In her budget presented on July 5, 2019, the finance minister, Nirmala Sitharaman announced disinvestment of governments’ shareholding in public sector undertakings [PSUs] to a level below 51% on a ‘case-by-case’ basis. The cabinet committee on economic affairs [CCEA] is expected to approve this policy any time soon.
The 51% threshold is very crucial as shareholding at this level or above enables the government to have majority ownership and control over the undertaking. If, the holding is reduced to below 51%, this will lead to relinquishment of majority ownership and control, or privatization in plain words. This will be transformative – a bold reform indeed. But, hold your breath, there is a caveat appended to it.
In the budget speech, Sitharaman had opined that the intent was to change the extant policy of the government ‘directly’ holding 51% or above in a PSU to one whereby its total holding ‘direct’ plus ‘indirect’ is maintained at 51%. This caveat changes the entire complexion of the stated intent. So, what is this ‘indirect’ holding concept?
To illustrate, let us take the case of Indian Oil Corporation Limited [IOCL]. In addition to its direct shareholding of 51.5%, the union government has majority shares [read: above 51%] in a number of other PSUs which in turn, hold shares in IOCL. Thus, Life Insurance Corporation [LIC] which is 100% owned by the union government, holds 6.5% shares in IOCL. The Oil and Natural Gas Corporation [ONGC] which is 63% owned by the union, holds 14% shares in IOCL. Likewise, Oil India Limited [OIL] which is 60% owned by the union, holds 5% shares in IOCL.
The shareholding of union government in IOCL via its holding in the three other PSUs viz. LIC, ONGC and OIL or a total of 18.3% [6.5×1+14×0.63+5×0.6] is ‘indirect’. However, when it comes to control or ability to influence decisions of IOCL, the ‘indirect’ contribution will be 25.5% [6.5+14+5] as the predominant view of the majority shareholder in LIC, ONGC and OIL i.e. union government would prevail. Hence, the effective control of the union in IOCL including both ‘direct’ and ‘indirect’ is 77% [51.5%+25.5%].
With these numbers at the backdrop, what the finance minister is alluding to is that the ‘direct’ shareholding of the government in IOCL can be reduced to from existing 51.5% to 25.5%. With this, technically though it may have changed its status to that of a minority shareholder holding a mere 25.5%, including the ‘indirect’ control, it will still have majority of 51%.
Thus, contrary to what one may infer from a plain reading of the numbers [union’s shareholding going below 51% mark to as low as 25.5%] that Modi – government has taken a bold decision to privatize IOCL, in reality it is not so. With the government continuing to retain overarching control, the very purpose of the exercise i.e. to entice a strategic investor to come and transform the way an enterprise is run, make it grow faster and enhance its competitiveness, will be defeated.
True, with government’s shareholding dipping below 51% and the undertaking stripped off the PSU tag, it can avoid coming under the scanner of the statutory watchdogs viz. Central Bureau of Investigation [CBI], Central Vigilance Commission [CVC], Comptroller and Auditor General [CAG]. But, continuous interference by the political brass and bureaucrats can’t be ruled out. In this backdrop, the strategic investor will think 10-times before taking a plunge.
A major reason as to why last year the sale of Air India could not go through, had to do with government’s decision then to retain 24% shareholding which discouraged bidders [this anomaly has now been corrected with the offer of 100% of its shareholding under the sale plan during the current year]. With change of policy stance to retain 51% shareholding [albeit direct plus indirect] in PSUs up for strategic sale – the reluctance among investors will be even greater.
This will also affect government’s ability to fetch a good price from sale of PSUs and hamper realization of the ambitious target of disinvestment proceeds [Rs 105,000 crore for the current year] though this can’t by itself be an objective of undertaking strategic sale.
A collateral damage has to do with the government losing policy space in regard to its future course of action with regard undertakings whose continued majority ownership is necessary for exercising ‘indirect’ control over the said PSU [read: IOCL in our example] to the required extent. If, at some future point of time, it wants to undertake privatization of say OIL, it won’t be able to do it as that will have the inevitable effect of losing control over IOCL as well.
A decision with regard to an undertaking should be made taking into account the circumstances facing it and in the overriding interest of maintaining its health, competitiveness and growth. Its fate can’t be tied to that of any other PSU which it wants to control. The very concept of looking at indirect control to arrive at a decision on disinvestment militates against this fundamental tenet.
The instinct of the government to retain control even while executing its strategic disinvestment plans is clearly discernible even in its previous actions. During 2017-18, it sold 51.11% of its shareholding in Hindustan Petroleum Corporation Limited [HPCL] to ONGC. In 2018-19, it sold 52.63% of its shareholding in Rural Electrification Corporation [REC] to Power Finance Corporation [PFC]. Though, touted as good examples of strategic sale, in reality it was not so as even after relinquishing 51% plus shareholding, the government continues to exercise full control [albeit indirectly] over HPCL/REC by virtue of being majority owner in the acquirer namely, ONGC/PFC.
During the current year also, it is continuing with this strategy as reflected in its decision to sell all of its 100% stake in North Eastern Electric Power Corporation [NEEPCO] and 75% in THDC India Limited. These shares will be picked up by National Thermal Power Corporation [NTPC] and NHPC Limited respectively which are majority owned by the government. So, post-divestment, the ownership and control of NEEPCO and THDC India will remain with the union government [albeit indirectly].
The only case where Modi – government has shown the gumption to go for strategic disinvestment in the true sense of the term is to sell all of its shareholding 53.29% in Bharat Petroleum Corporation Limited [BPCL] – the refiner and retailer of petroleum products – to a private investor. This will result in transfer of the ownership and management control – lock, stock and barrel – to the acquirer.
This has generated huge interest among all global energy majors viz. Saudi Aramco [Saudi Arabia], Total S.A. [France], ExxonMobil [USA], Royal Dutch Shell [UK/Netherlands], BP plc [UK] etc. Post-acquisition by any of these giants, BPCL will become an integral part of the global supply chain and will be able to operate free from all encumbrances, take quick decisions and run efficiently as per global standards for delivering low cost and best quality throughput.
The government should follow the BPCL model for undertaking disinvestment of all other PSUs. Its instinct to retain control by-hook-or–by-crook should give way to wholesome transfer of ownership and control to private investor. While, being in the best interest of the undertaking, this will also garner required resources for the exchequer at a time when it is facing huge shortfall in tax collection even as expenditure continues to grow.