A detailed look at yesterday, today and tomorrow of the government's strategy of selling psu/cpse stocks
For about 40 years after independence, our country, India, was pursuing a path of development, in which the public sector was expected to be the growth engine.
Public-sector Units (PSUs) were the instrument of social, economic and political agenda of the government. But, it became apparent that the public sector overgrew and its shortcomings started coming to the fore. Rampant corruption, low capacity utilization as well as abysmal efficiency, poor work ethics, a general inability to innovate, and huge interference in the decision-making process were evident. A decision was taken in 1991 to follow the path of disinvestment, which means the government will reduce its equity stake in government-owned companies.
In the year 1991-92, the Centre disinvested stake in 31 selected PSUs for Rs 3,038 crore. Over the years, disinvestment has become a huge revenue source for the government, although it has been a controversial way to plug the ever-increasing budgetary hole. Between FY92 and FY19, an estimated Rs 4.5 lakh crore was raised through divestments. Different governments have used the disinvestment route like a farmer uses a milch cow; they have tried to squeeze every last bit.
Disinvestment in its earliest avatar had three main purposes: promote people’s ownership of Central Public-Sector Enterprises (CPSEs), enable efficient management of public investment in CPSEs, and deepening of the capital market and spread of equity culture. The fourth was helping raise budgetary resources for the Government. Today, the main theme is about raising funds for the government.
People of India and a majority of Parliamentarians seem to believe that the government has no business to be in business! Hence, selling family jewel has become more of a norm. As per estimates, offloading the government’s stake entirely in just 51 CPSEs would yield around Rs 7.7 lakh crore in revenue to the exchequer. That is a big number and one that is difficult to ignore. Why? Because, the budget hole --- called fiscal deficit --- for the current financial year alone was pegged by the government at Rs 7.03 lakh crore or 3.3 per cent of the gross domestic product (GDP). The fiscal deficit is expected to eventually come near the four per cent mark, which means the pressure will be on the authorities to raise cash in a bid to plug its leaking ship.
As the budget hole grows bigger and despite maximum governance and minimum government chants, disinvestment and divestment (completely exiting) will become a bigger strategic focus. Loss-making CPSEs are ideal candidates for complete exits through strategic divestments, but nobody wants to pay a good price for a loss-making business. Hence, exiting profitable companies like Bharat Petroleum Corporation of India (BPCL) will be the main course.
There were primarily three different approaches to disinvestments (from the sellers’ i.e. Government’s perspective).
Minority Disinvestment - A minority disinvestment is one such that, at the end of it, the government retains a majority stake in the company, typically greater than 51 per cent, thus ensuring management control.
Historically, minority stakes have been either auctioned off to institutions (financial) or offloaded to the public by way of an Offer for Sale. The present government has made a policy statement that all disinvestments would only be minority disinvestments via public offers, as per www.bsepsu.com.
Examples of minority sales via auctioning to institutions go back into the early and mid-90s. Some of them were Andrew Yule & Co Ltd, CMC Ltd, etc. Examples of minority sales via Offer for Sale include recent issues of Power Grid Corporation of India Ltd, Rural Electrification Corporation (REC), NTPC Ltd, NHPC Ltd, etc.
Majority Disinvestment - A majority disinvestment is one in which the government, post disinvestment, retains a minority stake in the company i.e. it sells off a majority stake.
Historically, majority disinvestments have been typically made to strategic partners. These partners could be other CPSEs themselves, a few examples being BRPL to IOC, MRL to IOC, and KRL to BPCL. Alternatively, these can be private entities, like the sale of Modern Foods to Hindustan Lever, BALCO to Sterlite, CMC to TCS, etc.
Again, like in the case of minority disinvestment, the stake can also be offloaded by way of an Offer for Sale, separately or in conjunction with a sale to a strategic partner.
Complete Privatisation - Complete privatization is a form of majority disinvestment wherein 100 per cent control of the company is passed on to a buyer. Examples of this include 18 hotel properties of ITDC and 3 hotel properties of HCI.
Disinvestment and Privatisation are often loosely used interchangeably. There is, however, a vital difference between the two. Disinvestment may or may not result in Privatisation. When the Government retains 26 per cent of the shares carrying voting powers while selling the remaining to a strategic buyer, it would have disinvested, but would not have ‘privatized’, because, with 26 per cent, it can still stall vital decisions for which generally a special resolution (three-fourths majority) is required.
New Moves To Sell
In FY99, a cross-holding between Indian Oil (IOC) and Oil & Natural Gas Corporation (ONGC), and acquisition of a stake in Gas Authority of India Ltd. (GAIL) by ONGC helped meet the divestment target.
Similarly, in FY18, ONGC’s acquisition of Hindustan Petroleum Corporation Ltd (HPCL) helped meet nearly half of the original target.
In FY19, Power Finance Corporation Ltd (PFC) acquired a majority stake in Rural electrification Corporation (REC), helping to meet around 18 per cent of the original divestment target.
The sale of non-core assets of CPSEs is likely to yield higher returns for the government. In the case of the sale of non-core assets of potential strategic divestment candidates, the proceeds will be maintained in an escrow account/special purpose vehicle (SPV) apart from the core assets. The list of non-core assets of CPSEs for sale includes land and industrial plants of state-owned enterprises National Thermal Power Corporation (NTPC), Cement Corporation of India, Bharat Earth Movers Ltd. (BEML) and Steel Authority of India Ltd (SAIL).
In addition, assets that can be sold include electricity transmission lines of Power Grid, towers of BSNL & MTNL, pipelines of Gail India Ltd, airports in some cities and prime real estate owned by CPSEs. The Finance Ministry is said to be looking at the innovative Real Estate Investment Trusts (REITs) model for the sale of land assets of CPSEs and also those which are classified as ‘enemy property’ by the government.
Other modes of monetization include leasing or outright sale of land assets. In a list compiled by NITI Aayog, CPSEs that have monetizable land assets include National Textile Corporation (NTC), Hindustan Antibiotics, and NTPC.
The government is said to be planning a financial sector ETF. The sale of stakes in PSU banks may not be an immediate proposition. This is because only one-third of them are profit-making. A majority of PSU banks are receiving capital infusion from the government and are in the ICU! The proposed financial sector ETF could comprise shares of listed PSU banks, Public Sector Insurance Companies, and Public Financial Institutions.
A Huge Revenue Source For Government
Despite the significant wealth locked in central public-sector enterprises or CPSEs, disinvestments/divestments in India have had a checkered history. In the period between FY92 and FY19, Rs 4.5 lakh crore was raised through this route.
According to Teresa John, a research analyst (economy) at Nirmal Bang Institutional Equities, public offers have been the most popular mode, and account for just under half of the revenues so far or about Rs 2.1 lakh crore.
Exchange-Traded Funds (ETFs) are slowly catching up and accounted for the bulk of the disinvestment revenue in FY19. However, interestingly in three of the six years, in which divestment revenue exceeded the target – FY99, FY18, and FY19, a CPSE to CPSE sale has contributed to the bulk of the revenue.
The Congress government in FY92 kick-started divestment and the preferred mode of divestment was an auction to financial investors. However, the Atal Bihari Vajpayee-led NDA government turned its focus to strategic sales along with CPSE to CPSE sales and succeeded in raising a larger amount of revenue.
The performance of the Congress-led United Progress Alliance (UPA I) was lackluster in terms of divestments. Nevertheless, the UPA-II government did a fair bit of catch up. “The Narendra Modi-led BJP government has the best track record on divestments so far relying on public offers, ETFs and CPSE to CPSE sales along with buybacks. Therefore, in effect, we are witnessing a paradigm shift in divestments and we could expect the momentum to sustain. In our view, it is possible to sustain a divestment target of $14 billion per annum over the next decade. Our analysis suggests that India has over US$140 billion of assets that it can divest,” John said in a report.
This humongous figure excludes listing of Life Insurance Corporation (LIC) and other unlisted insurers, and the value of real estate assets.
While offloading the government’s stake in listed CPSEs (excluding banks and insurers) could yield around $108 billion, unlisted entities may yield around $15 billion. Nirmal Bang has identified unlisted CPSEs such as Hindustan Cables, Indian Railway Finance Corp, THDC India, Heavy Engineering Corp, Mazagaon Dock Shipbuilders, Kamarajar Port, Hindustan Antibiotics, WAPCOS, MECON, HSCC, EdCIL, NEPA, Pawan Hans, etc.
The government’s holding through the Special Undertaking of the Unit Trust of India (SUUTI) is worth around $5.1 billion (SUUTI holds shares in Axis Bank and ITC) and reduction of stake in listed banks and insurers to 51 per cent would yield around $14.6 billion.
Although the RBI’s surplus transfer announcement of nearly Rs 1.5 lakh crore provides some relief to the government’s fiscal deficit target, the disinvestment target of about Rs 1.05 lakh crore will be heavily reliant on the selling of assets in time and at a good price.
There are growing expectations that the government may also limit the market route to raise funds. What does it do raise cash then? The government could dig into the cash balances of select PSUs through buybacks.
"In general, the PSU stocks could see some relief as expectations of buybacks (or privatization) grow. For minority investors, a buyback done below the book value results in value accretion (more so if the minority investor chooses to skip tendering). Among the larger PSU stocks, an increase in the government’s buyback activity could benefit Oil India, BHEL, ONGC, and NALCO. The least to benefit could be Coal India and Concor," wrote Sunil Tirumalai, Head of Research and Strategist, Emkay Global in a September report.
Public-sector oil refiner and retailer Bharat Petroleum Corporation Ltd (BPCL) remains an important bet for the government in its disinvestment/divestment plans. The government plans to sell the entire 53.3 per cent stake in BPCL. Many feel that the current valuations of the PSU companies are depressed primarily because of government ownership and the market’s concerns. So, all eyes are on BPCL to see how the government approaches the sale.
The government can raise money either through (1) strategic sale of the government’s majority stake in the companies to a private (domestic or foreign) company or (2) sale of its shares in tranches to institutional and retail investors with an explicit commitment to reduce the government’s holding to below 50 per cent in a relatively short period. But selling off BPCL is not merely a trick to raise money. It has deeper implications.
India Ratings and Research (Ind-Ra) believes that a potential sale of the entire government of India (GoI) stake of 53.3 per cent in Bharat Petroleum Corporation of India (BPCL) could result in a reassessment of linkages between the Government and oil market companies (OMCs). BPCL’s stake sale is a part of the GoI’s disinvestment target of Rs 1.05 lakh crore, which also includes divestment in other companies namely Shipping Corporation of India, THDC India, and North Eastern Electric Power Corporation Ltd, and a 30% stake sale in Container Corporation of India from the government holding. Ind-Ra sees two alternatives to the proposed stake sale.
Acquisition by OMCs or Government Entities:
The key benefits of stake sale to an OMC would be the ease of structure with precedent being the Hindustan Petroleum Corporation Limited (HPCL) - Oil and Natural Gas Corporation Limited (ONGC) deal last year easier streamlining given OMCs Act as a policy implementation arm of the government providing subsidized LPG and kerosene; lesser complexity compared to privatization given only around five months left for FY20 and lower resistance from BPCL employees.
However, Ind-Ra believes the Competition Commission of India (CCI) may have reservations on this deal, given the market, in this case, would become more concentrated. While the private sector is allowed participation in the decontrolled products, their share remains low. The valuation from this deal is also likely to be lower due to the absence of a control premium. Additionally, OMCs’ liquidity could be impacted because of the deal leading to lower dividend payouts, which could affect in managing the fiscal position.
Acquisition by domestic private sector /international oil and gas companies:
Ind-Ra believes that privatization, on the other hand, is likely to induce increased competition for the existing refiners and thereby bring higher efficiencies in the system. The private sector would gain easy access to the large retail marketing network of BPCL, taking the share of the private sector to around 33 per cent from 11 per cent currently. Additionally, the fuel stations could be used for supplying other fuels such as compressed natural gas. Such a deal would also be beneficial for the government from a valuation point of view, given there would be a control premium.
While demand for petroleum products has been declining globally on account of increasing environmental concerns and thrust on electric vehicles (EVs), India continues to be a growth market, and thus a key market for international players.
However, BPCL’s stake sale to a private entity has additional complexity, unlike other sectors where the subsidy is received only from the GoI. In the case of petroleum subsidy, the quantity of subsidy per unit is not fixed and the burden of the subsidy burden-sharing is still ad-hoc in nature.
If privatization was to happen, Ind-Ra believes that the concern with respect to the subsidy sharing needs to be addressed as the private players would be less interested to bear any pricing intervention in recovering subsidy dues from the GoI in case BPCL continues to be a policy implementation arm. Further, increasing political and employee resentment for privatization along with challenges in continuing policy implementation could be possible deterrents for privatization.
(The writer is a journalist with 14 years of experience)