Disinvestment: the troublesome phase

By C. R. L. Narasimhan

A spate of recent news reports concerning the public sector sale programme once again show how intractable the process can be. On August 24, the Minister of State for Disinvestment told the Rajya Sabha that the systematic attempts to denigrate the bidding companies has lead to a situation where there are few bidders left in the race for the better known public sector enterprises. On the other side, most of the other PSEs lined up for divestment will not attract worthwhile bidding interest because of the pathetic state of the financials.

As the Minister pointed out, the bidding interest starts waning even after a preliminary examination of their financial situation. A third news item is specific to Air India. A letter purportedly written by the Cabinet Secretary warns the Government from going ahead with the AI's strategic sale in the present context where all but one bidder has dropped out or been eliminated.

The letter, whose authenticity has been questioned, pleads for a refurbishment of AI through fiscal concessions on aviation fuel and so on. According to the latest news Singapore Airlines has finally confirmed that it is not participating. This leaves the Government in a serious predicament.

No one need be surprised at the above developments. They ought to be viewed as a manifestation of the opposition to the process. Even without such news nobody can say that all is well with the disinvestment process. The most controversial of all the reform measures the public sector sale process has continuously failed to win a consensus on the methodology to be followed. This has been the bane of the disinvestment programme over the past ten years. There is unlikely to be a consensus anytime soon, as the recent developments demonstrate yet again.

Theoretical advantages

Currently, official policy has been relying on the strategic sale route to divest its shares. Under this method, the management control of the unit also passes on to the buyer of a chunk of the PSE's equity. For Air India, Indian Airlines and VSNL - to name just three of the most visible candidates - the Government has opted for this route. Earlier, there was a preference for offloading PSE shares in the stock market.

Practically all the previous disinvestment ``rounds'' involved a direct access to the capital market either domestic or international. All the PSEs that are now traded on the exchanges were originally owned entirely by the Government. A part of its stake has since been sold to investors. But significantly the Government continues to own the majority stake and needless to add retains the management control over them as well. None of them has ceased to be a government company till date.

The strategic sale route involves a change in the management control even though the Government might retain a major equity stake, post sale. The advantages claimed for this route over the offer for sale method are several. Often the PSE to be sold requires a substantial infusion of capital or technology. The strategic partner is expected to provide those and is in fact short-listed only on the basis of his proven abilities. An even bigger advantage is seen in the valuations of the PSEs concerned. The strategic sale process involving a competitive bidding is supposed to ensure a better price for the government. If the government merely offered its shares in tranches, the realisations from each round will naturally be different (depending on the market's perception). Besides, since the PSE will still remain in the government fold, valuations are unlikely to be favourable.

Logically, at some point in the privatisation programme (as the disinvestment programme is somewhat ambitiously called), the Government will have to cede control. The strategic sale route is a more straight forward attempt to identify the ultimate owner of the enterprise. Safeguards can therefore be built-in right from the beginning. If on the other hand the Government merely divests its shares in instalments, it will eventually find itself in a predicament at the time of handing over control. The various interplay of market forces would place one or other of the private parties in an unassailable position to take charge from the government. That party may not be the one most suited to run the enterprise.

Practical difficulties

The advantages claimed for the strategic sale method notwithstanding, the government is being sorely put to test. As the Air India episode - a ``forged" letter and all - how that the process can never be smooth. It was only to be expected that substantial lobbying will take place. The Government has somewhat belatedly realised this.

Allegations against many bidding companies of having adopted of unfair practices (in the past) with a view to knocking them off the short-list is another angle to the lobbying that needs to be reckoned with.

In an environment where every economic decision making is suspect, the Government cannot treat those accusations lightly. But for the disinvestment process to goon it has to draw a line somewhere and not budge an inch if the rest of the parameters are complied with.

There is a need for precedents and secondly those who actually handle the sale from the government side ought to be given reasonable protection from frivolous investigations and post- mortems.

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Section  : Business
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