Prime Minister Narendra Modi has been a votary of greater autonomy for State-owned enterprises, arguing for less government interference in public sector banks even recently at the Gyan Sangam. But logically, shouldn’t thisattitude also extend to non-bank public sector undertakings (PSUs)? Influential government officials believe that cash-rich PSUs should be asked to borrow more to fund their expansion projects. At other forums recently, they have also talked of using their cash balances to revive sick PSUs and to stimulate the economy through ‘public investments’. Such notions are premised on the idea that the government, as ‘owner’, has the right to dip into the tills of PSUs at will, which is fallacious as most cash-rich PSUs now have a sizeable public shareholding. Shouldn’t the boards of PSUs take investment decisions based purely on commercial considerations?
True, central PSUs have accumulated unnecessarily large cash piles in recent years. Cash and bank balances of the 33 listed PSUs (excluding banks) stood at ₹1.33 lakh crore by end-March 2014, about 12 per cent of their assets. Locking up precious capital in bank deposits rather than in productive assets carries a high opportunity cost. Given that most PSUs boast of a strong balance sheet and can borrow at near-sovereign rates whenever they need funds, there is no logic for stockpiling cash. However, deploying it in unrelated projects or untimely capital expansion just to stimulate the economy, is likely to prove detrimental to shareholders. Cash-rich PSUs such as NMDC, ONGC and Oil India, for instance, operate in cyclical businesses that are facing a global supply glut. Global commodity giants are in the process of mothballing or hiving off their inefficient units. To expect Indian commodity PSUs to forge ahead with ambitious expansion projects in this situation is hardly realistic. Nor will expansion projects solve the problems of the cash-rich BHEL or NTPC. While BHEL has been grappling with low-cost Chinese competition and slow order intake, NTPC has been short of adequate fuel to fire its power plants. Clearly, capex decisions in these firms need to be taken on a case-to-case basis with their business exigencies in mind.
The ideal solution is for the boards of the cash-rich PSUs to take a realistic view of their expansion needs and step up dividend payouts to shareholders. This will bolster the Centre’s coffers and allow re-routing of capital to the sectors that sorely need it. Central PSUs also need to be granted greater autonomy in managing their treasury for optimal returns. Currently they are hamstrung by ultra-conservative ministerial guidelines which require them to park large sums in public sector bank deposits and eschew actively managed mutual funds. Relaxing these rules will improve treasury gains for PSUs; the Centre, as the biggest shareholder, will be the key beneficiary.