Sunday, July 4, 2010

Public Sector Disinvestment: In Whose Ultimate Interest?

The Government is in the process of finalizing its disinvestment plans for Coal India Limited (CIL) and Steel Authority of India Ltd. (SAIL) through the public offer route. Various sources have reported that as much as $3.6 billion could be raised through the sale of SAIL’s stake and another $2.9 billion for CIL. This makes up over two-thirds of the $9 billion that Union Finance Minister Pranab Mukherjee promised would be raised through disinvestment in PSUs this year. Initial efforts of the government on smaller issues have been disappointing with few takers for what the investment community sees as overpriced public entities with a shaky track record of profitability.

Most of the high-profile disinvestment offers of the Government have involved the significant participation of another semi-governmental organization, the Life Insurance Corporation of India (LIC). Where public investment has fallen short of expectation, the company, arguably India’s largest insurance entity, has stepped in to take up slack. Critics argue if such a move can rightly be labeled disinvestment, since control just passes from direct to indirect forms, at the cost of the public’s money. They argue that the move might even be termed as an abuse of public trust, since the insurer is using public funds to make these investments, on the suggestion if not the recommendation of the Government. Ultimately, the Government gets its money, but ownership is still not open to public scrutiny, nor is it transparent. So who stands to gain?

The Government meanwhile claims to have no say in the decisions of the LIC, but the facts seem to indicate otherwise. Wherever public and private investment has fallen short of target, institutional buyers managed by the government have stepped in to fulfill the target realizations, irrespective of whether those valuations are justified by market or other benchmarks. If the response is poor and issues list below their offer price, reaching the target could be difficult. The government's objectives should be more than merely balancing its books, using public money for covering budgetary deficits is not the answer. Recent IPOs by private-sector companies have been oversubscribed and have listed at significant premiums to their issue price. The government needs to show value to investors if it wishes to gain the same level of response, claim a number of market analysts.

All this combined with the often entangled web of rules and regulations governing investments by various categories of investors which change ever so often make the process a literal minefield. For example, traditionally an IPO is based on the book building route, while the Government followed the French auction method for NMDC as recommended by SEBI. However, the method left investors confused and the Government reverted to the former method. In some cases, institutional investors were asked to put up 100% of the allocation amount before the allotment process, making liquidity a major problem. These issues also need to be worked out, as they can create additional problems in case of PSU disinvestment proceedings.

From a socialist viewpoint half a century ago, we have thankfully moved on to the thinking that the Government has no role in business, except in an enabling and mediating position. It is high time the Government actually showed this by smoothly removing its presence from the PSUs and allowed them to function as profit-making businesses. In doing so, it needs to also keep in mind that the price people pay for a share of that business represents the value they see in it, not the dues the government claims for decades of staying invested in a long term venture.

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