NMDC & NTPC disinvestment – why the lukewarm response?

With the Finance Minister laying out the path for disinvestment of PSUs over the next one year, one would expect the market to lap upcoming offers in a jiffy. But NTPC and more recently NMDC have proved to be otherwise. Subhomoy Bhattacharjee has written in his Financial Express article explaining reasons why the markets and the retail investors are not gung-ho about PSU disinvestment anymore. He says:

There are two value propositions in a PSU stock. The first is the sovereign guarantee against their failure. There are no studies to pinpoint the percentage impact on the stock prices of such guarantee. For instance, of the price difference between L&T and BHEL, what owes itself to the sovereign guarantee? The attraction among the earlier set of retail investors was based on this guarantee. Each of the 49 PSU was, therefore, a blue chip by design.

But that picture may have changed for ever. With more than a hundred PSUs in the market expected before 2011 is over, every one will compete against the other and then against their peer in the private sector for the same investor pie.

Then the other value proposition in these stocks will come to the fore. Namely, the value of good management in each company. It is this difference that will now guide how well each of them will perform in the primary market and going forward in the secondary market too. This is a tall order. Except for some of the power sector companies, most of the PSUs are inefficiently managed. They are sitting on huge cash reserves, (HAL, BSNL, for instance) running a monopoly charter with high inventory costs that are billed to the state or the captive consumers (like PFC which borrows with government guarantee at lower costs but sells at market rates).

I concur with him when he says Sovereign Guarantee is no more an incentive as it used to be earlier, but performance of the company is. And when Sam Pitroda says that BSNL has about 100,000 redundant staff it is obvious that efficiency and performance are not in the picture anymore. So ironically the basics still matter for PSUs: performance and only performance will count in the long run and unless the investors think that management can deliver the goods they will not go in for PSU stocks in a BIG way.

Now, rather rhetorically, I repeat my charge against the Govt: 10-15% selling of stakes with FPOs will only give money to fund the dark hole of fiscal deficit. The need of the hour is to have a management and mindset change to make PSUs compete with private sector, but I am criticized as patronaging “crony” capitalism when I say so.

Disinvestment in Indian context

Disinvestment is a milder word for Privatization of public sector enterprises in India. For some, this word has become synonymous with reforms. When the FM Mr. Pranab Mukherjee will raise to present the Indian budget for 2010-11, Disinvestment will figure in it for sure – But does this mean will it be a dosage of reforms? May be or may be not. I have thought about this many times and the eve before budget is the best time to pen down my thoughts!

When India went the reforms way in 1991, the reason was pressure from IMF and not to actually encourage/promote private sector participation, though that was a beneficial (IMO) side-effect. Economic Reforms took some sort of a shape under the 2nd NDA Govt. The following is a quote from Wiki: (Source):

Vajpayee’s administration earned the ire of many unionized workers groups and government workers for their aggressive campaign to privatize government owned corporations. Vajpayee promoted pro-business, free market reforms to reinvigorate India’s economic transformation and expansion that were started by former PM Narasimha Rao but stalled after 1996 due to unstable governments and the 1997 Asian financial crisis. Increased competitiveness, extra funding and support for the information technology and high-tech industries, improvements in infrastructure, deregulation of trade, investments and corporate laws – all increased foreign capital investment and set in motion an economic expansion. These couple of years of reform however were accompanied by infighting in the administration and confusion regarding the direction of government.

So, a lack of direction on Disinvestment has been a major issue ever since then and it is sad that we are not any bit wiser today after about 6 years of UPA rule. The Govt. remembers disinvestment when there’s a huge deficit which is deterring growth – so the easy way out is to sell “Family silver” as our Commie friends say. Consider the recent privatization of NTPC and other Govt. companies which yielded about 3.5b$. The FPO had lukewarm response from Retail investors. Arun Shourie summarized it superbly in an interview with MoneyControl (Source):

I sincerely hope that the programme will succeed because the government’s finances over the last few years were managed in such a way that deficits have reached proportions which cannot but lead to great problems for the country. We are seeing inflation, we are seeing the pressure on interest rates. So I sincerely hope that the programme will succeed. I am as disappointed as you are about the retail response. NTPC is one of our strongest companies.

I personally believe that power will be the next telecom sector in the country in leading growth and the reason why this probably has happened though we should hope that in this or in subsequent issues retail investors will get confidence and buy these, the reason why this disappointing response has happened is probably that this has been seen not as part of a reform programme of the government but as a measure of government offloading its equity only to raise resources to plug-in the deficit. That is always a reason why the retail investors do not get confidence.

What we need here, as Shourie had pointed out, is a statement of intent from Govt. that it is genuinely interested to improve the quality of public sector operations by actively involving the private sector. Not only would this give a fillip to the private sector by providing it with new opportunities, it would also serve to improve the the operational efficiency of these public enterprises. Above all the proceeds from this exercise would be credited to the National Investment Fund which could be used for better purposes than funding the black hole of fiscal deficit. This may sound very idealistic, but this is the need of the hour and with the kind of mandate UPA has for this term, it would be fantastic if the Govt. pushes through with Disinvestment for the right purposes.

P.S.: But, how will the fiscal deficit be brought down to the 3% levels as indicated in the FRBM act. I don’t think the FM will be addressing it concretely tomorrow. But most commentators and analysts have aired their views on taming the deficit and I’ll write about them in the next post.