While, presenting the budget for 2015-16, finance minister, Arun Jaitely had fixed an ambitious target of Rs 69,500 crores for proceeds of divestment in public sector undertakings [PSUs] during the current fiscal. Of this, Rs 41,000 crores was to come from divestment of ‘minority’ stakes and balance Rs 28,500 crores from ‘strategic’ sale.
The target was pretty ambitious considering that during 2014-15, as against a target of Rs 58,000 crores [including Rs 43,000 crores from sale of minority stake and Rs 15,000 crores strategic sale], the actual realization was only Rs 26,000 crores. Of this, Rs 22,000 crores came from sale of 10% stake in Coal India Limited [CIL] alone.
During the first 7 months April-October, the government has so far realized only Rs 12,600 crores from sale of its holding in Indian Oil Corporation Limited [IOCL], Power Finance Corporation [PFC], Rural Electrification Corporation [REC] and Dredging Corporation of India Limited [DCIL]. The response to divestment of PFC and IOCL in particular, was muted [latter’s share sale was in fact, salvaged by Life Insurance Corporation].
In view of above, the department of disinvestment [DoD] has lowered the target to Rs 30,000 crores. It apprehends that due to continuing volatility in stock markets, it won’t be possible to sell any big stock viz., Oil and Natural Gas Corporation [ONGC], National Thermal Power Corporation [NTPC], Oil India Limited [OIL], National Aluminium Company [NALCO], National Mineral Development Corporation [NMDC] etc during rest of the year.
Revising a target when more than half of the year is already over makes no sense. That sounds like making and presenting the budget all over again. At this juncture, government should only be talking of deliverables and in case, performance is not satisfactory [this indeed is the scenario thus far], it needs to look at how the tide can be turned to make up during rest of the year.
At the outset, it goes to the credit of government that right in the beginning of the year, it had prepared a carefully orchestrated action plan for undertaking divestment all through unlike in the past – under a decade of UPA–dispensation – when such exercise was invariably undertaken in a totally “ad-hoc” manner with most of share sale done towards fag end of the year.
DOD had taken ‘holistic’ approval for 20 public issues worth Rs 50,000 crores and worked out a road map with the aim to bring one issue each month. The merchant bankers were asked to conduct diligence studies and road shows for a bundle of PSUs so that a wide array of options could be exercised depending on unfolding market scenario for different undertakings.
To deal with market manipulators and maximize proceeds, government had also thought through innovations such as keeping bare minimum time gap between notification of its intent to sell and actual execution of share sale. The sale was to be done following offer-for-sale [OFS] methodology which is efficient, speedy & transparent and its efficacy already tested in sale of CIL.
Why then, the government is giving up now? Why the market perception for shares up for sale is depressed? Are there ‘extraneous’ forces at work? What can it do to fetch better price?
Two critical factors which affect the perception are (i) overall macro-economic environment and (ii) fundamentals of PSUs. As regards (i), GDP growth during second quarter was 7.4% on top of 7% in first Qr. This was propelled by growth in manufacturing by 9.3% even as services continued a high of 8% and agriculture too doing good at 2.2% [despite bad weather]. The fiscal deficit is on track and wholesale inflation continues to be in negative zone. Current account deficit [CAD] continues to cheer.
As regards (ii), major PSUs under the hammer are in oil, gas, power and minerals wherein, government has implemented far reaching reforms un-shackling them and augmenting their capability to generate higher profits on a sustained basis.
Consider ONGC. In the past, it was forced to share a good slice of under-recoveries on sale of oil products at low prices, but no more. Having exempt it during last Qr of 2014-15, during current fiscal, even as government is meeting entire LPG under-recovery from budget under DBT [direct benefit transfer], on kerosene also, it is working in that direction. With diesel and petrol already de-regulated, there are no under-recoveries and hence, no sharing.
That is a big positive as henceforth, whatever profit ONGC generates will be retained by it. True, reduction in price of crude has offset benefit of no sharing, but the gain from this policy reform is unprecedented. The impact will be felt in medium to long-term when crude price moves up. In regard to gas, it can leverage slump in global market for rigs, other equipment and services to lower exploration & production cost. All this holds for OIL as well.
Oil marketing PSUs viz., IOCL, Bharat Petroleum Corporation [BPCL] and Hindustan Petroleum Corporation [HPCL] were hamstrung due to adverse effects of under-recoveries such as high interest cost on delayed payments and burden of a portion of under-recoveries itself [amount not covered by subsidy and discount from upstream majors ONGC/OIL]. Now, with oil reforms and whatever little left of under-recoveries [on kerosene only], these are unshackled.
NMDC for which government has approved 10% share sale is in to exploration and production of minerals. In this regard, the passage of Mines and Minerals (Development & Regulation) Act, 2015 has resulted in significant improvement in the policy environment. This together with steps to ensure all approvals regarding land and environment before allotting the mines has bolstered the prospects of catapulting this company on high profit trajectory.
In the power sector too, Modi – dispensation has taken several steps viz., increase in domestic supply of coal at low price, improvement in coal quality, strengthening transmission and distribution [T&D] and above all a restructuring package for state electricity boards [SEBs] called UDAY [Ujwal Discom Assurance Yojna]. By literally extinguishing their outstanding debt, UDAY will turn them in to financially viable entities. This in turn, will enable them to pay off their dues to NTPC and PFC. This will give a further boost to valuations of both these PSUs which already have sound fundamentals.
The only PSUs where sentiment is down are NALCO, Bharat Aluminium Company Limited [BALCO] and Hindustan Zinc Limited [HZL], courtesy declining international price of metals triggered primarily by slump in China. In HZL and BALCO, government holds residual stakes of 29.5% and 49% respectively, but their divestment is constrained by legacy issues. As regards NALCO, its expected contribution to overall divestment kitty is any way small.
On the whole, economic circumstances are propitious for divestment to yield good price realization. The immaculate show casing of a resurgent India by Modi on the global platform has also prompted foreign investors to look at our economy with loads of funds. Yet, if demand for PSU shares on the block is subdued, one cannot rule out manipulative tactics being put to play. Considering that domestic markets crashed by over 1600 points on the day IOC offer for sale was launched [likewise, BSE Sensex fell by over 550 points on the day of PFC share sale] does provide ample confirmation to such a proposition. It confirms tendencies among market players to somehow beat down the stocks of blue chips like ONGC, IOC, OIL, NTPC etc and acquire them at depressed values so that they can make handsome gains.
The government needs to guard against such tendencies and mount its intelligence and surveillance to nip these in the bud. But, that by itself won’t serve the purpose. The only way it can enhance valuations and fetch a good price is to think in terms of strategic divestment in these undertakings [instead of current approach to sell minority stakes]. Bringing strategic investors on board will not only add to proceeds substantially but will also help run them on professional lines.
Having committed to subsidy free regime [sans direct support to the poor and vulnerable sections] and wholesome reliance on inter-play of market forces, Modi will have to a take a big leap forward to make its undertakings globally competitive. And, this will be possible only by involving private players [including MNCs] as strategic partners – say by giving them up to 26% share holding – thereby ensuring access to funds as well as technology.
Hon’ble prime minister needs to break away from hitherto incremental approach to “big bang” reforms if he really wants to realize his dream of catapulting India to the league of strong economies on the global plane.