September 2013: Indian Oil Corporation (IOC) chairman and managing director RS Butola showed a red flag to the proposed disinvestment in the country’s largest oil and gas operator. He warned against the wrong time for disinvestment due to “prevailing uncertain environment”, which, he said, would not be in the interest of all stakeholders. Following which the department of disinvestment (DoD), under the finance ministry, withdrew its plan to organise road shows with potential investors, in the UK, US, Hong Kong, Dubai and Singapore for the sale of 10% of the government’s 78.92% stake in IOC and raise around Rs 5,000 crore.

July 2014: Butola, who retired in June, has reversed his stand and believes that current market conditions are appropriate for the government to sell off its stakes in PSUs. “The market is booming and we are expecting growth. From that perspective general mood is for it (disinvestment).”

The NDA government is drawing up an ambitious plan to sell shares in state-owned companies to raise a record amount from disinvestment this year.

Finance minister Arun Jaitley, while presenting his maiden budget on July 10, flagged off disinvestment by raising the target for the current fiscal to '58,425 crore. The target includes Rs 43,425 crore from selling stake in PSUs and another Rs15,000 crore from sale of residual stake in erstwhile government companies.

The government is looking to sell stakes in about 10 public sector enterprises in the mining, steel and power sectors to cover the fiscal deficit and to raise money for development projects.

This is by far the highest target, crossing the Rs 51,925 crore figure, estimated in the interim budget presented in February by the UPA government. It is much higher than what UPA-2 tried to achieve but failed miserably in the last fiscal. Against its target of '40,000 crore, it could manage to raise only Rs15,819 crore, largely due to the slowdown in the market.

Is the NDA government aiming too high? Or has the tide really turned in favour of PSU stocks?

With stock market sentiments improving dramatically over the last few months, experts say current market conditions are expected to fetch a good price for PSU stocks that have been held back from sale earlier due to volatile conditions in stock markets. But whether the NDA government would be able to recreate its magic is too early to predict.

S Ranganathan, head of research at Mumbai-based LKP Securities, says this is certainly the right time to kick-start the process of disinvestment. This is the most tactical way to reduce fiscal deficit, he says.

“Most PSUs have inherent strength; they have fairly strong business models with clear balance sheets. It is just the lack of full autonomy in
decision-making that they don’t find enough investors. Disinvestment will thus help both the parties, including companies. And investing companies will also get a chance to grow with the company,” he adds.

The key reason for resistance from the public sector last year, he says, was the low value of PSU stocks due to the slowdown of economy. But now markets are fairly buoyant and thus resistance from PSU companies will not be too much, he adds. He also suggests a judicious mix of all options of disinvestment.

Abhishek Jain, head of research at JHP Securities, an integrated brokerage firm based in Mumbai, says whether this is the right time depends on the quantum of stocks the government is planning to sell.

“For instance, SAIL plans to expand and so there will be good demand for a stake in it from big players. Thus strategic sale of say 5-10% to global players who are ready to pay more than the current market price will add value to the company. But if the government plans to meet a big target (through disinvestment), then the market is still not suitable for that kind of sale.” He suggests Hindustan Petroleum Coporation Ltd (HPCL) as an ideal candidate for strategic sale which will not just help the company but will also help bring down the fiscal deficit.
Earlier in June, the securities and exchange board of India (Sebi) had also recommended that the government should dilute its stake in listed public sector companies over the next three years and cap its holdings at 75%. Experts believe this would push divestment and could lead to an estimated $10 billion worth of share sales.

The current market situation, experts believe, is far different from last September when the stake sale of the two of the biggest PSUs known as Maharatnas – Coal India Ltd (CIL) and IOC – were put on hold. CIL, the world’s largest coal miner, went to the DoD and argued that the stock market was down and a sale would not fetch right prices. In the case of IOC, the then chairman Butola warned against the wrong timing, forcing the government to put the plan on the back burner.

Butola says the current conditions do favour disinvestment but the decision should be taken on a case-by-case basis. “There is generally no particular sector which is severely impacted. All are doing well from the stock market point of view. But there have been reports of ONGC also likely to be divested. There are issues about gas pricing; it would be a better idea to wait for some time for such companies.”
Butola also suggests the government should divest soon after the announcement is made. “If they (the government) are announcing in July they should not wait for November to start the process. Not much time should be given to the market players.”

He emphasises that the process, if executed under right market conditions, helps the company as well. “It brings more liquidity around stocks. The market is always a good place to understand the real worth of the company. A lot of people are interested in becoming stakeholders. It is good from the governance point of view as you become answerable to various stakeholders.” He further adds, “Once you are in the market, each decision of the board has an impact on it. And no company would want its share price to come down.”

Political economy of disinvestment
Observers say the first stake sale to the public under NDA’s current regime can prove to be a small step in the long journey towards disinvestment in its truest form, the way it happened in the case of VSNL, Balco and Maruti during its previous rule.

During 1999-2004, the NDA government mobilised '28,284.48 crore by selling stakes in 15 PSUs, which the UPA could not match in its first term. It made strategic sales in a number of loss-making PSUs including Bharat Aluminium, Hindustan Zinc and some ITDC hotels. But it faced huge criticism later. The CBI launched a preliminary inquiry, in the matter relating to sale of Udaipur’s Laxmi Vilas hotel to Bharat Hotels during the NDA regime in 2002, in April this year. The inquiry brought under scanner Arun Shourie, the then disinvestment minister, for selling the Udaipur hotel less than the market rate. It was sold to Bharat Hotels for Rs 7 crore, when the market rate was over Rs 150 crore. 
Along with a large number of stake sales between 2000 and 2004, the government exited several PSUs completely. But UPA-1 reduced the ministry into a department and put the programme on the back burner. Thus, the income from disinvestment came down from over '28,000 crore in the NDA years to Rs 8,500 crore in the UPA-1 regime; while there was no disinvestment in 2006-07 and 2008-09.

Though UPA-2 showed belief in the disinvestment programme, largely to cover fiscal deficit, every case of disinvestment proved to be a deal of under-pricing. Large quantities of shares of profit-making PSUs were sold away to private sector at throwaway prices. It also proved to be a disaster for lakhs of investors who thought PSU shares were safe bets.

The current market conditions may favour the government’s disinvestment plan, but it might not be a smooth ride. There are many who call it an unrealistic dream.

“If the government requires money why can’t it generate from direct tax default which is around Rs 72,000 crore and is not even litigated? They are just doing it because they want to satisfy their marketers in the private sector who helped them win the election,” says Tapan Kumar Sen, CPM leader and member of Rajya Sabha.

Being sceptical about the disinvestment target government has set for its self, Sen calls NDA a bigger privatiser than its predecessor. He says there will be huge resistance from industrial trade unions.

Congress leader Manish Tewari says disinvestment through stealth is the worst thing any government can do. “He (finance minister Arun Jaitley while reading the budget) did not mention it upfront, fearing disruption from the Left parties. It is bad statecraft. At least the finance minister under UPA was upfront about its disinvestment policy.”

There is no rationale behind setting a target of over Rs 6,000 crore monthly through disinvestment, he adds. “As far as market conditions are concerned, it would entirely depend upon individual companies, their strength and how the market would react to public offerings,” he argues.

Disinvestment: The story so far
* Only four times so far the disinvestment targets have been met
* The last was 2003-04, when the Arun Shourie-led disinvestment ministry under NDA government sold shares of ONGC in the largest         public offer till then
* Between 1999 and 2004, the NDA government earned '28,284.48 cr through stake sale in various CPSEs
* UPA I, between 2004-2009 sold off stakes worth '8,515.94 cr while there was no disinvestment in 2006-07 and 2008-09
* During the current fiscal, stake sale in some blue chip companies, including SAIL and Coal India, is on the cards
* The government is also looking to sell its residual stake in Hindustan Zinc and Balco

(This story appeared in the July 16-31, 2014 issue of the magazine)