That the Narendra Modi government has not been able to make a single major strategic sale — ie, sale to a non-public sector entity — for more than three years now should tell us something. Its strategy and commitment are simply not good enough.
In 2018, it botched the Air India sale because it was too cautious in how the sale was to be made. It retained a stake for itself and loaded the airline with too much debt.
In 2019-20, its planned disinvestment in Bharat Petroleum Corporation Ltd (BPCL) was stymied by the Covid-related stock market meltdown and the possibility of not getting a good price for the transfer of a controlling interest in the refiner.
Now, The Economic Times reports, it is holding back on selling some of the major public sector banks. It wants to see how the IDBI Bank sale will be received before putting the rest on the block.
There are good reasons for making a strategic sale, but waiting endlessly for the right price and right opportunity — never well-defined terms — is not one of them. While it is not a bad idea to realise the best price possible at any time, the value of an asset — like beauty — lies in the eyes of the beholder. It is not always possible that the right time to sell is the right time to buy. And vice-versa.
Moreover, the government never calculates the opportunity cost of waiting too long for the “right buyer” or the “right price".
If Air India had been sold even for a song in 2018, the government would not be losing crores annually in bankrolling the loss-making airline.
Moreover, it would not be facing an effort by Cairn and Devas to target Air India’s remaining assets after winning arbitration awards against the government. Now any buyer will not bid for Air India without additional indemnities from the government.
Point No 1: The reason for selling public sector assets is not always about raising money, but preventing future haemorrhage and losses. So, even if the price isn’t all that great now, the real value in the sale is reduction of future losses.
The same reasoning should apply to selling the public sector banks in which the government wants a strategic investor on its own terms. If the sale of big banks like Bank of India, Bank of Maharashtra, Central Bank of India, Indian Overseas Bank, UCO Bank and Punjab and Sind Bank is to depend on what happens with IDBI Bank (in which Life Insurance Corporation and government are planning to disinvest jointly), we are essentially talking of a prolonged delay for the remaining sales — perhaps never, or at huge loss to the exchequer.
The best way to sell these banks is to offer them all together in one lot, and ask potential buyers to select what suits them best. This way, even if the prices available are not up to the government’s expectations, the government will at least be spared the possibility of having to keep providing them with capital year after year.
Who knows what kind of support they will need when the Covid threat is far from over? Right now, if the price is not too high, buyers may see value in them in hopes of making big gains when Covid is behind us and bank lending takes off.
Additionally, if six or seven banks are simultaneously on offer, it sends out another powerful signal: that the Modi government is serious about selling its public sector assets. When there is choice, investors are more likely to come and check the assets and bid for what they see as the best bargains.
Even some banks are more preferred than the others, the competition for them will get us a better price than in trying to sell one bank at a time — with bureaucrats deciding which ones to sell.
Point No 2: If investors believe that they are getting a good deal and a choice of assets, they are more likely to go for them. It is also likely that smart Indian bankers, with foreign capital backing them, will bid for the smaller banks which may offer enough in terms of scalability but at lower capital infusions.
Singapore-based DBS Bank bought flailing Lakshmi Vilas Bank in order to increase its footprint in India at a reasonable cost. Banks will see bids when buyers see some potential upside for them.
Point No 3: Different bidders may see different value in buying small or big banks. It is possible for even non-banks to see value in buying weak banks, if they are on offer. The beleaguered PMC Bank is being taken over by the Centrum Group headed by former Standard Chartered Bank chief Jaspal Bindra, with some financial bankers, for ultimate conversion into a small finance bank. Payments company Bharat Pe is buying a strategic stake in PMC along with Bindra.
The government needs to up its strategy on public sector sales. It is not always about timing and the right price. The right price and investor will appear if it has the right strategy for sales.
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