PSU sale: Paying proposition

Is the divestment of government stake in public sector undertakings (PSUs) the next big opportunity in the India equity story? There is sufficient historical evidence that makes for a strong argument in favour of this theory. Companies like Oil and Natural Gas Corporation (ONGC), NMDC, National Thermal Power Corporation (NTPC), State Bank of India, Bharat Heavy Electricals Ltd, Bharat Electronics Ltd, Rural Electrification Corporation, Power Finance Corporation, Steel Authority of India Ltd (SAIL), GAIL, BEML, Engineers India, etc, have multiplied shareholder wealth several fold in the past decade. The proposal for further stake sales in these companies, as well as in a clutch of hitherto unlisted PSUs, has had investors salivating in anticipation.

Contrary to popular, and unfair, perception that government-owned companies are inefficient and poorly managed, many PSUs are actually rather wellmanaged enterprises spewing high profits year after year. Their talented managements, unique positions, operating efficiencies, mostly 'clean' operations and decent HR practices have led to their emergence as long-term investor favourites. This is at the root of investor interest in further stake sales in PSUs that are being mooted in the corridors of power.Another cause for cheer is the relatively low 'public float' in the shareholding pattern of most PSUs. This ensures that their index weightage in the Nifty calculation, which is based on free float, is much lower than that suggested by their market capitalisation. For instance, a follow-on public offer (FPO) in NTPC (89.5 per cent government-held) or ONGC (74 per cent government-held) would certainly lead to an increase in their weightages in the Nifty. This, in turn, will force many Niftybenchmarked or Nifty Index funds to increase their allocation to these stocks, providing greater support to their prices.The PSU stake sale also provides the government the much-needed money to part-finance its spiralling budget deficit. At the stated target of Rs 25,000 crore, the first round of stake sales will plug roughly 10 per cent of the fiscal deficit hole. The initial public offerings (IPOs) of unlisted giants such as the Bharat Sanchar Nigam Ltd and Coal India will easily exceed this target.

This would be an impressive start, especially since there's plenty more of the government's family silver in the pipeline. Then there are the FPO candidates, the PSU companies that are currently listed, where a further dilution of government holding is feasible. These include stocks like ONGC, NMDC, SAIL, Hindustan Copper and some of the smaller PSU banks. This would also enable the government to raise another Rs 23,000 crore.

Besides investor appetite, there are bigger reasons why divestment of PSU stakes by the government is desirable. For one, it exposes these companies to the rigours and requirements of being publicly held, even as the government retains controlling stake. They learn to report their operations more transparently and are a little more likely to be hauled up by the press or shareholders. This will make them more focused on creating shareholder value in their business endeavours.

There are several PSUs enjoying strategic advantages in key businesses. Why should the investing public be denied the right to own, and benefit from owning, stakes in these companies? Allowing public stakes will not only increase shareholder wealth for investors and the government, it will also open up strategic options for these companies to raise capital from the public at a low cost in the future without having to depend on the government. Companies like NMDC, ONGC, SAIL, BSNL and Coal India have the advantage of resources or assets acquired in the past, which are perhaps not replicable today. Why not unleash part of this wealth and simultaneously enable these companies to tap into the public funds markets for their evolution?

Critics of the PSU disinvestment programme suggest that the government is bartering away family silver to fund its profligate ways. In a sense, this is a valid argument. To counter this criticism, it might make sense, for example, to ensure that the proceeds from PSU divestment are channelised to a pre-planned expenditure. It could be in infrastructure projects, such as rural roads, primary education or healthcare centres, in which nobody has been able to create a commercially viable option.

Also, it must be understood that PSU stake sales are not a limitless option for the government to lean on in times of fiscal stress. The move towards fiscal discipline must continue in earnest. A time-bound plan has to be first put in place for reducing the fiscal deficit to manageable levels. By itself, the PSU stake sale is not a sufficient, recurring or sustainable way to manage the fiscal deficit. This is a point that might be lost on the enthusiastic soldiers of the PSU divestment brigade. But in times like the present, it provides a desirable relief (and only in part) from the fiscal pain.

Dipen Sheth is Vice-President, Institutional Equities, BRICS Securities