June 14, 1999
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KAUTILYA Live and Let Divest The winds of privatisation have started blowing slowly but surely. By Jairam Ramesh Kautilya has become suspect among his political colleagues because he has been publicly applauding the two coalition governments since May 1996 for significantly advancing economic reforms. It would have been intellectually dishonest and churlish not to acknowledge these contributions. Now one more step has been taken. Last week's issue of The Economist carried a full-page announcement of the proposed privatisation of IPCL -- the Indian Petrochemicals Corporation Limited. IPCL's market capitalisation is at present around $600 million. The government's equity share in IPCL is at 59 per cent. A fresh 25 per cent share as well as management control is now being offered to a strategic investor. This sale will bring down the government share to 34 per cent. There is a convertible bond due for redemption in early 2001. If investors decide to convert to equity -- and this will depend entirely on market conditions -- then government holding will rest at 26 per cent, which is the minimum needed under our Companies Act to block a shareholder's resolution. But this 26 per cent may or may not materialise. It is better to go to 26 per cent straightaway or even better to zero per cent -- and have a separate agreement giving the government a single "golden share" that could be triggered in the national interest, clearly defined. This is how successful privatisations have taken place elsewhere in the world. The Central Government owns and operates 237 companies. IPCL is one of the five being offered for privatisation or "strategic sales", as we insist on calling it. The other four are Bharat Aluminium (BALCO), Modern Foods Limited (MFL), Kudremukh Iron Ore Company Limited (KIOCL) and India Tourism Development Corporation (ITDC). Taken together, these five privatisations, which should be complete by this time next year, could generate upwards of $1.5 billion. These revenues should be used for retiring the stock of internal debt and reducing the mounting burden of interest payments. The privatisation is being carried out on the basis of the recommendations of the Disinvestment Commission set up by the United Front (UF) government in August 1996. After a great deal of debate, the UF government accepted the recommendations regarding BALCO, KIOCL, MFL and ITDC, while the BJP government went ahead in regard to IPCL. Very recently, a decision has been taken to reduce government holding in Air-India and Indian Airlines too to 49 per cent. IPCL is actually the most significant since the prevailing theology in India has been that only public-sector companies in low-tech areas or those making losses should be privatised. IPCL is neither. In February 1997, P. Chidambaram's budget had identified it as one of the navaratnas -- the nine super-profitmaking, globally competitive enterprises. IPCL will also present an interesting problem to the government in case Reliance bids for the 25 per cent -- which it will surely do -- and finally wins the beauty contest in competition with global majors like Shell and Dupont. In the US and Europe, a Reliance taking over an IPCL would immediately trigger anti-monopoly investigations and action since such a combine would wield formidable market dominance. Some years ago, management gurus Michael Porter and C.K. Prahalad created a stir in this country when they publicly criticised the government's approval of GE's joint venture with Godrej for refrigerators saying that this was not adding to competition. But we do not have effective competition and what the Americans call "anti-trust" laws, laws that helped break up AT&T and are now being used against Microsoft. Till we have such laws, the answer to Reliance-IPCL type situations is to sharply cut import duties to no more than 5-10 per cent, so market discipline is enforced by imports or their threat. Privatisation, in the sense of transfer of existing assets and ownership from the government to private companies, is still a bad word in this country. Examples of successful privatisations are few and far between. The first instance was that of Allwyn Nissan, a truck unit of Hyderabad Allwyn that N.T. Rama Rao sold off to Mahindra and Mahindra in 1988-89. The deal was professional and transparent, quite unlike how Mulayam Singh Yadav tried to sell off UP Cements to his industrialist friends. Jyoti Basu has been trying to entice French investors to buy out Great Eastern Hotel. Maharashtra has privatised its industrial promotion company, SICOM. Orissa, Andhra Pradesh, Haryana and Uttar Pradesh have all embarked on privatising power distribution. Technically Maruti has been privatised but the government still retains around 49 per cent. This is serving no social or economic interest. The Cement Corporation of India has sold its Yerraguntla cement plant to India Cements and a German company has acquired Andrew Yule's steel belting unit at Kalyani without a murmur from the workers. HMT has been trying to sell its tractor and bearings plants. Buyers are also being wooed for Scooters India, Hindustan Photo Films and other companies. What we are learning is that divestiture is an extremely demanding, time-consuming and meticulously detailed task that calls for professional expertise of the highest standard. The author is secretary of the AICC's
Economic Affairs Department. |
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