Government gets aggressive on PSU disinvestment - Views on News from Equitymaster

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Government gets aggressive on PSU disinvestment

May 8, 2000

The government's track record in divesting holdings in public sector units has been dismal (PSU disinvestment - An embarrassing record). In view of the dismal fiscal scenario, there is a compelling need to step up the process. The government may have already initiated some steps towards this. Tough talk by the finance minister relating to the issue of disinvestment and newspaper reports, make it apparent that something is brewing. Most likely the decisions are said to involve the oil units – the government's most prized assets. The reports state that the government is likely to shed its equity in Madras Refineries to Indian Oil Corporation and that in Cochin Refineries to Bharat Petroleum Corporation Limited (BPCL).

Does such a sale make sense? Maybe, or maybe not. All the four organizations are government owned and therefore pre and post merger, the net position of the ‘public sector (including the government’ will remain unchanged. Only funds will change hands, not the management. On the other hand it could be argued that the move will lead to a consolidation in the public sector oil units, thus making it more competitive – implying better valuations when key units are sold off (if at all they are).

Although the talk of consolidation seems logical, it cannot be ignored that the government seems to be reverting to the tactics it adopted in FY99 to meet the disinvestment target – creating cross holdings among public sector units. Such a move will not cure the ill that plagues the public sectors – inefficiencies. Maybe the government needs to go in for a ‘real’ disinvestment. This will invite competition, result in better pricing (for consumers) and above all improve inefficiencies as companies try to gain leadership position. There is an urgent need for a ‘capitalistic’ approach to the issue.

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