Economy: PSU Disinvestment; A Bold Gambit

Despite a downbeat market, the Government puts key stocks on the block and alters strategy to mop up funds.

This does seem a happy coincidence. Just when the Finance Ministry wants to launch an offensive on disinvestment, it has got itself a new secretary whose pet subject happens to be privatisation. On his part, it is almost as if the technocrat Vijay Kelkar had readied himself for the job. As petroleum secretary earlier, he had initiated measures to push for reforms in the oil sector; even later when he was shunted to the lacklustre Tariff Commission, he had used his spare time to work out a full-fledged strategy for privatisation.

With the Government embarking on its disinvestment blitzkrieg this month, Kelkar hopes his report -- "Privatisation: A Fast Track" -- will give a new thrust to the process. While the report is under review -- much to Kelkar's delight -- the Government has already decided to alter the basic sellout strategy to make disinvestment a success this year. For the first time, issues will be launched simultaneously within the country for domestic financial institutions and in markets abroad for foreign buyers. And depending on where the Government gets a better price, it will offload its shareholding.

The New Agenda

Disinvest simultaneously in domestic and foreign markets. Offload where bids are better.

Sell a part of the shareholding to retail investors at a discount.

Begin with concor this month. Reduce stake from 77 to 60 per cent; follow it up with IOC (from 91 to 81 per cent); by January, reduce holding in GAIL (from 96.6 to 71 per cent) and VSNL (from 65 to 54 per cent).

Start strategic sales this year to bring in new management partners. PSUs selected: Modern Foods, ITDC, Bongaigon Oil refineries, Kudremukh Iron Ore and Bharat Aluminium Co.

There is something for small individual investors too. Following the sale to the FIs, the Government will offload the shares to retail investors at a discount. There will be a time lag of about two months though. Unlike in the past, the Government has no intention of pulling out of the market once the issue is thrown open, even if it doesn't get a good price. "We will disinvest at the market price and we won't wait for the market to turn so that we can make larger profits," says Finance Minister Yashwant Sinha.

The show begins with the offer of some of the best public-sector stocks. The Container Corporation of India (CONCOR) will be first off the block sometime this month, followed by Indian Oil Corporation (IOC). The disinvestment process in the Gas Authority of India (GAIL) and the Videsh Sanchar Nigam Ltd (VSNL) will also be completed by the close of the current financial, if not earlier.

Given their relative strengths, these public-sector undertakings (PSUs) have been sell-off favourites ever since the policy decision to reduce government stake in public enterprises was taken. concor enjoys a monopoly in handling imports and exports trade in containers through the rail route. IOC is the biggest oil company in India. Its hold on the refinery market apart, it is the sole canalising agency for imported crude oil and figures in the Fortune 500 list. GAIL and VSNL too are crown jewels in the state treasury. While GAIL's earnings are expected to grow at the rate of 20-25 per cent an annum at least for the next two years, VSNL has an assured monopoly on international calls till the year 2004.

The idea of selecting these prime stocks is to mop up at least Rs 5,000 crore this year, the sum targeted in the budget. Experience has shown that previous strategies do not deliver. Last year, for instance, all that former finance minister P. Chidambaram could manage was Rs 906 crore. This when he had ambitiously increased the initial traget of Rs 4,800 crore to Rs 7,000 crore following the pay hike to bureaucrats. In 1996-97 too, the Government had aimed at Rs 5,000 crore but could garner only a tenth of that.

This time the Government is desperate to meet its target so that its mega spending plan to kickstart the economy doesn't go awry. It is also banking on the sell-offs for sentiments to look up in the stock markets. It hopes they will have at least a mild Viagra effect on the markets so that equity mop ups will no longer end up as flop shows. Says Roddy Sale, head of investment banking, Jardine Fleming: "If the issues are priced attractively, they will revitalise the markets, improve liquidity and popularise the concept of disinvestment."

Towards the end of this year, the Government will also go in for strategic sales where it will shed management control and let a partner with greater expertise come in. Among those undertakings shortlisted here is the Modern Food Industries, the PSU where over 2,000 workers threatened a rampage because the Disinvestment Commission recommended a 100 per cent sell-out of government equity. For now, the Government intends to retain half its hold on the company while global advisers have been appointed to find the strategic partner.

The other PSUs being considered are Indian Tourism Development Corporation, which owns the Ashok group of hotels; Kudremukh Iron Ore Company Ltd, set up as a 100 per cent export-oriented unit to mine low grade iron ore in the Western Ghats; the Bongaigon Refinery & Petrochemicals Limited in Assam, which has a small presence in its market segment and suffers from locational disadvantages; and Bharat Aluminium Company which has a minor share in the competitive aluminium market and is likely to lose it further. With strategic sales in these cases taking about 18-24 months, the Government is not expecting the proceeds from these units this fiscal.

But for all the strategic planning, the disinvestment programme is really a gamble. Seldom in the past have governments attempted to sell when the markets are down. For instance, the previous cabinet had refused permission to the Finance Ministry to sell shares in VSNL when it was trading at $11.5 a GDR (the equivalent of half a share) because in the previous round the company had sold at close to $14 a GDR. Currently, VSNL's GDRs are trading at $10.2. "We certainly don't believe that the Government should sell when the markets are downbeat," says Disinvestment Commission Chairman G.V. Ramakrishna. "These are among the country's best assets and they shouldn't be sold cheap."

Critics are also sceptical about the extent to which sales can have an impact on market sentiments and the economy this year. "In none of the disinvestments is the Government reducing its stake to 51 per cent," says Ajay Shah, economist with the Mumbai-based Indira Gandhi Institute for Development Research. "It's a timid affair, more dramatic steps are needed." The contention is that only a booming economy can sustain upswings. So far the feel-good factor has not yet returned. While Sinha keeps his fingers crossed, Kelkar may as well get started on a follow-up paper, this one titled: "Reviving the economy: a fast track strategy".

ALTERNATIVE STRATEGY

Finance Secretary Vijay Kelkar believes the Government should hasten its disinvestment and privatisation process. In his strategy paper on privatisation, he argues for a reduction in government shareholding to 49 per cent. That is the Government should not have majority control, even in PSUs as good as the Industrial Development Bank of India and the Mahanagar Telephone Nigam Limited.

The paper is being referred to the core group on disinvestment, a body of secretaries led by the cabinet secretary. If it is approved, it may be pursued as an alternative mode to privatisation.

Kelkar's strategy differs from the past that it envisages the setting up of a Special Purpose Vehicle (SPV), a new corporate body. It requires that the Government sell its holdings above 49 per cent to the SPV, which in turn would offer it to other investors within a time frame of 18-24 months. This way, the undertakings would become privately owned and there would be pressure on them to become more competitive. Kelkar believes that the SPVs will also reduce delays in the sale procedure, bring about transparency and help meet budgetary disinvestment targets.

Though the finance secretary is bullish on his proposal, it can be pushed through only if the Government reduces its stake in prime PSUs to 49 per cent within a maximum period of two years. So far, however, the Government has shown reluctance to do so.

Policy matters notwithstanding, the core group will also have to study efficiency gains through the new process. But what is heartening is that the new finance secretary begins his tenure with a commitment to privatise public enterprises whose inefficiency has been one of the most deep-rooted ills of the Indian economy.