Govt shareholding going below 51% is a good way to dilute impact of the 3Cs, but that may not be the biggest constraint
The government has, it would appear, come up with a great solution to the problem of what are called the 3Cs, the CAG, CBI and CVC. Since these watchdog agencies question each decision taken by PSU firms, this delays their decision-making. While a Reliance Industries can, for instance, decide it wants to tie up with a BP for its gas fields, an ONGC cannot do this without a global tender; and since this applies to even routine business decisions, the 3Cs effectively end up ensuring that PSUs can’t be as nimble as their private sector counterparts.
The solution that finance minister Nirmala Sitharaman has come up with—one also suggested by Yashwant Sinha when he was FM in the Vajpayee government—is to reduce the government stake to below 51%. The moment this happens, the 3Cs no longer have any jurisdiction and the PSUs are free to operate as they like. Sinha had wanted to go to 33% levels in banks; Sitharaman’s proposal leaves out banks.
There is no law that says government shareholdings in PSUs have to be at 51% levels, this was more a convention in the context of the government retaining control of PSUs; indeed, few private sector firms have promoter-shareholdings of 51%, but they still remain in control. In which case, if the government brings it shareholding down to below 51%, this does not require any approval from Parliament; this also means the government can earn a lot of money selling shares of PSUs without actual privatisation. The FM has proposed a two-stage process for lowering the government stake.
To begin with, equity cross-holdings of PSUs will be taken into account. In the case of MTNL, for instance, while the government holds 56.25% of the firm, LIC owns another 18.28%; this means the government can lower its holdings by 23.53% while the broader government shareholding will still be 51%. In the case of BHEL where the government holds 63.17%, LIC owns 14.13%; this means the government can sell a 26.3% stake while the broader government shareholding is still above 51%. There could be other cases where, even if the broader government shareholding falls to below 51%, shares will be sold, but this will be more the exception than the rule.
While the move to dilute equity so as to get PSUs out of the clutches of the 3Cs is desirable, the other positive spinoff is that it will allow us to know what the real bottleneck is. In the case of MTNL, for instance, will performance improve once it is no longer answerable to the CAG etc? Chances are it may not since, in many cases, it is government rules that prevent efficient functioning. Most private telcos farm out large parts of their functions to cut costs, but well-entrenched trade unions—not the 3Cs—in the PSUs prevent this from happening;this is also why government/PSU salaries are much higher than those in the private sector.
A large number of decisions, it is equally true, such as on expansion or not shutting certain operations, take place due to political pressure; even pricing decisions such as those by the oil PSUs are mostly taken by the government, not the management of the PSUs at certain critical times. If the government does finally go through with the road map indicated by Sitharaman, it will help disentangle PSUs from one layer of constraint.
There are, however, several more that, sooner rather than later, also need to be dealt with; a holding company structure to insulate the management of banks from the owners had been suggested in the case of PSU banks, but this never got implemented.