The Scale of PSU Disinvestments And How It Will Matter In The Long Run
After the heady days of disinvestments in Maruti, BALCO (Bharat Aluminium Company Ltd.) and Hindustan Zinc, when subsequent governments sat back on inconvenient decisions for more than a decade, the current set of decisions by the NDA government are phenomenal.
India’s state-owned enterprises are in the midst of the largest ever churn in decades.
This week’s cabinet decision to sell the government’s ownership in five of those companies including the giant BPCL (Bharat Petroleum Corporation Limited), Shipping Corporation of India (SCI), Container Corporation of India (CONCOR), Tehri Hydel Corporation and NEEPCO (North Eastern Electric Power Corporation Limited) is, therefore, part of this churn.
You name any significant enterprise, you can be sure it is in the middle of either a sale, a merger or is being reconstructed. It is difficult to recall a period when so many such companies were affected all at once.
Obviously the huge hole in government finances has played its part in creating this churn. There is a possibility that the Narendra Modi-led government will run a Rs 2.6 trillion deficit in taxes this year from the budget estimate of about Rs 24.6 trillion.
So it needs the money from the sales of state-owned companies to fill some portion of that hole. But that does not explain the totality of the transformation.
As a CII-ICRIER (Confederation of Indian Industry-Indian Council for Research on International Economic Relations) paper on the sector puts it: “These enterprises account for around 20 per cent of (India’s) global investments, 5 per cent of employment and up to 40 per cent of output.”
Yet in Asia, where the state-owned or directed companies dominate the firepower of the respective economies, the Indian public sector companies have not shown any comparable geo-strategic reach.
Alibaba, Temasek or Petronas have far more impressive footprints globally than any Indian company, public or private. India’s government-run companies are way behind in taking up current challenges.
A National Research Development Corporation or a Central Electronics Limited have budgets that would not satisfy even a small scale industry development programme (as an aside, how many of them update their Wikipedia page or keep their websites abreast of latest developments?)
Notwithstanding these obvious shortcomings, decisions being undertaken by the government now, on this scale to change their landscape, has vast implications. For instance, the disinvestments have the potential to gobble up the decision- making space of their ministries for quite some time.
Not every ministry has the bandwidth to deal with the follow-up impact of the companies on their delivery models. Many of the ministries cannot function without the prop of the state-owned companies.
But once freed of the straitjacket of state controls, these companies can do wonders for the shape of the Indian economy.
In the short run, the disinvestments would increase the free float of shares available in the market. This would create a wider investment space for retail and institutional investors and offer a positive impact on Foreign Portfolio Investments (FPIs).
The public-sector-focussed Exchange Traded Funds (ETF) have tended to underperform in the market and the reasons are clear.
Both Central Public Sector Enterprise (CPSE) ETF and Bharat 22 hold over half of their portfolios in just five companies — 75 per cent for the former and 55 per cent for the latter.
So how one stock behaves more or less determines how the index behaves. A diversified float — as it seems is going to happen soon — will change all that.
Let us just look back to see the scale of what has been done so far to justify this as the largest swirl for the state-owned companies.
In the telecom sector, the government has begun the merger of its two telecom companies, BSNL and MTNL. The future of these two companies had hung fire for years.
In the process, their staff had become their biggest cost burden, accounting for 70 per cent of their total expenditure, compared to just 5 per cent for most private-sector telecom companies.
In the oil and gas sector, from among the twelve government-owned companies, the rank of leaders has become very narrow.
ONGC (Oil and Natural Gas Corporation) has already absorbed HPCL (Hindustan Petroleum Corporation Limited) last year. Once BPCL too is sold outright, the top rungs will look quite bare.
Once mighty MMTC (Metals and Minerals Trading Corporation of India) will be merged with STC (State Trading Corporation) and PEC (Project & Equipment Corporation) to be subsequently offloaded in the markets.
Similarly, others heading for a sale include Air India and — once a star among the state-owned enterprises — BHEL (Bharat Heavy Electricals Limited).
Besides them, in the insurance sector, the plans to merge the three companies — Oriental Insurance, United India and National Insurance — are almost finalised.
And we do not even include the mergers among the smaller fries like that of NPCC (National Projects Construction Corporation Limited) and WAPCOS (earlier known as Water and Power Consultancy Services Limited).
The number of state-owned banks will soon become just twelve. Even among them, three are effectively on their way to become small finance banks. There were 26 of these government-owned banks in February 2017.
For all of them, the government is either offering a merger or is going in for strategic disinvestment. The term ‘strategic disinvestment’ means that government shareholding in these companies will dip below the majority mark and in some cases cease altogether, like in BPCL.
They shall have new owners. It is far different from the sale of a tranche of shares of these companies but still retaining a government majority, which is what has been practiced all these years.
The larger impact of these decisions should be on how these companies would perform post disinvestment.
While it is difficult to figure out if MMTC-STC would have any major role to play since they had lost their role as a canalising agency for imports decades ago, the beneficial impact of the disinvestments on BPCL and CONCOR is quite obvious.
BPCL is a profit-making company with a return on net worth of 19 per cent. CONCOR has a return of 12 per cent and both these companies have hardly any debt.
But even those with massive debt like Air India have a clear business case, provided they are freed of the burden of having to keep an army of staff employed.
The insurance companies could easily return to profit, once they get the freedom to market their products smartly.
The insurance sector has been growing enormously agnostic of the downturn in the Indian economy, but only these companies are not. These companies are what hold massive promises for the economy.
However, it is not only about disinvestment, though. An equally large set of companies are being merged or simply being wound up. The list is getting pruned and this is possibly one of the biggest reforms happening in the Indian economy right now.
All of these would take time though the pace has just kept on accelerating. Finance Minister, Nirmala Sitharaman, for instance, announced the merger of 18 banks at one go.
Earlier, the Union Cabinet had taken three years to finally decide on the merger of the associate banks of State Bank of India with itself.
It is not sure that all of these measures will run through within this financial year. An India Ratings study shows that the disinvestment receipts in the first half of FY20 have been muted.
As against a budgeted target of Rs 1.05 trillion only Rs 123.59 billion has been realised. “However, the confidence can be drawn from the disinvestment performance of the government in last couple of years where they have been able to surpass budgeted disinvestment target and majority of this has happened in third and fourth quarter,” it notes.
Even at the current pace with the list of 28 companies to be disinvested, only five have materialised so far.
But after the heady days of disinvestments in Maruti, BALCO (Bharat Aluminium Company Ltd.) and Hindustan Zinc, when subsequent governments sat back on inconvenient decisions for more than a decade, the current set of decisions are phenomenal.
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