How PSUs valuations are being destroyed

6 MARCH 2010

At the dawn of independence, our first Prime Minister, Jawaharlal Nehru, said that our public sector must occupy commanding heights in the economy. Well, some sectors, such as steel, being capital intensive, would have taken longer to come up had it only depended on the private sector. But the Government invested hugely in building up, or, like banks and textile firms, taking over through nationalisation, far too many units in far too many sectors. This was at the cost of neglecting things the Government was supposed to do, such as building both physical and social infrastructure. In building up its companies, the Government incurred a debt mountain, interest on which is swallowing up a major chunk of tax revenues, leaving a trickle for plan expenditure on capital account.

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For 2010-11, the interest payment on past debts is Rs 248,000 crores. Compare this to plan expenditure of Rs 58,000 crores on capital account, the amount spent on building physical infrastructure, and one can see why the profligacy of past Governments is hampering the growth of future ones. And the same trend continues, meaning that each generation will leave a weaker economy for the subsequent ones.

The interest of Rs 248,000 crores is incurred at a cost of debt which is higher than the earnings of Government companies, which average 2-3% a year. Most of these companies are not relevant for the security of the economy or of the state and can easily be privatised. Privatisation, or the more politically acceptable, divestment, was objected to by the Left parties, when they formed part of Government, but it has been a year since this millstone was removed. It not only makes economic sense to sell an asset which is yielding less than the cost of retaining it, it also makes sense from a public governance perspective.

Now the Government is, rightly, talking about unravelling a bit of that 'commanding heights policy' by disinvesting stakes in companies it had invested in. One would have thought that, like any prudent owner of an asset, it would strive to maximise the value of the asset prior to a sale of a bit of it. Its often doing the reverse!

The destruction of value in IOC, HPCL and BPCL, by asking them to bear a part of the subsidy burden on petro products, is well known. These companies are paying for the pleasure of car owners driving around rather than investing in refining assets which would be needed if the economy is to grow at over 8% annually.

Indian banks do not get their fair valuation because Government insists on holding a majority stake in all 20 of them, including SBI. The safety of our financial markets cannot be at risk if most were privatised; surely the Government could retain control over the top, say, 3 banks without any risk to the system.

Contrast this with the way Chinese banks are promoted.

In 2005, there were no Chinese banks in the top 20 global banks, by market cap. There were 10 American ones. By 2009 there are 5 Chinese banks in the top 20, including the top 3, and only 3 American ones. The most valuable bank in the world is Chinese ICBC, with a valuation of $175b.) At its peak it was over $400b. ICBC was set up in 1984. Now SBI, our largest bank, has an uninterrupted dividend history of over 150 years, which is astounding, and very strong financials. Yet its market cap. is $11.5b. If India is to grow at over 8%, so must its companies and so also must its banks! When Bharti needs $ 9b. to fund a Zain acquisition, it is Standard Chartered that is in the lead. By holding on to majority ownership in 20 banks, and depriving them the freedom to fly, we destroy valuations and do ourselves a disservice.

BSNL has been hampered from growing and is now being hauled up by the CVC (Central Vigilance Commission). It had tried to expand capacity to meet demand, by floating a tender for 90 m. lines. Those who lost out in the tender complained and the contract was stayed, stunting BSNL's growth. Now an expert panel appointed by the Government, headed by Sam Pitroda, has recommended the sale of 30% of BSNL to a strategic investor, who ought, the panel feels, have the managerial freedom to take steps to revive BSNL in a highly competitive industry. Why, one may ask, was BSNL management, not given the same freedom? Left free to take decisions, several public sector companies have shown good performance; efficiency is not the preserve of any one sector.

The CVC is now pointing out that for the forthcoming (and horribly delayed) auction for 3G spectrum, the rules have to allow for fair competition to foreign telcos and to new entrants. The rules require a bidder to hold 2G spectrum, which is scarce, thus driving up the value for (private) spectrum holders. There have been players who have bought telecom licences but made money from sale of spectrum, not from operations. This distorts future policy. Why does the Government not consider selling only the 'right to use' spectrum, but not own the resource? If ownership rights do not vest in the telco, they would pay less for it, but would then be able to further bring down costs. The Government would get its revenue not from selling a scarce resource (which then provides a bounty to the buyer) but from increased usage. It should treat spectrum as 'commons'.

This is what the Railways do. If a project requires a dedicated rail line, the promoters, including, sometimes, the State Government, part finances it without owning the land or the rail stock. Those belong to the Railways. The amount paid is adjusted in future freight rates, which are discounted. Can this not be applied for spectrum allocation?

The market rallied last week, in line with global markets, after the bailout by the EU of Greece, which promised, in return, to behave with greater fiscal prudence. The high savings rate (30%) of our savers, together with the compulsory impounding of their bank savings through SLR and CRR, means that the Indian Government has more leeway to be fiscally imprudent, without the pressure of creditor nations. It can do wonders simply by cutting wasteful expenditure and by enhancing, through policy and by providing more managerial freedom, the value of its own assets.

Over the past week the BSE-Sensex rose 435 points to end at 16994 and the NSE-Nifty rose 166 to end at 5088. The India story remains good; it is the global scene that is still bad, so tread with caution. The India story would be far better if we did not cut ourselves in the foot!

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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14 Responses to "How PSUs valuations are being destroyed"

r j

Mar 12, 2010

Unfortunately the usual story of politicians screwing the country for personal gain.

In India we have uneducated politicans screwing the educated public merely because they are elected somehow and the first step in the politician's primer is to loot the public.

Any child can do that. First baby steps. The big adult steps are loot and more loot and then become a bigger more "seasoned" politician.Fit to sit next to Sonia while the house is screaming for your ouster.

Or become a Lalu Prsad and make a mockery of the Lok Sabha and people laugh and think " this Lalu is great, the system cannot throw him out...."

The servants of janata are really the rulers. The kings have gone the "rulers" remain.



Mar 9, 2010

though using a gas-guzzler myself, i very much support the policy of fair market prices for fuel to ensure demamd/supply equilibrium.
what pains me is that despite making losses on selling petrol/diesel, why are these companies coming up with mega fuel outlets, one next to each other, one more flashier than the other. if as a business, i realise that selling more means losing more, would i not stop selling more, even if i cannot start selling less. is that more to this story than meets the eye???



Mar 8, 2010

Fantastic article. Please go to the root cause of the problem. 1/6th of our elected representatives have a criminal record. Freebies and cash are gifted to voters to garner votes. Wasteful expenditure are incurred on constructing humungus monuments. Nobody in the political spectrum is truly held accountable for their actions. Unless these fundamental issues are comprehensively addressed we can never progress in the true sense of the word.



Mar 8, 2010

I cant understand what is the purpose of valuations. Valuations are fixed by market in arbitary terms without relevance to the potential of the company. The reason for NTPC getting lukewarm response is nothing but market was greedy that is all. Government is not the looser. Definitely all the banks who had subscribed NTPC will get more return than keeping the money idle. Market operators do not want a success story for a PSU issue because, the interest for the following private IPOs will be lost. Why there is lackning in the OIL PSUs. It is happening only with oil companies. Look at steel, coal, power, banks, fertilizers, infrastrucuture, telecom. In all these sectors PSUs are indeed giving a run for money for the private sector. Top executives of oil companies alone to be blamed for this anarchy. They never advoated transparency in pricing. The mess is only because of them. Please publish my letter



Mar 7, 2010

Every aspect has been splendidly analysed. There is food for serious thought. This should serve as an eye-opener to all concerned.



Mar 7, 2010

As long as politicians are not serious enough to take right steps to cut down the fiscal deficit our advices will go in vain. Decontrol of petrol, diesel and LPG prices will go a long way in restricting the sale of cars polluting the air. Budget has no social inclinations to create an equal society. Because tax rates have been brought down for the higher middle class drastically. Encouraging consumption thus will be applicable only to the salaried class and others earning six digit incomes. On the other hand consumption by rural masses should show increase. The Budget is woefully inadequate in providing for that.


V S Gurumani

Mar 7, 2010

Quite simply, those in power, i.e., the PM and his cabinet colleagues, must answer the Parliament and the country (through the media) on what they are doing with the money they collect from all of us. They will not do it by themselves, so people like us must lobby for these people to be asked questions publicly. Why not? Can you recall a single meaningful conversation between the PM and the Press in the six years that he has been in power? The British PM has subjected himself to over two hours of televised questioning called the Chilcot questions over the Iraq war. Is the squandering of resources on the scale you have described above in any way less of a crime than what Britain and the US committed in Iraq? The Agriculture Minister is singularly responsible over the last six years for failing to arrest the decline of Indian farming. Has he been called into question in a meaningful way, except for random questioning in some off the cuff meetings? Something to think about.


subramanian sambasivam

Mar 7, 2010

It is really nice to read.Quite informative.India is trailing behind over population,terrorism and more so corruption.Prompt governance is a must of the hour.


Chandravinod Pathak

Mar 7, 2010

Comment on "How PSU valuations are being destroyed"

J. Mulraj has explained in simple manner, and it is so obvious that our govt. is guilty of the misappropriation ofpublic money.

Isn't there a legal way to put the govt of India accountable in the court? If we do it, we may not find the single lawyer sho will do it honestly.



Mar 7, 2010

Without any doubt, govt. is solely responsible for destroying the value of PSUs, IOC/HPCL/BPCL cases are very obvious, but there are several other PSUs like SBI,ONGC,GAIL,SAIL,BSNL and several others where the destruction process is already underway. There is a great pool of talented people in our PSUs and if nurutured and handled properly, they can deliver as much as in pvt sector if not more. However, govt policies on PSUs based on the vote bank politics is very demotivating for every employee of PSU. That is why NTPC who is already operating huge power generation capacity gets poor valuation and poor response to its FPO and the pvt sector companies who have barely started to build power plants like JSW energy, Adani power and RPower get decent valuations. Wake up govt... sorry it won't because you can wake up a person who is asleep, but not the one who is pretending to be sleeping.

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