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Revitalising PSE privatisation: Issues that may impact investor appetite need to be resolved before notification for privatisation

For each PSE earmarked for privatisation, issues that may impact investor appetite need to be anticipated and resolved much before the notification for privatisation is issued

This isnot only inefficacious with respect to the time, energy, and resources invested but also quite puzzling, considering that the intent is clear—minimising the government’s presence in business.
This isnot only inefficacious with respect to the time, energy, and resources invested but also quite puzzling, considering that the intent is clear—minimising the government’s presence in business.

By Kishore Desai

Recently, the Centre called off the privatisation of Bharat Petroleum Corporation Ltd. (BPCL) after almost two years of the process’s initiation. Lack of sufficient interest from potential bidders, the impact of Covid, and the Ukraine-crisis fallout were cited as reasons. However, BPCL is not an exception. Except perhaps Air India and Neelanchal Ispat Nigam Ltd. (NINL), closure eludes most privatisation deals, which are either inordinately delayed or likely to be cancelled (like in the case of Pawan Hans and Central Electronics Ltd). This isnot only inefficacious with respect to the time, energy, and resources invested but also quite puzzling, considering that the intent is clear—minimising the government’s presence in business.

The most evident challenge seems to be the pace of the exercise itself. The Public Sector Enterprises (PSE) disinvestment policy announced in Budget 2021 clearly outlined that in non-strategic sectors, PSEs will either be privatised or closed, while in strategic sectors, there will only be a minimum presence. Even if one assumes that the Centre would like to retain 2-3 PSEs in each of the strategic sectors, it will be reasonable to expect that eventually, India will have around 30-35 central PSEs (CPSEs). As per the Public Enterprises Survey 2019-20, as on March 31, 2020, India had 366 CPSEs. Of these, 256 were operating and the rest were under construction. Excluding the latter, the essence of the PSE disinvestment policy is that more than 220 CPSEs will have to be either privatised or closed in the years to come. This is an ambitious pipeline by any measure, and given the current situation, the Centre will certainly find it very difficult to achieve its targets realistically.

The fundamental problem seems that the PSEs to be privatised are far from being ready to be transacted. Private investors prefer deals which are neat, clean, and where they do not have to inherit major legacy issues and complexities. Consider the case of CONCOR, whose disinvestment was approved in 2019. Being a PSE, CONCOR had access to prime government-owned land across India at concessional terms. But once the ownership is transferred to the private sector, the lease rentals are proposed to be levied at par with the market, which will increase its costs and thus profitability. This is a major concern, among others, that has been flagged by interested bidders and a fair resolution of this issue that meets both the private sector and government interests is still missing. Likewise, the privatisation process for Shipping Corporation of India (SCI) and Bharat Earth Movers Ltd. (BEML) is also getting pushed back from its schedule as non-core assets of these CPSEs are still being demerged into a separate entity, while the shortlisted bidders continue to wait and watch.

Corporate governance standards of PSEs (particularly listed ones) also need attention. Ajay Tyagi, former chairman, Sebi, recently wrote an important piece in a leading newspaper where he flagged the gaps in corporate governance standards of such PSEs, the independence of their boards, and their penchant for routinely seeking special regulatory dispensations due to them being PSEs. Delays in resolution of such issues and continued back and forth in the process sends confusing signals to the market and impacts investor interest negatively. Therefore, it is imperative that before initiating EOI, the administrative departments and PSEs must do the necessary background work to ensure that the PSEs are privatisation-ready and that the transaction can be implemented timely without breaks.

The third important challenge relates to clarity regarding the government’s exit path. Currently, PSEs are being privatised through a transparent competitive bidding process. The question that needs careful consideration is if it is better to offload the entire stake of the government in one go or in tranches. The experience from round one of privatisation- that of Hindustan Zinc and BALCO- suggests that the latter may be a better strategy for value optimisation. However, investors seem to prefer deals where the government does not hold any residual stakes so that the private sector can exercise unencumbered management control. While the answer may not be this simple, it is clear that should the government choose to retain residual stakes in PSEs, it must provide a clear path to complete exit in terms of timelines and modalities upfront.

There is no doubt that privatisation is an important strategic priority for the government, especially in the current circumstances. Done efficiently, it can be immensely beneficial to the economy as it can declutter the government’s management bandwidth and improve the utilisation of scarce public money. However, mere intent to privatise may not be enough for the private sector. For each PSE to be put up for privatisation, issues that may impact investor appetite need to be anticipated and resolved much before the notification for privatisation is issued. Only then will it pick up pace and be able to meaningfully capture investor interest.

(The author is Public policy professional, and Ex-OSD, EAC-PM; Views are personal)

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