INSUBCONTINENT EXCLUSIVE:
By Somnath MukherjeeAfter a very long time, privatisation has re-entered the policy-making lexicon in India
A flurry of news reports has informed us that several public sector undertakings (PSUs) will be put on the block for privatisation
It certainly is a big departure from the last decade and a half, when successive governments chose to disinvest (a uniquely Indian
contribution to the policy-making jargon), which is, sell small chunks of PSU shares to investors, rather than outrightly privatise PSUs
In general, the announcement has been welcomed by the markets and the broader market commentariat.
From idea to truism to tautology is often
a quick (and in some ways intellectually lazy) journey
Lack of movement in privatisation is a much-lamented deficit on the part of economic managers
irrespective of the source of the extant troubles (whether a demand slowdown as in today or an oil price-related currency crisis as in
maximising value for taxpayer monies
maximum value for the investment made
A disinvestment programme, which is linked to a budgetary revenue target, is simply inefficient way of achieving it
Markets have cycles and a budgetary target necessitates equity sale even during weak market years
The result is either extraction of less-than-optimum value or (as is the case very often) a left-pocketright-pocket transaction of PSUs
(and/or LIC) picking up disinvestment offers
A firesale privatisation, as is prescribed by free market evangelists, is an even less efficient method of value maximization, besides being
Evidence, even though thin, has a different conclusion for maximisation of taxpayer value though
Neither disinvestment nor the few outright privatisations that have taken place seem to have really maximised value for the key shareholder
Obviously, selling small chunks of equity to the public (and other PSUs) has not resulted in any great efficiency/governance gains for the
companies.
The case for privatisation is trickier, given that we have had a grand total of 13 PSUs (plus, a few hotel properties) that have
been priviatised since the onset of the 1991 reforms
But given the general hesitation in the political economy around privatisation and litigations around several privatisation cases, it is
Within the Indian landscape, there are examples, albeit few, where significant (or even majority) government ownership has not prevented the
company from creating enormous value for shareholders
Since Independence, while most government-funded enterprises were set up as public sector undertakings, mostly under enabling legislations,
there were other models explored too
Maruti Udyog was set up as a JV of the government of India with Suzuki of Japan, with the latter initially holding a minority stake
of management and operational freedom to Suzuki to manage the company on commercial lines
sector-level management and operational freedoms
The Industrial Credit and Investment Corporation of India (ICICI), the erstwhile parent company of ICICI Bank was set up as a joint venture
of public sector banks, insurance companies and the World Bank
UTI Bank (known as Axis Bank now) was sponsored by the governmentowned UTI-1, a special purpose vehicle created out of the restructuring of
HDFC, the mortgage lender, was initially sponsored by ICICI, with minority shareholdings with IFC (part of the World Bank group) and the
and have created enormous amount of wealth not only for their private shareholders but also for the Indian taxpayer (who directly and/or
indirectly owns significant parts of these companies).
While there would be several reasons for the success, a key common thread running
across all the four cases is one of management control
The respective management teams (and/or minority stakeholders with domain expertise) were given full flexibility to run the enterprises on
This is also a thread that is most often brought up by PSU executives whenever they are questioned on their relative performance with regard
Its time perhaps for the government to really bring in real reforms by first giving up management control and maximise the value of these
companies for the Indian taxpayer.
(The author is Managing Partner at ASK Wealth Advisors)