There is a change in the business environment and there is also change in the market conditions. The government has put in place certain process that will ease the way business is conducted and this should help in the disinvestment process, which is looking at a highly ambitious target.

From the way business is usually done to getting timely approvals on the list of the companies to be divested, necessary changes have been put in place. But the volatility in the stock market has made the target challenging and  daunting.

The finance ministry set the target of raising Rs 69,500 crore, the highest ever, through disinvestment in the current fiscal. Of this, Rs 41,000 crore is to be raised through sale of minority stakes in central public sector enterprises (CPSEs) and the rest Rs 28,500 crore through strategic sale of equity in loss making CPSEs.

The government expedited the disinvestment process and tried to bring in the structural reforms and even encouraged the retail investment which in return will help in the proper valuation of PSU stocks. The department of disinvestment (DoD) too called it an ambitious and challenging task.

The target of disinvestment has often not been met. Unfavourable market conditions and low valuations of PSU stocks because of bad planning are some of the reasons attributed to this.

The last fiscal, under the NDA government, the outcome was no different. The disinvestment of Coal India and SAIL was not enough to meet the target.

This year, however, the general expectation is that the target could be attained in the favourable stock market. But the ground situation looks different. The first quarter of the financial year is over, and so far the government has only divested five percent of its stake in Rural Electrification Corporation (REC) and earned Rs 1,610 crore. The sensex, which had crossed 30,000 in March, slipped to 26,370.98 on June 10, the lowest since October 20, 2014. This forced the government to put on hold its disinvestment plans, with no activity seen in the last two months.

While the government has huge plans to divest its stake in some of the big companies and also to sell off some of the loss-making PSUs this fiscal, there are other reasons to believe that things may turn out to be different this year.
 
Changing the business dynamics

The DoD, before the beginning of the current fiscal, worked hard to change the way business is usually done. In May, the cabinet committee on economic affairs (CCEA) headed by the prime minister approved the sale of public stakes in a number of PSUs. The department has approval from the cabinet to sell its 5 percent stake in companies like ONGC, BHEL and NTPC, and 10 percent each in IOC, NALCO and NMDC Ltd.

Earlier there used to be annual action plans, under which selective stocks were identified and approvals were sought one by one. A lot of time was wasted in getting approvals.

Unlike previous years, when the disinvestment target was usually pushed to the end of the financial year, the department initiated the process in April with REC and was hopeful of spreading the entire process across the year.

Also, every time a stock came up for sale, the market got to know about it and ended up hammering down the stock prices. The DoD was able to protect the value of Coal India (divested in January) stocks from being beaten down as the market did not get to know that it was being divested.
 
While the NDA government did aim for too high, experts say, the target is achievable in the booming economy. They say the growth was expected and the general mood was for disinvestment.
 
RS Sharma, former chairman and managing director, ONGC says while the new government started with a lot of fanfare and commitments and they promised to bring reforms, eventually everything slowed down. “If they keep looking for the best market scenario to divest its stake in the public sector companies, it will never come and they will end up losing the disinvestment target they set for themselves.”

He says while the government started on a positive note, the huge target it set for itself also looked feasible. But with slow progress till now, the target has become frustrating. “Its achievability will now depend on the action taken during the remaining fiscal.”

The market volatility has impacted valuation in companies like ONGC. The nation’s largest oil and gas producer has been on the list of disinvestment since the last fiscal. Sharma, however, says price is not an issue in case of ONGC and the current market condition is favourable for divesting. 

The DoD has the pipeline ready but the volatile market condition is holding them back to go ahead with stake sale. Experts, however, believe that the disinvestment must be carried out as a reform required for greater economic efficiency rather than just meeting the expenditure needs of the government.

Pranav Haldea, managing director of Prime Database, which compiles data on capital markets and related issues, says whether the market is up or down, the government should not hold itself back from divesting its stake. He says there can’t be 12 months of ideal market conditions. “It started on a very positive note with REC divested in the beginning of the financial year. But in the last two months we do not see any activity on this front.”
 
The first quarter of the financial year is almost over and with such a huge target to achieve, the government will have to act efficiently. The target is still achievable if the government works in a structured and planned manner, he says.
 
“The good thing is that the government is looking at the entire gamut of CPSEs and not just few companies. But certainly more action is required and they should be consistent in their approach.”

However Reena Ramachandran, former chairman and managing diretor at Hindustan Organic Chemicals, says the government should not be too desperate to divest and it must look at the best market opportunity to get the best price.

“Any good investor will look at an appropriate condition to divest its stake. It would be too early to conclude for the rest of the fiscal. India is a growth story. The analysis by international agencies indicates India as a perspective area for investment.”

After any procedural changes – refining the whole process, bringing in new system and transparency – there is a gestation period to see how things actually take shape, she felt. “Essentially structural changes have been brought in and they seem to be well intended. But the basic issues still remain the same. I do not see major changes happening in decision making process, it is still slow and there is multiplicity of agencies. The enforcement mechanism has been a weak a spot,” she points out.

But she points out that the current fiscal will be crucial for the government and it will be more accountable. “They could not attain the disinvestment target despite favourable market condition, last fiscal. But this time they got enough time to bring in the required structural changes and clear hurdles.” However, according to her the main agenda behind disinvestment should not be just to meet the fiscal deficit.

Strategic sale a good sign

The centre has plans of strategic sale of some of the loss making CPSEs and giving up the management hold to a private party. Eight loss-making Ashok group hotels under the India Tourism Development Corporation (ITDC), a CPSE, could be on the block soon.

Currently, ITDC runs 16 hotels across the country and eight hotels likely to be sold include those at Jaipur, Bhubaneswar, Puri, Jammu, Guwahati, Ranchi, Puducherry and Mysuru.

During the NDA rule between 1999 and 2004, Atal Bihari Vajpayee government had divested 18 ITDC hotels. It had brought down the number of state run hotels from 34 to 16.

Experts see the decision of completely giving up the management control in these properties as a positive sign. “The government has no business of staying in most of the businesses. The decision of aggressive strategic sale will send out positive signals,” says Haldea.

Minister of heavy industries and public enterprises Anant Geete has also said that the government is contemplating sale of HMT Watches, HMT Chinar and HMT Bearing among others. In addition, it is also considering selling some of the unutilised property owned by state-owned pharma firms such as Hindustan Antibiotics, BCPL and IDPL in cities like Mumbai, Pune and Hyderabad.

jasleen@governancenow.com

(The story appears in July 1-15. 2015 issue)