What's wrong with India's PSU divestment policy? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

What's wrong with India's PSU divestment policy? 

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In this issue:
» Middle East decides what we pay for petrol in India
» Inflation alarm is ringing louder, says Jim Rogers
» The dollar's doomed, suggests world's biggest bond fund manager
» Indian companies staying away from GDR fund raising
» and more!

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Today's Wall Street Journal carries an interesting piece on the key mistake a government makes in privatizing public sector companies. And that is - the government focuses so much on pricing the IPOs that they miss the more important economic reasons for privatisation. And that is that privatisation brings in greater efficiencies in the working of the companies that helps them in growing more strongly and becoming more profitable in the future.

Take the case of the privatisation and divestment in India as well.

The government has found itself at the wrong side of the debate several times when it came to pricing the issues. Like the case with privatisation of Maruti in 2003, when the government faced flak for over-pricing the issue. Or in some recent cases of follow-on public offerings, where the government deferred the issues just because the 'timing' (alternative for 'time to get high valuations') was not right.

"No, no...we will wait. There is very less time left in this fiscal. We are looking at market conditions." These are some recent comments from India's steel minister on the FPO of SAIL, and speak volumes about why India has consistently missed its divestment targets.

In fact, given that it has postponed the issues of some of PSUs of late, the government is expected to miss its Rs 400 bn divestment target for this year by a huge 50%! Now the question is - how will it fund its welfare schemes that it promised earlier on the back of the divestment proceeds?

The WSJ story captures it right - "The choice of asset pricing (pricing of IPOs/FPOs), in effect, becomes exactly the kind of strategic business decision that governments are fundamentally bad at. That's the very reason governments made another choice-to hand over that asset to the market-in the first place."

Ironical, isn't it?

What do you say? Are you looking to invest in the upcoming public issues of Indian PSUs? Share with us or post your comment on our Facebook page.

01:25  Chart of the day
If you are worried that rising petrol and LPG prices will continue to ruin your household budget, we're sorry but here is something more to worry about!

We know that global crude prices have risen sharply in recent times in the wake of rising tensions in the Middle East. Now how's this for a fact that Middle East forms a majority 70% of India's total oil imports (and India imports 70% of its total oil consumption). This means that the Middle East indirectly decides what we pay for almost 50% of our oil usage in the form of petrol and LPG!

Data Source: BP Statistical Review of World Energy 2010

That the fate of US Treasuries (government bonds) is headed towards disaster is no secret. The Chinese, amongst the biggest holders of these bonds, have been crying hoarse of its futility for long. The US' ballooning deficit problem is also not unknown.

But when the world's largest bond fund PIMCO sheds all its US Treasury holdings, you know that the problem is grave. Its chief fund manager Bill Gross has been critical of the US government's low interest rate policy. But of late he has dumped all US Treasuries from his portfolio citing very low yields to sustain demand for the paper. He believes that the yields of around 1.5% were at historical lows. Not just that, it is also way below the nominal GDP growth of the US economy projected at 5%.

More importantly, Gross has reiterated interest in emerging market debt. These already accounted for 10% of his portfolio in January 2011. But instead of betting on better sense prevailing within the US Fed, Gross seems more sanguine about the future of conservative central bankers. Is the RBI listening?

Moving on from US bonds to the US currency, the dollar for several decades has enjoyed the reputation of being the world's reserve currency. The reasons are not hard to find. It has so far been the convenient currency in which to do business for corporations, central banks and governments alike. The liquidity of this currency is immense. Plus, the dollar has benefitted from a dearth of better alternatives. But that could all change over the next few years.

There are several reasons for this. For starters, the US Fed in its zeal to kickstart the floundering economy has neglected the dollar by running huge deficits and printing dollars at the drop of a hat. This has undermined the confidence of several nations who are holding dollar assets or are trading in the currency. The dollar in that sense is no longer being looked upon as secure.

Secondly, other alternatives to the dollar are beginning to look more viable in the form of the Euro and the Yuan. True, the Euro-zone has been plagued by problems of debt as well. But the European Union has not abandoned the Euro and is taking austerity steps, something which the US has shown no signs of doing. With China growing at a stupendous pace, it has increased its might in the international arena and is increasingly doing its trade in Yuan. Thus, unless the US government does something drastic to bring its debt down, it will have to come to terms with the fact that its currency may no longer hold its dominant position in international trade and affairs as it once did.

"Unfortunately, in Washington they've abandoned the dollar and they're trying to debase it and make it go down." These are the words of Jim Rogers, the legendary commodities investor. In a latest interview with CNBC, Rogers has said that the US's policy of debasing the dollar is going to lead to high inflation in the future.

And given this view, Rogers remains positive on commodities like silver, rice, natural gas, and foreign currencies like the Chinese Yuan.

Indian markets had a weak day today. The BSE-Sensex was trading lower by around 140 points (0.8%) at the time of writing this. Today's losses were mainly due to selling in stocks from the banking and metal sectors.

All other key Asian markets also closed in the red today. While China and Japan were down around 1.5% each, Hong Kong closed weaker by 0.6%.

Global investors have been shying away from the 'hot' emerging markets of late. The reason has little to do with fundamentals of the markets but more with the global turmoil, especially the crisis in the Middle East. So no wonder that Indian companies have put on hold their plans to raise funds in the overseas markets. As per a leading daily, several Indian companies have stalled their GDR (Global Depository Receipts) issues for now. They fear lack of enthusiasm from overseas investors at this point of time.

04:54  Today's investing mantra
"Content makes poor men rich; discontent makes rich men poor." - Benjamin Franklin
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4 Responses to "What's wrong with India's PSU divestment policy?"


Mar 10, 2011

Its great that for ordinary mortals like me, divestment gives an opportunity to own & indeed reap cap gain & dividends true Navaratnas (not necessarily what the GOI calls as Navaratnas but the solid ones, thanks largely due protection offered till date by Mai Baap Govt policies) built since independence. BUt if I look at it from the otherside, it pains me that Mai Baap Govt is selling family silver to get money for day-to-day livelihood; had there been a direct link to Asset creating new buss investments from the Divestment proceeds, I will be happy as an Indian too (besides being an investor) that the Govt is also benefiting from value accrual & transfer themselves to the next orbit (to borrow a line from Dhirubhai). Alas, the money is needed to pay for our majority corrupt MPs to carry their spouses or girl/boy-friends (if un marries) free-of-cost on National Carriers designed to die due such largesse or for that matter spending on mammoth wealth transfer scheme MNREGA. I believe that taxable society should bear the burden and help the non-taxable society too to bring them up; but they should work to earn that social-gift. Alas, leaving aside the massive leak of funds from New-Delhi down to the aam admi who gets paid Rs100 (atleast on paper!) for 100 days, which by the way is the Standard Operating Procedure of our bureaucracy when it comes to implementation (Why not; afterall they have enacted rules about how babus should 'function' and how some designated corrupt-babus from within should handle charges of corruption on the rest of the babus, ensuring absolute protection to themselves!!), what worries me is that this massive MNREGA at 40000Cr per annum has reached a stage where no one (including the lot of noise making & publicity seeking NGOs - they deserve it, for if they too are absent, the loot by Netha-babu will be 100%) is asking what have we got in return a la how many kilometer of man made river channels to link flooding east to parched mid-land and south - I donot mean Govt's often touted 'outcome' budget - it has come to mean a measure of what is 'spent' if annually the Rs40000Cr allotted to MNREGA is spent fully, the outcome is deemed 100% in babudom & to ministers like even PC when they care to talk on their Ministries report card!

So, from a concerned Citizen's point of view, if a certain divestment target is not reached, I would say 'Just as well; family silver is protected atleast for one more year, instead of wating its proceeds on useless non-plan expenditures'!!

But then there is one other good thing about divestment - instead of FOP and pressures to up divestment of market-deemed Navaratna's alone all the way upto the 'permissible' 49%, I wish the (good) policy makers divest 10% off from all its companies, over a decade. For, many of those companies have learnt for the first time the word called 'customer' only after becoming Public (take the most spoilt entity - SBI,for eg; yet, despite so much sloth, entrenched anti business ethics in staff, service-protection for life in the significantly large in-efficient workforce, thanks to Unions, investors & market see value in SBI, thanks to enviable branch network, Customer base that is 100s of time larger than the largest etc etc - thanks to mai baap past policies and that great spoiler of India in every sphere, Indira Gandhi)!!

I hope the people outside Govt who have some influence over Fiscal Management policies of GOI, prevail to being about some linkage to asset-forming investments off divestment. Else, frankly no great shakes, if the 'divestment' target of any amount is not reached....infact it is sad that (any set of) people feel proud at all when they 'reached' the target of divestment; it is not exactly same as saying, justifiably proudly 'we set a traget of producing 200 tonnes of steel this year and we reached as on yesterday 210 tonnes, with one more month of production left in the FY!'

Like (1)


Mar 10, 2011

MANY OF THE INDIAN PSU share IPOs have been similar to REliance power - to name a few: BEML and NHPC are quoting below the IPO price even after 1-2 years. The govt wants a futuristic price , I will never subscribe to a PSU IPO- better to wait for the price to fall below the IPO price

Like (1)


Mar 10, 2011

1. All PSUs are inefficient, bueracratic, corruption breeding Institutions, now falling on general public to eat more. They may be profitable as long as there are no competitors. the Govt. is prepelling them to continue their plunder through Budget allocations a la AirIndia, BSNL, Indian Railways, Electricity Boards where the salaries are more than IAS / IPS, and ITians. They loot on one pretext or the other, sucking the blood of these Institutions. This is more than Tax-evasions or Black-Money.

Like (1)

Shome suvra chakraborty

Mar 10, 2011

The big profitable cos of the Govt should reduce the promoter's holding so that there is more public float and thus increased turnover velocity which increases liquidity and breadth of the market.The way should be from disinvestment to privatization with greater public float.Pricing the shares should take into account also the present values of dividends forgone.The shortfall of divestment target can be met with more divestment before going for privatization which will raise the market value of shares if the cos are fundamentally strong. The Gradual disinvestment policy is welcome so that the market can absorb it.

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