Know your bidder

Govt must develop capacity for privatisation

The Union government on Wednesday decided to sell its residual stake in Hindustan Zinc. The government currently holds 29.5 per cent in the company and is expected to raise over Rs 38,000 crore by selling its stake. This would significantly help in attaining the current year’s disinvestment target of Rs 65,000 crore, though the decision to cancel the privatisation process of Bharat Petroleum Corporation is a big setback. The government should nonetheless aim to take the overall process forward. Higher disinvestment proceeds will help in pushing up capital expenditure, which is absolutely critical at this stage of economic recovery from the pandemic-induced disruption. Since the government has announced tax cuts and will incur additional expenditure, which is likely to put pressure on its finances, higher disinvestment proceeds will help protect the allocation for capital expenditure. While the merits of disinvestment and privatisation can hardly be overstated, the government is experiencing a somewhat unexpected problem in this context. It had to halt the privatisation of two public sector enterprises (PSEs) because the winning bidders had questionable credentials.

After stopping the privatisation of Central Electronics and Pawan Hans, the government has revised the process. It will now ask bidders to give a legal declaration stating that they have not been convicted by any court or received an adverse order from regulators about a serious offence. In the case of Central Electronics, the winning bidder had a case pending at the National Company Law Appellate Tribunal. In the Pawan Hans deal, it was found that one of the members of the winning consortium had an adverse order against its management from the National Company Law Tribunal for not paying the required amount after winning the bid in the resolution process of a Kolkata-based company.

Although current rules prevent such entities from participating, the government will now ask for a legal declaration with a number of details. A separate legal declaration will hopefully help avoid a repeat of what happened in the above-mentioned cases, but the government would do well to not solely rely on such declarations. Since privatising a PSE is likely to be a reasonably large transaction, the Department of Investment and Public Asset Management (DIPAM) would be well advised to do its own due diligence. What if it is known after a transaction has been completed that the buyer has grave legal troubles and the declaration made during the time of bidding was incomplete. To be sure, the government would be in a position to take legal action, but the future of the firm will be at risk. It could also put the entire privatisation process in jeopardy. Privatisation of PSEs is still not politically popular in India. Although the government must be commended for pursuing this process, it is extremely important that it doesn’t make mistakes.

In fact, aside from legal issues, DIPAM must ensure that PSEs are sold to bidders with strong balance sheets and the ability to protect the interests of all stakeholders. Since the government now has the policy to maintain a minimum presence in strategic areas and sell all other PSEs, it is important to develop capabilities to execute a large privatisation pipeline. This will also help in the government’s asset monetisation exercise.