Cheques and balances by Sucheta Dalal

Cheques & Balances by Sucheta Dalal

June 25, 2000

Disinvestment & erosion in PSU attractiveness

Arun Jaitley, the Minister of State in charge of Disinvestment, is a top-notch lawyer and excellent debater, who can hardly be accused of not knowing his audience. So when Jaitley, delivering the DM Harish Memorial Lecture to Income Tax Consultants last week made a completely political speech on the need for a consensus on disinvestment of Public Sector Undertakings (PSUs), it was an indicator of the deep opinion divide within his own ruling coalition.

Income-tax consultants, lawyers and the smattering of financial experts who heard Jaitley in Mumbai certainly did not need any convincing about the need for privatisation. On the contrary, they are impatient at the delay in decision making, and at the dawdling and dithering by government and exhorted Jaitley to get on with the sell-off process. Yet, Jaitley’s speech, complete with references to Maggie Thatchers’ privatisation drive in Britain, could well have been delivered by Manmohan Singh in 1991 when he had to sell the concept of disinvestment. What is worse, it certainly did not sound anywhere as confident a P Chidambaram was in 1996 when he set up the Disinvestment Commission. And trashing the hypocrisy of the opposition parties was no help at all when the biggest opposition was within BJP itself.
Ironically, it is Jaitley who has something to really crow about in the sale of Modern Foods to Hindustan Lever, but his speech, delivered on the eve of the big cabinet meeting was a worrying signal that the battle is far from over. On Friday, the government seems to have managed a cosmetic consensus.

Ram Vilas Paswan, Manohar Joshi, Ram Naik and Sharad Yadav may have held their peace, but the government has little to show in terms of credible decisions. Oil and telecom PSUs were left alone while 11 others were accorded “in-principal” clearance for disinvestment. The three-year road map for disinvestment was jettisoned, and even those which have been cleared or divestment still need a go-ahead from the Cabinet Committee on Disinvestment.

Finance Minister Yashwant Sinha needs the Rs 10,000 crore that is hoped to be raised from disinvestment this year and Arun Jaitley can certainly deliver the goods. However, without strong support from the Prime Minister (PM), they will find it impossible to tackle the triad of recalcitrant ministers, the babus who silently but effectively protect their vested interests, and short-sighted trade unions capable of disruptive blackmail and strikes. The PM is capable of neutralising even the more belligerent of his ministers; he demonstrated this last Friday, but he needs to keep up the pressure if the government hopes to meet its financial targets set for disinvestment.

Competition, liberalisation and changing technology are rapidly making PSUs unattractive to investors and the government needs to take note of the rapid decline in investors’ appetite for PSU stock.

Sharing the platform with Jaitley in Mumbai, leading investment banker Uday Kotak made a very striking comparison. He said, just two years ago, well after the disinvestment programme had begun, eight of the top ten companies in terms of market capitalisation were all PSUs. The only private company in the top 10 was Hindustan Lever, while the last slot was a toss up between Reliance and ITC. Today, only two PSUs Indian Oil and Mahanagar Telephone Nigam Ltd form a part of the top 10 with MTNL at the bottom of the list — the rest are private companies. Kotak warned that such a rapid deterioration in value could completely derail the government’s divestment targets.

For instance, he said, the market capitalisation of a State Bank of India is equal to ICICI, that of MTNL and VSNL is equal to Himachal Futuristic (for various reasons) and that of Indian Petrochemicals Corporation has dwindled to five per cent of that of Reliance after being equal to it in the 1990s. Serious damage was done to oil PSUs a couple of years ago, when Yashwant Sinha decided that cross-holding of their shares were a quick way of financing the deficit. Ram Vilas Paswan’s free phone bonanza for telecom employees will have the same effect on telecom PSUs if the government wins the public interest litigation filed against the proposed move in Kerala.
Today, when GG Vaidya, Chairman of the State Bank of India (SBI) announcing spectacular results, he must be painfully aware that all his efforts are so short-term. The absence of a succession policy in all public sector banks, and the fact that senior PSU appointments are always subject to political manipulation, the top five posts in SBI are due to fall vacant this year.

Air India and Indian Airlines have rapidly sunk into the red because of fierce competition while Maruti Udyog is the ongoing victim of indecision over its disinvestment. The erosion in market capitalisation and competitiveness cause far bigger losses than the Rs 3000 crore that the government currently pays out in salaries, bonuses and costs to closed PSUs. IPCL has gone from being an attractive blue chip company to an unattractive one stuck in the wrong business. The losses of one PSU alone accounts for 80 per cent of the government’s revenue target through disinvestment, yet Arun Jaitley fights shy of naming it publicly.

While Atal Bihari Vajpayee’s ministers lobby against privatisation, the PM himself cannot avoid responsibility. The Disinvestment Commission may have been jettisoned, but a three-year road map is imperative. Apart from the sell-off programme, it should include an independent analysis of the fate of these PSUs if they do not respond to changes in technology and competition. It would need to cover succession planning and the installation of professional managements in PSUs and discuss voluntary retirement schemes including retraining for workers. In fact, the Prime Minister probably needs to re-read at least the first and last reports of the Disinvestment Commission which was headed by GV Ramakrishna — they may underline to him the urgent need for decisive action.