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Government of India: Wake up! - Views on News from Equitymaster
 
 
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  • Oct 9, 2001

    Government of India: Wake up!

    If the market reaction to the divestment of CMC and HTL is any indication, then the committee of disinvestment should be happier now. Almost all the PSU stocks, despite US retaliation, were in the limelight yesterday.

    If one were to look at the historical trend, barring three years, successive governments have failed to achieve disinvestment targets. We have till date sold 42 PSUs for Rs 202 bn in a decade's time. This is just 37.3% of the actual target of Rs 543 bn. Though the sale of PSUs like CMC is a step in the right direction, is the government selling very few of its most profitable businesses at throw away prices? Remember, the government is selling PSUs when the bargaining power of the buyer is at the highest (CMC was sold to the Tata's at a discount to the market price). Just to achieve a pre-determined target of Rs 120 bn (without even considering external factors that have a bearing on it), profit-making PSUs should not be sold in haste.

    Promises infinite...
    (Rs bn) Target Actual Actual/Target (%)
    FY92 25.0 30.4 121.5%
    FY93 25.0 19.1 76.5%
    FY94 35.0 0.0 0.0%
    FY95 40.0 48.4 121.1%
    FY96 70.0 3.6 5.2%
    FY97 50.0 3.8 7.6%
    FY98 48.0 9.0 18.8%
    FY99 50.0 53.7 107.4%
    FY00 100.0 15.8 15.8%
    FY01 100.0 18.7 18.7%
    Total 543.0 202.6 37.3%
    Source: DoD

    The sale of HTL to HFCL has sparked debates about the ethical standards followed in the process of disinvestment. Everybody knows that HFCL was one of the key accused in the recent stock market scam and the credibility of the management has always been under cloud. Yes, agreed that HFCL was the only bidder. But the disinvestment committee should chart out certain rules and regulations and adhere to that if disinvestment is aimed at welfare of the state and the general public.

    The government still has 98 PSUs in its disinvestment list out which it proposes to disinvest around 20 in the current year. This includes some of the most profitable companies like VSNL and IPCL. Given the state of telecom sector, both internationally as well as in the domestic markets, not many are interested in companies like VSNL despite the fact that it generates around Rs 15 bn in free cash flow every year. There is only a half bidder for Air India (Tata's without a foreign partner). Lack of clarity on dismantling of the administered price mechanism has also resulted in few bidders for PSU petrochemical majors like IPCL.

    With high profile disinvestments like VSNL, IPCL and Hotel Corporation on the cards, transparency will emerge as one of the key issues. In its absence, opposition will also have something to crib about and we will have ministers like Mr. Jogi bidding for VSNL. Hope the government understands that disinvestment is not just exiting businesses but also selling them at a right price and to a right bidder. Given the current state of the markets, not achieving the target need not be a bad thing after all!

     

     

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