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Loss making PSUs: The way forward
Mon, 10 Nov Pre-Open

Readers might be aware that recently, the Finance Minister hinted at the possibility the privatization of loss making PSUs. It's not the first time he has made such a statement. It should not come as a surprise to note that there are 79 PSUs in the country that have been declared sick. The accumulated losses of these entities stood at Rs 55.66 bn in FY13 (the last year for which data is available), according to the Business Standard. The government's data show that the number of sick PSUs had declined steadily from 90 in FY05 to 66 in FY12. However, the trend reversed in FY13.

The reasons are not hard to find. Excessive bureaucracies, corruption, the inability to cope with a rapidly changing economy are just some of the factors. Among the unlisted firms are names like, Air India, Hindustan cables, Hindustan Fertiliser Corporation and Hindustan Photo Films. The business models of these firms have deteriorated over the years. Financially, their business models are no longer viable. For example, Air India has a negative net worth of a little over Rs 15.6 bn! Among the listed names are, Hindustan Fluorocarbons, HMT and ITI.. While there are few factors common to the failure of most of these firms; it is important to note that there are company specific factors as well that plague these firms. If any of these firms are privatized, the acquiring company will have to keep all the risks in mind.

The government has not been able to do much for these firms due to its own apathy. Revival plans have not really worked. Many of these firms have several vacant positions at the senior management level. Even the government's own department which looks into the reconstruction of sick PSUs has many vacant posts. The government should start with filling up these posts and then coming up with a clear plan to either revive or privatize or close down these firms.

It is possible to extract some value from some loss making PSUs. However, shareholders of the acquiring firm must be convinced that the deal will add value. If this is not possible then we believe that closing down the firms would be a better option.

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