A spur to public sector sale

By C. R. L. Narasimhan

On October 5, the Central Government announced the strategic sale of two public sector undertakings - Computer Maintenance Corporation (CMC) and Hindusthan Teleprinters(HTL). The Government will sell 51 per cent of its equity in CMC to Tata Sons, the holding company of TCS for Rs. 152 crores. It will be TCS that will manage CMC. For HTL, the successful bidder was HFCL which is paying Rs. 54 crores for a 74 per cent stake. With these two the Government is seen kick-starting the public sector sale process. In fiscal terms, the aggregate receipts from the two, at around 1.7 per cent of the year's budgeted Rs. 12,000 crores are not significant. However, there are welcome messages from their sale that go beyond the merely fiscal. They demonstrate a new resolve on the Government's part, which hopefully will take care of the attendent controversies.

For instance, in the case of CMC there have already been accusations: mainly, why hand over the company to the solitary bidder? There has been concern over the share price movements before the announcement of divestment, which the Securities and Exchange Board of India (SEBI) is now looking into.

However, the success of the public sector enterprise sale programme depends largely on how the government tackles the controversies that are inevitable.

The strategic sale route, now the preferred method of disinvestments, comes into sharp focus.

The preferred route

The strategic sale route involves handing over the management of the undertaking concerned along with a chunk of its equity. Such a methodology of sale has been advocated among others by the Disinvestment Commission in its earlier incarnation. Only recently it has caught the fancy of the Government in a big way.

In contrast to the earlier rounds of disinvestment which involved offloading the government equity through the stock markets, either domestic or global, the strategic sale route focuses more on handing over management control of the undertaking. Transfer of equity from the Government side to the buyer is of course a concomitant factor but the point is that a strategic sale can take place even when the government keeps a large chunk of equity. In the earlier rounds the Government has kept its majority stake in tact.

In all the four concluded cases of strategic sale the Government continues to be a shareholder even though the units have passed on to private hands. For prospective buyers the key attraction is the securing of management control. Other things remaining the same the valuation of the enterprise should be higher than those arrived at through other methods and also more certain. If, on the other hand, shares are offloaded in the exchanges in instalments the chances are that there will be an uneven realisation. Each round will be subject to the vagaries of the market, perceptions of the investors and so on.

In practice, however, the strategic sale method has proved especially difficult for those in charge of disinvestment. Since accusations - of short-selling, cronyism in selecting advisers, in evaluating the bids and before that the bidders were to be expected - the Government has had to devise procedures that were transparent. The last is a much abused expression in this country. Recently the question of security clearance of the bidding parties had to be reckoned with. Procedurally as many as 11 stages exist before a proposal for sale can be consummated. What happens if along the way the bidders loose interest and the undertakings up for sale their value?

The root of the matter

The above is not an academic issue but something that lies at the root of the current phase of the disinvestment process. There has been an alarming number of dropouts, that is, short-listed buyers backing off at the last stage. The relatively long timeframe gives ample scope for interested lobbying, a point that seems to have escaped government's attention earlier. Equally relevantly the undertakings in the process of being divested suffer in many ways. There could be a general lack of direction in their affairs, understandable because they will not know who their new owners would be and whether the culture the buyers will bring in will be compatible with theirs. The biggest consequence will be on employee morale, especially at the top management levels. Most of them will migrate if they have a chance ahead of the stake dissolution.

In the case of the petro-chemicals major, IPCL, one of the first candidates for a strategic sale, the cream of its top management moved over to competitors, who have also been bidders in the much-delayed process. In technology oriented companies such as VSNL, the sweeping changes in the environment can nullify whatever gains it makes because of its protected environment. (As it is, VSNL is going to lose its monopoly over long-distance telephony next year). CMC, divested at last, has seen an erosion in its value, not just in terms of the stock market but, according to industry sources, by a flight of its key personnel. In any case, the Government had to take a bold decision to sell it to the only eligible bidder left - the Tatas. At one time there were many other big names interested in acquiring CMC. For now the Government has to come out with a persuasive case to justify its sale to the only bidder. It would have been easier if there was a multiplicity of bids.

Thus, the delayed decision-making that is implicit in the strategic sale method partly at least nullifies the gains of disinvestment. Yet, given the present environment in the country, no short-circuiting of the cumbersome process is possible or is to be recommended.

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