Aarati Krishnan

Public sector firms are no milch cows

AARATI KRISHNAN | Updated on November 23, 2017 Published on January 12, 2014

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By expecting listed PSUs to sell products below cost, foot subsidy bills and cough up cash whenever the exchequer needs it, the government is trampling over the rights of public shareholders.

Can you imagine the promoter of a listed private sector company arm-twisting it to sell its products below cost to his favourite charity? Or asking it to buy shares in a group firm or demanding big dividends whenever he was short of cash?

You probably can’t, because this would have investors coming down on him like a tonne of bricks and regulators hauling him up for bad corporate governance. Yet, such promoter behaviour is par for the course in listed public sector companies in India. Just consider the following facts.

What commercial interest?

Ever heard of a monopolistic business that sells its produce below market price and enters into contracts that are loaded against it? Well, meet the 90 per cent Indian government-owned Coal India.

First, in order to keep fuel costs low for power generation companies (many of which are for-profit private players), the government insists that Coal India sell its output far below market price and not hike its selling prices, even when costs escalate. This earned the ire of UK-based Children’s Investment Fund, one of the few institutional investors in Coal India. Last year, the fund dragged Coal India to court for riding roughshod over shareholder interests by under-pricing its output. It alleged that government interference was costing Coal India shareholders a whopping $20 billion in annual profits.

Then the mining major was forced to sign Fuel Supply Agreements (FSAs) with power producers, where it committed to heavy penalties if it didn’t meet these commitments. But the only problem is, Coal India says it simply won’t be able to produce the committed quantities of coal.

In a recent interview with this newspaper, Coal India’s chairman lamented: “Did we sign the FSAs at our free will? We can drive at 60 kmph. But you are forcing us to drive at 120 kmph and then penalising us for the eventual failure. What kind of business proposal is this?”

Don’t dismiss this as typical public sector inertia. Coal India can’t increase coal production at will because, with multiple statutory clearances required for developing each mine, securing the necessary permissions does take several years. Neither private sector miners nor power producers who have been allocated captive coal blocks have managed to ramp up output either.

The irony is that after taking flak from the UK fund for sacrificing commercial interests to favour its customers, Coal India was also recently slapped with a Rs 1,770-crore penalty by the Competition Commission of India (CCI) for signing FSAs without consulting its customers!

Tangled web of subsidy

But Coal India is still a profitable enterprise and its woes actually pale in comparison with the travails of the public sector oil companies.

First, amid spiralling import costs for crude oil, oil marketers are required by the government to sell their products below cost, to keep prices low for the aam aadmi. Then, after co-opting listed PSUs into this charitable endeavour, the government takes its own sweet time reimbursing the deficit. It also haggles over the sums, with a complicated debate about whether the oil companies should be compensated based on import parity prices or export parity prices. These delays result in oil marketing companies using up huge amounts of working capital and running up gigantic losses quarter after quarter.

However, what really adds insult to injury is the government’s bright idea of asking upstream oil companies such as ONGC, Oil India and GAIL, who actually have nothing to do with all this, to ‘share’ the losses by selling their output at a discount. The proportion of losses that oil producers bear changes every year, making it impossible for investors to take a call on the earnings or prospects of any of these companies.

Is it any wonder that the market has made mincemeat of the oil PSU stocks? Today, after the stock market rally has pushed up the market’s price-earnings multiple to over 18 times, the giant oil PSUs languish at pathetic multiples of 3-5 times their earnings.

However, it is not just the oil PSUs, but also the public sector banks which are often called upon to support the government’s social endeavours. Remember how they had to offer agricultural loans to farmers at a discounted interest rate after a bad monsoon, with the government promising to foot the bill later? Or how they were recently ‘urged’ to give the economy a helping hand by offering loans to two-wheeler and consumer durable buyers at low rates?

Neither move may make commercial sense for banks, but with their majority owner insisting, do they have any choice? With top-level appointments at the PSUs at the discretion of the ruling government, the firms’ Boards usually offer little protest at such interference.

Deposit cash here, please

While oil and bank PSUs probably accept irrational diktats from the government as an everyday occurrence, those in other sectors have reason to fear the end of each fiscal year. For, this is the time of the year when the Centre usually realises that it could do with some quick cash to balance the budget. It usually turns to the PSUs.

All would be well if it were to simply raise cash by divesting its equity stakes to public investors. But sometimes, if market conditions aren’t right, investors may fail to take the bait. This is the cue for policymakers to come up with a host of unusual ideas to make the larger listed PSUs part with their cash.

This year, these efforts have taken many forms. First, PSUs were asked to consider buybacks, no matter if they needed the capital for their own expansion projects. Then, it was suggested that state-owned firms buy stakes in each other. Recently, pressure is mounting on public sector banks to consider interim dividends. This is relatively harmless, given that dividends will have to be equally distributed to all shareholders. But the only problem is, most public sector banks also need capital infusion from the government. Therefore, it makes little sense for them to first pay out hefty dividends to the government (with an additional dividend distribution tax), only to later request a return of that capital.

The challenges faced by PSUs have not gone unnoticed by the markets and the PSU pack has been ruthlessly de-rated and languishes at big discounts to private peers. Institutional investors are willing to assign hardly any value to their rock-solid assets or their large cash pile.

That is why it is time the Centre made up its mind about the future of listed PSUs. If it is keen to reduce its role in business by divesting its stakes in PSUs, it needs to allow these firms to pursue their commercial interests and maximise shareholder wealth. But if it wants PSUs to act as vehicles for delivering social good, it is best that it shelves its divestment programme and takes these firms fully private. Then no one will object if a PSU is always dancing to its promoter’s tunes.

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Published on January 12, 2014
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