The Hindu Business Line : Divestment, really?

AFTER MONTHS OF public statements about its commitment to reducing its holdings in public sector units, the Government has finally got down to business. It has started off, announcing the sale of 8 per cent stake in Maruti Udyog Limited. Admittedly, this is a tentative and small step. For, the sale of equity will be limited to scheduled banks and financial institutions through competitive bidding. Presumably this means private banks will not have the privilege of putting in their Expression of Interest (EoI), and definitely, the retail investor is not being considered at all. What kind of dilution is this?

One way of viewing this sale, that will garner Rs 1,500 crore or thereabouts at the stock's current value, is that it meets a part of the Government's agenda with the tacit consent of its coalition partners. Successful bidders will be quasi-government entities and to that extent the sale will be politically correct, though half-hearted. Further, the proceeds of this sale will not cover current government expenditure but go into the National Investment Fund whose corpus is being used to finance social sector projects. To this extent, the pressures of the Left parties can only be commended because the past practice of using the sale proceeds to finance current needs was not a good enough reason to sell the `family silver'. But, surely, the rationale for dilution of government stake should be more broad-based than just raising resources for social sector projects.

From the economic standpoint, the advantages of dilution obviously lie in the more efficient management of the PSU. A listed entity is motivated by the market to do well, follow corporate governance norms and maintain rates of growth that meet investor expectations. If GAIL, ONGC and BHEL are high fliers today, it has much to do with their listing on the exchanges than with any administrative fiat. The second advantage is more implicit, in as much as a broadening of the investor base spreads wealth to greater numbers. If the aforementioned PSUs have done well on the market and in physical terms, an expansion of the ownership base must take as much credit as their efficient running by their managements. In 2003, the Government sold 27.56 per cent of its stake in Maruti at Rs 125 per share. On the day the sale of the eight per cent was announced, the Maruti share price closed at Rs 667.75. That spike was the result of a buoyant market to be sure but it also reflected the expectations of more to come.

The Government must not disappoint the retail investor. It would be very tempting for the Finance Ministry to adopt the MUL sale model to scheduled banks or other government entities, because it does not upset anyone. Having ensured an appropriate place for the government to park its post-dilution funds in the NIF, the coalition partners must take the long-term view and ensure that the retail investor benefits from the earnings potential of the PSUs whose further sale they are opposed to; BHEL, for instance.