Distorting divestment

Updated: Jan 31 2014, 08:24am hrs
Hats off to all the great men who have thought of the ingenious ways of meeting the disinvestment target (read, meeting the fiscal deficit).

Disinvestment has, for long, meant diluting a small part of the government-holding in PSUs by way of a capital market offering. The stated objective, on one hand, has been to broaden and deepen the capital market and, on the other, bring about more transparency and better corporate governance in PSUs. Over the last few years, this indeed has been the case. During its entire history, some of the highest sums mobilised through divestment have been in the recent yearsR23,857 crore last fiscal, followed by R22,763 crore in FY11 and R21,305 crore in FY10. The intervening year 2011-12 had witnessed a mobilisation of R14,036 crore.

The ambitious target for the current fiscal is R40,000 crore through disinvestments and R14,000 crore through the sale of residual stakes.

With 10 months already gone by in the current fiscal year, only R968 crore has been raised through offers for sale of shares of MMTC, Hindustan Copper, National Fertilisers, ITDC and STC, and another R1,638 crore through the FPO of PowerGrid. The real disinvestment works out to only R2,606 crore or just 6% of the target.

Opponents of disinvestment include the relevant ministries who just do not want more transparency and who hate intrusion into their fiefdoms. Recently, the ministry of petroleum and the ministry of heavy industries intervened in the capital market process for divestment of IOC and BHEL, respectively. In the first case, disinvestment has now been substituted by getting related PSUs to effect cross-holdings using the latters surplus cash and, in the second, by a crass usurping of cash from cash-surplus PSUs and PSU banks.

Earlier this fiscal year, trade unions successfully prevented Neyveli Lignite Corporation Ltds divestment. Subsequently, a novel way was adoptedthe central government sold Neyveli shares worth R358 crore to the Tamil Nadu government. Recently, trade union protests led to the government jettisoning its 5% divestment (down from the originally envisioned 10%) plans for Coal India.

Then, there have been unknown opponents who long prevented the sale of shares held by Specified Undertaking of Unit Trust of India (SUUTI). Plans for selling SUUTIs stake in three companiesAxis Bank, ITC and L&Ttouted to rake in R50,000 crore, made the headlines recently. It may be recalled that SUUTI was being wound up, and this decision has now been reversed to facilitate this sale. Hot on the burner, among these, is Axis Bank, where SUUTI has a 20.72% stake, of which only 12% is proposed to be sold to raise about R6,300 crore. Why is the entire stake not being sold Why should the government keep holding on to Axis shares In any case, the government-owned insurance companies already hold about 15% stake in this bank.

It is also a guessing game as to why SUUTIs holding of 11.54% in ITC and 8.3% in L&T is not being sold, despite Cabinet approval. Why does the government want to hold on to these two stocks, especially of the non-strategic cigarette company Also coming in the way of clean divestments are the proponents of exchange-traded funds (ETF). About R3,000 crore (scaled down from an earlier target of R25,000 crore) is proposed to be raised through an ETF comprising 11 PSU stocks. Conceptually, it is a good idea; its biggest advantage is that it provides diversification to the investor. However, the weightage of stocks in the proposed ETF is very high for Coal India and ONGC (65%) and, hence, there would be no true diversification for the investor and the performance of the two biggies shall dictate the fate of the fund. In any case, this ETF may have to be postponed because investors do not seem to be excited, especially as the market cap weighted index of these 11 stocks has significantly underperformed the 50-shares Nifty in the last three years.

Enemies of divestments also include policies and procedures. For example, since the government, in the name of transparency, announces its intentions of specific share sale of listed companies much in advance, the market starts beating down the prices of such stocks, resulting in the government having to sell the shares at very low prices, leading to losses for the government. There have been many such cases in the past. Take the recent one of PowerGrid. Its 52-week high price was R121. Subsequent to the advance announcement of the FPO, the market beat down the price, and its FPO had to be priced only at R90. For 18.52 crore shares that were divested, the loss to the government was a whopping R574 crore. Who is accountable for such losses No questions would ever be asked as the offer could have been done only at the current market prices.

A similar story exists for forthcoming offers as well. The price of Axis Bank has already fallen from R1,292 to R1,122 in less than a month. In the case of BHEL, the price has fallen to about R160 from its 52-week high of R234. And in IOC, the shares have gone down by nearly half from its 52-week high price of R375. Another novel method used this year has been the buy-back, i.e. selling the shares back to the company instead of in the market. NHPC was directed to do a buy-back programme, under which the government tendered shares worth R2,131 crore.

Then, there are the special dividends. First to fill the government coffers is the special dividend that Coal India has been asked to declare. Last year, it had paid a dividend of R14 per share; it has now been asked to up it to a bumper R29 per share. This would bring in R16,485 crore to the government (and another R3,100 crore as dividend distribution tax), though none of this can be counted against the disinvestment target. In fact, there would be more special dividends coming from other PSUs and PSU banks. While dividend is normally a reward, in this case the government extracted this.

Regarding the stake sale of 10% in IOC, the government has asked ONGC and OIL to shell out about R5,000 crore. This is being wrongly termed as a cross-holding deal. In reality, these are one-sided diktats and only a false comfort is being created by selling these to companies in the same sector. A 5% shareholder would not enjoy any special rights, nor any discounts on raw materials or higher prices on sales, nor get a board seat. It may be recalled that there were some real cross-holding sales in the late 1990s, when ONGC, on one hand, was asked to buy 9.11% in IOC and 4.83% in GAIL and, on the other, IOC was asked to buy 9.61% in ONGC and 4.83% in GAIL, while GAIL, in turn, had bought 2.4% in ONGC. This methodology was subsequently junked.

However, the proposal to cancel the market sale of IOC has some solace, as otherwise FIIs would have again acquired shares of a PSU at beaten-down prices. Nevertheless, the cash available with ONGC and OIL, both of which are listed entities, should not be used for this purpose; it should be left for their own expansion plans. But do these entities have a choice According to reports, the government stated that the decision on IOC has already been taken. Now, the board of the two companies would meet to approve the purchase. These entities would be free to encash their shares any time, as there are no conditions and no lock-in. ONGC and OIL have, as such, been converted into investment companies without Board approval. The defence being forwarded is that because the acquisition price will be low, these companies will be able to exit at a profit. In reality, they would not be allowed to sell; any such action would again require some tacit approval of the government.

Regarding governments plan to sell 5% stake in BHEL to other PSUs and PSU banks to raise another R2,100 crore, the EGoM would be meeting soon to approve this and also name the entities (another diktat!) who would be asked to buy the stake. This again brings the issue of corporate governance to the fore. By depleting cash reserves from NHPC, Coal India and other PSUs, the government is hurting the valuations of these companies and, hence, also the value of the government-holding. This will lead to lower realisations when it goes for a public divestment. Of course, the cash could have been utilised by these companies for modernisation and expansion.

Given all the above disingenuous methods adopted by the government, both the Securities and Exchange Board of India and the ministry of corporate affairs would probably have little moral ground to expect good governance from the private sector. The boards of PSUs have been reduced to dummies. The fate of the independent directors in such boards is worse. They are supposed to be the conscience-keepers and take care of the minority shareholders. However, even they have to seek directions from the ministries! ONGC and OILor for that matter, any PSUare being treated like fiefdoms. At the very least, these kind of sales should be done only for unlisted PSUs and government insurance companies, that are fully government-owned and are often utilised to buy stakes in PSUs. If subsequent sales indeed are at a profit, let these companies enjoy that benefit.

The good news is the residual stake sale of 30% in Hindustan Zinc (HZL) and 49% in BALCO. The HZL sale would happen soon to raise about R18,000 crore. If BALCO sale also comes through, it may raise another R4,000 crore.

Things are worse on the IPO front. The last PSU IPO was the small, R125 crore one from NBCC in March 2012. Since then, we have read many reports of impending IPOs of Rashtriya Ispat Nigam and Hindustan Aeronautics, among others, but nothing has materialised.

Prithvi Haldea

The author is chairman, PRIME Database