PSU divestments: Walking the talk

In 22 days, between February 20 and March 13, the government raised Rs 14,338 crore by divesting its stake in six public sector undertakings (PSUs). Inclusive of the Maruti Udyog sell-off in June last year, the mop-up from PSU divestment this fiscal stood at Rs 15,332 crore. This is roughly one-third of the total PSU sell-off kitty (Rs 44,851 crore) over the past 15 years since 1991-92, when the Centre sold its stake in 47 companies in two tranches.

This year's divestment programme is unique in more than one way. First, at Rs 15,332 crore, this is the highest mop-up in a year. Second, the actual realisation has exceeded the target by close to Rs 1,000 crore.

In the PSU divestment history, the government thrice exceeded its target in raising money by selling its stake in PSUs; but the margin was smaller. For instance, in 1991-92, it raised Rs 3,038 crore against a target of Rs 2,500 crore. In 1994-95, it raised Rs 4,843 crore against the targeted Rs 4,000 crore and in 1998-99, the mop-up was Rs 5,371 crore against Rs 5000 crore.

However, the government has, by and large, missed targets by wide margins. In 1995-96, it raised Rs 351 crore against the aimed-for Rs 7,000 crore and in 1999-00, the amount raised was Rs 1,860 crore against Rs 10,000 crore.

Early this month, while addressing an investors' conference in Singapore organised by I-Sec, the investment banking arm of ICICI Bank, Disinvestment Minister Arun Shourie promised to accelerate the speed of the divestment programme if the BJP-led coalition government comes back to power. If Shourie lives up to his word, one may see a sharp rise in the government's sell-off programme and a parallel slowdown in its borrowing programme, managed by the Reserve Bank of India (RBI). If the sale proceeds from the PSUs take care of a part of the fiscal deficit, the government will not need to borrow heavily from the market.

Before analysing the future of the sell-off programme, here's a look at how the PSU disinvestment programme has evolved since 1991-92 when the first waves of liberalisation hit the Indian economy. The government kicked off the exercise by selling minority shares in 47 PSUs (in two tranches of 31 and 16) through auction in bundles of "very good", "good" and "average" companies. But the very next year, it abandoned the method of bundling shares even though the auction system continued.

In 1994-95, non-resident Indians were permitted to participate in the divestment programme and in 1996-97, the government took its first PSU (VSNL) overseas by floating global depository receipts (GDRs). In 2000-01, the concept of strategic sale was introduced with Balco.

Except for Modern Food, only minority stakes in PSUs were sold before 2000; strategic sales changed the scenario. The main disadvantage of the sale of minority stakes has been lower realisation as management control is not transferred. Minority sales also give the impression that the main objective of the government is to raise funds for reducing its fiscal deficit, and not to improve performance or governance.

Along with the methods, the government's language of divestment has also changed over the years. Take a look at the interim Budget of 1991-92, which said, "It has been decided that government would disinvest up to 20 per cent of its equity in selected public sector undertakings, in favour of mutual funds and financial or investment institutions... The disinvestment, which would broadbase the equity, improve management and enhance the availability of resources for these enterprises, is also expected to yield Rs 2,500 crore to the exchequer...".

The 1998-99 Budget document went a step further and declared that the government stake could come down to 26 per cent in the non-strategic sector: "The government has decided that in the generality of cases, the government shareholding in public sector enterprises will be brought down to 26 per cent. In cases of public sector enterprises involving strategic considerations, the government will continue to retain majority holdings. The interest of workers shall be protected in all cases."

The next year, in 1999-2000, the government subtly introduced "privatisation" in its vocabulary. "Government's strategy towards PSUs will continue to encompass a judicious mix of strengthening strategic units, privatising non-strategic ones through gradual disinvestment or strategic sale and devising viable rehabilitation strategies for weak units," said the Budget statement.

The next year, the government made it clear that it was ready to bring down its stake in non-strategic PSUs to below 26 per cent. In his Budget speech, the finance minister said: "The government's policy towards the public sector is clear and unambiguous. Its main elements are: restructure and revive potentially viable PSUs, close down PSUs which cannot be revived and bring down government equity in all non-strategic PSUs to 26 per cent or lower, if necessary".

The success of the Maruti public issue in June 2003 and the six public sector floats in February and March have proved that the government is indeed walking the talk. If his Singapore speech is any indication, it's also clear that Shourie does not want to "walk" on the disinvestment path any more; he wants to run. He is a man in a hurry to cash in on the India story, written by foreign institutional investors' new-found interest and global rating agencies' re-rating of the country.

There is nothing wrong in Shourie's enthusiasm. But his investment bankers, who are steering the disinvestment programme with him, will do well to advise him on certain issues.

First, the programme should be spaced out. Most of the six PSUs that hit the market over the past month saw parallel launches of domestic floats as well as overseas road shows. In some cases, the issue was almost over before the companies were even properly introduced to overseas investors. Better planning can avoid such tight schedules.

Ideally, the issue should come out with a disinvestment calendar on the lines of the RBI's debt calendar, which outlines the timing of all dated government securities.

Second, the success of public floats should not induce the government to keep its eyes shut to strategic sale and block trades. It should try all three ways simultaneously "" public issues, strategic sale as well as block deals with financial investors to get the maximum out of it. Third, it should stop acting miserly when it comes to investment bankers' fees.

The investment banking community earned fees worth around Rs 18 crore from the government's Rs 14,338 crore mega-disinvestment programme of the past month. Two years back, in January 2002, investment bankers had earned fees of Rs 25 crore from the Bharti Televentures public issue alone. The size of the issue was Rs 834 crore! In fact, even for the Maruti Udyog capital issue in June last year, the merchant bankers' fees was 1 per cent of the issue size. Thus, for the Rs 993.34 crore issue, they got Rs 9.93 crore.

This time around, they did not have the luxury of earning even 1 per cent of the issue size. Of the six issues, the CMC float offered the highest"" 65 basis points (one basis point is one hundredth of a percentage point) "" and ONGC the lowest "" 7.5 basis points for the Rs 10,695 crore issue.

So far, investment bankers have been looking at these issues as an opportunity for brand building. But this may not be the case any more. The government must improve the economics for the investment bankers if it wants better service.

Finally, when it comes to hitting the market, the government should stop behaving like a government. It should act like a promoter. That is, it must stop dictating terms to the market and should have the courage of withdrawing its floats if market conditions are not conducive.