The month of September delivered a double whammy to the disinvestment story, as the stake sale of the two of the five biggest public sector units (PSUs) known as Maha Navratnas – Coal India Ltd (CIL) and Indian Oil Corporation (IOC) – were put on hold.

Blame it on the vicious cycle that has afflicted the economy: a burgeoning deficit, leading to a slowdown in growth, which has affected the stock market, which in turn has affected PSU disinvestment time line. And without disinvestment bridging the deficit may prove difficult.

The department of disinvestment (DoD), under the finance ministry, was planning to organise road shows, or interactions with potential investors, in the UK, US, Hong Kong, Dubai and Singapore in October-end for the sale of 10 percent of the government’s 78.92% stake in IOC and raise around Rs 5,000 crore.

But in late September, IOC chairman RS Butola warned that “the current timing of the disinvestment is not in the interest of all stakeholders”. The head of the country’s largest oil refining and marketing company cautioned the petroleum ministry that the timing was not right due to the “prevailing uncertain environment”.

The ministry agreed and told the DoD that shares of the country’s top PSUs should not be sold for a song.

Earlier in September, the same story had played out with CIL, the world’s largest coal miner. Even as the management sought to engage with an irate trade union that was warning of a nationwide strike against the disinvestment plan, the coal ministry went to the DoD and argued that the stock market was down and a sale would not fetch right prices.

The delay in the IOC and CIL sales will further affect the disinvestment process of other PSUs, especially Power Grid Corporation and NHPC.

Differences of opinion

The two instances show that the DoD and the ministries in charge of PSUs are often not on the same page. The disinvestment target for the current fiscal is Rs 40,000 crore, but DoD has so far raised only Rs 1,325 crore by divesting stakes in Neyveli Lignite Corporation, MMTC and ITDC among others. The department, possibly under pressure from the government, seems to be chasing the target notwithstanding the weak market that is making PSUs and their ministries cringe.

Does the disinvestment move in such a market hurt a PSU and should it object to it? A former secretary with the department, wishing not to be named, says that, “Technically the company does not have a right over a shareholder’s decision to sell its share. It can step in only if it hurts the interests of other shareholders.” He adds that that the government is a holding company of a PSU and if it wants to sell its stake and raise money, for use somewhere else; it cannot be faulted.

Political economy of disinvestment

Observers say the current dilemma on disinvestment is quite typical of UPA. It was NDA that championed the disinvestment route – in fact, it was during the Vajpayee  government that a full-fledged ministry was set up to push the disinvestment drive. Along with a large number of stake sales between 2000 and 2004, the government exited several PSUs completely. But UPA 1, supported as it was by the Left parties, truncated the ministry into a department and put the programme on a back burner. Thus, the income from disinvestment came down from Rs 28,000 crore of the NDA years to Rs 8,500 crore in the UPA 1 regime.

UPA 2 has shown some belief in the disinvestment programme, partly because it is freed from the Left pressure and also because the welfare initiatives that are the hallmark of the Congress are only widening the fiscal deficit and selling ‘crown jewels’ is one way to finance it.

Unfortunately, every case of disinvestment has proved to be a deal of under-pricing in the recent years. Large quantities of shares of profit-making PSUs have been sold away to private sector at throwaway prices in the recent past.

This has proved to be a disaster for lakhs of investors as well who thought PSU shares were safe bets. Some 50 listed PSU stocks lost over Rs 2 lakh crore in market capitalisation due to the ham-handed manner in which the government went about selling these shares at huge discount to prevailing market rates.

“Public sector enterprises should not be used as cash cows,” says Bhaskar Chatterjee, a former secretary at the department of public enterprises who is now CEO and director-general of the Indian Institute of Corporate Affairs. He says there is a “division in opinion” on disinvestment, as the government wants disinvestment to raise revenue, ignoring the interest of the PSUs in the process.

“It is not considering if it [disinvestment] will help the enterprises or if it is good time to go to the market, when their market price is reduced. This affects the corporate image of PSUs,” he says. Chatterjee says that only the stake sale of CIL has proved to be a good deal so far.

“If the government goes ahead with disinvestment only to raise resources, the PSUs get the impression that the government is not on their side and they feel left out. The government, before going for disinvestment, should take the PSUs in confidence and should consider the market conditions as well. They should not just impose disinvestment on PSUs.”

Market conditions matter

Pradeep Baijal, a former secretary at the department of disinvestment, says that disinvestment is a ‘political’ decision and thus depends entirely on the government’s perception but all the same market conditions cannot be ignored. “Right now there is no demand of shares. Markets are volatile and people do not want to invest. And precisely when there is not much demand in the market, if the shares are sold at huge discounts, the government would lose out,” he said.

But Baijal emphasises that even an aggressive disinvestment process cannot do much for the economy. “The amount received through disinvestment is very small (to help recover the economy). It cannot fill the government’s kitty and would not create much difference to the economy,” he says.

Still, if disinvestment has to be done, the question is how to go about it. Instead of offloading the whole quantity in one go, many experts favour starting out with smaller issues, gauge the market response and then move forward accordingly. This way, the government can avoid destroying the value of PSUs, they argue.

Economists, though, are against any delay in disinvestment. “There is a fiscal compulsion that has to be met. Delay in selling shares would involve a lot of risk,” says Abheek Barua, chief economist of HDFC Bank. He adds, “Hypothetically, yes, when the market would go up, the government can get better money. But that involves a lot of risk. Markets are very unpredictable and fiscal needs are very strong.”

He says that all the issues related to disinvestment, be it the timing or the market situation, are relevant only when there is enough time in hand. “But right now not all the options are open. It would be an appropriate decision if the government sells stakes, earns money and boosts the economy for larger good.”

That, however, calls for a deft maneuvering of the market: something few experts expect from the blundering mandarins.

(This story appeared in the October 16-31, 2013 issue of the print issue)