Efforts to sell PSU stakes lose steam

In the run-up to the general elections later this year, the Union Budget might not be announced. Finance Minister P Chidambaram is likely to only present a vote-on-account for the next financial year.

But the budget month of February is driven by one motive: keep the fiscal deficit in check.

One crucial revenue source that can help the government achieve its fiscal-deficit target --- set at 4.8 per cent of the gross domestic product -- is the proceeds from the sale of its stakes in public sector companies.

The government plans to raise Rs 40,000 crore (Rs 400 billion) by selling its share in public sector companies in the current fiscal.

But as the financial year enters its last quarter, the target seems elusive.

So far only Rs 2,962 crore (Rs 29.62 billion) has been generated through equity sale in seven companies this year.

That’s a big problem.

Already the fiscal deficit is 94 per cent of budgeted this year, and there seems to be plenty of issues plaguing the disinvestment programme.

With its expenditure worryingly high, disinvestment has now become a necessity for the government to balance its books. And yet, the efforts are lackadaisical, at best.

In the last four and half years, the ruling United Progressive Alliance government has only listed eight companies, garnering Rs 22,982 crore (Rs 229.82 billion) through sale of shares -- less than one-third of Rs 86,510 crore (Rs 865.1 billion) that it has raised overall since 2009.

Jagannadham Thunuguntla, chief strategist, SMC Global, says, “The whole government approach has been ad-hoc.

“But there is nothing wrong if the government thinks currently managing the fiscal deficit gap is the prime objective.”

Part of the government’s problem also stems from doubts about its own policy direction.

When the UPA government assumed office for the second time in 2009, the intention of disinvestment was to “to develop a road map for listing and people-ownership of public sector undertakings”.

The policy statement delivered that year by Pratibha Patil, then the president of India, said government equity in a company would not fall below 51 per cent, while ensuring there was public ownership of the company's shares.

Public companies themselves are not comfortable with this approach.

“While the public sector at large should not have any problem in holding the equity at 51 per cent, it appears to be contrary to the trend being witnessed worldwide in the post-recession period where many developed/developing countries have started consolidating the government equity and are allowing larger capital flow by sovereign committees instead of allowing the private sector to hold the capital,” says UD Choubey, director general, Standing Committee for Public Sector Enterprises.

(Sovereign wealth committees invest proceeds from divestment within the country and overseas.

(In India, there is no such policy direction.

One purpose for which the National Investment Fund, which holds all proceeds of disinvestment, is being used is for bank capitalisation).

The response to the government's disinvestment efforts has been erratic.

While the latest listing, that of the Power Grid Corporation of India, sailed through smoothly, other companies slated for divestment are struggling to evoke any investor interest.

The sale of 4 per cent equity in Power Grid, priced at Rs 90 per share, helped the government raise Rs 1,637 crore (Rs 16.37 billion).

“One of the reasons the Power Grid Corporation sale did fairly well was the company's clear plans,” says a merchant banker.

Along with the government's divestment, Power Grid also raised 13 per cent fresh equity that helped it garner Rs 5,321 crore (Rs 53.21 billion) from the market for its plans.

However, it is a different story in the case of Indian Oil Corporation where the finance ministry has been pushing for a public issue despite objections from the company and the ministry of petroleum and natural gas.

The finance ministry is reluctant to let go of the revenue that could come from the sale of 10 per cent equity in a year when tax revenues are running behind target.

As the owner of the oil company, the finance ministry might well be asserting its right to offload equity, but its roadshows have received only a lukewarm response from investors so far.

Investors contend that divesting at a time when the oil company's shares are hovering at 52-week low of Rs 186 would be a huge loss for the government. Indian Oil share closed at Rs 204.40 on Monday, up 0.54 per cent from Friday on BSE.

The petroleum ministry too has made a case for postponement of divestment, citing low scrip value and poor investor interest.

But the department of disinvestment has so far been unresponsive.

A questionnaire by Business Standard sent to Disinvestment Secretary Ravi Mathur remained unanswered.

But it's not merely a question of selling a certain stake.

Sachin Shah, fund manager, Emkay Investment Managers, says a successful follow-on issue for oil and natural gas companies will have to be backed by strong reforms in the sector.

“In other words, eliminating all kinds of subsidies and pricing discounts to various users,” he says.

To be sure, a phased diesel price decontrol and capping of subsidised LPG cylinder have set the policy direction for pricing reforms, but oil marketing companies are still reeling under the subsidy burden. Indian Oil is expected to make Rs 74,700-crore (Rs 747-billion) revenue loss in 2013-14 on sale of diesel, LPG and kerosene.

Shah adds that it is important for the government also to ascertain that market conditions are good before offloading its stake and to assess the strength of individual companies to fetch good value in the market.

According to him, the Power Grid issue was a success mainly because of the attractive pricing.

In the current scenario, residual stake sale in Balco and Hindustan Zinc to Vedanta Resources, which was expected to fetch Rs 21,637 crore (Rs 216.37 billion), is also unlikely to materialise.

Having fallen short of targeted receipts, the government is now looking at special dividends from companies to the tune of Rs 20,000 crore (Rs 200 billion) to make up for the shortfall in the disinvestment target it had set for the year.

Image: P Chidambaram