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Chaitanya Kalbag

The author is former Editor, Reuters Asia, Editor-in-Chief of The Hindustan Times, and Editor of Business Today

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Hollowing Out

Governments cynically scoop out value from their own companies

Photo Credit : Reuters,

Privatisation will work only when the government sells more than 50 per cent of a state-owned company’s capital to the public  and relinquishes management control. This has not happened. Successive governments have mostly destroyed value by divesting only thin slivers of public sector undertakings (PSUs) and not strengthening their balance sheets to benefit minority shareholders.

A PSU’s initial public offering (IPO) usually lists only about 10 per cent of its total capital. Deep-pocketed government institutions like the Life Insurance Corporation (LIC) snap up big chunks of PSU stock, leaving only the crumbs for the ‘public’.  

But an IPO of the part yields an enticing valuation of the whole.   Greedy governments have cynically squeezed listed PSUs to beef up their revenue shortfalls. The Modi government, which has announced huge outlays for state-owned banks’ recapitalisation and highway construction, is in dire need of funds and in danger of  breaching its fiscal-deficit target. So it has turned its basilisk gaze on PSUs’ coffers.

The government was quick to deny a Reuters report that it had ordered PSUs to maximise their dividend payouts. To understand how the Sarkar can hollow out a PSU, let us look at Coal India Limited (CIL), once touted as the most successful example of disinvestment.

Coal India was listed in November 2010 and the sale of 10 per cent of its equity fetched the government Rs 15,200 crore. Its shares listed at Rs 245, traded at a lifetime high of  Rs 438 in August 2015, and closed at 272.85 on November 17. In January 2015 another 10 per cent slice of CIL was offloaded on an ‘offer for sale’ (OFS) basis mainly to institutions; it fetched the Centre’s coffers Rs 22,557 crore. Life Insurance Corporation currently owns about 8 per cent of CIL, the government about 79 per cent. Foreign institutional investors who had flocked to the IPO are unhappy because the company’s worth has been continually eroded.
 
Coal India, which in 2011 briefly toppled Reliance Industries to be India’s most valuable company, has seen its market capitalisation fall to Rs 1.99 trillion in 2016 from Rs 2.4 trillion in 2011. Its reserves have halved to Rs 21,917 crore from Rs 42,155 crore in 2013. Its net worth (assets minus liabilities) has also halved to Rs 24,506 crore on March 31, 2017 from Rs 48,460 crore on March 31, 2013.

Meanwhile, there have been only 14 PSU IPOs since 2007 — none took place between March 2012 (National Buildings Construction Corp) and October 2016 (PNB Housing Finance), data compiled at my request by Prime Database show. The Modi government has done only five PSU IPOs so far in 30 months.  

Retail investors are probably growing wiser to the blandishments of disinvestment. The response to the IPOs of General Insurance Corporation (GIC) and New India Assurance (NIA) over the past few weeks has been underwhelming. GIC’s shares opened at Rs 850 against its IPO price of Rs 912; it ended at Rs 794 on November 17. New India Assurance opened at Rs 748.90 against its issue price of Rs 800 and ended on November 17 at Rs 675.50.  Only 14.22 per cent of GIC shares were initially sold; LIC pumped about Rs 8,000 crore into the Rs 11,372-crore IPO.  LIC also bid Rs 6,500 crore for shares in NIA’s Rs 9,600-crore IPO. Even if you are optimistic about the long-term prospects for the insurance sector, does this augur well for privatisation?


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