A September Revolution

Last week, even with the political situation in a tumult and the government's future uncertain, the Union Cabinet made bold and welcome changes in its disinvestment policy. Shifting from its philosophy of holding controlling stakes in PSUs, the government announced that it was willing to divest beyond the 51 per cent controlling stake something unprecedented not only in this government, but also in its preceding ones apart from putting in place a structure that will take the disinvestment process to its logical end.

The Disinvestment Commission, set up to energise the process, had done its work in right earnest, but its efforts have till now been stymied by either depressed market sentiments or pressure from interest groups. But the BJP government appears finally willing to cross that psychological barrier and offload majority stake in select PSUs that are loss-making, or operate in areas where the government has no business to be in. In some of these "strategic sales", the government will retain only a 26 per cent stake the minimum required to have a position on the companies' boards. This is practical. According to an investment banker, it would have been impossible to find a strategic buyer for less than 51 per cent on offer. "The present move will definitely make a difference," he says.

The PSUs identified for strategic sale this year include India Tourism Development Corporation (ITDC), Modern Food Industries Limited (MFIL), Balco and Kudremukh Iron Ore Company Limited (KIOCL). The other PSUs to be divested (but less than controlling stake) include Gas Authority of India Limited (GAIL), Indian Oil Corporation (IOC), Container Corporation of India (CONCOR) and Videsh Sanchar Nigam Limited (VSNL).

The government seems to be serious. The exercise is expected to take off in September as the companies were cleared recently by the core group of secretaries on disinvestment as well as by the Group of Ministers consisting of finance minister Sinha and human resources development minister Murli Manohar Joshi. North Block sources say that most of the structure is already in place and everything can kick off on schedule. According to them, the public issues of the selected four companies will be spaced out to avoid crowding in the market as well as to fetch the best price for each. As regards the structural mechanism, the proposal is to free these PSUs from the administrative control of their parent ministries and place them under a new body which will be created specially for monitoring the progress of the disinvestment process.

THE other paradigm shift is from a pre-fixed issue price to a market-determined price. This will not only give the government a large amount of flexibility in deciding the timing and size of an issue, but also help it get the best out of the situation. The earlier wait-and-watch policies have not paid off. The endless wait for a bullish stockmarket postponed the much-hyped issues of blue-chip PSUs like GAIL and MTNL, and the government gained little, as it could never get the price it was asking for.

Of course, even now, there's a lot of pessimism about the entire exercise. After all, in the first round of disinvestment in 1995-96, the Narasimha Rao government could manage only about Rs 350 crore against a target of Rs 7,000 crore. Even Disinvestment Commission chairman G.V. Ramakrishna feels that "unless there is a rapid improvement in the market conditions, the target might remain a far cry." He thinks disinvestment needed to be handled carefully but there were not too many alternatives available before the government.

This year, the government is aiming to net Rs 5,000 crore, but shares of PSUs are being quoted at 45-50 per cent lower than their 1997 highs. GAIL, for instance, is being quoted in the Rs 85-95 range against Rs 150-160 in end-1997. IOC, similarly, is at Rs 470 against a price of Rs 890 last year.

Experts, however, think that the problem lies elsewhere. Says economist Shubhashis Gangopadhyay: "The basic problem is that the government still has a huge role to play in the economy and when it spends only 10 per cent of its time for this while 90 per cent goes for politics, economic decisions have to take a backseat." Also, what about the Left parties, ardent opposers of any disinvestment move? They threaten dire consequences if it is carried through. Left leaders still believe that the emphasis ought to be on reviving and modernising the PSUs rather than selling "family jewels for a song". Says an agitated A.B. Bardhan, general secretary, CPI: "Disinvestment is nothing but a motivated move towards privatisation—something we oppose in any form."

According to Bardhan, the government's basic intention about disinvestment is wrong and unacceptable. "In the past disinvestment proceeds have been used not for productive purposes but fiscal management." Gangopadhyay concurs: "Disinvestment should not be a budgetary exercise at all. Ever since 1991, disinvestment proceeds have not been earmarked for reducing debt or for any productive purpose but for reducing the fiscal deficit. The entire premise on which disinvestment is based is wrong." A fundamental problem could also be the multiple and complex objectives of the disinvestment process, as stated by the government: maximising broad-based equity holdings and disinvestment revenue, and also promoting employee interests. This, in a market that is not only depressed but also unpredictable, is hardly going to be easy.

Even the Disinvestment Commission is not too happy. It had warned the government that to enhance their intrinsic share value, the PSUs needed to be restructured before divestment. Almost nothing has been done on this front. The investor will also demand a clear message that the government is serious about making PSUs more independent and efficient and less prone to whims and fancies of politicians. So there could be several hurdles coming up. But the good news is the government is at least moving in the right direction.