In recent years, divestment has been an important watchword for the Center. Last year, its budget was, in some ways, even anchored on expected divestment proceeds, with the government looking to earn Rs 1.75 lakh crore from the monetization of PSUs (public sector companies) such as Air India, BPCL (Bharat Petroleum Corporation Limited) and SCI (Shipping Corporation of India). However, as of December 2021, the government had reached only around five per cent of that target or 9.24 billion rupees. In her budget this year, Union Finance Minister Nirmala Sitharaman indirectly acknowledged the big mistake by lowering the FY22 divestment income projection from Rs 1.75 lakh crore to Rs 78,000 crore and setting the target for 2022-23 at just Rs 65,000 crore.
For several years, the Center has faced a series of problems in fulfilling its privatization promises, either due to rejection by unions of employees worried about their future or problems generating investor interest. Many PSUs on the block also have complex and damaged balance sheets, making it difficult to accurately assess them. Tuhin Kanta Pandey, Secretary, DIPAM (Department of Investment and Public Asset Management), says the government is aware of the challenges and has shifted the focus from diluting PSU holdings to outright privatization. The sale of Air India to the Tata Group has been encouraging, although it brought the government only Rs 2.7 billion in cash. Pandey hopes to repeat this success.
Other PSUs in the bloc include IDBI Bank (which was not mentioned in this year’s budget speech) and helicopter operator Pawan Hans. Despite the continuing push for privatization, the Center’s budget this year is much more conservative in expectations and goals. For one, it sets no targets for divestment of PSBs (public sector banks) and financial institutions, a politically contentious area, and revises last year’s target to zero from Rs 1 lakh crore. An expected success is LIC’s upcoming IPO (Life Insurance Corporation IPO), which is expected to launch on March 11. Fund managers say the IPO could raise between Rs 50,000 crore and Rs 1 lakh crore, but with the outbreak of war in Ukraine, the government could choose to delay the launch, which will have consequences for its divestment agenda. . Meanwhile, Tata Steel has also acquired a 93.2 per cent stake in the government’s Neelachal Ispat Nigam, a steelmaker, for Rs 12.1 billion.
The list of missed divestment targets includes companies that have now spent years on the bloc. Pawan Hans, for example, has been for sale for 10 years. The company’s revenue has reportedly been falling since 2016, with losses in 2019 and 2020. Last year, the Center made another attempt to sell it, relaxing its previous terms to attract more buyers. In December, he announced that he had received offers, but little has been said about it since then.
Another example is the sale of BPCL. So far, the government has had to extend the deadline for preliminary expressions of interest four times. Part of the problem has to do with the sector: with crude oil prices highly volatile in recent years, it has been difficult to generate investor interest in energy companies. In the block is the government’s total participation of 52.98 percent in BPCL, for which it says that it has received three expressions of interest. Rating agency Fitch rates the company BBB- with a negative outlook and says that “uncertainty over consortiums of bidders and the complexity of the process, including valuation, may lead to possible delays in the privatization of the second-largest fuel retailer great of India. Similarly, the sale of SCI remains in limbo because bidders have found it difficult to complete their due diligence on the company’s assets.
A major obstacle to privatization, in all sectors, has been the rejection of employee unions. On the morning of January 27, the day DIPAM would officially hand over Air India to the Tata Group, officials attended a virtual hearing of the Madras High Court. The court had taken up a petition from an employee union against the sale of Air India, citing concerns about the future welfare of current workers. Concerned that employee activism and litigation could scupper the sale, the government agreed to almost all of the union’s demands in this particular case, including the continuation of medical benefits for Air India’s retired and retired employees. , license fees, etc.
Employee unions are rarely in favour of divestment. The main reasons include job security and pay levels. “PSU employees want to stay [in the public sector] because they are paid three times the salary of their counterparts in the private sector,” says Nilesh Shah, MD of Kotak Mahindra Asset Management. “The average salary of BPCL is Rs 20 lakh per year; the average private-sector employee earns a third of that.”
Another systemic problem is the complexity of PSU balance sheets, which makes it difficult to value such companies. In addition to the massive debt that often comes with it, many government companies also come with unwanted assets. Air India again is a good example: the sale required the airline’s non-core assets (including real estate like Centaur Hotel) and around Rs 51,000 crore of its debt to be divided into an SPV (special purpose vehicle). After many rounds of discussions, it was also decided to sell the airline at its enterprise value (market capitalization plus net debt) rather than its equity value. An official closely associated with the project says it was only after these decisions were made that the Center was able to find bidders. “We faced a lot of obstacles with the sale of Air India,” admits Pandey. “The bidders were scared.” When it comes to the sale of BPCL, the government may have to go down the asset-split path again, as a major hurdle is the company’s huge real estate assets.
According to DIPAM, in 2021-22, the government had received around Rs 44,450 crore as of January 3 from various subsidiaries. Of this, only Rs 9,329.9 crore was from divestment, with the remaining Rs 35,116.72 crore being dividend receipts.
In a sense, the government’s divestment challenge gets harder with each success, as what remains in the bloc are companies that investors have already left behind. Pandey says, “Except for the new listings, for example, the LIC IPO, which is a great opportunity because we are bringing something new to the market, the scope is very limited for the government to raise money through divestment. We have been diluting our holdings in existing companies. if we want [reduce our stake] below 51 percent, then we are talking about privatization and delivery of management control”.
The to-do list so far includes IDBI, SCI, BPCL and Pawan Hans, which have been a difficult sell for various reasons. A senior official closely involved in the divestment effort says: “Pawan Hans has been in the bloc for 10 years and it will be difficult to find buyers for IDBI due to the low competitiveness of the bank. Most companies are also saddled with tarnished assets.”
One challenge the government will have to grapple with is how to maintain investor interest throughout the process. Bidders have often cooled off in the middle of their valuation/due diligence reviews, perhaps realizing how difficult it will be to take on the management of a PSU. In addition to depreciated assets, massive debt, and complicated asset holdings, there is also the challenge of bringing many different stakeholders (employee unions, existing PSU management, bidders, regulators, and policymakers) on the same page. . Although the political leadership appears determined to see this through, the reduced divestment targets in the 2022-23 budget indicate a recognition of the enormity of this challenge.
The difficulty is also compounded by continuity issues at DIPAM. Secretaries have relatively short terms (three years), but creating and channelling the investor interest needed to sell a PSU is a huge effort. It involves not only a marketing blitz but also careful financial analysis and a strategic political and regulatory campaign to bring the deal to a successful conclusion.
There are no easy answers to privatization. Experts say clear plans and quick decision-making could help. Accelerating sales is also critical to plug asset erosion: Air India’s debt doubled in the period between the first announcement of its privatization and its eventual transfer to the Tata Group. The reopening of old cases by the judiciary, such as the one related to a divestment deal made under the supervision of former IAS officer Pradeep Baijal, or one related to the divestment of Hindustan Zinc years after the deal was concluded, also has a chilling effect. in bureaucratic speed.
Shah says the Center may find it efficient to adopt the Singapore model. In Singapore, one company, Temasek Holdings, manages the investments and assets formerly held by the government, while another, GIC (formerly the Government of Singapore Investment Corporation), manages the government’s financial assets. This frees up ministries to do the policy work by handing the privatization process over to the professionals. Yet another option is to take advantage of the stock markets to dilute PSU’s holdings and let a private board manage these companies. Meanwhile, amendments to the General Insurance Business (Nationalization) Law were approved during the monsoon session of Parliament. The Banking Laws (Amendment) Bill 2021, related to the privatization of two PSBs, was also listed for introduction in the 2021 winter session, but opposition from banking unions and state elections have delayed his presentation.
The fact that billionaire investor Rakesh Jhunjhunwala decided to launch his airline rather than bid for Air India is a lesson for the Centre. There are many reasons why India’s ailing PSUs remain stuck in the bloc, from their low competitiveness and massive debt to continued asset erosion and rejection by employee unions. If the Center is committed to achieving its divestment goals, these issues must be addressed quickly and fully.