Public sector undertakings were established in the 1950s to generate employment, create self-reliance and augment non-tax revenues. The financial investment in the initial five central PSUs was about R290 million. Today, there are nearly 260 central PSUs, with an investment of R7,292.3 billion (as on March 31, 2012), in addition to state enterprises, banks and insurance companies.

Despite significant capital infusion by the government, barring a few ratna companies, the results have not been encouraging, as is evident from the following:

o PSUs have given employment to only about 6 million people.

o They are largely inefficient compared to private enterprises.

o Many PSUs provide no return but continue to be funded by the government.

o The average return on capital is abysmally low (2% to 5%), while the government?s borrowing cost is much higher.

o The government subsidises PSUs? losses, estimated to be around

R80 billion annually for only 120

central PSUs, not to mention nearly 1,000 loss-making state PSUs.

o PSU losses eat into public money which could have been utilised for better public purposes, including healthcare, education, and debt re-payment.

The way forward for the government to get a better return on its investment and cut losses is to kick-start disinvestment and shut down perennially loss-making units.

Through disinvestment, the government can revive economic growth, revitalise the capital market and create jobs equal to (or more) than the jobs created by PSUs. In the process, India would transform.

According to analysts, a growth rate of 7.5% creates 11 million new jobs annually. Therefore, by accelerating growth, the country can match the jobs created by PSUs in about three years.

The government should not be in the business of doing business except in a few defined strategic areas. The widely worded 1999 list of ?strategic? industries covers all Arms and ammunitions and allied items of defence equipment, defence aircraft and warships; Atomic energy and Railway transport. This list should be carefully re-visited. In particular, certain dual-use equipment?having both defence and civilian use?should be excluded, to facilitate private investment, including FDI, in such areas.

The disinvestment policy should be clear and transparent, and disinvestment targets, realistically fixed. In the past, the target was missed by more than 50% (during 1991-92 to 2000-01) and by around 45% during 2001-02, which was the ?strategic sale? disinvestment period.

Since one size does not fit all, a flexible approach to unlocking value is needed. Disinvestment must benefit the government, the company, remaining shareholders and industry in general. To enhance sale value, effort should be made to improve management practices, restructure business or even merge PSUs prior to disinvestment. In appropriate cases, work force should be downsized through voluntary retirement schemes.

Profitable PSUs must be the ones to enter the market first so that their success lifts the market sentiment and set the stage for other robust exits. The policy of retaining majority control

also needs re-visiting, particularly in non-strategic areas, to allow the

government to obtain a substantial ?control premium?.

Disinvestment through the stock exchange is a means of sharing wealth with the public. In such cases, timing, pricing and understanding investor concerns are critical. The choice of the lead merchant banker and allocation to investors are equally important to ensure success.

The normal tendency of merchant bankers is to allocate to institutional investors at their discretion. Companies usually do not play an active role in this process nor do they make appropriate provisions before signing the agreement with the merchant banker. To ensure that the stock price remains high post-listing, it is vital to ensure a large retail allocation that would leave institutional investors ?hungry?. This was done in the Maruti disinvestment case and the results are evident. Within three hours of opening, the IPO was oversubscribed 10 times. The final price was at R125 per share, against a floor price of R115, and on the first day of listing (on July 10, 2003) the stock closed at R164. The share went up to over R500 in six months (Feb 2004) and is currently hovering above R2300.

The Maruti divestment occurred in an otherwise dull capital market. However, thanks to the collaborative efforts between the government, the legal and other advisors of Suzuki and Maruti, it turned out to be a ?win-win? situation for all. While learning from earlier successes, bold decisions are needed to spur growth and regain confidence in India. By kick-starting disinvestment, PSUs can be made a catalyst for reviving growth and creating wealth for India.

Lira Goswami is senior partner, Associated Law Advisers