The Hindu Business Line : Use of disinvestment proceeds

The UPA Government says that the proceeds of PSU disinvestment will help in financial restructuring of companies and eventually make them profitable again. However, a recent CAG report states that the net worth of companies considered has become negative as equity investment been completely eroded by accumulated losses. This negates the very purpose of PSU investment, points out G. Srinivasan.

THE debate over the virtue or otherwise of disinvestment of equity in public sector undertakings (PSUs) continues to rage, with the Left parties supporting the Government from outside, stoutly opposing the disinvestment of profit-making PSUs.

The UPA Government is trying its best to pacify the opposition from within. At a meeting with the Central and Orissa units of the CPI(M) and the CPI on June 17, the Prime Minister, Dr Manmohan Singh, reassured them that the National Aluminum Company (Nalco) would not be privatised. He added that "privatisation and disinvestment cannot be equated".

The rationale behind such a display of amity is not difficult to understand. Only a week earlier, the CPI had issued a statement about how the Government's notification scrapping Press Note 18 had resulted in South Korean multinational LG serving termination notice to its sole Indian joint venture licensee.

The Left parties have also been vehemently voicing their protests against the Government's decision to sell its equity in Bharat Heavy Electricals Limited (BHEL).

The Prime Minister has always maintained that the UPA government is keen on disinvestment of government equities in PSUs to ensure investible surplus for social investment and also to revive other potentially profitable PSUs. While the government equity will not be lowered below 51 per cent, the Government's idea is to sell a small stake even in profit-making PSUs so that the proceeds so obtained could be funnelled into the "National Investment Fund".

The government has enough PSUs lined up for equity divestment to last its term, though the succeeding government might have to go in for privatisation.

While this policy seems to be going smoothly despite dissenting noises from certain coalition partners, there are also instances where ministers in the UPA government have taken up the cudgels against disinvestment such as Mr Pranab Mukherjee and Mr Ram Vilas Paswan.

The latest to join this brigade is the Petroleum Minister, Mr Mani Shankar Aiyar, who is reported to have written to the Finance Minister, Mr P. Chidambaram, expressing his reservations over the disinvestment of government equities in PSUs. Prior to this, he had failed to convince the latter on the need for an excise duty cut on petroleum products.

This double whammy from within and outside is something the UPA government must learn to cope with.

As such policy measures to end distortions in the economy are being opposed from so many quarters, the UPA government has perforce to give in at many places. So the Cabinet meeting on June 16 zeroed in on a few decisions, understandably to gain the confidence of the Left parties.

Subsequently, the Cabinet consented to restructure Braithwaite, Burn & Jessop (BBJ) Construction Company Limited, by allowing conversion of loan and interest into equity at the cost of Rs 13.88 crore. Besides, it also allowed the conversion of interest outstanding on Government loans amounting to Rs 10 crore to zero rate debentures (ZRD), and waived the balance interest, penal interest and dues accrued on the same till end-March 2004.

The Government claims that the financial restructuring would clear the company's balance-sheet and make its net-worth positive.

In yet another decision, the Cabinet Committee on Economic Affairs gave its approval for a sum of Rs 141.41 crore towards outstanding statutory dues, salary/wages to 15 Central PSUs for the period up to March 31. The beneficiaries include Andrew Yule and Co. Ltd., Hindustan Cables Ltd., Bharat Wagon Engg. Co Ltd., Hindustan Photo Films Ltd., Burn Standard Co.Ltd. (Burnpur unit), Triveni Structurals Ltd., NEPA Ltd. and Instrumentation Ltd.

However, the latest report of the Comptroller and Auditor General of India (CAG) on PSUs for the year ended March 2004, states that equity investment in 93 companies has been completely eroded by their accumulated losses. As a result, the aggregate net worth of these companies has become negative to the extent of a mind-boggling Rs 60,080.58 crore. And because of this, the recovery of Government loans has also become doubtful. It is particularly distressing that the 15 PSUs whose statutory dues were settled using the Rs 141.41 crore are part of the 93 PSUs whose net worth turned negative!

While the Government claims that its gesture would "mitigate the hardships of the employees, thereby motivating them for better output and preparing them to achieve the goal of revival of the company", such subvention and indirect assistance is of no real help.

A moratorium on the repayment of loans or waiver of interest has been a constant feature of Government's support to PSUs. Throwing good money after bad money does not get desirable results nor does it stand to reason when the government succumbs to duress to honour social obligations even when Constitutional bodies such as the CAG have documented the ill-effects of such an open-ended approach to governance.

The CCEA, on June 16, after taking approval from the Board of Industrial and Financial Reconstruction (BIFR), gave its consent to the Ministry of Steel to permit Steel Authority of India Ltd (SAIL) to initiate the process of merger between Indian Iron and Steel Company (IISCO) and itself .

IISCO, one of the oldest steel-making plants in the country ( incorporated in 1918), was in the private sector before 1972. It has been wholly owned subsidiary of SAIL since 1978 but over the years its performance has been insipid, mainly due to old plant and machinery, obsolete technology and the lack of necessary capital inputs.

ISSCO had accumulated losses of Rs 954.57crore and negative networth of Rs 625.61 crore by March 2004. Thanks to the huge bailout package provided by SAIL, the company has begun making modest profits.

Given that SAIL is recording excellent results (in view of the robust revival of demand for steel across the world and good off-take within the country in the light of increased construction activity, including on infrastructure), the Government has been considering the idea of merging IISCO with SAIL.

It is notable that during the first nine months of 2004-05, SAIL logged the highest ever net profit (after tax) of Rs 4,139 crore. So it can sail along with IISCO in tow for the time being, as the market conditions appear conducive to such an alliance. In all these decisions, the Government seems to have been guided by sheer political calculations to safeguard workers' interests, an ideology close to the Left parties even though the means to secure it seems to be through the pursuit of bad economics.

This sends out a sort of negative signal about the reform credentials of this `progressive' Government.

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