Why divestment needs a reboot

As the Government is swamped by wish-lists for its first budget, here’s one that it needs to consider — de-link the public sector divestment programme from the annual budget.

In the last four years, public sector divestment has followed a predictable script reminiscent of a mega-serial. The year starts with the Government, full of sunny optimism, announcing a big divestment target in the budget. Then, finding that market conditions are dodgy and it has other pressing matters to attend to, it puts the idea in cold storage until the new year. Waking up late and finding that divestment has made little progress, it then rushes into fire-fighting mode.

Vague threats are issued to PSU bosses to pay more dividends, quick calls are made to the LIC to contribute to the cause and garage sales of prime PSUs are lined up, with the share offered on discount. After nail-biting suspense, the divestment collections are announced in the budget — a little short of target, but handsome nevertheless.

The problem with this kind of divestment is that while it may appear to be progressing well on paper, it does not meet many of the basic objectives of the exercise. Because of a constant equity overhang, PSU stocks struggle to command fair value on the bourses.

With the offers often made in great haste, the exchequer gets a sub-optimal price for perfectly good assets. And with the Centre continuing to breathe down their necks, PSUs don’t enjoy any operational autonomy either.

The divestment programme, as it is being run now, needs a thorough overhaul. To take it forward in letter as well as spirit, the Centre should consider a rethink on the following lines.

Have you ever come across a private sector promoter who fixes a target date for his firm’s IPO and offloads his stock at whatever price he gets, just to beat the deadline? Not likely. His intention, if he wanted to sell his holding, would be to wait until he can get the best possible valuation for it. This should be the Centre’s approach to diluting its stakes in the prized PSUs as well.

Market conditions have a very large role to play in deciding the pricing for any public offer. By setting annual divestment targets mainly with an eye to filling the budgetary gap, the Centre is relinquishing its right to time its divestment offers to the best market conditions. The opportunity loss from this short-sightedness can be quite significant. Just consider the string of divestment offers that were pushed through in the moribund markets of last year.

With these stocks gaining anywhere between 10 and 100 per cent since then, investors in the offer may be a happy lot. But their gains, resulting partly from the under-valuation of the shares during the offer, have been at the exchequer’s expense. A back of the envelope calculation shows that the Centre could have realised another ₹12,000 crore from the shares it sold last year (they raised ₹15,000 crore) just by waiting another nine months.

Given that divestment involves one-off stake sales in Government assets, the sale should seek to maximise value to the exchequer. Therefore, they should be put through in buoyant market conditions. If the price isn’t right, it is best not to divest at all.

But the problems with the divestment programme, as it stands now, don’t stop with its failure to maximise value to the exchequer. ‘Less government’ is one of the cardinal objectives of divestment, but the recent divestment offers haven’t achieved that in any meaningful measure.

Through last year, oil and gas firms bore the brunt of rising under-recoveries on their products as the Government dilly-dallied on freeing up their prices. State-owned banks have seen their bad loan problems accentuated by the Centre’s periodic directions to lend to one or the other sector. Firms in the coal and mining sectors have had to kow-tow to informal government directives to keep their selling prices under check for their end-users. This suggests that even where the Centre dilutes its holdings in a PSU under the divestment programme, the firm may not really enjoy much operational autonomy.

These interventions are tantamount to the Government shooting itself in the foot. Frequent interventions impact the market perception and valuation of PSU stocks. This hurts the Centre’s own wealth invested in these firms.

To put the numbers in perspective, stake sales in PSUs have annually yielded about ₹15,000-20,000 crore to the exchequer in recent years. But did you know that the Government wealth that remains invested in the PSUs today — the market value of its shares — stands at nearly ₹11 lakh crore?

Maybe it is time the Centre took a holistic view of its PSU ‘portfolio’. To measure the value of this portfolio, it must take stock not just of the amounts raised through stake sales, but also of the wealth that remains invested in the PSUs at the end of each fiscal.

But if the Centre is to avoid annual targets and tailor divestment to market conditions, how will it make up the fiscal deficit, you may ask.

Well, the answer is that it was never a sound idea to use divestment proceeds to make up the Government’s annual budget shortfall.

Any rookie accountant knows that, in measuring the excess or shortfall between annual revenues and expenses, capital items such as asset sales have no role to play. If a listed company fails to generate adequate sales to cover its annual expenses, it certainly cannot sell off a promising division and then use the offer proceeds to report a neat ‘profit’ for the year.

The quirks of government accounting allow the proceeds from the sale of assets such as government holdings in PSUs to enter the annual budget and to be utilised to ‘bridge’ the fiscal deficit. But such accounting ignores the fact that selling off stakes in PSUs each year has an impact on the Centre’s future revenues and ‘profits’. When the Government divests its equity holdings in a PSU, it forgoes the right to the firm’s future profits and dividends.

Therefore, if the Centre desires to divest prime assets in form of state-owned firms, the proceeds of these sales should not be frittered away on unproductive expenditure or giveaways.

Creating a separate fund to house divestment proceeds and finding ways to utilise it to create new assets would be the best way to make sure that PSU divestment creates lasting wealth for the exchequer.