Privatisation this time, not disinvestment: Financial Express Feb 23 2021

 

The path towards total privatisation does involve breaking ideological shibboleths that have been built since Independence. At the same time, is it necessary for the government to actually sell stake to get private ethics in PSUs? Can’t the same be done by simply changing the rules of governance? This may also be worth considering

Is there a difference between privatisation and disinvestment? Disinvestment is a purely an Indian term that connotes what it means. The government sells shares of companies so that it supports the Budget. The tone of privatisation is different as it means that the government is keen to get out of certain sectors that are not strategic and where the belief is that it has no right to be there. By selling its stake to below 50%, the ownership passes, and the company works like any other private sector enterprise and the government need no longer worry about it. This makes a lot of sense, and as the finance minister spoke of the concept during the Atmanirbhar series, it does appear that the government is keen on moving out of some companies.

But a question here is whether making a company privately-run is better than keeping it where it is? If one looks at the private corporate sector, the performance is not always very good if one moves away from the top 100 companies. First, most of the non-farm NPAs reside in the private sector. Data on this is not provided by RBI post 2017, but at that time the share of public sector in NPAs was just around 3%. Second, most failures are in the private sector. On both these points it can be counter-argued that some PSUs would have closed down due to similar failure but are afloat because of government support. True, this is valid, especially if one sees PSBs where some of them may have folded up just like the private ones which had to be merged with others.

Third, the private sector does not create jobs, which was a mandate of the public sector. In fact, there is a distinct dislike for creating jobs as technology takes over, ostensibly due to rigid labour laws. Hence, by privatising such units, unemployment will increase as the flab is reduced. Fourth, in the last five years the share of the private corporate sector in gross fixed capital formation had fallen from 26.1% to 23.4%, if IPR is excluded. If included, it would go up from 32% to 35.3%. Clearly, there is intellectual capital generated, though fixed asset is more in the domain of households (individuals and small enterprises) and the government. Hence, it is not very unequivocal as to which model works better from a macro point of view.

There is, however, a strong argument that the private sector has delivered very high value in the market and hence qualifies to take over PSUs. But this holds for some PSUs too. In fact, the Nifty has around eight PSUs that are also favourites of the market.

Now, when we go for privatisation, we have so far followed the disinvestment route where the government sells generally a part of its stake in the market. The modalities are quite well known. At times, one PSU buys into another so that the public ownership remains. Instead of the profits and reserves being transferred directly to the government, it is done through this sale. The other way out is to actually sell fully to the private sector, where there are examples of VSNL or Modern Foods. Otherwise, there is some market sale where individuals can also buy the equity through IPOs. The latest is through the ETF route where the public buys these units which are used to buy shares of PSUs.

The new mode of disinvestment will be privatisation where there are strategic sales taking place. Here the government needs to clearly state that all these sales will lead to its share coming down to below 50% in five years’ time to assure the investors. Will we hear this for all such cases or will it be a case of the government showing intention but still holding the reins? This becomes critical especially so as the government has announced sale of PSBs and insurance companies in the life and general segments.

This is interesting because, traditionally, government-backed insurance companies have been the investor of last resort in all disinvestment plans. Once the stake goes below 50%, the government loses this freedom and has to look elsewhere. The same holds for banks which are used to carry out political agenda of the reigning government.

Shamiana banking, which is the norm today, does not hold for private banks. We cannot have banks being forced to lend to any sector beyond the RBI stipulations once the stake goes below 49%. Therefore, it stands to reason that privatisation in the BFSI space is more likely to be partial stake only and the ‘private’ part will probably not happen in the next decade or so. The government has to be very clear on these issues before going below 50% stake.

To really make PSUs being privatised work, ideally, the entire unit needs to be sold to a single player who can manage the company. Selling to diverse stakeholders like HNIs, FPIs, mutual funds, public will still not add focus to the management. Ideally, an existing airline company buying the state-owned carrier makes sense as there is proven expertise in the field. Even a promoter group that is seeking diversification can extend its claim for such a purchase if the track-record is good. A criteria matrix can be drawn for this purpose where there are qualifications for a buyer.

Having such guidelines in place just helps to fine-tune the process of privatisation in a seamless manner so that all the cards are on the table. The choice of companies is always a challenge because the well-performing ones probably do not need to be privatised, while the loss-making ones would have less value for potential investors. Interestingly, PSUs outside the banking area have contributed to around `40,000-60,000 crore of dividend to the government on an annual basis, and selling off the stake can give one-time revenue but plug the annuity-like flows.

Also, often PSUs are told to invest in machinery to boost capex, which will not be possible once privatised. We have had cases of one OMC buying stake in another to meet the disinvestment target. This again will not be possible. Therefore, the path towards total privatisation involves breaking ideological shibboleths that have been built since Independence.

A rather curious thought that often comes up in this debate is whether it is necessary for the government to actually sell stake to get the private ethic in the organisation? Cannot the same be done by simply changing the rules of governance where the government does not have a say in appointments (which are normally considered as being favours given to the concerned persons) and policies pursued? Creating appointment panels of accepted private sector luminaries to select the top management of PSU staff can actually achieve the same without selling stake. This may also be worth considering.