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The price we pay for privatization delays

For 2021-22, the Centre budgeted for collections of  ₹1.75 trillion from selling stakes in several PSUs, including BPCL, Shipping Corporation of India, Container Corporation of India and Bharat Earth Movers. (MINT)Premium
For 2021-22, the Centre budgeted for collections of 1.75 trillion from selling stakes in several PSUs, including BPCL, Shipping Corporation of India, Container Corporation of India and Bharat Earth Movers. (MINT)

  • The Centre’s struggles with disinvestment are hurting PSUs themselves. They are seeing more of their surplus being taken by the government and are having to endure a stagnation in market value

Next week, when the central government unveils its Budget numbers, it will show a 95% shortfall in budgeted revenues from the sale of equity stakes in companies it owns. The government’s struggles in disinvestment is also hurting these public sector undertakings (PSUs). A revenue-seeking Centre is squeezing out more from PSUs as dividends, leaving less with them for expansion. At the same time, the market value of PSUs—a marker of how investors see them—has stagnated.

For 2021-22, the Centre budgeted for collections of 1.75 trillion from selling stakes in several PSUs, including BPCL, Shipping Corporation of India, Container Corporation of India and Bharat Earth Movers. So far, it has collected just 9,329 crore. In a departure from the past, its disinvestment philosophy involved giving controlling stakes in PSUs to private companies. Other than between 2000 and 2004, most disinvestment has either been about offloading small stakes in the stock market or arranged marriages between two PSUs (for example, HPCL’s sale to ONGC). Both are sub-optimal, and also rein in revenue potential for the Centre.

On 10 August 2017, the Bombay Stock Exchange introduced the S&P BSE Bharat 22 Index. This index measures the stock performance of 22 companies that had seen different degrees of disinvestment by the Centre. While the Sensex has nearly doubled since, this index has risen 16%. The S&P BSE PSU, another index of 57 PSUs, has inched up 2% during this period. Even since May 2014, when the current BJP-led dispensation took charge, the return from the S&P BSE PSU is just 2%.

Dividend Drawdowns

During this period, PSUs, as a collective, have been distributing more of their net profits as dividends. A company can either retain its surplus (for expansion or improvement in operations, or for tighter days) or distribute it to shareholders as dividends. The set of central PSUs has seen its composition of this mix veer towards dividends.

In the backdrop of numerous nudges from the Centre to distribute more, the share of dividends paid out by PSUs has increased from 36% of their net profit in 2009-10 to 77% in 2020-21. Much of this has gone to their principal shareholder: the central government. To put this number in perspective, the dividend-to-net profit ratio of Reliance Industries—a company that is in the midst of an ambitious expansion and, like PSUs, has a prominent owner group—was 12% in 2020-21. For TCS, the IT company of the Tata Group, this ratio was 33%.

Waiting Loss

For 2021-22, the Centre set several big disinvestment targets. The finance minister’s budget speech in February 2021 listed BPCL, Air India, Shipping Corporation of India, Container Corporation of India, IDBI Bank, Bharat Earth Movers, Pawan Hans, Neelachal Ispat Nigam, two more banks and one general insurance company. In addition, the 10% sale of Life Insurance Corporation (LIC). The only transaction that has materialized is Air India going to the Tata Group, and even this was less about receiving current revenues and more about plugging future liabilities.

Delays hurt the prospects of PSUs listed for disinvestment. The sale of BPCL, for instance, was approved by the Centre on 21 November 2019. In the three-month period prior to that announcement, the BPCL stock surged 60%. However, the sale process has meandered, and the company received only three bids , with global majors staying away. And the stock has dropped 10%.

New Ventures

The Centre is looking to exit businesses without strategic import. Responding to a question in the Lok Sabha on 19 September 2020, it said it was “being guided by the basic economic principle that government should discontinue in sectors where competitive markets have come of age and economic potential of such entities may be better discovered in the hands of strategic investors".

At the same time, it is also forming new ventures. According to the Department of Public Enterprises, as of March 2020, 96 new PSUs were coming up. Most were subsidiaries of existing PSUs. But there were 10 PSUs where the central government was also contributing equity. Among these are infrastructure businesses like metro rail and freight corridors, where it still has a role. But it’s also contributing to companies in the businesses of convention centres and engineering goods, areas where its role is questionable. Sorting through these dichotomies, and executing, remains key.

(howindialives.com is a database and search engine for public data)

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