The Hindu Business Line : Will disinvestment soon be back on track?

SHARES of public sector companies were back in the limelight the last two days. And the immediate provocation appears to be the statement of the Finance Minister, Mr P. Chidambaram, that the Government is considering disinvestment of small portions of equity in non-navratna, profit-making public sector units.

The BSE PSU Index comprising stocks of 50 listed PSUs gained 3.6 per cent (171 points) in the last two days of trading after Mr Chidambaram's statement on November 9 compared to a rise of 1.9 in the Sensex in the same period.

In fact, PSU stocks were the prime drivers of the Sensex in Friday's trading.

So, is this exuberance warranted?

Before answering that, we have to consider a recent statement made by the CPI(M) General Secretary, Mr Prakash Karat. Speaking at a public forum, he said that his party is open to the idea of disinvestment in non-navratna and unviable public sector undertakings but opposed to disinvestment in navratna companies.

Traders and investors appear to have read the two statements together and concluded that disinvestment would take off again. Their optimism could yet turn out to be premature if experience is any yardstick.

What Mr Chidambaram said is merely an expression of intent and it is not as if a programme has been drawn up for disinvesting government holding in selected companies. And the real test of Mr Karat's statement will happen if and when the government initiates a sell-off of shares.

The BHEL episode is still too fresh in memory for any comfort to be drawn from Mr Chidambaram's declaration. There is a lot of ground to be covered before disinvestment becomes a reality again and policies and positions can undergo a change in the interim. Therefore, it may be dangerous for investors to build up positions in public sector stocks in the hope of reaping the dividends of disinvestment. But what exactly is the policy change now?

With the Left parties opposing the sale of shares in navratna companies, the Government is turning its attention to other profit-making PSUs.

There is quite a laundry list of such companies — Bharat Earth Movers, Bharat Electronics, Engineers India, Container Corporation, MTNL, Nalco and Neyveli Lignite Corporation, to name a few.

The plan appears to be to offload small percentages of equity in a few or more such second-rung PSUs in the market to common investors and institutions as wa0s done in the case of ONGC and IBP in early 2004. With strategic sales of big chunks of equity to a single buyer ruled out as a policy option, the only mode of disinvestment possible is to sell in the market.

This holds both pluses and minuses. The biggest plus is that it helps broad-base shareholding and enables common investors to participate in the wealth creation process.

The flip side is that this may not really fetch the best price for the government, which may be able to get a better valuation for its holdings from a strategic investor, including a premium for transfer of control.

Of course, at the moment, this is a strict no-no as it would constitute privatisation and not disinvestment.

Given the exuberant market, the Government may yet be able to fetch a very good price for its holdings if it were to disinvest now.

The market is awash with liquidity and there is a tremendous appetite for good paper. Some of the non-navratna PSUs are well-run companies with a good profitability record and have a big following in the market.

Stocks of companies such as BEML, Bharat Electronics and Container Corporation enjoy high valuations and prices of the first two have already shot up after Mr Chidambaram's statement.

The market probably believes that they may be among the first candidates in the Finance Minister's list.

Maybe and maybe not. But the important issue here is whether Mr Chidambaram is able to get the disinvestment process smoothly back on the rails. If he manages to do so, then it will certainly be a big step forward for this Government in the reform process.

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