Conundrums of disinvestment

THE DISINVESTMENT programme of the Union Finance Ministry had to encounter many hurdles in its implementation with the Opposition parties being averse even to a limited dilution of Government ownership in public sector enterprises (PSEs). Because of the difficulty in arriving at a consensus and taking firm decisions, the disinvestment of portions of Government holdings in PSEs could not be attempted advantageously. The targets for securing resources could not be reached in many financial years. Besides, the incorrect timing of sales and the adoption of different procedures for disinvestment of specified blocks of shares were responsible in earlier years for the realisation of prices, which were lower than visualised. Full advantage was not taken of the buoyancy in stock markets at particular stages.

Ingenious strategy in 1998-99

The resources secured since the disinvestment process started in 1991 amounted to Rs.19,209 crores upto March 31, 2000. Only in three years, 1991-92, 1994-95 and 1998-99 were the were exceeded. This was due to the fact that the package offers in 1991 were highly advantageous from the point of view of institutional investors. In 1994-95 the stock markets were buoyant and auctions could be successfully conducted at intervals. However, in 1998-99 an ingenious approach was adopted with the Government offloading specified blocks of shares by taking advantage of the cash rich position of companies in the petroleum sector. In these three years, the total amount secured was Rs. 13,252 crores or 69 per cent of the total proceeds.

The budget estimate of Rs. 5,000 crores under this head in 1998- 99 was surpassed with the total at Rs. 5,371. The Centre divested 9.11 per cent of its holdings in Indian Oil Corporation (IOC) to Oil and Natural Gas Corporation (ONGC) while IOC itself took up from the Centre 10 per cent of the capital of ONGC and a similar percentage in Gas Authority of India (GAIL). The last mentioned for its part absorbed 2.5 per cent of equity capital of ONGC.

In 1999-2000, the required resources could have been easily mobilised from the open market as the bourses were extremely active until March this year. The BSE index touched a new peak of 6150.69 on February 14. But the Union Finance Ministry could not take definite decisions as the unloading of blocks of equities in GAIL through an issue of GDRs having an equivalent price of Rs. 70 per share in November 1999 was at a price lower than on the previous occasion. This came in for severe criticism. As the opportunities for effecting sales of equities of IOC and other profitably functioning companies in the petroleum sector were not utilised, there was a shortfall of Rs. 7,600 crores in respect of receipts from the Budget estimate of Rs. 10,000 crores. As differing opinions have been expressed about the extent of dilution of ownership in profitably functioning PSEs and the manner in which sales should be effected, the whole strategy of disinvestment has undergone a significant change latterly. At a meeting of the Cabinet Committee on Disinvestment (CCD) held on June 23 this year, it was decided in principle that there should be disinvestment in 11 public sector enterprises (PSEs) while 33 PSEs were to be taken up for dilution in the annual plans. During the course of the year it is proposed that Minerals and Metals Trading Corporation, Shipping Corporation of India, State Trading Corporation, Indo-Burma Petroleum, Hindustan Zinc, Hindustan Organic Chemicals, Hindustan Insecticides, Sponge Iron India, Minerals Exploration Corporation, Hotel Ranchi Ashok and Hotel Utkal Ashok should be restructured for enabling strategic sales to entrepreneurs who can improve efficiency and profitability of these PSEs. It was also indicated earlier that Air India and Indian Airlines should be reorganised and the Government ownership limited to 40 per cent.

While eligible foreign interests are being allowed to take up 26 per cent of the equity capital in Air India and Indian entrepreneurs can take up a similar stake in Indian Airlines, the Government will be inclined to effect strategic sale of 25 per cent in Indian Petrochemicals Corporation (IPCL) to worthy Indian or foreign managements. Global advisors have been appointed for making suitable recommendations for restructuring, valuation of assets and determining prices at which strategic sales of equities of the PSEs concerned could be concluded. These exercises are expected to be completed in the coming months in a transparent manner. It was felt that the Union Finance Ministry would be enabled to realise the target of Rs. 10,000 crores through the disinvestment and even exceed it in the current financial year.

Stock market circles were disappointed over the absence of announcements relating to sales of equity holdings in Mahanagar Telephone Nigam (MTNL), Videsh Sanchar Nigam (VSNL) and Maruti Udyog (MUL). It is not intended for the time being to dilute Government ownership in oil refining or marketing companies such as Cochin Refineries (CRL), Chennai Petroleum Corporation (CPCL) or IBP as these have no integrated facilities for marketing or refining. The dilution process will be taken up only after these organisations get integrated with others having marketing as well as refining facilities. It has also been clarified that the oil companies have no "strategic status" and the decisions about disinvestment of portions of holdings in the petroleum sector will be taken at the appropriate stage.

Immediately, the emphasis will be on restructuring Steel Authority of India (SAIL) while the Centre is undecided about the course of action that should be adopted for restructuring or effecting strategic sale of the Vizakhapatnam Steel Plant. The Managing Director of Tata Iron and Steel Company (TISCO) has actually offered to acquire the Vizakhapatnam Steel Plant as well as the Salem Steel Plant as the objective of the company would henceforth be to increase capacity with advantageous acquisitions. Hindustan Machine Tools (HMT) too is to be reorganised with the closure of five unviable units. Two subsidiaries are to be formed for the Machine Tool Division and Watch Group. It is the intention to divest upto 74 per cent in these two subsidiaries. Besides, a subsidiary is to be promoted for the Tractor Division later. As regards Hindustan Organic Chemicals (HOC), the Government ownership is to be reduced to 26 per cent from 58 per cent with a strategic sale.

Will there be sales to the public?

It is of course stated that 10 per cent of IOC equity capital can be disposed of later in the year when the reorganisation schemes take shape. The stake of the Centre in IOC is now 82.30 per cent after a block of shares was made available to ONGC. While there may be important developments in the coming months, with the global advisors submitting their proposals to the Government in respect of the revamping of PSEs assigned to them, it will also be examined how the operations of Bharat Aluminium Company (BALCO), CRPL, Hindustan Teleprinters (HTPL) and others can be improved with fresh investment by new partners successful in securing strategic blocks of equities on a negotiated basis. In view of the new moves adopted by the Union Finance Ministry, there is confidence that the Budget estimate of Rs.10,000 crores through disinvestment can be realised.

The recent developments in the political situation however have had a clouding effect as FIIs and others have been net sellers in the bourses and the BSE Index slumped to 4188.34 on July 24 from 4905.94 on July 15. The rupee also touched a new low of 45.03 on July 21 with a heavy demand for dollars from FIIs, importers and others. As the depreciation of the rupee was unmerited, the Governor of the Reserve Bank of India (RBI) decided to raise the Bank Rate to 8 per cent from 7 per cent and the cash reserve ratio (CRR) by half percentage point in two stages to 8.5 per cent.

The refinance facilities available to banks also have been severely curtailed. Though the rupee has staged a modest recovery, the sentiment in bourses is depressed and it will be possible for the Union Finance Ministry to make a success of the disinvestment programme only if the institutional investors and others were inclined to adopt cautiously optimistic view of the outlook for the bourses. It is hope that the measures adopted by RBI to check volatility in the forex markets will be temporary. Happily, the Indian economy has been acquitting itself creditably and it is anticipated that the gross domestic product (GDP) will rise by over 7 per cent in 2000-01.

The utilisation of the proceeds from disinvestment for revenue purposes has not understandably resulted in any contraction of the internal debt. It has been emphasised that sale proceeds out of Government holdings in PSEs should be utilised for reducing the internal debt and also for fresh investment, if need be in enterprises still under Government management. The stake of the Centre in various enterprises is still substantial. Even in 1997- 98, the paid-up capital in 236 profitably functioning Central Public Sector undertakings was Rs.65,760 crores and the net worth Rs.1,32,440 crores. As the quotations for many scrips can be expected to rule at high levels, it should not be difficult to secure at least Rs.1,00,000 crores through disinvestment in three or four years.

Also, fairly large loans have been made available to numerous enterprises and these can be recovered with appropriate funding operations.

The total capital employed was Rs.2,23,050 crores. But internal debt and other liabilities amounted to Rs.9,72,840.80 crores on March 31, 2000. If a reduction of Rs.1,50,000 crores can be achieved through the above mentioned arrangements and efforts also are made simultaneously to reduce the fiscal deficit, there will be scope for a noticeable reduction in the burden of interest charges.

It is therefore important to realise that there should also be a higher return on investment with improvement in efficiency and profitability so that non-tax revenues can be augmented tangibly. The percentage of net profit to capital employed in respect of the manufacturing sector in 1998-99 was only 4.78 per cent and those of services sector 4.94 per cent.

The average return for both these groups was 4.83 per cent. Even if a return of 10 per cent can be secured, the net profit will get more than doubled to Rs.27,000 crores or an increase of Rs.14,000 crores. A saving in the burden of interest charges by over Rs.15,000 crores and a higher level of internally generated resources of PSEs should strengthen the budgetary position tangibly.

The disinvestment programme has been vigorously implemented in other countries as Brazil has benefited to the extent of $66,729 million, Argentina $28,431 million, Mexico $28,302 million, China $17,467 million, Hungary $12,634 million, Malaysia $10,029 million, Poland $8,281 million and Peru $7,848 million. In the case of India it is only $7,125 million.

P. A. Seshan

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