Privatisation and controls can’t go hand-in-hand. The Centre’s instinct to retain its hold on PSUs indirectly should give way to wholesome transfer of ownership and authority to private investors
In the Budget presented on July 5, Union Finance Minister Nirmala Sitharaman announced disinvestment of the Government’s shareholding in public sector undertakings (PSUs) to a level below 51 per cent on a “case-by-case” basis. The Cabinet Committee on Economic Affairs (CCEA) is expected to approve this policy soon.
The 51 per cent threshold is very crucial as shareholding at this level or above enables the Government to have majority ownership and control over the undertaking. If the holding is reduced to below 51 per cent, this will lead to relinquishment of majority ownership and control, or privatisation in plain words. This will be transformative — a bold reform indeed. But, hold your breath, there is a caveat appended to it.
In the Budget speech, Sitharaman had explained that the intent was to change the extant policy of the Government “directly” holding 51 per cent or above in a PSU to one whereby its total holding, “direct” and “indirect,” is maintained at 51 per cent. This caveat changes the entire complexion of the stated intent. So, what is “indirect” holding?
To illustrate, let us take the case of the Indian Oil Corporation Limited (IOCL). In addition to its direct shareholding of 51.5 per cent, the Union Government has majority shares (above 51 per cent) in a number of other PSUs which in turn, hold shares in IOCL. Thus, Life Insurance Corporation (LIC), which is 100 per cent owned by the Centre, holds 6.5 per cent shares in IOCL. The Oil and Natural Gas Corporation (ONGC) which is 63 per cent owned by the Government, holds 14 per cent shares in IOCL. Likewise, Oil India Limited (OIL) which is 60 per cent owned by the Government, holds 5 per cent shares in IOCL.
The “indirect” shareholding of the Union Government in IOCL via its holdings in the three other PSUs, viz LIC, ONGC and OIL, works out to 18.3 per cent (6.5x1 + 14x0.63 + 5x0.6). However, when it comes to control or ability to influence decisions of IOCL, the “indirect” contribution will be 25.5 per cent (6.5x1 + 14x1 + 5x1) as the predominant view of the majority shareholder, that is the Centre in LIC, ONGC and OIL, would prevail. Including “indirect,” the effective control of the Union Government in IOCL is 77 per cent (51.5 per cent+25.5 per cent).
With these numbers in the backdrop, what the Finance Minister is alluding to is that the “direct” shareholding of the Government in IOCL can be reduced from the existing 51.5 per cent to 25.5 per cent. With this, technically though it may have changed its status to that of a minority shareholder with a mere 25.5 per cent holding, including the “indirect” control will still give it a majority share of 51 per cent.
Thus, contrary to what one may infer from a plain reading of the numbers that the Modi Government has taken a bold decision to privatise IOCL, in reality it is not so. With the Government continuing to retain overarching control, the very purpose of the exercise — which is to entice a strategic investor to come and transform the way an enterprise is run, make it grow faster and enhance its competitiveness in an increasingly challenging world — will be defeated.
True, with the Government’s shareholding dipping below 51 per cent and the undertaking stripped off the PSU tag, it can avoid coming under the scanner of the statutory watchdogs like the Central Bureau of Investigation (CBI), Central Vigilance Commission (CVC), Comptroller and Auditor General (CAG). But, continuous interference by the political brass and bureaucrats can’t be ruled out. Hence, the strategic investor will think many times before taking the plunge.
A major reason as to why last year the sale of Air India could not go through had to do with the Government’s decision then to retain 24 per cent shareholding, which discouraged bidders (this anomaly has now been corrected with the offer of 100 per cent of its shareholding under the sale plan during the current year).
With change of policy stance to retain 51 per cent shareholding (albeit direct plus indirect) in PSUs up for strategic sale — the reluctance among investors will be even greater. This will also affect the Government’s ability to fetch a good price though this can’t by itself be an objective of strategic sale.
Collateral damage has to do with the Government losing policy space with regard to its future course of action on undertakings whose continued majority ownership is necessary for exercising “indirect” control over the said PSU (IOCL is an example) to the required extent.
If, at some future point of time, it wants to undertake privatisation of say OIL, it won’t be able to do it as that will have the inevitable effect of losing control over IOCL as well.
A decision with regard to an undertaking should be made taking into account the circumstances facing it and in the overriding interest of maintaining its health, competitiveness and growth. Its fate can’t be tied to that of any other PSU which the Government wants to control.
The very concept of looking at indirect control to arrive at a decision on disinvestment militates against this fundamental tenet.
The instinct of the Government to retain control even while executing its strategic disinvestment plans is discernible even in its previous actions. During 2017-18, it sold 51.11 per cent of its shareholding in Hindustan Petroleum Corporation Limited (HPCL) to ONGC. In 2018-19, it sold 52.63 per cent of its shareholding in Rural Electrification Corporation (REC) to Power Finance Corporation (PFC).
Though touted as good examples of strategic sale, in reality it was not so, as even after relinquishing 51 per cent plus shareholding, the Government continues to exercise full control (albeit indirectly) over HPCL/REC by virtue of being majority owner in the acquirer namely, ONGC/PFC.
During the current year also, it is continuing with this strategy as reflected in its decision to sell all of its 100 per cent stake in North Eastern Electric Power Corporation (NEEPCO) and 75 per cent in THDC India Limited.
These shares will be picked up by National Thermal Power Corporation (NTPC) and NHPC Limited respectively which are majority owned by the Government. So, post-divestment, the ownership and control of NEEPCO and THDC India will remain with the Union Government (albeit indirectly).
The only case where the Modi Government has shown gumption to go for strategic disinvestment in the true sense of the term is in its decision to sell all of its 53.29 per cent shareholding in Bharat Petroleum Corporation Limited (BPCL) — the refiner and retailer of petroleum products — to a private investor. This will result in transfer of the ownership and management control — lock, stock and barrel — to the acquirer.
This has generated huge interest among all global energy majors like Saudi Aramco (Saudi Arabia), Total SA (France), ExxonMobil (USA), Royal Dutch Shell (UK/Netherlands), BP Plc (UK) and so on.
Post-acquisition by any of these giants, BPCL will become an integral part of the global supply chain and will be able to operate free from all encumbrances, take quick decisions and run efficiently as per global standards for delivering low cost and best quality products.
The Government should follow the BPCL model for undertaking disinvestment of all other PSUs. Its instinct to retain control, by hook or by crook, should give way to wholesome transfer of ownership and authority to private investors.
While being in the best interest of the undertaking, this will also garner required resources for the exchequer at a time when it is facing a huge shortfall in tax collection even as expenditure continues to grow.
(The writer is a New Delhi-based policy analyst)
