Sale of two PSEs: More complex than usual

By C. R. L. Narasimhan

The public sector disinvestment programme has once again been in the news with the Cabinet Committee on Disinvestment (CCD) taking some decisions. No spectacular sell-offs have been announced.

It is unlikely that the majority of the CCD decisions will translate into immediate action. Not certainly in the sense of even partially meeting the budgetary target of Rs. 10,000 crores that has been fixed for public sector sale during this year.

Only one PSE - the loss-making Paradeep Phosphate - has been approved for privatisation through a strategic sale.

The time frame for concluding a strategic sale - where management control is also handed over to the buyer of a chunk of equity shares - is anybody's guess.

The significance of the recent CCD meeting lies elsewhere. The other two companies which figured in the agenda - Maruti and IPCL - automatically draw attention to themselves. Irrespective of the disinvestment moves contemplated for them, there is a certain topicality about these two companies.

The Government's proposals for them do not add up to much in disinvestment terms at this stage. In the case of IPCL, many would say that there is actually a setback. For, only one of its units is being sold to Indian Oil.

The rest of the company, made up of the Nagothane and Gandhar complexes, will be once again placed on the block and international bids for strategic sale called for.

For Maruti, the disinvestment route is if anything even more tentative. Barely a day after the Minister in charge of Disinvestment, Mr. Arun Shourie, announced that a committee of senior Secretaries will prepare the groundwork for the eventual sale of the government's 50 per cent stake in the company, the Minister in charge of Heavy Industries, Mr. Manohar Joshi, seemed to discount that news.

In the background of well-publicised differences in the Cabinet over certain companies' privatisation, there is a feeling that no changes are in the offing.

However, the fact that a core team of bureaucrats rather than politicians is at the task somehow augurs well for the eventual outcome.

Not much leeway

One has to wait and see as to what the committee of Secretaries recommends. Contrary to speculative reports, the Government will not have much leeway to strike a novel path. Suzuki, the Japanese co-promoter has to concur with whatever decision that is taken. S

uzuki has been calling the shots in the management of the company since June 1998 when a costly skirmish between the two partners ended in favour of the Japanese.

Commonsense suggests that the sale of Government's share to a third party is not feasible in a situation where the partners are equal only in the matter of stake holding.

Sourcing of technology by the company, for instance, is crucially dependent on Suzuki. The latter has played the technology card a few times before.

Moreover, unlike anytime before, the dynamics of the automobile industry characterised by excess capacity and severe competition will be the key issue in valuing the Government's stake in Maruti.

The company's formidable strengths in the A and B segments plus its outstanding success in building a huge and high-quality network will be the positive attributes. Its shrinking market share has been widely commented upon but is an inevitable consequence of a monopoly giving way to competition.

What is not realised is that competitive forces can unlock the hidden strengths of the previous monopolist. Clearly from a consumer's standpoint this has happened. The big task is to capture this and other positive traits in the valuation.

Global scenario to be reckoned

A few other factors have a bearing. Globally the auto industry is consolidating at a furious pace. The world's number one car maker, General Motors, has bought into Suzuki and equally relevantly has been seriously contemplating a big-push into small cars-Suzuki's and Maruti's traditional strengths.

In India, GM does not have a presence befitting its pre-eminent status outside. Who knows what Maruti's disinvestment will lead to? The other uncertainty - this time in a negative way - is the impact of the ongoing employee unrest.

About IPCL, the only thing that could be said for now is that the Government has struck a compromise in the face a difficult and complex decision making situation.

The issue is simply not one of determining whether the remaining parts of IPCL plus the realisation from the sale of the Vadodara unit to Indian Oil will be at least equal to what the Government would have got through a strategic sale of the whole company.

IPCL's strategic sale process has been in the works for a while. By August last year, it had reached an advanced stage. Following the flotation of international tenders four parties had made the short-list.

Of them Reliance was said to be strongly in the reckoning. This raised key issues relating to the creation of monopolies after privatisation.

On the other side there was intense lobbying to keep out a PSE such as Indian Oil from the bidding (IOC was a late entrant at that stage).

The key issue here was that post-divestment a new monopoly would have been created if Reliance had acquired IPCL.

With the sale of the Vadodara unit to IOC that aspect of the controversy at least has been avoided. But the disinvestment process has neither gained through valuable precedents nor moved forward in a financial sense. IOC is itself a candidate for privatisation at a future date.

Its buying a part of another PSE will invite the usual criticism. It is reminiscent of the unfortunate share ``swaps'' among the public sector oil companies early last year. A clear strategy is needed to project the rationale of this particular transaction.

Moreover, the interests of the other shareholders of IPCL - the public equity stake is currently around 10.73 per cent - will have to be reckoned with. Minority shareholders do matter.

It has become customary to take them for granted. Note how both IOC's as well as IPCL's shareholders are assumed to have concurred with the Government's decision. In the end it is the ordinary shareholders who will play a pivotal role in the entire privatisation process.

Send this article to Friends by E-Mail

Section  : Business
Previous : Plea to scrap export duty on EI leather