PSU disinvestment: Selling family silver at raddi shop

Why it is a bad idea the way it is practised

alam-srinivas

Alam Srinivas | March 18, 2013


P Chidambaram took budget-related queries from citizens on Google Hangout on March 4
P Chidambaram took budget-related queries from citizens on Google Hangout on March 4

Two incidents prove how politicians and bureaucrats treat public sector undertakings (PSUs) as their private jagirs and fiefdoms. In one case, witnessed personally, a junior (and young) cabinet minister asked his senior colleague how he could control the hundreds of crores of rupees that the PSUs under his charge spent on sports, especially cricket. “They spend so much every year, but I have no say in how they spend such huge amounts,” he complained.

The senior minister, who has fingers in several cricket pies, replied that by virtue of being a minister, he should ask the state-owned entities to appoint him the chairman of their respective sports and cricket bodies. “Each PSU has a sports committee or some such thing. Just issue a circular that from now on the junior minister will be their head,” he advised. The conversation shows that politicians always look for ways and means to influence investment and spending decisions in PSUs.

In the second incident, as recalled by a former senior PSU manager, when a chairman of a successful PSU sought a meeting with a senior bureaucrat, he was asked to wait for three hours. “Finally, when he was called in, the bureaucrat sat with one leg on the table. He treated the PSU chairman like dirt, and threw his weight around. It was a perfect encounter between a docile chieftain and his arrogant, abrasive and dismissive ‘mai baap’. This is what happens with most PSUs.”

Clearly, despite loud noises about autonomy, deregulation, management flexibility and reforms, the government’s attitude towards state-owned firms hasn’t changed much in the past two decades. The PSUs are either cash cow, i.e., a means to make money for politicians and their cronies, and/or fiefdoms to lord over. In effect, all the key decisions taken by the PSUs’ chairmen or their boards are dictated, or largely influenced, by the concerned ministers and bureaucrats.

Nowhere is this attitude more visible than in the disinvestment process, especially in the past year or so. The sell-off of the government’s stake was forced on the state enterprises, since the finance ministry’s sole aim was to raise sufficient revenues to reduce the fiscal deficit. The prices at which the shares were sold were ridiculously low, allegedly due to a nexus between government officials and institutional and other big investors. More importantly, other cash-rich PSUs bailed out many disinvestments.

Bridging the fiscal gap
The idea behind disinvestment is to make the PSU more autonomous, attract institutional and retail investors, who can force managements to take professional decisions, and reduce the government’s influence on the company. In India, the sole priority is to raise money to reduce fiscal deficit. This trend has intensified and magnified in the past year as finance minister P Chidambaram was obsessed with fiscal deficit. In effect, the whole purpose of disinvestment has gone for a six.

Several things happen when the aim of selling shares in a PSU is dictated by fiscal considerations. The government is forced to lay out the year’s disinvestment blueprint in advance. For example, Budget 2013 announced the intentions to raise more than twice the amount (Rs 55,000 crore) from this avenue in 2013-14, compared to the previous year (Rs 24,000 crore). Hence, everyone is aware how critical disinvestment is for the FM to meet his revenue targets.

Second, the list of PSUs, whose shares will be offloaded in the fiscal 2013-14, is also clear. “Apart from a couple of new entities, like Hindustan Aeronautics where an IPO is possible, most of the sales will happen in companies that are already listed on the stock exchanges. These will include the usual suspects in power, oil and mining,” explains Prithvi Haldea, founder & CMD, Prime Database Group. Thus, investors, especially FIIs, are aware of the amounts and companies.

Finally, it becomes awfully difficult for the government to postpone disinvestment. This is especially true when it faces the threat of a downgrade to junk status by global rating agencies, as is the situation today. So, the investors are sure that the FM will push through sell-offs, rather than backtrack even if the market conditions are adverse. All these factors result in changed market dynamics, where the direct beneficiaries are the potential investors, mostly the large ones.

Impact on valuations
In such a scenario, where people are reasonably aware of what is likely to happen in 2013-14, they can initiate strategies that will benefit them more than the government. In most cases, they start selling the shares of PSUs, which are in disinvestment play, to bring down the prices of the stocks before their issues. Who wouldn’t do this? After all, a lower market price implies that the government will need to offload at a lower price, which will result in huge gains for the investors.

Here are a few recent examples to illustrate this point. On October 13, 2010, a share of Power Finance Corporation (PFC) was quoted at Rs 379.90. From there on, it was a steady downhill trend as investors realised it was a good disinvestment candidate. By May 10, 2011, when its issue opened, the price was around Rs 200, or a drop of almost 45%. The offer price for the investor stood at '203 per share. Even after the issue, the price fell and reached a low of below Rs 125, before it climbed up.
Rashtriya Chemicals & Fertilizers was at a high of over Rs 80 in September 2012. Finally, when its issue opened, the floor price, or the price below which the government refused to sell, was Rs 45. It signified a drop of almost 45%. In the case of Hindustan Copper, the difference between its highest price (Rs 283 in August 2012) and floor price (Rs 155 in November 2012) was significant too. In all these cases, the government, which wanted to maximise its revenues from disinvestment, lost out.

However, some experts feel that a sharp dip in valuations of PSU stocks before their issues is a normal cycle of demand and supply. “In stocks, as in other products, if the potential buyers know that there is likely to be an increase in supply, as when the government sells its stakes in PSUs, the price has to go down. The investors don’t have enough appetite to buy inefficient state-owned companies’ stocks,” explains Dhirendra Kumar, founder, Value Research, which analyses mutual funds.

Even if one accepts this argument, which is not quite true, what is shocking is that the government does not have to announce PSU issues in advance. In July 2012, the market regulator, SEBI, allowed blue-chip listed companies (which include several PSUs) to opt for an “offer for sale”, which can be intimated a day before the issue date. In this process, the investors bid for the shares the next day during trading hours and, at the end of the trading session, the offer is closed. The price and volume of shares sold is determined by the market, and no one has any time to hammer down prices.

So, why doesn’t the government keep its PSU cards close to the chest? Why does it make a song and dance about disinvestment months in advance, especially since many PSUs are listed and can/do opt for an “offer for sale”? When PSUs like Hindustan Copper went in for an “offer for sale”, everyone in the market knew about it months before the issue. The reason, explain observers, is that “there may be a nexus between brokers, institutional players and government officials to benefit the large investors. As prices of PSU stocks go down before the issue, they benefit as they buy at lower prices.” 

Rob Peter to pay Paul
What is unique, and also shocking, about recent disinvestment process is that many of them have led to money taken out from one government pocket and put into another one. The only difference being that the pocket that gets the money is the one that can be used to reduce the fiscal deficit as explained before. Let us again look at a few recent examples to determine how this happens, and how most of the stake sell-offs by the government is actually a huge sham.

In many cases, like disinvestment of Hindustan Copper, the state-owned Life Insurance Corporation (LIC) bailed out the government. When the government decided to sell 5.58% in the company in November 2012, there were no takers. Scared that the issue would bomb and derail the entire disinvestment process, LIC, along with State Bank of India, was forced to buy as much as 60-70% of the issue. In March 2011, LIC bailed out another high-profile PSU issue of ONGC.

Just a week before Hindustan Copper’s “offer for sale”, the government also relaxed norms for LIC’s investments in equities. The cap for the state-owned insurer’s exposure to a single stock was raised to 30% of the paid-up capital of a specific company. Thus, LIC could now invest larger sums in a single stock, which benefitted the disinvestment of Hindustan Copper. More importantly, the relaxation was despite the opposition from the insurance regulator, Insurance Regulatory & Development Authority (IRDA).

One can safely assume that in a bid to garner Rs 55,000 crore from disinvestment proceeds in 2013-14, the government will again use LIC’s coffers in a similar way. In fact, other cash-rich PSUs have been urged to keep aside huge sums to invest in PSU stocks, as and when they are available for sale. Reports claim that NMDC (which has set aside Rs 4,000 crore for this purpose) and Coal India (which has huge cash reserves) are on this list of PSUs, which are likely to invest in other PSU shares.

Therefore, as market experts contend, disinvestment has turned into a financial circus to manage the deficit. It has made a mockery of a process, whose intention should have been to better manage the PSUs, especially the ones that are doing well, and give them more autonomy. And at the end of the day, both the government and outsiders blame the PSUs for being inefficient!

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