The murder of some public sector companies - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
The murder of some public sector companies A  A  A

21 MAY 2011

Some of our largest public sector companies are being murdered, by bad policies of the Government, which owns a majority in them and runs roughshod over the rights of minority shareholders. Had these been private sector companies, minority shareholders would have taken their grievance to SEBI, which would have addressed them, but no one is willing, or able, to take on the Government.

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Thus, arbitrarily, ONGC is asked to pay an additional burden of Rs 2,000 crores towards the bill to subsidise petro products, viz. diesel, kerosene and LPG. Never mind that 13% of shares are with the public. The Government owns 74% whilst IOC, LIC and Gail own 13%. Since IOC and Gail are also listed stocks, the beneficial interest of the public in ONGC increases to more than 13%. The arbitrary manner of loading it with subsidies that truly should be borne by the Budget (since it is Government policy to provide subsidies) results in depressing the valuation of ONGC. In fact, the loss in value of Government's holding of 74% because of the additional Rs 2000 crores burden loaded on the ONGC P&L is many times the Rs 2000 crores saved in its budget. Penny wise, pound foolish. The Government should think like Warren Buffett instead.

Or take our largest refining company, IOCL. The policy of subsidising petro products results in a loss to oil marketing companies IOCL, BPCL and HPCL which have to borrow to keep operating. How long can it last? In the past 45 days, IOCL's debt has gone up from Rs 56,000 crores to Rs 67,600 crores. If petro product prices, especially diesel, are not raised, it would need to borrow Rs 8000 crores a month. After a few months, banks will refuse to lend it more.

That is what's happened to the largest airline, Air India. It has defaulted, for the first time, on its debt repayment obligation after banks refused (and rightly so) to lend it more. The airline was forced by its sole owner, the Government, to buy aircraft it didn't need, borrowing heavily for it, and ran into financial problems as a result. Then the Government forced a merger of Indian Airlines with Air India and two other subsidiaries, which caused huge problems due to differential pay for similar work, resulting in the recent pilot strike. Which, of course, severely dents consumer confidence, forcing the airline to offer discounts to lure customers to fill planes that are in excess. Under direction from the Ministry, for reasons unknown, the airline also gave up routes, promptly snapped up by private airlines. The murder of Air India should make a case study in a management school. The best course would be sell Air India. However, the Government is too weak kneed to do so. It has taken decades before they realised there was no value in Scooters India (except the land) and to muster the political will to sell it.

Or take the largest bank in India, SBI. It recently declared a 99% fall in net profit after tax, to Rs 20.8 crores, from Rs 1866 crores in Q4 last year, because of higher provisioning. The higher provisioning was on two accounts. One was for pension, in line with AS15 accounting standards, and the other was on account of higher provisioning for non performing loans (an increase of Rs 1177 crores for this). However, SBI, which was to make a Rs 20,000 crores rights issue to get more capital for its business, may be unable to do so because the Government, which owns 59.4% of it, is unable to cough up its share of the rights.

And one of the reasons for its inability to fund SBI's rights issue is because of all the money stolen in the scams that have been surfacing, including the bloated bills for the Commonwealth Games or the bribes-for-spectrum-allocation in the 2G scam.

For the first time a senior politician has been jailed in the 2G scam, Kanimozhi, the daughter of the DMK supremo. None, however, has been investigated by the tax authorities. Declarations of assets filed by the politicians reveals a growth in assets that can only be accepted as legitimate either by the very naive or the very inept. The solution is really simple, if, again, the spineless Government wishes to cleanse its stables.

The solution is simply to tax agricultural income! For genuine farmers, the tax exempt limit can be 4 times that of non agricultural income. For non genuine farmers, such as politicians using the facility of tax exempt agricultural income to show galloping rises in incomes/assets (with bribe money), it would, however, deprive people from using agri income as an avenue to conceal bribes.

Perhaps now that the people have sent out a strong signal of their intolerance for corruption, may be a good time for the Government to implement this. There is no physiotherapic exercise as good for a political back as the fear of losing the next election!

Returning to the subsidy on petro products, another way to alleviate the unfair (and possibly illegal) burden imposed on ONGC, Gail, Oil India, IOC, BPCL and HPCL, is for the Government to reduce the taxes it levies. In the case of petrol, 43% of the retail sale price of petrol and 31% of diesel accrues to Central and State Governments in the form of various taxes. The price of diesel is not being raised for fear it would stoke inflation. At least thats the ostensible reason. It will stoke inflation, but, by subsidising it, the figure is wrong, anyways! The real reason is that there are vested interests in keeping diesel and kerosene subsidised, and the Government has not the will to tackle the lobby.

The fight against inflation will likely lead to more interest rate hikes, which will start impacting consumer spending. Sales of things needing borrowing (houses, cars, white goods) would fall.

Globally, the IPO of Linked In created a stir by doubling on the first day of listing. Valuations being talked about for the forthcoming IPO of Facebook are reminiscent of the dotcom bubble. Its likely that another one is forming.

Last week the BSE sensex lost 205 points to end at 18,326, and NSE Nifty dropped 58 to end at 5,486.

There are no bullish factors in the offing that can cause the market to run away. It is likely to continue its downward drift.

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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9 Responses to "The murder of some public sector companies"
Sankara Narayanan
May 31, 2011
The painful situation of our Public Sector Undertakings are the creation of the cunning politico-business-bureaucratic axis that is functioning in India behind the screen. Its aim is to make all the PSUs sick, incur such huge loss due to poor governance, subsidies, payhikes, siphoning off profits to some trick hands and ultimately make it non-viable and then in the last stage, sell them to some pre-determined private hands- may be group of individuals/corporate/s or companies.

Thanks to the "good Governance" of the authorities in power, thanks to the heavy taxation on products, and many more thanks for making the common man blessed with the huge tax structure by providing negligible subsidies.

The corrupt governs the country in the most corrupt ways, siphons off the public money and amasses wealth by the most cunning selfish politicians and the common man perspires by the unbearable dual burden of taxes and inflation simultaneously.
May 26, 2011
It would be nice if you would have included BSNL and MTNL in your article with a brief analysis. Both of which have been slowly and systematically destroyed over a period of years. Like 
May 23, 2011
Kanimozhi is not a senior politician. First time MP that too through Rajya Sabha route. Since because she is novice, she is caught red-handed. Like 
May 23, 2011
i forgot to mention this phenomenon the author has detiled Dog catching its tail. Please dont blame the dog as its brain is numb. and yes, please neither try to disturb or get near it can be on your case.
its like public sector bank lending it to private sector guessed it right come banks like SBI showing pethetic bottomlines. TBTF very soon in India. THese consultants are flown in USA to give thier expertise in India...and yes they are paid for it.
please dont try to invest in these companies ..return may be good but risk can weigh you down to settle for too less.
The politicians running these companies knoe that you know that they are doing a daytime kill...Now, why to stand stright upfront and take that bullet in the chest...stay away and you will help yourself.
its not how (%) its about when is the murder.

May 23, 2011
More the reason for a retail investor to shy away from Public sector companies.
you can ask a question to board or Board to CEO the challenge is with public sector companies investors you are dealing with a 'ROUGHSHOD' god father. They hire consultants and bend the CEO's and twist arm and find cracks in the system to twist existing mired policies. So, Ones belief on investing in 'public sector companies (should i say political clouts) with its uncertainities' has remined same and now degrading.
or IS IT? please do not have anymore doubts as the author has just shared the reality...

Nitin Patel
May 23, 2011
Going back to fuel subsidies we need to stop subsidising those who do not need Diesel subsidy for those owning Rs. 50 lac plus value SUVs.
This can be easily done by eliminating cash purchases of all fuels, an alternative would be the debit cards / credit cards. This would at one stroke bring all purchases on record and all purchases below a fixed limit would be at subsidised rate while the fuel guzlers would pay the full price.
May 21, 2011
Every day goes by, UPA is proving to be unfriendly to people. Manmohan and Soniaji should set things right or else congress will never come to power again. Look at the petrol price hike, or endosulfan in Kerala, they seem to work for the multinational companies. With 2 dozen educational degrees,PM is most qualified person but lack any conviction. He should step down and let an efficient pm to take over. PM may be clean but he is joining hands with crooks and greedy politicians. Let there be accountability of every individual of India, tax them and take back all the bribe money from politician and bring back to exchequer that will solve all the issues Like 
May 21, 2011
I beg to differ slightly from the author... I feel it's not a case of poor management rather it's a case of deliberate slaughter of Indian public sector companies and it is being done to further the interest certain organizations. Every downfall of Indian public sector joints is associated with a phenomenal rise of its competitor. It's not by accident it's deliberate. Like 
May 21, 2011
Very truly presented article. On one side Government gives subsidy of Rs. 5 to 10 in case of Petrol which is about less than 10% of retail price and on other side imposes 43% tax. This infact eats up people money Like 
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