The Hindu Business Line : Quid pro quo for BHEL back-down

As a quid pro quo for abandoning BHEL divestment, the Left parties should back the UPA's efforts sell the government's shares in the wholly-owned PSUs to the public, and root for the creation of value through the listing of these equity shares . The gains, to the Government and its exchequer and to the PSU customers, will exceed the proceeds from the sale of equity in BHEL by a factor of at least 10. What is more, the gains will be recurring, happening year after year.

BHARAT Heavy Electricals Limited (BHEL) has been at the centre of a noisy argument between the Government and India's two major Communist parties. What is significant is that the two Communist parties are not in the Opposition. They are supporters of the Government constituted by the United Progressive Alliance (UPA). Their support is based on the National Common Minimum Programme (NCMP), a statement of `dos' and `don'ts' that is supposed to aid governance and policy-making.

The UPA Government wanted to lower its stake in the equity of BHEL from 67.72 per cent to 57.72 per cent by offering 10 per cent of the Navratna's shares for sale to the public. The two Left parties vigorously challenged the proposal. They argued that the plan is in direct contravention of the NCMP.

In our evaluation, the Left has a defensible case. The UPA should back off from its plan to dilute the Government's stake in BHEL. The UPA should take its focus away from BHEL and turn its attention towards the numerous public sector units (PSUs) whose equity is owned wholly by the government.

The UPA should tell the Left that there is a quid pro quo for abandoning the plan to dilute government stake in BHEL: the Left should back the UPA's efforts aimed at creating value for India's citizens, consumers and taxpayers. How?

First, the Left should support the sale of Government's equity shares in the wholly-owned PSUs to the public. Second, the Left should root for the creation of value through the listing for trading of these equity shares.

The gains from the sale of equity and the consequent listing will accrue to Government and its exchequer, and to the customers of the PSUs. The gains will exceed the proceeds from the sale of equity in BHEL by a factor of at least 10. What is more, the gains will be recurring in character, year after year.

We urge the UPA and the Left to unleash the power of listing on the Indian economy. This unleashing will fully comply with the basic principles outlined in the NCMP. Towards backing our case, we present empirical data pertinent to the performance of listed and unlisted PSUs. Listed PSUs such as BHEL have outperformed their unlisted counterparts such as Air India. The gap in their performance is primarily because of the favourable impact of listing.

Productivity of capital

Net sales measures the market value of the utility generated by a firm by working on its capital resources. Listed PSUs such as BHEL are four times as productive as the unlisted PSUs in utilising capital resources (Graph 1). The net sales to capital employed ratio of a portfolio or group of 40 listed PSUs is 200 per cent. It is pathetically low at 50 per cent for a portfolio or group of 134 unlisted PSUs.

Listed PSUs create higher utility per unit of capital. They are the right remedy for India, an economy that is often termed capital-starved. By contrast, unlisted PSUs waste capital. They fail to serve their customers in particular and India's citizens in general.

Potency of capital

Earnings before interest and taxes (EBIT) are independent of the capital structure of a firm. What is more, EBIT is also independent of interest rates and taxation rates in an economy.

Therefore, EBIT is regarded by puritans as well as by practitioners as a measure of how well a firm's mangers use capital resources to produce societal surplus. Listed PSUs are twice as potent as the unlisted PSUs in the creation of societal surplus (Graph 2).

The EBIT to capital employed ratio of the group of listed PSUs is 25 per cent. It is a little over 12.50 per cent for the 134 unlisted PSUs. Unlisted PSUs will serve society much better if their equity is listed.

Borrowing costs

The advantages of listing extend to the terms that potential borrowers face in the market for corporate debt. The effective interest rate paid by listed PSUs is about 5 per cent (Graph 3). The effective interest rate paid by unlisted PSUs is about 12 per cent. What this means is that the unlisted PSUs will find it both costly and difficult to fund their expansion and capability enhancement. This will affect the morale and the financial welfare of the employees of the unlisted PSUs.

Benefits to the exchequer

Listed PSUs are exchequer-friendly corporate citizens. By contrast, unlisted PSUs are not exchequer-friendly corporate citizens (Graph 4). Listed PSUs have a tax to capital employed ratio of about 7 per cent. It is less than 2 per cent for the unlisted PSUs.

Listed PSUs create higher utility in favour of the Government per unit of capital. They push tax to GDP ratio up in a two-step process. First, they are productive and potent users of capital. Their EBIT to capital employed is very high. Second, they face lower borrowing costs. This expands the slice of the pie in favour of the Government.

The big game

Let us return to BHEL. On behalf of the Government, the President of India owns 67.72 per cent of the 24.476 crore shares of BHEL. A conservative estimate of the market value of this investment as on June 30, 2005 is Rs 13,791 crore. The Government would realise at best Rs 2,500 crore by reducing its stake to 57.72 per cent. An aggressive estimate of the prospective market value of the Government's remaining stake of 57.72 per cent is Rs 17,000 crore.

The `gain' to the Government and, thereby, to society would be Rs 5,709 crore. The two Left parties are not impressed by any of the numbers. We too are not impressed by the paltry gain of Rs 5,709 crore. There is more at stake for India, its citizens, the Left and the UPA.

BHEL is a jewel in the crown because it is listed. Its active stakeholders in the market monitor its performance vigorously. The gains from listing have been harvested. Gains from any further disinvestment will be marginal.

It would be silly to play the marginal gains game when bigger gains can be pursued. There are the unlisted PSUs that are waiting to be pulled into the super-league to which BHEL belongs. The time to pull them in is now.

(The authors are financial analysts. Feedback may be sent to indiagrow@yahoo.com, sarma.vempati@gmail.com and pari@thehindu.co.in)

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