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    Disinvestment: The Agony and the Ecstasy

    Disinvestment: The Agony and the Ecstasy

    Disinvestment: The Agony and the Ecstasy
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    By CNBCTV18.com Contributor  IST (Updated)

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    The first four decades after Independence, the public sector enterprise was expected to be the growth engine of the economy. Poor work ethos and the red tape, soon established that this was not to be. Hence, a decision was taken in 1991 to follow the path of Disinvestment.

    Today is the day when the reins of Air India are entrusted back in the hands of Tata's. The event can qualify as a success for disinvestment. It took our government, two decades and three attempts to woo the airline industry, but finally succeeded. The deal was a win-win for both. Tata's paid cash of Rs 2700 crore, and took over Rs 15,300 crore of the airline's debt.
    However, ever since 1991, when the government first announced its plans to divest some of the public sector enterprises, even though the effort was lauded by experts, the results have been far from satisfactory.
    The first four decades after Independence, the public sector enterprise was expected to be the growth engine of the economy. Poor work ethos and the red tape, soon established that this was not to be. Hence, a decision was taken in 1991 to follow the path of Disinvestment.
    However, against a target of Rs. 54,300 crores to be raised from PSU disinvestment from 1991-92 to 2000-01, the Government managed to raise less than half the money. In fact, the year 93-94 drew a total blank. The reason for such pathetic underperformance was attributed to unfavourable market conditions. The real reason could be a lack of strong political will, opposition to the valuation process, unattractive offers and not taking the trade unions in full confidence.
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    This was the period when disinvestment happened primarily by way of sale of minority stakes of the PSUs through a domestic or international issue of shares in small tranches. The value realized through the sale of shares, even in blue chip companies like IOC, BPCL, HPCL, GAIL & VSNL, however, was low since the control still lay with the government. It was customary to lure UTI or LIC to buy these stakes if no other takers came forward.
    During 2001 to 2004 maximum number of disinvestments took place. There were two methods
    1. Strategic sales, involving transfer of control and management to a private entity. The bright examples being Hindustan Zinc and the VSNL. The transfer of control of HZL created value for the shareholder and also for the Government, taking the market capitalisation from USD 4 billion to around USD 20 billion today. The history of VSNL was even better. The stake was sold by the Government at Rs 177 per share in 2002 and the balance stake held by the Government fetched Rs 8800 crore in 2021 at Rs 1080 per share. Not to speak of umpteen dividends which accrued to the Government during these years.
    2. An offer for sale to the public, with the government still retaining control of the management
    3. During this period, against an aggregate target of Rs. 38,500 crore to be raised from PSU disinvestment, the Government managed to raise Rs. 21,163.68 crore.
      Soon the Government devised short cuts. The disinvestment was reduced to selling one public enterprise to the other cash rich PSE. The sale of Hindustan Petroleum to ONGC and REC to PFC followed this pattern. The Government’s target was further helped by collecting hefty dividends from these enterprises and stripping them of their cash reserves.
      In 2014, a new product; namely CPSE ETF was introduced through Nippon and ICICI mutual funds, The idea was excellent as it offered 5% discount to the market rates for the retail investor. However, the performance of the ETF depended on the underlying PSE shares and the market sentiment. The CPSE ETF by ICICI mutual fund which hit the market during 2017 has given 30% absolute returns since inception.
      Undeterred by the poor success of the disinvestment efforts, the Government did not desist from raising the targets year after year. For the year 2019-20 the proceeds were 50298 crores against target of 1,05,000 crores.
      The Government has been talking about disinvestment of public sector companies like BPCL, Air India, LIC and Container Corporation since 2019. Till this day this intent has turned in to action only in case of Air India.
      It is obvious that the execution skills leave a lot to be desired. One fails to understand why there cannot be a timebound process irrespective of the market sentiment to convert disinvestment plan to action. If a target is set at say Rs 1,20,000 crore for the year, why it cannot be divided in to quarterly targets of 30000 crores each?
      CPSE ETF is an excellent option and the Government will do well to offer an attractive bouquet of profit making listed or unlisted PSU units at a discount to the small investor.
      In any case, the authorities will do well to desist from dividend stripping and forcing one PSU to buy another, to take care of the government’s distress as the yearend approaches.
      The strategic sale of a part stake, giving the complete management control to an efficient private entity has already proved to be value accreditive in the short and long run. The Government will do well to identify efficient companies in private sector with immaculate governance standards to be its strategic partner in businesses. This I the path to follow.
      -The author Bhushan Mahajan is Founder and CEO of Arthbodh Shares & Investments Pvt. Ltd. The views expressed are personal.
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