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Disinvestment in PSU - Is it a Good Idea?

Posted in Finance Articles, Total Reads: 6993 , Published on March 08, 2013

Disinvestment means sale of equity and bond capital invested by government in the PSU’s. However, it is the government and not the PSU who receive money from disinvestment. In the current year government targeted to raise as much as 30000 crores through disinvestments in PSU’s having less than 25% of public holding. The companies which will fall under this are the likes of SAIL, NTPC, NMDC and CIL.

After knowing about disinvestment, the next question is why it is required? Economists and researchers give various reasons for it. One of the most valid arguments given is that PSU’s have been characterized by low productivity, unsatisfactory quality of goods, excessive manpower utilization, inadequate human resource development and low rate of return on capital. For instance, the above mentioned PSU’s are sitting on a cash pile of over 1 lakh crore of rupees, which clearly reflects the inefficient capital utilization. They could have extended their investment plans all these years, or could have bought stakes abroad to extend their reach, but instead they have kept the money with them as if it is going to give higher return when kept idle.

The rationale behind divestment is that the government wants to increase the operational efficiencies of PSU’s as well as it wants to generate money to reduce its fiscal deficit. When private players will come, they will bring all sorts of technological and managerial skills to raise the level of operation which in turn will subsequently take the company on a growth path. But the question here is – Is it a good idea?

The answer to this is a bit technical as even if disinvestment is allowed the government will enjoy majority stake in the PSU’s, so the so called operational inefficiencies will not look to decrease any further, because private players are sensible enough to figure this out which is why they have restrained themselves from putting in money so far whenever the government has decided to divest its stake. This is fairly evident by looking at the past data; during the period 1991-92 to 2003-04 the government planned to mobilize as much as 78300 crores via disinvestment but could actually attract 30917 crores. Moreover, till now the government was interested in using the funds hence generated, for capital consumption and not for capital generation. What adds to the worries of private players or what keeps them outside is the use of power by the government to force the financial institutions to buy the equity stake unloaded by it through disinvestment. Above all, the shares thus bought can be traded freely in market and these institutions that were forced to buy, again are not willing to sell their share as it will reduce their ownership in the PSU’s. So, ultimately the rationale has always been subdued. But, it is not like that only private players are uninterested in buying , even the PSU’s are not ready to sell their stake because they in no case will be able to partner in the monetary benefits, and thus abstain from creating and distributing the prospectus freely, which results in the lack of transparency and openness in the deal.

Another angle to look at the issue is that the motive behind creation of PSU’s was to utilize the natural resources for public welfare, but when they are sold to private players it is quite obvious that the sole idea of creation is monetized. And it is the government’s policy to dispose both profit making and potentially viable PSU’s. So stake sale is to an extent disadvantageous for the government also because if the PSU is loss making then the deal is worth for the government as it will have someone to infuse funds but on the contrary if the PSU is profit making then there is a chance of loss of regular source of income to the government. Still, it is fine to sell the stake to private Indian players but why to allow foreign player take part in the bidding process when the matter is of national wealth, control and power. Few of these questions are often unanswered or even when answers are given they are by far very generic.

Now, there is an alternative to it – but it depends on government’s priority and since its motive behind divestment is to reduce the fiscal deficit it can be achieved by allowing the PSU’S to buy back their shares. As already mentioned that there are some PSU’s which are highly rich in cash, so if they buy back their own shares from market, then they will get a way to utilize their reserves and moreover they will retain their ownership, which will now be more than 50%, and moreover they can opt to buy stake in other ailing PSU’s, by doing this the government’s problem of raising less than expected from stake sale will be resolved and simultaneously there will be no threat of passing the ownership to foreign players. But, will it justify the other motive? i.e. improving the efficiency of operation, the answer is – it may or may not because the governance will be still with the PSU and not with any of the private players and there will be no change in the operational activities. On the contrary, it may happen that when the PSU’s will have more than 50% ownership they can take decisions independently and without much of the influence of the government which in turn will be helpful in charting out growth and investment plans at a faster pace.

So is it a better alternative to divestment? In fact it is fulfilling the purpose of government and PSU’. When the share buyback route is followed, PSU’s repurchase their shares and extinguish those shares meaning the no. of shares remaining with the promoters is reduced but at the same time it means that the percentage of ownership is increased and it has an immediate effect on the company’s financials like the most important ratios to judge the performance of a company are improved, the higher Earnings per share (EPS), improved Return on Assets (ROA) coupled with lower P/E can make a significant positive impact on share prices in the stock market which will further gauge for the growth of the company.

Hence, divestment indeed is a good idea provided it is coupled with share buyback , but still we can’t predict its unforeseeable consequences , its long term effects.

This article has been authored by Himanshu Bhinda from NMIMS.

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