Can PSU divestment change the face of India Inc? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Can PSU divestment change the face of India Inc? 

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In this issue:
»  How the bitcoin currency can be manipulated?
» Most governments have lost faith of individuals
» Retirement savings for Americans are 15 years short
» EU penalizes banks for manipulation of Euribor
» ...and more!


00:00
 
Capitalism and socialism are two basic forms of governance structures prevailing in any society. Profiteering is the main motive of capitalism. It would not be wrong to say that India is a capitalist economy. Private ownership is abundant here and most companies operate in a free market. However, there are also quite a few government owned entities in India. They happen to be the part of a socialist ecosystem. Profits are not their sole motto. They have various other social obligations.

While both governance structures have their own pros and cons there has been a constant need to move towards privatization. For one, governance at public sector undertakings (PSUs) has been abysmal. Social obligations have taken a toll on their profits. Further, most PSUs do not have clearly defined succession planning in place. They function as per the whims and fancies of government. As a result, most of them are bleeding. Further, regulations and inefficient management is another issue to deal with PSUs.

It seems that privatization is the only way to revive their fortunes. It has dual benefits. For one, passing on the management control to a more efficient and ethical private sector entity can bring in better governance. Better governance shall ensure improved profitability. Secondly, money raised via divestment can be used to plug the fiscal problems. Or improve infrastructure for that matter.

Taking stock of this situation, government has lined up a divestment plan of Rs 400 bn this fiscal. However, even that is not finding any takers due to ridiculous pricing expectations and waning investor interest amidst depressed market conditions.

No doubt that once the market conditions improve, privatization shall ensure better governance and improve the profitability of the divested entity. Higher profits can benefit investors in the form of higher share price. In short, privatization shall help improve the overall environment in capital markets.

However, what would that mean for a common man? We feel that across the board privatization may not be good for the society in general. Let's assume oil PSUs are privatized. Or for that matter Coal India is privatized. If oil PSUs are privatized it would mean that price of the fuel would be market determined. And this means that common man is burdened with higher fuel cost which in part is being absorbed by the government now. Also, if Coal India is privatized and outside shareholders have more say they would vouch for higher coal price as that would increase the company's profits. Remember, the Coal India and TCI row over coal pricing issues. This would increase power cost.

Private enterprises have no social obligations. Profiteering is their sole motto. Hence, across the board privatization may not help. A proper stock of the situation must be made before privatizing any entity. Companies like BHEL and SAIL can be the candidates here since social costs associated with their privatization are low. Privatizing such entities will bring better control with minimal ill effects to the society.

Do you think privatization shall improve governance without impacting societal obligations? Let us know your comments or post them on our Facebook page / Google+ page

01:50  Chart of the day
 
Indian stock markets hit a record high recently. Easing global liquidity is one of the primary reasons for current rally. It may be noted that FIIs have pumped in approximately US$3.5 bn into Indian equities since September. In short, the current rally is liquidity driven. In fact, it is also sector driven. In other words, there are only certain pockets like defensives which are performing well. Cyclicals and regulated sectors have been laggards. And this can be seen from today's chart.

It shows the best and worst performing Sensex stocks since 2008. As can be seen Sun Pharma tops the list with gains of 456% followed by TCS and ITC. Rupee depreciation has helped pharma and IT stocks. Also, consumption driven stocks like ITC have been performing well due to stability in earnings. However, cyclicals on the other hand, have been the worst performers. This can be said from the fact that BHEL and Tata Steel have topped the chart of worst performing stocks. Execution issues and dampening steel demand due to slowdown in infrastructure have impacted the performance of both these stocks.

Going by the performance of these stocks, one can say that the current rally is not broad based. Outperformance by certain sectors and easing global liquidity has seen Indian markets scaling new highs. Thus, it would be interesting to see if this rally can be sustained or not. We feel that unless retail interest bounces back and cyclicals start delivering the rally will not have enough legs from here on. It may well turn out to be a dead cat bounce.

Best & worst Sensex performers since 2008


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02:15
 
We believe most of you would be familiar with the Bitcoin mania. This virtual currency, introduced only about a few years back, has really made people sit up and take notice. Most are intrigued over how far the currency has gone despite not being supported by any Government or the central bank. The going for Bitcoins though is far from smooth. Take the most recent case. Apparently, a bug has been identified in the system which when exploited gives a group a greater chance of getting Bitcoins than rival miners. Thus there is a risk that a group gets so big that it eventually takes control of the currency. Fortunately, there is a way around this problem. And as cnn.com reports, it involves a rule change that will prohibit any one group to have more than 25% mining power of the total Bitcoin mining community. So far though, Bitcoin prices haven't shown any particular tendency of large scale manipulation. Worth adding that Bitcoins have started generating interests from the corporate world. Baidu, the Chinese online giant recently started accepting bitcoin payments.

02:50
 
Just yesterday we discussed how policy makers, instead of stabilizing the economy often play a key role in aggravating financial crisis. What happens when policy makers fail to carry out their responsibilities? Public confidence collapses. An article in Money News shares the findings of an OECD report that validates the loss of people's confidence in public institutions.

There has been a sharp drop in the percentage of people that trust the US government. From 50% in 2009, the number of people who trust the national government has fallen to 35% in 2012. The trend is similar across most OECD countries. Just the degree of decline in people's confidence differs from country to country. The steepest fall in confidence is seen in countries that have been worst hit by the financial crisis. In crisis-struck Greece, the percentage of people reporting that they trust the government dropped sharply from 38% to 13%. But it's not the government alone. People also seem to be losing faith in financial and judicial institutions as well as the media. Is the situation in India any different? Not at all, we believe. In fact, it seems to be much worse. We believe that the faith of people in Indian public institutions has been destroyed thanks to the myriads of corruptions scandals, populist policies and lack of much-need reforms.

03:25
 
It was just a couple of months back that the RBI fined few private sector banks in India for violating KYC norms. The fines summed up to just a few crores and were less than 10% of the banks' profits. The RBI's peers in the Eurozone, however, are raking in millions by subjecting the top global banks to fines for rigging benchmark interest rates. The European Commission is investigating rigging of interest rates linked not just the Euribor and Libor. But also to the yen (Tibor) and the Swiss franc. The likes of Deutsche Bank, HSBC, JP Morgan, RBS, Credit Agricole and Societe Generale are expected to cough up as much as 10% of their revenues as penalty. Most global banks have already set aside more money to cover the cost of fines and lawsuits this earnings season. And investment banks are the next in line. As per Business Standard, an investigation into dubious derivative deals involving 13 top investment bank's like Citigroup and Goldman Sachs is on the cards. This seems like a perfect win-win solution for both the regulators and the banks. The former gets a huge payout and the latter gets away with just a fine. However, for the banks' shareholders and taxpayers, the holes in their pocket are just getting bigger!

04:05
 
When one thinks of retirement, one thinks of savings. Because that is when a person generally needs savings the most. But for the quantum of savings to be sufficient during the retirement period, one needs to start saving as early as possible. However is this plan to start saving at an early age enough? The answer to this question is sadly a no for most American citizens. As per a study conducted by HelloWallet, most Americans are not saving enough for their retirement. The study states that at this rate the savings are only sufficient to cover two years of retirement. This means that if we assume that a typical retirement period is 17 years, then the savings are roughly 15 years short.

Interestingly the reason for this shortfall is not inadequate saving but over borrowing. That's right. Just like the US government, the US citizens too have built up a penchant for debt. They tend to continue borrowing even when they enter their 50s. As a result, their burden of expenses is so high that the savings are insufficient to meet them during the retirement period. Many financial and investment advisors are now advising that people should start paying off their debts as they age. This is a piece of advice that all of us could benefit from. While borrowed funds can provide access to certain luxuries; but the burden of the same will weigh down at some point of time or the other. Especially when the income levels come down.

04:30
 
In the meanwhile Indian stock markets have shed their gains and are trading weak. At the time of writing, the benchmark BSE Sensex was down by 23 points (0.11%). Power and IT (IT) stocks were trading strong while banking and realty were trading weak. Most of the Asian stock markets were trading lower led by China and Singapore. The European markets opened on a positive note.

04:50  Today's investing mantra
"Average investors can become experts in their own field and can pick winning stocks as effectively as Wall Street professionals by doing just a little research" - Peter Lynch
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16 Responses to "Can PSU divestment change the face of India Inc?"

V.Vijayamohan

Nov 10, 2013

PSUs need to be dis-invested, and private sector Managers must be brought in - to improve the productivity and profits of these PSUs. Social responsibilities of PSUs - is merely and excuse to cover up inefficiencies and corrupt practices prevailing in them.

Like 

BRIJ

Nov 8, 2013

To improve the financial administrative scenarionin INDIA u need honest and dedicated bureaucrates who can withstand the pressure from their political masters. We have enough resources but saddled with dishonest people at the top who at any time are looking towards their pockets be it LTCscam, Coal gate, recruitment scam etc. how a person who has been recruited therogh unfair means will do the right things and take right decisions. It is the judiciary which has kept this nation running otherwise it would have turned in to a banana republic.
Long live my motherland

Like 

sambhu charan sannyasi

Nov 7, 2013

There is a general perception that public get some relief through subsidy of gas diesel etc etc. Govt pay directly to the companies producing those materials, but from where those money are coming? Govts are only earning those money throgh TAXES and DUTIES from public and companies. So we can surmise that publics are only paying their own subsidy. In stead if Govt tax us less and allows companies to function in their won way in ethical manner, i believe our country will be benefited more. So I strongly vouch for early privatisation of the companies to start with.

Like 

Sadasivan

Nov 7, 2013

As regards your "chart of the day',BHEL was betrayed by the U{PA,by allowing the Chinese to compete with it and offering them too many orders at BHEL's cost.

Like 

Sadasivan

Nov 7, 2013

As regards Peter Lynch's recommendation,one should buy shares of DEBT FREE Cos,in growth sectors.

Like 

Sadasivan

Nov 7, 2013

Many PSUs are doing well.Even Air India had done well,but it was DESTROYED deliberately,by wrong policies like merger with IA,not allowing it, its legitimate routes by right,as per Agreements [Only Foreign Air Cos benefited by new routes and Air India lost].Such blatant policy to destroy the PSUs is the aim of the Globalists of which M M Singh s one,being member Club Of Rome.It is not privatization or Public Sector holding that matters,buy HONESTY,from the politicians and the others concerned.
Please google for:-
1.Globalist Elites
2.M M Singh member Club of Rome
3.Dangers of Club Of Rome,

Like 

P.SUBRAMANIAN

Nov 7, 2013

PRIVATIZATION MAY NOT BE THE NECESSARY ROUTE TO MANAGE THE COUNTRY'S ECONOMY.PRIVATE PROMOTERS MAY EFFECT THE RESALE OF COMPANY TO ANY ONE IF RESALE MAKES THEM PROFITABLE WITHOUT ANY CONCERN FOR COUNTRY'S SOVEREIGNTY.THE MAJOR PORTION OF NPA ACCOUNTS IN BANKING INDUSTRY BELONGS TO PRIVATE PROMOTERS. WE MAY INVENT WAYS AND MEANS TO MANAGE THE PUBLIC SECTOR COMPANIES WITHOUT GOVERNMENT INTERVENTION.

Like 

sharad sharda

Nov 6, 2013

We can think about privatisation of PSUs. It is a good idea but before going for that we shall have to make arrangements to the effect that any company or industry should die or suffer only and only after its promoter/director/manager dies/suffer before that. Instances of Kingfisher Airlines wherein Airline is shut down but gates of all type of extra luxurious personal expenses of Vijay Mallya are very well open and he is hardly concerned with the well being of his company Kingfisher. Such types of examples are many more in India. This should not at all be tolerated.

Like 

VSK Sarma

Nov 6, 2013

No.
Evan after opening up of the economy in 1992, companies like SAIL, RINL are able to compete with steel majors like Tata Steel. They are able to sustain without any government support.

Some companies are even better performing over their peers in private sector in terms of techno economics.

The solution could be removal of interference of political bosses. Not privatization in total.

Like (1)

Abhay Dixit

Nov 6, 2013

I am shocked to read your views. Privatization with adequate safeguard to ensure competition is the real solution. PSU oil and coal companies should be broken down in smaller companies and sold to many competing business houses. High oil prices also have a substantial component of taxes. Can you study prices, taxes on oil products across some developing (oil importing)countries and shade some light. Electricity transmission losses--theft increases cost for paying customer. look at what has happened to telecom after it was privatized. Only competition will ensure better utilisation of resources. Same goes for agro products. Min Guaranteed Prices ensure mis-allocation of water-land etc by farmers. Also APMs controlled by politicians ensures poor prices to farmers and high prices to consumers. Politicians ruin economy under the guise of socialism. Changes should happen in calibrated fashion. Air line privatization has failed because of presence of AI.

Like (1)
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