However well-intentioned the government’s disinvestment policy may be, the results till date haven’t met expectations.
If it is to meet its disinvestment target for the sixth time in 19 years, the government must be pragmatic on its valuations and take retail investors along instead of merely depending on (foreign) institutional investors.
Chances are that you have never heard of Hooghly Dock & Port Engineers or even Hospital Services Consultancy Corp. Neither of them has ever made an overseas acquisition or made it to the Fortune 500 list. Nevertheless, they are but two of the stars in a list of public sector enterprises (PSEs) recommended by the Disinvestment Committee in which a proposed partial sale of shares can help the government realise its ambitious target of raising Rs. 400 billion in FY 2010-11. Over the years, the size of public sector has increased dramatically and currently there are 473 central PSEs, out of these 104 are listed and 369 are unlisted, while at the state level, there are about 1,160 state PSEs. Quiet interestingly, the valuations of these central PSEs on P/E (Price to Earning) basis for the listed companies and P/B (Price to Book) basis for unlisted companies is pegged at $450-500 billion (approximately 40-45% of the nation’s GDP) while the net profits of these central PSUs work out to be a meager 2.2% of their total assets. Calling for people’s participation in the disinvestment programme, the finance minister, Pranab Mukherjee, in his budget speech said, “The public sector undertakings are the wealth of the nation, and part of this wealth should rest in the hands of the people. While retaining at least 51% government equity in our enterprises, I propose to encourage people’s participation in our disinvestment programme.”
There is little doubt that most of the PSUs being put on the block for disinvestment are fundamentally strong and account for the largest market share in the domain of their operation. Yet, why is it that retail investors are wary of putting their hard earned money in these companies? Isn’t it ironical that Life Insurance Corporation (LIC), India’s largest insurance company, had to bail out the NMDC FPO on the last day, subscribing to 75-80% of the issue at Rs.300 per share putting in nearly Rs.75-80 billon, or for that matter the government had to cut a sorry figure having had to bailout the Rs. 82.86 billion NTPC follow-on-issue asking State bank of India and LIC to write out cheques of Rs.40 billion or more?
Given such a scenario, a better way out for the government would be to simply enter into an off-market agreement with LIC and SBI to sell the shares. Why make the pretence of having a follow-on issue? Certainly, this is not the best way to begin the disinvestment process. The calendar year 2010 has seen 4 public issues from PSUs (NTPC FPO, REC FPO, NMDC FPO and United Bank of India IPO) raising an amount of Rs. 223 billion, but the lukewarm response that the issues received one after the other portrayed a grim picture. While it’s true that the government needs money to meet its disinvestment target, it cannot ask for valuations that are way beyond the fair value (one of the reasons cited for the poor performance of NMDC FPO). Isn’t the government over-stretching itself? On one hand, the deteriorating fiscal situation leaves the government with no option but to push ahead with its disinvestment plans. On the other, it is equally true that having burnt its fingers more than once, the government must reconsider its ‘blanket disinvestment’ philosophy and opt for a calibrated approach to meet capital needs.
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