Business Today

The mother of all stimulus

After several deaths and rebirths, disinvestment is back as a big-ticket reform. And the timing is good—it's the only reform that can stimulate demand without straining the fiscal deficit.

Shalini S. Dagar | Print Edition: February 21, 2010

Of all the economic reforms measures taken since 1991, disinvestment deserves the most distinguished mention on one account—it has had the maximum number of deaths and rebirths in the intervening 20-odd years. Yet, the power of the idea of disinvestment is so strong that it revives every now and then. And, why not? It's the only measure that—in one stroke—can generate billions in wealth on the stock markets, millions in revenue for the government and incalculable value to the public sector company divested.

This triple dose prescription is exactly what the economy needs right now. With the size of the fiscal deficit threatening the continuation of the fiscal stimulus, disinvestment offers a way of keeping the demand stimulus alive without having to pay for it from the exchequer's pocket—either in the form of lower taxes or through higher spending. If done the right way, the wealth created through disinvestment on the stock market can buoy sentiment for consumption and investment.

The funds raised for the government in the process are a bonus. Much of this has happened in the past too, but not through an organised, methodical and well-stated approach—which is what the new disinvestment plan promises to be. Disinvestment Secretary Sunil Mitra, who has become Revenue Secretary with effect from February 1, believes that the disinvestment process should be demystified, made boring, predictable and "business as usual," so that neither the public nor the media give it any undue attention. While this could take some time, the process can easily be sold as a www proposition in the meantime: Win for the people, win for the government and win for the company divested.

The Wealth Creation
Enormous wealth has already been created on the stock markets via the disinvestment route. Maruti's current stock price is over 1,000 per cent higher than the offer price of its IPO in 2003. On the 3.6 crore shares allocated to the retail segment alone, over Rs 4,500 crore of wealth has been created so far (assuming all those allotted IPO shares have held them). Following similar calculations, the NTPC IPO has created over Rs 3,200 crore worth of wealth for the retail investors since November 2004.

Sure, not all disinvestments have been equally successful in generating wealth. Some have even destroyed wealth. This is where the method— and the extent—of equity dilution becomes relevant. Maruti was a case study for successful strategic sales—a method most favoured during the NDA government, which actually had a ministry for privatisation. Though contentious, strategic sales yielded the best returns for the investors and the best price for the government. Former disinvestment secretary Pradip Baijal recounts that the price-to-earnings (P/E) ratio of the strategic sales was in a band of 15-89, way higher than what was achieved through the sale of minority stakes.

Can disinvestment create enough wealth to really work as a demand stimulus? After all, a very small percentage of Indians invest in stocks. Though that's true, the wealth impact of the stock market goes well beyond those who directly invest in stocks. The value of Rs 8 lakh crore mutual funds investments and majority of life insurance policies now sold (e.g. ULIPs) critically hinges on stock prices. Besides, stock and mutual fund investing people comprise the majority of consuming class in India.

Funds for the Government
For the first nine months of 2009-10, the tax revenues of the Central government were trailing behind last year's collections by 2.5 per cent— with big falls in income tax and indirect tax collections. This has happened at a time when the total expenditure is projected to rise by nearly 70 per cent. A higher borrowing, just when private demand for funds is likely to pick up, will create the much feared "crowding out" effect—especially when RBI has already begun to squeeze excess liquidity from the banking system. Disinvestment is just the right approach to bridge at least some of the income-expenditure gap. In 2009-10 alone, if all the remaining four companies' disinvestment goes ahead as planned, around Rs 24,000 crore will be generated. For 2010-11, the target could be double or triple this amount.

Of course, the proceeds from disinvestment are not at the disposal of the Finance Ministry directly and may not help cover the deficit. According to the mechanism of the National Investment Fund (NIF) introduced in 2005, the income from disinvestment proceeds has to be utilised for social sector projects and revival of viable PSUs. However, for the period between April 2009 and March 2012, the provisions of the NIF have been withheld and the proceeds will be used as capital expenditure in specific social sector schemes determined by the Planning Commission and the Department of Expenditure. More the funding for such schemes, more the stimulus.

Boon for the Companies
A collateral benefit of diluting the government's equity stake is the improvement of the governance structures in the companies, even if they are just minority stake sales in the public markets. "When a company is listed, the judges of performance are not bureaucrats but auditors and millions of shareholders," says Baijal. Prithvi Haldea, Founder-Chairman and Managing Director of Prime Database which tracks capital markets, agrees wholeheartedly. "Daily analysis typically forces fiefdoms to convert to responsible companies," he says.

The 60-PSU Plan
Having burnt its fingers in the last stint when several proposed disinvestments did not finally take place, the UPA is following a more cautious approach. It has crafted a low-key, middle-of-theroad disinvestment model which will be politically palatable. "It is going to be listing-led, incremental and phased disinvestment," says Mitra. He reckons that since the capital markets route is a "well-understood and well regulated path", it should offer minimum reasons for curiosity or controversy.

The plan is to list the unlisted, profitable public sector enterprises with positive net worth. This should add up to about 60-odd companies, including Coal India and BSNL. The other plan is to increase public holding of already listed companies. Around 10 companies fall in this list, including Engineers India. Depending on the companies' preparedness to list and their requirements for fund raising, the Department of Disinvestment will finalise the blueprint for future disinvestment by early March. For the remaining two months of this financial year, four disinvestments can still happen (see box, The Line-up Up To March).

The government is also exploring a new method for pricing of already-listed companies in the follow-on offers. Rather than a proportional allotment to bidders on a price within a predetermined band, an auction method would be followed based on a floor (reserve) price which is announced at least a day in advance. Qualified Institutional Bidders (QIBs) such as mutual funds, life insurance companies, can bid both for price and quantity. Up to 50 per cent of the issue will be allotted to the QIBs on a "price priority" basis—essentially the higher price bids will get preference. Retail investors and high networth investors will get the shares on a proportionate basis at the floor price.

Haldea believes that this will not only get higher revenues for the government, but will also lead to true price discovery.

Maybe—by design or by default— the UPA has actually hit upon the right strategy. A nervous stock market could play a minor spoiler. But then that is never a major concern for government disinvestment. As Haldea quips, "It is never a bad time to disinvest."


Total expected mop-up till 2010 is Rs 24,000 cr.

National Thermal Power Corp: NTPC

  • MODE: Follow-on public offer with auction process for pricing.
  • EQUITY FOR SALE : 5 per cent of GOI's existing stake of 89.50 per cent
  • DATE FOR BIDDING: February 3 to 5
  • SHARES ON OFFER : 41 crore shares
  • SHARE PRICE: Rs 214.80

Rural Electrification Corp: REC

  • MODE: Follow-on public offer
  • EQUITY FOR SALE: 5 per cent of GOI equity along with 15 per cent of fresh issuance
  • DATE: Late February
  • SHARES ON OFFER: GOI portion is for 4.3 crore shares, the rest 12.9 crore
  • SHARE PRICE: Rs 240.05

National Mineral Development Corp: NMDC

  • MODE: Follow-on public offer
  • EQUITY FOR SALE: GOI to dilute 8.38 per cent of its existing shareholding of 98.38 per cent
  • DATE: Early March
  • SHARES ON OFFER: 33 crore
  • SHARE PRICE: Rs 496.55

Satluj Jal Vidyut Nigam: SJVN

  • MODE: Initial public offer
  • EQUITY FOR SALE: 10 per cent of GOI equity on offer
  • DATE: Late March

— Share prices on NSE as of Jan. 29, 2010. Source: SEBI, Dept of Disinvestment

Which PSUs to select

  1. Unlisted PSUs with positive networth, no accumulated losses and net profit in the previous three years.
  2. Companies which are compliant and ready for listing according to SEBI's listing requirements.
  3. Listed PSUs in which public holding is less than 10% will also make follow-on offer.
  4. Follow-on offers can be made through fresh issue of equity by PSUs which need to raise funds. GOI may sell more equity.

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