With a proactive and dynamic regime led by a ‘charismatic’ and ‘decisive’ Modiji taking charge about an year ago, divestment of government’s share in central public sector undertakings (CPSUs) has once again caught the imagination of public.
When, seen purely from the perspective of garnering resources from this exercise to meet fiscal deficit target and thus, help government’s fiscal consolidation drive, 2014-15 was bit of a disappointment. Against a target of Rs 58,000 crores [Rs 43,000 crores from sale of shares and Rs 15,000 crores from divesting its ‘residual’ stake in Hindustan Zinc Limited (HZL) and BALCO], it could get only Rs 26,000 crores [bulk of it Rs 22,000 crores from 10% in divestment in Coal India Limited (CIL) alone].
An overriding reason for the massive shortfall of Rs 32,000 crores [58,000-26,000] was deferment of planned sale of 5% shares in ONGC which would have yielded about Rs 18,000 crores @ Rs 472 per share price prevailing in June, 2014. However, due to the price plummeting to a low of Rs 320 in early 2015 – an erosion of over 30% – the government had no other option left but to postpone the sale. The residual share in HZL and BALCO could not be taken up due to legal glitches.
For the current year 2015-16, the finance minister has set an even more ambitious target of Rs 69,500 crores. This includes Rs 41,000 crores from sale of shares and Rs 28,500 crores from “strategic” sale in certain undertakings including loss making to bring in private partner [this route was also followed by NDA (National Democratic Alliance) government under Vajpayee in early 2000s when it had divested majority stake in HZL and BALCO].
Critics may be tempted to question the basis of setting above goal when, government could not achieve even 50% of a much lower target in 2014-15. But, last year may not be a good benchmark for making inference, as time was not on its side. Besides assuming office towards end May, 2014 [thereby loosing 2 months] and preparation of budget, there were far more compelling areas viz., economic reforms, revitalizing governance structures and unclogging stalled projects which needed immediate attention.
For the current year, the government is in a state of full preparedness and has taken necessary steps well in advance. Amongst these, the foremost is preparation of a carefully orchestrated action plan for undertaking divestment all through the year unlike in the past – under a decade of UPA–dispensation – when such exercise was invariably undertaken in a totally “ad-hoc” manner with most of share sale done towards fag end of the year.
Thus, department of disinvestment has a ‘holistic’ approval for 20 public issues worth Rs 50,000 crores and is in the process of working out a road map with an aim to bring one issue each month. Already, government has consummated sale of 5% stake in Rural Electrification Corporation (REC) yielding Rs 1600 crores. [there could have been more sales but for turbulence in market due to legacy issues reg taxation of FPIs (foreign portfolio investors), global concerns and transfer of funds to other emerging market economies].
The sale share plan has a number of other innovative features aimed at compressing the time frame for execution on one hand and making the best of available opportunities to realize a good price on the other. Thus, merchant bankers are doing diligence studies and road shows for a bundle of PSUs so that a wide array of options can be exercised to tap the market at the right time. The broad thrust of the strategy is to push stake sale in smaller state-run companies like National Building Construction Corporation (NBCC) and SJVN and slip in between issues of big ones like NTPC, ONGC, IOC etc.
In the past, there have been umpteen instances of market manipulators hammering down the price of a PSU scrip after notification of its divestment thereby resulting in huge loss to exchequer. To prevent this and maximize the proceeds from sale, Modi – government will keep a bare minimum time gap between notification of its intent to sell and actual execution of share sale. The sales will be done following OFS [offer-for-sale] methodology which is fast, speedy & transparent and its efficacy already tested in sale of Coal India Limited (CIL) shares last fiscal.
The sale of residual equity in HZL [29.5%] and BALCO [49%] can yield a significant around Rs 15,000 crores. The government is examining all options to address the legal issues [a PIL (public interest litigation) against divestment in HZL is pending in Supreme Court] and thus ensure that these two divestments are completed within this year.
Modi – government has already taken policy decisions that will give a boost to investor sentiment especially for PSUs in oil, gas, power and minerals. Thus, in case of ONGC [5% stake sale approval is already in place], coming on top of its decision not to insist on sharing under-recovery on sale of LPG and kerosene in last quarter of 2014-15, for current year too, it won’t ask the company to share under-recovery on LPG. As regards kerosene where under-recovery is expected to be Rs 13,000 crore [at USD 60/barrel], ONGC may be exempted from sharing under a formula being worked out by oil ministry.
Likewise, in case of Indian Oil Corporation (IOC) [for this, cabinet has approved 10% stake sale], with diesel de-regulation in October, 2014, subsidy on LPG moving on to DBT [direct benefit transfer] mode from January, 2015 and the same being pursued for kerosene as well, its woes on account of under-recoveries, delayed payments and resultant higher interest cost will be substantially reduced. As a consequence, its inherent high valuations will be resurrected resulting in higher proceeds.
In coal, power and minerals too, the government has significantly improved policy environment vide enactment of Coal Mines (Special Provisions) Act, 2015 and Mines and Minerals (Development & Regulation) Act, 2015 to provide for allocation of coal and all other minerals through auction and ensuring that all approvals [reg land and environment] are in place before allotting the mines. This will bolster the prospects of NTPC, National Mineral Development Corporation (NMDC) improving their profitability and in turn, possibility of fetching higher valuations.
The government has proposed divestment of shares in Rashtriya Chemicals & Fertilizers Limited (RCFL) and National Fertilizers Limited (NFL). Both being major players in urea segment, these may not fetch attractive valuations as thus far, neither the government has brought about any major reform nor it is expected in the near term. However, considering their small role in divestment kitty, the overall proceeds from share sale won’t be impacted much.
A major positive factor that is expected to drive improved valuations of all PSUs flagged for sale is the commitment of this government to grant greater autonomy and freedom of operation to their managements. This single act of Modi – dispensation to let them take decisions without any interference from the ministries will help improve efficiency and profitability in turn, leading to better perception among investors.
In a nut-shell, with deft planning, management and execution aided by a conducive policy environment, the government is reasonably well poised to reach its divestment proceeds target of Rs 69,500 crores for 2015-16.