The Hindu Business Line : The right route to privatisation

The success or failure of a privatisation method would depend on a number of factors such as the state of the stock market, the degree of competition, the liberalisation and economic policies (including the extent of foreign ownership), and the level of entrepreneurship available in the country.

THE strategic sale route to privatisation has all but been junked and sale through public offers taken up as the better and superior method. But this is an example of jumping the gun, as it were.

There are several methods of privatisation besides strategic sale and public flotation, such as management contract, lease, management/employee buy-out, trade sale, public auction, mass or voucher privatisation and liquidation, followed by sale of assets.

While management contracts and leases are non-divestiture options (suitable for hotels in prime locations), the rest are forms of divestiture. Many countries have tried these options with various degrees of success. For instance, mass or voucher privatisation was the main method of sale in East European countries, as was strategic sale in Sri Lanka, Brazil, Chile, Jamaica and a host of African states. Some countries have opted for more than one form of privatisation. For instance, in the UK, there have been private placements and employee buy-outs in addition to public flotation.

Liquidation has been resorted to as for privatisation in Poland, particularly with small and medium-size firms. After studying their experiences, it cannot be categorically said that one method of privatisation is better than the other.

Ultimately, the success or failure of a privatisation method would depend on a number of factors such as the state of the stock market, the degree of competition, the liberalisation and economic policies (including the extent of foreign ownership) of the country, and the level of entrepreneurship available in the country.

In India, the first attempts at disinvestment were through selling small percentages of shares of both good and not-so-good companies by bundling and offering them to financial institutions. This method of disinvestment, practised from 1991-92 to 1998-99, was criticised by the then Comptroller and Auditor General (CAG).

Following these comments, the policy of disinvestment was changed in 2000. The then government opted for strategic sale as the method of disinvestment.

In doing so, it was, no doubt, influenced by the recommendations of the Disinvestment Commission, which had suggested the strategic sale methodology for maximising returns to the government and providing the public enterprise with the right kind of expertise it needed to compete successfully in the market.

Strategic sale implies selling of a substantial block of government holdings to a single party, which would not only acquire substantial equity holdings of up to 51 per cent but also bring in the necessary technology for making the public sector enterprise viable and competitive in the global market.

The selection of the strategic partner had, therefore, to be done keeping in view the deficiencies of the enterprise and the strengths of the strategic partner. Valuation of the enterprise would depend on the extent of disinvestment, the nature of the competition that the public enterprise was facing and the pricing and regulatory machinery in existence. In strategic sale, where the management would be controlled by the strategic partner, the valuation of land and other physical assets need also to be computed at current market values to fix the reserve price.

To get the best value through strategic sale, it would be necessary to have a transparent and competitive procedure and to encourage enough competition among viable parties.

There is no doubt that the strategic sale method followed by the National Democratic Alliance (NDA) regime was successful. Of the total Rs 45,066 crore so far realised from disinvestment through various methods, strategic sale alone accounted for Rs 25,462.12 crore from 2000 onwards.

This methodology also benefited all those who invested in public sector units (PSU) stocks, including retail investors and financial institutions and also provided strength to the market. The small investor who had stake in the privatised enterprises has gained tremendously due to the open offer after the strategic sale in CMC, VSNL, IBP and IPCL. The Government's residual shareholding in partly disinvested PSUs has also jumped substantially.

In three years (1999-2002), disinvestment proceeds (inclusive of dividend and dividend tax) provided more than Rs 11,300 crore to the exchequer.

By selling loss-making companies and those that had been referred to the Bureau of Industrial and Financial Reconstruction (BIFR), the government saved the amount it would have had to pay in rehabilitation packages, which will now be provided by strategic investor.

However, complaints of undervaluation and other wrong doings have dogged these strategic sales. The CAG's comments have pointed attention at undervaluation, sale of enterprises to single bids, and so on. These comments must necessarily be probed by agencies, the CVC or the CBI, so that the wrong-doers are exposed. This will also lead to better appreciation of factors that go into successful sale of public enterprises.

This does not imply that privatisation through the strategic sale method is prima facie wrong; right procedures must be put in place so that such complaints do not occur.

The recommendations of some newspaper editorials that, only public offers should be undertaken for sale of equity of public sector enterprises suffer from the classic knee-jerk reaction to recent events. While it is true that the public flotation method would widen the base of ownership and provide profit opportunities for retail investors, a number of safeguards would have to be taken for the objectives to be achieved.

A leaf can be taken from the UK example of privatisation. There before chunks of equity were floated on the stock exchange for retail investors, a highly professional management team was in place in the companies concerned and it was given sufficient time of, say, two-three years, to prepare the company for privatisation.

During this period, the management was given the free hand to downsize the strength of employees and implement measures to make it lean and keen for competition. Second, the necessary regulatory machinery was installed before these companies were privatised and the government practised what is known as `arms length' regulation over the company and the regulatory machinery. Should India want to undertake privatisation through the public flotation route, similar steps would be necessary.

If the government does not want to relinquish ownership and wishes to retain 51 per cent or more of the equity in any PSU, there is the danger of status quo in the working culture of the enterprise. For instance, working efficiency in the nationalised banks has not improved substantially due to disinvestment of shares to the public.

If the government remains the single largest shareholder in a company, with the rest dispersed among retail investors, there is the danger of the government indulging in back-seat driving. That would amount to power without responsibility.

It is, therefore, better for the government to disinvest 100 per cent of equity through the public flotation route, in case the stock market is deep enough, after placing a highly professional management team in the company and creating appropriate regulation.

(The author, a former IAS officer, was Member-Secretary of the Disinvestment Commission.)

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