The UPA Cabinet decided in 2005 to disinvest 10 percent of India’s power equipment maker public sector enterprise, Bharat Heavy Electricals Limited (BHEL). The decision, however, had to be kept in abeyance due to resistance from the Left which supported the ruling alliance. The Left had boycotted the coordination committee meeting in protest against the move to disinvest BHEL.
Another attempt to disinvest BHEL was made during UPA 2. This time too the decision was kept on hold as the PSE withdrew its draft red herring prospectus (DHRP) for a Follow-on Public Offering (FPO) in April 2012.
The offer was initially made for the disinvestment of the government’s five percent stake in the company.
BHEL is a test case to amply demonstrate the difficulty in reimagining the public sector enterprises, especially from the perspective of government stake sale. Despite divestment being a clearly enunciated objective of successive governments in India, the politics around the decision endures. The easiest thing is to retain control. However, ceding control has proved to be a key challenge, with politicians of all hues keen to see these enterprises as individual turfs.
Divestment to Privatisation?
It is, therefore, interesting to note that the Modi 2.0 aims to bring about comprehensive reforms in the PSE space. Finance Minister Nirmala Sitharaman last month said a new public sector enterprises policy will be announced soon to define strategic sectors that will have not more than four PSUs.
This is bound to pave the way for opening up of all sectors to the private sector. Strategic sectors, to be notified, will have at least one enterprise within the PSE fold but private sector will also be allowed. For the remaining sectors, PSUs will be privatised. On paper, this surely looks like being as reformist as it can get. The move is set to unleash a wave of consolidation, mergers, divestment and privatisation.
What makes the announcement unique is the outright push for privatisation. It probably also makes the case for minimum government and maximum governance a reality. PM’s self-reliance pitch also gets a valid context with the government keen to shed the “commanding heights” economic model. The room for integration and not isolation looks like to be the correct mantra.
But privatisation is easier said than done. It is a political hot potato. The Modi government will have to risk its entire political will to make a success of the private sector play in public sector. That is why the policy fine print (notification) is quite critical. The caveats, if any, will determine the intent and the implementation agenda of the government.
Modi 1.0 raked in around Rs 2.8 lakh crore through disinvestment during its first term. The latest budget has pegged disinvestment target for 2020-21 at 1.20 lakh crore. The government missed the budgeted disinvestment target of 1.05 lakh crore for the last fiscal.
Vajpayee Model
It is interesting to note the divestment to privatisation journey in India. If BHEL set a bad template, the Vajpayee era embraced public sector reforms like never before. Vajpayee in August 2000 disinvested 26 percent of Hindustan Zinc Limited (HZL) equity through a strategic sale. NDA-1 privatised 12 public sector companies and these included Maruti Udyog, Hindustan Zinc, Bharat Aluminum, Videsh Sanchar Nigam Limited (VSNL) among others. But his government fell short of the target and raked in about Rs 30,000 crore.
Sterlite Industries emerged as the highest bidder for HZL and the transaction was completed in April 2002. The NDA-1 government further divested around 19 percent stake in November 2003. The two-phase deal resulted in the government shedding 45 percent of its stake in the firm for around Rs 769 crore. While the government has yet retained a 30 percent stake in HZL, the company has since become the world’s second-largest zinc-lead miner and top-10 silver producer. The learning from HZL is unique. Simply because we have not been yet able to replicate the success with the model.
Maruti is another success story. The journey from Maruti Udyog Limited to Maruti Suzuki India Limited has been marred by controversy over control. The government finally shed its residual stake in May 2007. The Indo-Japanese partnership is a great ‘Make in India’ case study but the partnership observed a bumpy ride, especially during 1995-96, when K Karunakaran served as the Union industry minister.
Reform Roadmap
Going forward, what model should the Modi government adopt as it aims to make virtue of its public sector reform announcement? Ideologically, it has to keep the following perspectives in mind:
- The 1991 reforms made it clear that privatisation is the way to go forward. Especially, there is room for the government to exit businesses where the social contract is minimal. These include tourism, hotel industry, consumer goods manufacturing, automobiles and such sectors where private players can provide consumers with abundant choice. But 30 years down the line, the government has not exited many of these businesses.
- That all public sector is inefficient and that privatisation is a panacea for all ills. No one size fits the bill. Like in the private sector, there are laggards and leaders, public sector also has winners and losers. Each PSE has to be treated as a corporate entity with a balance sheet that does the talking honestly; no bookkeeping wonders. This is where Air India makes an interesting case study. It failed to attract a right suitor last time it was put up for divestment. Now, it is on the radar again. The government, which floated an Expression Of Interest (EOI) in January this year, has proposed to sell 100 percent stake in the airline along with entire shareholding in AI Express and 50 percent in ground handling joint venture — Air India-SATS. The EOI timeline has been extended until June 30 and is likely to be extended further in view of the COVID challenge.
- That losers or more accurately loss-making companies should be sold off while profit-making companies should stay under the government control. This is as flawed as the idea of putting premium on inefficiency. Why should the burden of disease be passed on to a healthy company? If market forces have to operate, then why should someone buy a sick company? Good commercial transactions are not based on emotion.
- Definition of strategic (something that holds the key to the latest move to rope in the private sector) is highly subjective. Should the government alone decide what is strategic? Air India did a yeoman service bringing home stranded Indians from all over the world and therefore, it is time to term it as a strategic asset. This argument is flawed. It does not make commercial sense.
- That the government should divest or privatise to raise money to be spent on causes that are dear to it or have a public utility. Have we not moved quite away the maxim? Divestment or privatisation is a stated objective for enabling a commercial framework for monetising assets at a market-determined price. What if the government is the seller? What use the money is put to, is another issue and should not cloud the transactional nature of the buyer and seller? Ideology – left, right or centre – has to steer clear of the deal.
- That private sector is not entitled to draw the growth trajectory and that government alone is the sole custodian of the growth agenda. Growth with equity and growth without equity – whether in the state sector or the private sector – is an irrelevant debate today. In today’s age and time, growth with equity is a prerequisite for any commercial entity for multiple stakeholder engagement. There is need to enrich the last mile connect but compliance is a regulatory challenge and the government is seized of it.
Reforms Driver?
- That we should choose the right time for the divestment agenda. If stock markets are the matrices for deciding the timing, then there is no good or bad time. There, however, are a composite set of factors that determine the sale time. There is no substitute to due diligence but it is left to domain experts under complete transparency and accountability and market pundits better stay out.
- Setting out realistic targets: The government’s track record here has not been impressive. The government pegged a stiff disinvestment target for 2020-21. Meeting the target by merging loss-making units with healthy units is no great business strategy. Consolidation for the sake of consolidation is not a great idea. There is an urgent need for private capital.
- Who should champion the big-ticket change? PSEs are prime real estate for respective ministries and ministers. There are obvious conflicting turf interests. NDA-1 has shown us the way forward. Set up a divestment/strategic sale/privatisation ministry under direct supervision of the PMO. This should cut undue interference and take charge of development of a great India Inc story without being coloured by the shareholder origin. The ministry’s first and foremost target should be to make a virtue of AI sale. That in turn will set up the tempo for the reforms to take shape on the ground.
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