Sucheta Dalal :Danger Signals Over PSU Disinvestment (2 September 2002)
Sucheta Dalal

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Danger Signals Over PSU Disinvestment (2 September 2002)  

Disinvestment minister Arun Shourie bought his government much needed credibility by setting a spanking pace for the disinvestment of Public Sector Undertakings and conducting the process in a clean and credible manner, but his colleagues seem determined to sabotage his efforts. The last few days have seen various ministers resort to sulks and somersaults that would do them more credit if they were in opposition rather than in government. That the disinvestment process has brought in much needed funds to the government kitty has made no difference to their attitude.

Last week, George Fernandes called for a review of the disinvestment policy and was successful in having a meeting of the Cabinet Committee on Disinvestment postponed. It is hardly a secret that given a choice, union petroleum minister Ram Naik would rather not divest control over his oil companies. This group of papers has provided ample evidence of one his many reasons for not letting go.

The controversy over the petroleum companies has also provided an opportunity for other ministers to signal their opposition to divestment. Fertiliser minister S S Dhindsa has immediately asserted that he will make all efforts to prevent an immediate sale of National Fertilisers Ltd, while Congress leader Srikant Jena has urged Orissa chief minister Naveen Patnaik to oppose the disinvestment of National Aluminium Co Ltd and call an all-party meeting to drum up support.

Let us examine George Fernandes’s objections and his request to the Prime Minister to convene a meeting of key ministers to debate the disinvestment policy. Fernandes reportedly wants the government to guard against the rich getting richer and prevent private monopolies. There may be some merit in this statement. After all, it is not divestment if the monolithic Indian Oil Corporation acquired another oil company or the competition was limited to one large industry house and IOC. But, when Fernandes goes on to claim that privatised companies would refuse to cooperate with government and threaten national security, that is taking things too far. Also, Fernandes was more worried at the Reliance group’s monopoly rather than IOC’s.

Fernandes also says that it may be better to look at a direct sale of PSU shares to retail investors rather than a strategic sale to private sector companies. This argument too has some merit, but probably not in the manner that he envisages. He should remember that strategic sales were the quickest disinvestment option when most politicians were reluctant to let go of PSUs in their ministries. A sale to retail investors would need, what G V Ramakrishna, former chairman of the Disinvestment Commission colourfully described as polishing the family silver before its sale (FE, Aug 30, 2002). In fact, any sale to retail investors would work only if it is routed through a special purpose vehicle such as the National Shareholding Trust and the PSU is adequately spruced and polished before divestment. An NST type arrangement would allow government to divest its shares and at the same time delink the policy aspect of disinvestment issues such as price and timing. It would also have time to restructure PSUs without glossing over fundamental issues that need to be resolved before they are privatised.

The NST model also brings in competent professional management at the PSUs, who could well do a better job of running them than many private industrialists who have asset-stripped their companies, ‘looted’ public funds and turned defaulters. The trustees of NST (eminent people of proven integrity) would be charged with finding "credible and competent" persons to head the PSUs (as argued by Dr Sanjaya Baru in FE, Aug 30, 2002) through a sensible selection procedure. This would enhance the PSUs’ valuation and attract retail investors, even without a strategic sale to a private sector acquirer.

George Fernandes and his fellow politicians should realise that the key is to stem the steady rot in PSUs and help create value. Retail investors are no fools; they have stayed away from the Initial Public Offerings market for more than three years and will not touch a PSU unless they see growth opportunity in the stock. Unless of course, Fernandes wants the IPO process to be another farce with government-owned financial institutions being forced to pick up PSU stocks via IPOs.

Another reason why the NST model may be worth exploring is the problems that have been cropping up with divested PSUs. The fact that Ruia Cotex, which took over Jessop & Company, is a defaulter and owes large sums of money to leading financial institutions and tax dues to the West Bengal government worries bankers. Tulip Hotels led by Ajit Kerkar, which took over the massive Centaur Hotel by funding the acquisition almost entirely through bank borrowings, is unable to service its loans within months after it inked the deal.

Finally, the controversial Videsh Sanchar Nigam Ltd’s privatisation seems headed for further trouble with the Tatas openly expressing their ‘unhappiness’ at government harassment over the issue of interconnectivity. Speaking to us, a top Tata official said that the company would, if necessary, explore its legal options and also pointed out that the shareholders agreement provides for a reversal of the divestment under certain circumstances. Although he said the threat of an actual ‘divorce’ as reported by a business daily was not imminent, he did not rule out such a drastic option.

The reversal clause was written into the shareholders agreement to give government a handle over the PSU after disinvestment –– nobody envisaged that an acquirer would threaten to opt out and deal a blow to the divestment process. Clearly, a Tata walkout would be acutely embarrassing for the government. Its charges need to be examined by an independent committee. Was it truly misled about the terms of acquisition? Are its claims about government harassment at the behest of rival industrialists true, or is it sulking because it wasn’t allowed to divert Rs 1,200 crore to Tata Teleservices? Many of these problems will be minimised or eliminated by the NST route, or by granting autonomy to PSUs after installing professional management and a public offering of shares.

Interestingly, Dr Vijay Kelkar, who as finance secretary had mooted a variation of the NST, is back in Delhi as an advisor to the union finance minister. Maybe his second stint at North Block would see this idea inch towards implementation. It would be a tragedy if the entire disinvestment programme were derailed only because the NDA government is divided between friends of a large business house and those who hate it.

-- Sucheta Dalal