Disinvestment hopes slip on stock market volatility

The government’s efforts to offload a portion of its shareholding in public sector undertakings (PSUs) have begun in right earnest. In the third week of May, the Cabinet Committee on Economic Affairs (CCEA) headed by the Prime Minister gave its approval to the Department of Disinvestment for the sale of government stake in 20 PSUs. The CCEA’s approval was given anticipating a realisation of nearly Rs.50,000 crore, if disinvestment was to be carried out, at the then ruling prices.

A major portion of the budgetary commitment would be met. That, of course, is a facile assumption. The market prices of the shares of the companies, being divested will obviously not be the same as those prevailing at the time of cabinet approval.

Indeed, in a sharp jolt to the assumptions, the share market has slipped badly in the intervening weeks. The Sensex, which had crossed 30,000 in March, has slipped badly since then. The government would have based their expectations on the extremely buoyant stock quotes. The fallacy of basing estimates on a volatile market stands exposed so early in the year.

Secondly, it is also problematic as to whether the market can absorb so many shares at one ago at the assumed price. Further, question marks arise over investors’ appetite for such large quantities, and the practical difficulties in selling those shares. These and other reasons suggest that most target-based calculations will end in disappointment as indeed they have in all the previous years.

However, the government is right in planning ahead. It should, to some extent, minimise the glitches that had bedevilled the disinvestment programme over the years, and no matter which coalition was in power. The stock markets get the correct message. The companies chosen for divestment will probably get more time to spruce themselves up for the markets. That, as past experience suggests, has been a neglected area.

Understanding disinvestment

The term disinvestment refers to the process through which the government offloads a portion of its shareholding in a PSU. Capital receipts so garnered will help in central government finances. Importantly, however, under disinvestment, government will remain the majority shareholder even if its post-divestment shareholding is smaller than before.

However, disinvestment is more than the government diluting its stake in some PSUs.

The Finance Minister has indicated that the government might undertake strategic sales of identified units as well as selling some shares in unlisted companies.

These two processes should also go under the nomenclature disinvestment but because there have been so few of these in the past, they are often discussed separately. Together with the more conventional forms of divestment, the government hopes to garner Rs.69,500 crore of capital receipts this year from strategic sale and selling shares in unlisted companies.

Standing firm at 51 per cent

Government ownership with at least 51 per cent stake after divestment has been non-negotiable in most cases. Underlying that logical is political compulsion, more than anything else. That, for instance, makes the government repeat, ad nauseam, its willingness to protect government shareholding at least 51 per cent in all public sector banks. Economic logic would suggest a further divestment in some PSBs to enable them raise additional capital. However, even if government would remain the biggest shareholder, it will not let its stake come down to below 51 per cent.

The usual challenges

With such a large budgetary target, the government faces a number of daunting challenges. Some of these are common, inherent in the process itself. The most important challenge is for the government’s economic managers to remain steadfast in the face of fierce criticism that could derail the process. Selling ‘family jewels’, as the critics of disinvestment call it, can never be popular — not with the unions nor with the politicians. The latter are known to oppose any sale of PSU shares when they are in opposition. Main points of criticism relate to the price and the timing of sale. It is never easy to arrive at the correct price: there will always be an accusation that you have undersold public property. Even the most literate of the political class are not immune to this habit.

Attempts to blunt the criticism by letting the market discover the price — through book-building process and so on — have not helped. On the hand, there are instances to show that a larger technology application to stock markets can alienate small shareholders. Much has been said about protecting the interests of the small man but so very little obtains in real life.

The timing of the issue is another rallying point for the critics. There is never a good time anymore than there is a correct price. Consequently, decision-making by the government is a thankless task. Accountability issues — not very different from those involved in credit decisions by government banks — can stall the disinvestment process, often indefinitely.

If the ‘conventional’ divestment — the government sells only a small portion and keeps the majority stake — can be so controversial, strategic sale has become well nigh impossible. Here, the government cedes control along with a majority stake and control to strategic partner. None of the strategic sales undertaken in the past have escaped trenchant criticism. The controversies remain to this day,

The shadow looms over one important source of public finance .The stock markets are slippery, and the other usual challenges remain as daunting as ever.

crl.thehindu@gmail.com

(This article first appeared in The Hindu dated June 15, 2015)

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