Debating India

Disinvestment designs

Tuesday 7 June 2005, by SRIDHAR*V.

The government decides to sell 10 per cent of its stake in BHEL despite protests from the Left parties.

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K. Ganesan
At the BHEL unit in Tiruchi, Tamil Nadu. Despite the hostile policy environment, the company has managed to stay afloat.

FOUR days after celebrating its anniversary in power the Congress-led United Progressive Alliance (UPA) government launched its disinvestment drive in the current fiscal. On May 26, the Cabinet Committee on Economic Affairs (CCEA) decided to sell 10 per cent of government stake in Bharat Heavy Electricals Ltd. (BHEL), a Navaratna public sector undertaking. Although disinvestment has always been a controversial issue, the move was not unexpected. Neither was the timing. With Parliament not in session there was apprehension that the government would administer the more bitter doses of the reform medicine.

Those who complained that the reforms process had slowed down welcomed the move. Business interests and other industrial lobbies have been restive, complaining that the momentum of the economic reforms had slackened after the UPA assumed power. The Left parties, they said, were using their unprecedented leverage to stall reforms. The move comes barely weeks after allegations of improprieties in the sale of the Centaur hotels by the previous National Democratic Alliance (NDA) government rocked Parliament (Frontline, June 3). Finance Minister P. Chidambaram announced a probe into the deal, although its nature and scope have not yet been specified clearly. The Left reacted immediately against the move to dilute government stake in BHEL.

BHEL, incorporated in 1964, is India’s leading producer of power-generation equipment and a pioneer in the field. Over the years, it has withstood competition from multinationals and symbolised self-sufficiency in its area of expertise. However, its fortunes took a turn for the worse after the government announced its new power policy in 1991. The policy, aimed at wooing foreign capital, proved not only controversial but also costly, as the Enron affair has demonstrated. Despite these obvious disadvantages, BHEL has managed to stay afloat in the face of a hostile policy environment. In 2004-05 the company had a turnover of Rs.10,686 crores, an increase of about 22 per cent over the previous year, and made a net profit of Rs.1,003 crores against Rs.658 crores the previous year.

Reports indicated that while the Department of Disinvestment (now under the charge of the Finance Ministry) had initially proposed to sell 16 per cent government stake in BHEL, the Department of Heavy Industry gave approval for offloading only 10 per cent.

The Left greeted the move with protests. Leaders of the Left parties insisted that they had been kept in the dark, although Chidambaram claimed that "the Left had been consulted" on the issue. Dipankar Mukherjee, Communist Party of India (Marxist) member of the Rajya Sabha, said his party had categorically stated its opposition to the disinvestment of government stake in BHEL in its pre-Budget memorandum to the Finance Minister. The memorandum had stated that the bias against indigenous power equipment manufacturers such as BHEL in the existing policy ought to be corrected. Reminding Chidambaram of the commitment in the Common Minimum Programme (CMP) to desist from privatising profit-making PSUs, the memorandum referred specifically to BHEL as a case where there ought to be no disinvestment.

The CCEA mandated a book-building route for the disinvestment. After several rounds of creeping disinvestment in the company, the government now holds 67.72 per cent stake in it. The 10 per cent disinvestment amounts to offloading about 2.2 crore shares. (The government currently holds 16.57 crores of the 22.48-crore shares issued by the company.) Foreign Institutional Investors have cornered a substantial portion of the shares that are not in the hands of the government.

It was not surprising that the price of the BHEL share increased sharply, by about 4 per cent, on the day of the announcement. FIIs control two out of three shares held by investors other than the government. They, and other investor groups such as Overseas Corporate Bodies, which have a rather sordid track record in the Indian stock markets, hold the vast majority of shares that lie outside government control.

The concentration of floating stock in the hands of a few obviously facilitates easier manipulation of the share price. This is important because the prevailing price serves as a benchmark for the issue price when the shares are offloaded by the government. The possibilities for manipulation are not merely hypothetical. For instance, when the NDA government offloaded a minority stake in Gas Authority of India Ltd. (GAIL) in 1999, there were allegations that FIIs, British Gas and Enron managed to acquire the shares at low prices. In fact, Chidambaram, then in the Tamil Maanila Congress (TMC), had termed the disinvestment "scandalous". He said the NDA government’s handling of the GAIL issue had made the disinvestment process "open to ridicule". "Doubts will be raised about the integrity of the disinvestment mechanism," he said (Frontline, December 10, 1999).

Chidambaram’s defence has centred on two counts. First, he has argued that the disinvestment did not violate the coalition dharma as enshrined in the CMP. He asserted that the CMP provided for the sale of shares to retail investors. He also argued that the CMP required the government to find ways to revive ailing PSUs. His second set of arguments centred round what he proposed to do with the money mobilised through the sale.

Chidambaram said that after the 10 per cent disinvestment the government would still retain 57 per cent of the shares in the company. With the share now trading at about Rs.900, a ball-park figure for the amount that the government can expect to mobilise would be about Rs.1,980 crores (2.2-crore shares multiplied by Rs.900). The Finance Minister appears to suggest that the sale of a minority stake would not cause any harm to the PSU. However, price discovery - of the intrinsic worth of the share - through book-building may be hampered by the fact that there are very few shares in circulation. The current issue may lead to undervaluation of the BHEL share, which may then act as a benchmark for an eventual outright sale of the company to a private acquirer.

The government has attempted to soften the impact of the move by announcing that the money collected by the sale of BHEL equity would remain off Budget. The money is to be deposited in the National Investment Fund. Chidambaram said that Fund managers would ensure that 75 per cent of the funds shall be utilised for health and education and the remaining portion shall be used for reviving sick PSUs.

Chidambaram also said that the proposed stock-split (that is, the breaking up of a share into multiple units, each with a lower price) would ensure that small investors and BHEL employees would be able to acquire them. About 15 per cent of the 10 per cent that is to be offloaded will be for company employees. This approach, of justifying the disinvestment by arguing that it will only be used for laudable purposes, begs important questions.

First, why should BHEL, a company already suffering at the hands of a government that exposes it to unfair foreign competition, be used for what the government ought to do anyway? BHEL has already suffered heavily in recent tenders for power projects. It has been unable to compete with foreign companies, which enjoy the advantage of zero import duty on finished equipment. Critics have also pointed out that the disinvestment, even if only partial, makes things uncertain for the company, its employees as well as its clients.

Indeed, creeping privatisation is just as deadly a blow as outright sale on the viability of a running business concern. The example of the two nationally owned airlines comes to mind. Both Indian Airlines and Air-India, which have been repeatedly threatened by the prospect of being sold to private interests in the last six to seven years, have suffered possibly irreparable damage. They have not been able to augment their fleet because the government (the owner) has dragged its feet while threatening to sell them off. Meanwhile, private airlines have grabbed market shares, which ought to have belonged to the two airlines.

Second, how does the company plan for the future when there is no certainty about who the owner is going to be a few months or years down the road? The most serious problem relates to the fact that investments in the company’s future are likely to be affected seriously. The owner (the government) may well see little rationality in investing in the company when it is going to be bought by a private company in the near future. If the government does make the investments and then sells the company to a private company later, it will attract the criticism that public money has been spent to favour the acquirer of the company. This uncertainty is likely to have devastating consequences for the Navaratna.

Third, why should a publicly owned company be used to pay for the rather dubious objective of rewarding small investors and its employees? In fact, studies of privatisation have shown that positioning disinvestment as an "investor-friendly" measure is generally a ploy used by governments to deflect the flak that privatisation attracts for selling public assets at throwaway prices. Shares parked in the hands of small investors could come in handy to private investors who may acquire control of the company later if and when it is sold outright. Shareholders who acquire a BHEL share would only be too willing to sell their shares for a small premium to a company that acquires a controlling stake in the company later. That would be a cheap option for the acquirer as well.

The other justification for the sale - that it would fund schemes for education and health or the revival of ailing PSUs - is also seen as a cynical excuse. Critics argue that the government could have raised taxes for these schemes instead of milking its own company.

Reports indicate that the government plans to offload 15 per cent of its stake in Shipping Corporation of India. A public offer of the government’s shares in Maruti is also expected in the second half of 2005-06. The government is also expected to sell the 44 per cent stake it now has in Balco to Sterlite.

See online : Frontline

P.S.

Volume 22 - Issue 12, Jun 04 - 17, 2005

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