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Giving PSUs back to the public
R Jagannathan | July 15, 2003
Arguments about privatisation tend to get caught up in what is ideal and what is doable.
Soon after the success of the Maruti IPO, Divestment Minister Arun Shourie was quick to point out the obvious: that where the public is clear about who is in control, it is willing to pay a good price for public sector shares. Therefore, giving private parties strategic control is the way to go.
Shourie may be right, but he would be making a strategic mistake if he thinks he has an iron-clad argument. In politics, it is not always the right argument that wins, but the right approach. A lot of public education has to precede the stage where rational arguments begin working. The problem with strategic sale is not that it is a bad idea, but it becomes an easy political target.
Investors would be rewarded for confidence in Maruti: Shourie
In the case of companies such as Nalco, politicians can play the regional card. Oriyas feel a close sense of ownership of the company. So even an NDA constituent like the Biju Janata Dal, which has a foreign-educated chief minister, feels obliged to play populist tunes.
When it comes to banks, it is even easier for politicians to play on public fears about the safety of their money after privatisation. History shows that it is public sector banks that carelessly doled out public money to undeserving borrowers.
But that is almost beside the point when it comes to explaining privatisation to the public. What the public knows is that when things go wrong -- as in the case of UTI -- government institutions will be bailed out.
The point I am getting at is simple: if privatisation has to proceed smoothly from now on, it is important for ministers like Shourie to widen the political constituency for change instead on focusing on short-term moral victories.
Once there is wider acceptability of the idea of privatisation, strategic sales will not be a problem. But right now, we have not reached that stage. So ministers who strongly believe in privatisation -- one can count Arun Jaitley and Jaswant Singh apart from Shourie among them -- have to work at a different gameplan.
To do that, one has to change the line of reasoning. Let's take banks.
Despite the recent bull run, the market value of all public sector banks and institutions put together is not more than Rs 50,000-55,000 crore (Rs 500-550 billion).
Even with strategic sales, the government cannot hope to garner more than half that amount. The strategic dilemma is this: should one go for the kill, sell off a controlling interest in banks, and risk political opposition, or should one sacrifice some gains to the exchequer and instead use these sales to widen the reform constituency? I would opt for the latter.
The bank privatisation plan could be positioned as returning public sector banks to the public. Taxpayers helped recapitalise banks. It is time to return the favour by using bank IPOs to benefit taxpayers. Any taxpayer with a PAN number can be assured minimum allotments of 100 shares, with 500 as a maximum.
Investments can also be made eligible for tax deduction. To widen the constituency beyond taxpayers, one could even reserve allotments for Dalits and OBCs -- with banks financing their investment on the assumption that the shares will be sold after allotment.
If this is not feasible, instead of individual allotments, a portion of the disinvestment proceeds could be earmarked for specific schemes that will benefit these communities.
A few months after these shares are listed, the government could allow private parties to mop up shares from the market and then make an open offer as per the takeover code.
Depending on the price, the government could unload its shares in the open offer itself or negotiate a higher price with bidders directly. Since this will have the effect of pushing up share prices further, original allottees in the IPO will benefit doubly if they have held on to the shares.
To be sure, the government needs to adopt different tactics for different groups of companies. For oil, it may make sense to take the golden share route, to allay all fears that privatised companies may act against national interests.
In companies like Nalco, it may make sense to offer benefits to the states concerned -- interest-free loans, project subsidies from a part of the disinvestment proceeds -- to get more politicians on board.
Divestment will have fewer opponents if the process is seen as win-win rather than win-lose. The general public, and the politicians who reflect their fears and attitudes, would have less reason to be obstructionist if they know what's in it for them.