Keep it simple

By Bharat Banka

The finance budgets in India since the last decade have consistently talked about using disinvestment of government stakes in Public Sector Undertakings (PSU) as a measure of raising resources for the central government. These have had mixed successes over the years, and over time were loosely categorized into:

(a) disinvestments where a controlling stake or an outright sale of an entire PSU took place to strategic buyers; or

(b) disinvestments where a minority stake was sold to the public at large, paving the way for listing of the company.

While instances of sale of controlling stakes can be counted on the fingers of one hand, even the total cases of minority stake sales fail to add up to an astounding number. The approach appears a more switch-on/switch-off kind, with the underlying sentiment loaded against disinvestment but brought out from the closet every time fiscal deficit looms large.

Order of options
While the option of strategic sale can be assumed to have been buried for all practical purposes, the sale of minority shares can be executed smartly to achieve the best outcomes from minimal efforts, just if the prioritization can be more spot-on. Here is what the order of options should be:

1. Float PSUs that are unlisted as the first priority. The capital markets are known to take fancy to the process of discovering the unknown. The fact that such companies are not quoted means they don’t have any legacy valuation and can be positioned as unique companies. It will ensure sufficient investor interest is generated for the process to be successful.

2. Sell additional stake in PSUs with extremely low (2-5 percent) public float. While such companies have a discovered market multiple and market capitalization, the discovery is imperfect due to inadequate depth. However, such discovery is sufficient indicator of investor interest and they would want to own more stakes in such companies but float remains a constraint. Make available what they long for, a win-win for all!

3. Sell further stakes of PSUs with substantial government ownership. Here, the multiples are well-discovered and market cap fairly represents the underlying value. The only purpose of a government stake sale here would be to raise resources, better done in a vibrant and buoyant capital market for the maximum effect. However, if such companies need to raise capital for growth, allow it, irrespective of the state of market.

Common points for the above priorities

1. Get over the intellectual inaction on the level of right valuation. In real life, there is no right valuation. A particular valuation is relevant at a given time and in a given set of circumstances; remember the dotcom valuations of 2000 and now!

2. Decide the equity stake to be sold. The overall disinvestment program and expected contribution of each sale to overall proceeds need to be the driving forces. In an ideal world, for good companies, sell as little as possible in the first tranche; establish valuation, create further value, then sell next set of tranches.

3. Respect presence of minority shareholders. Refrain from using balancesheets of such companies as extension of fiscal budgets.

If you follow the above, the outcome could be outstanding. Did one hear someone saying, “Keep it simple, Sir!’ Voila!

(The views expressed here are personal)

© Entrepreneur India September 2012