Fernandes Doesnt Smell A Problem, But An Opportunity

Updated: Sep 8 2002, 05:30am hrs
The debate on disinvestment has acquired a new farcical dimension, thanks to defence minister George Fernandes. No one knows what his real position is (not even himself, I suspect), but from various statements attributed to him he seems concerned about three matters. Firstly, the crown jewels should not be sold for a song; secondly, public monopolies should not be replaced by private monopolies; and, thirdly, the wealth created by the public sector undertakings (PSUs) should be distributed among the people and not allowed to be taken over by strategic investors.

It is difficult to believe that Mr Fernandes genuinely holds any view his view on any subject is liable to change from year to year or from government to government. I shall not burden this piece with examples. The most recent one is when Mr Fernandes opposed joint patrolling of the LoC by Indian and Pakistan troops, only to reverse himself when he found that the Prime Minister had offered joint-patrolling as a confidence building measure.

Mr Fernandes is also not a diligent student of facts. The value of the Central Governments equity in all central PSUs as on 31 March, 2000 was Rs 78,484 crore (acquisition cost). Since many PSUs are not listed, it would be difficult to calculate the market value of these shares.

Of the Rs 78,484 crore equity, in the last two years, the government has sold equity worth Rs 891 crore and realised a price of Rs 11,315 crore. Even if we assume, generously, that the market value of Rs 891 crore was five times more, government has realised Rs 11,315 crore for stock of the value of Rs 4,455 crore.

Actually, over a period of 11 years, the government has been able to sell only a fraction of its equity out of a total of Rs 78,484 crore, but it has invariably secured a price that was much more than the face value of the share.

The second concern is regarding private monopolies. I find it difficult to believe that by selling a fraction of its holdings, government has created private monopolies. Lets look at the companies in which shares have been disinvested so far. There are 48 companies. Of these, only in the case of 16 companies has there been a transfer of ownership and management to private hands. These 16 companies include ITDC (18 hotels) and HCI (three hotels). There are no monopolies in the hotel industry. A close look at the remaining 14 companies will reveal that only Balco (aluminium), IBP (petroleum), VSNL (telecommunication), HZL (zinc) and IPCL (petrochemicals) could even raise a concern of private monopoly. But where is the monopoly Is there not intense domestic competition in each of the five industries represented by these five companies Besides, does not each of these companies face fierce international competition

The story will not end with the strategic sale of some companies. Down the road, there will be mergers and acquisitions. Some of these companies will eventually be acquired by foreign companies. In certain industries, the rule of three may emerge, that is a leader, a close second and a third company that will carve for itself a niche market. Mergers, acquisitions and the rule of three will intensify competition, not reduce it.

Mr Fernandes third concern is the people of this country who should inherit the wealth that has been created by their taxes. Give this wealth to the people, banish the predatory strategic investor may be an appealing war-cry to an old war-horse who is running out of battles to fight. There will be few takers for this pitch because retail investors have no appetite for PSU shares. In 1999-00, government decided to sell 200 million shares of Gail. Only 30.6 million shares were sold at Rs 60 per share, and most of those shares were bought by financial institutions. The retail investor knows that by buying 100 or 1,000 shares of a PSU he would have no control over the affairs of the company. He would not even be sure whether there will be a change in management. What reveals the underlying fundamental value of a PSU is a change in management. The company must actually pass from the hands of the government into the hands of a private enterprise or private investor. It is at that stage the retail investors interest in the company could be kindled. The initiation of the process of disinvestment to a strategic investor has lifted share prices of the PSUs concerned. When news broke out of ministers stalling tactics, prices fell.

One can see the contours of an emerging consensus on privatisation among political parties barring the communist parties. So, why is Mr Fernandes reopening this issue Mr Fernandes does not smell a problem, he smells an opportunity. He is positioning himself as a possible candidate for prime minister of a non-Congress, non-BJP Front, should such a Front emerge before or after the parliamentary elections in 2004. Failing such a front, he is positioning himself for the No. 2 slot in an Advani-led Government. It would be a pity if the thinking ministers in the NDA Government (Jaswant Singh, Yashwant Sinha, Arun Shourie, Arun Jaitley, Jagmohan) give in to Mr Fernandes bluff and bluster.

Mr Shourie has made a reasonable success of a nearly impossible task, but sometimes he overstates his case. Not all PSUs need to be privatised. If there is a PSU which is profitable, efficient, competitive and capable of adding to its net worth, it should remain as a PSU and given complete autonomy. IOC, NTPC and Neyveli Lignite Corporation are fine examples. Mr Shourie is looking at dividend yield (dividend return as a percentage of market price) to justify sale of shares. No investor will look merely at dividend yield, only a money-lender will, and investment in equity is not money-lending. If dividend yield is the true measure, why should anyone hold shares in Infosys Mr Shourie should also consider disinvesting 51 per cent of the shares in a company to a strategic investor, holding the remainder until share prices rise and offering them to retail investors (the people) to share the new-found wealth.

The immediate task, of course, is to call Mr Fernandes bluff.

The author is former Union finance minister