the 11 recent PSE offerings – NTPC, PFC, PGCI, REC, NHPC, OIL, SJVN, CIL, MOIL, PSB and NBCC – the government has made an overall gain of '70,520 crore over the issue price (as on November 30, 2013) since their listing dates.
Based on the data of profit-making PSUs as on December 27, 2013, more than 80 firms qualify on the parameter of three consecutive years of making profit. They include notables like the Airport Authority of India, Cement Corporation of
India, Engineering Projects (India), Heavy Engineering Corporation and Hindustan Aeronautics.
PSEs: a more dominant role to play
Contrary to the perception in some quarters, PSEs are among the largest and most profitable organisations in the country. Market experts believe these companies have the potential to play an even more dominant role, with a large number
of profitable unlisted CPSEs that can go to the market. And they feel that listing would improve corporate governance in these firms as it would bring in a robust oversight mechanism.
But experts say that in most cases, where initial public offers (IPOs) were announced by the government but the stocks were not listed, the finance ministry and the respective administrative ministries of PSEs have often not been on the
Prithvi Haldea, chairman and managing director of Prime Database, says, “There has been little activity on the listing front over the last four or five years, and it has not been taken up in an aggressive manner by the government.” He
says though the finance ministry has been pushing for it, the concerned administrative ministries have shown resistance to open for public scrutiny.
Though listing helps companies raise money and expand, it may not be the case for many cash-rich PSEs, Haldea says. According to him, the appetite of PSEs is huge and despite all the problems they face, there is still a huge demand for
“There is a requirement of corporate restructuring in PSEs and they need to cross the ministerial hurdle for that. There is fear among bureaucrats of going for public scrutiny. They have little knowledge about the capital market and its
advantages. Bureaucrats do
not want their companies to be discussed 24 hours on television channels,” Haldea says.
Shying away from public scrutiny
The government-run companies are facing challenges like never before. Though the government has given managerial and commercial autonomy to many PSEs through the scheme of maharatnas, navratnas and miniratnas, greater autonomy is
required to enable PSEs to deal with the increased competition in the market.
The listing of a company, experts believe, would not just improve transparency but would also result in better disclosure. The board of directors will be open to market scrutiny and its decisions would also become market-sensitive.
Listing of PSEs calls for opening up the access to information that many of them are not used to, says Sanjeev Ahluwalia, a former joint secretary of department of disinvestment under the ministry of finance. He says that taking the
listing route would help bridge the information gap and make it more accountable.
“Who is a public sector manager accountable to: the board or the government? They should be accountable to the public at large as well because they are using a part of the public money,” Ahluwalia says. “To bring that accountability,
listing is an important intervention that must not be ignored. This social accountability would not come unless there is a legal base for it.”
Ahluwalia says besides PSEs, even cash-rich entrepreneurs of private companies hesitate to list their firms on the bourses. “It restricts the lever of management for them.” According to him, PSEs need direct governance of citizens across
horizontal and vertical length of the company.
Bhaskar Chatterjee, a former secretary at the department of public sector enterprises and now CEO and director general of the Indian Institute of Corporate Affairs, says that whether PSEs like it or not, they will have to list
themselves. “Opening up the Indian economy has forced PSEs to get exposed to the competition,” he says. “They will have to become a market player to survive and will have to follow the market system. They can’t continue to hide behind
Lauding their role in economy, Chatterjee says PSEs have a great potential and if more such firms are listed their total market capitalisation could account for over 50 percent of the total listed companies on BSE. Chatterjee says this
will bring higher autonomy and will help de-bureaucratise the sector to a large extent.
This will (also) help increase the pace of decision making, making it quicker, he adds.
In the past, the government has asked financial advisers on CPSE boards to get them listed in compliance with the disinvestment policy. Heavy industry and public sector enterprises minister Praful Patel has also said that valuation of
PSEs in the stock market is far less than that of the private sector.
RS Butola, chairman and managing director of Indian Oil Corporation (listed on BSE), says the listing of the company has helped it become a market-driven company and other companies should also be encouraged to do so. Speaking at the
global PSE summit, Butola says: “My eyes are always on the share price. We also discuss the implications of decisions we take in the boardroom.”
But former cabinet secretary TSR Subramanian says listing is a cosmetic step to bring in transparency and the real transparency would come only when PSEs are given operational and strategic freedom from the government. “Listing would
bring them under the purview of market mechanism. But they are already under strict regulations, unlike the private sector,” he says. “They (PSEs) have to face the finance ministry and CAG audit, and they are under the control of their
functional ministries. The real question is whether their boards have the autonomy to function the way they want to.”
Blame it on a slowdown in growth or growing deficit, the government is in dire need of money and is depending largely on PSEs for that. First it was disinvestment, which many PSEs resisted, and now it is a push for listing. This,
however, calls for a greater autonomy – something experts think would be difficult for the companies