Disinvestment, at What Price

Dec 28th 1999

Through the 1990s, consecutive governments at the Centre have advocated the sale of public sector equity as a means of public sector 'reform'. Equity sale, the industry policy statement of July 1991 argued, was a means of ensuring financial discipline and improving performance. The fact that there is little theoretical justification for or empirical validation of this position has of course been ignored. The immediate reason is fiscal convenience. Having internalised the IMF prescription that reducing or doing away with fiscal deficits is the prime indicator of good macroeconomic management, the government has found privatisation proceeds to be a useful source of revenues to window dress budgets. To boot, such window dressing could be defended on the grounds that privatisation was taking the economy in a market friendly direction.
This has meant that, while there has been much talk of managerial reform, voluntary retrenchment and greater public sector autonomy, the thrust of public sector reform has been the sale of equity. In the event, the target for disinvestment has been increasing. It was placed at Rs. 2,500 crore in 1991-92, Rs. 3,500 crore in 1992-93 and 1993-94, Rs. 4,000 crore in 1994-95, Rs. 7,000 crore in 1995-96, Rs. 5,000 crore in 1996-97, Rs. 4,800 crore in 1997-98, Rs. 5,000 crore in 1998-99 and an ambitious Rs. 10,000 crore in 1999-2000.
Over these years, the nature of the privatisation has also changed. Initially the emphasis was on divestment of a part of equity, with the controlling block still being with the government. Since shares of different public sector units (PSUs) would be valued differently by the market because of variations in performance, shares were offered only in "bundles" which combined equity from poor and good performers. In practice, rather than help the government divest shares in loss-making enterprises at reasonable prices, bundling resulted in the government obtaining an extremely low average price for each bundle, implying that prime shares where being handed over at rock-bottom prices. Thus, in 1991-92, when the bundling option was resorted to, the average price at which more than 87 crore shares were sold stood at Rs. 34.83, as compared with the average price of Rs. 109.61 realised since then (Table 2). While the growing tendency to sell equity in the best PSUs partially accounts for this difference, it was also due to the low prices obtained for even premium shares in that year. As Table 1 shows, MTNL, ITI, VSNL, CMC and Cochin Refineries were some of the firms in which the government's equity was divested that year.

Table 1 >> Click to Enlarge

Table 2 >> Click to Enlarge

With the experience of 'bundling' proving to be disastrous from a price (and revenue) point of view, the government soon began talking of the need for privatisation, as opposed to just disinvestment. It was argued, by a committee headed by former RBI Governor C. Rangarajan, that equity sales could be of magnitudes that brought the government's stake below 50 per cent and even as low as 25 per cent in some cases. This, it was held, was not merely in keeping with the objective of the State withdrawing from non-core and non-strategic areas, but also provided a greater incentive to the private sector to acquire public sector equity. More recently, after the constitution of the now dissolved Disinvestment Commisssion in 1996, the government has gone further and advocated 'strategic sales' of particular PSUs, or sales of equity blocks to a single buyer accompanied by the transfer of management to the private investor. What is amazing is that in some cases such as IPCL, a highly successful and profitable PSU, the transfer of management has been recommended to any private party which acquires a 25 per cent in the company.

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