Disinvestment a Strategy for Growth It was the vision of Jawaharlal Nehru that saw establishment of various public sector companies in strategically important sectors of the economy viz. steel, mining and metals, electric power generation, ship building, aircraft building, machine building, atomic energy, defence production, oil exploration etc. The idea was to keep control on all the key factors of endowment and deploy them for social uplift and nation building. India owes its present infrastructure by and large to this 60 year old vision. The policy of investments in capacity building areas has paid rich dividends in last few decades. There have been few large scale infrastructure building projects in private sector like Reliance Group’s global capacity creations in petrochemical and oil exploration sectors. The private sector needed supporting industries in early days of industrialization. Today we have come a long way and with liberalization as well as industrialization, the private sector does not need hand holding any longer. Today Adani Group is in ports and power sector. Companies like L& T have achieved engineering feet difficult to achieve. So technology or skills or even financial resources are not the forte of the government alone. Disinvestment has come a long way without much mileage so far. The Economic Survey has suggested that the government should aim at raising Rs. 25,000 crores from disinvestment every year. However, the objectives of disinvestment must be clear and beneficial to the entity being disinvested as well as nation at large. If government decides to disinvest for the sake of bridging the fiscal deficit, it will be like selling the family silver to meet monthly expenses. It is tempting to sell just 1015% equity in major 5060 public sector companies to raise around Rs 2 lakh crores. These companies have built the brand equity over the decades with hard work and therefore must be allowed to encash on the same for enhancing their future growth, diversification, capital investments or any strategic benefits. Strategic Benefits: The strategic benefits out of disinvestment could be access to new technology, access to new market, access to fresh capital etc. These benefits would add to the strengths of company more than what the company will part with in terms of monetary value of the share holding in the company’s structure. If this advantage can be sustained over a long term then disinvestment is desirable. If such a strategic advantage is not on the table then it does not make sense to disinvest in a company if it is making good profits and growing. Courage to Disinvest: The government has been carrying several sick public sector companies on the back as it lacks conviction, political will & courage to take bold decisions. Some of the companies
have turnover in double digits and barely past the “teens”. It is shocking to see that revenue of HMT Watches Ltd for 200708 is about Rs. 22 crores registering a loss of Rs.58 crores. They have 2200 employees with wage bill of Rs. 53 crores. There are thousands of SSI units with this kind of turnover but they will not have losses and disproportionate manpower. It is no longer meeting any of the objectives for which it was started. A company which could not sustain either market share or mindshare (except those of employees) and has shrunk ten times in as many years piling up losses, year after year, should be a candidate for disinvestment. It would be logical to exit and disinvest completely. HMT Bearings Ltd is in fact a new avatar due to forced acquisition of Indo Nippon Bearings of Andhra Pradesh. It should have been sold off to private sector then instead of merger with HMT. Professional Freedom: The fundamental reasons for sickness of such good companies of the gone by era is the lack of professional freedom to the managements of PSUs and political interference in strategic decision making process. It is just possible that professional managers of HMT may have liked to shut down such units but the government can not take a decision. Air India is a classical case of the minister virtually being in the driver’s seat. Air India and Indian Airlines were merged to leverage and optimize on common resources but the experiment has not succeeded. Air India made estimated loss of Rs. 7200 crores last year. Air India has asked for bailout package of Rs. 20,000 crores. Why are they in such a big mess? It is not just due to global meltdown. The government should make public all the facts. In fact Air India can also be disinvested completely instead of a massive bail out. If government wants to keep the national flag carrier for its own use, it may retain a small fleet and sell off the airline at a time of its choosing to maximize valuation as the global aviation markets are currently in turmoil. It may retain say 25% share for strategic reasons from national security point of view. Satyam Computers, a large private sick company, has been handed over to Mahindra Group, which would surely turn it around. The government appointed a board led by Mr.Kiran Karnik to facilitate finding a suitor for Satyam Computers. They did just that job swiftly and nicely. CMC Ltd, a central PSU, was also sold off to TCS. BALCO, VSNL were also sold off. There is no reason why stalwarts like Mr.Ratan Tata and Mr.Sam Pitroda, whose names are going around for nomination on the board of Air India, be given similar mandate to restructure the airline such that it can be sold off, or managed and turned around without a minister at the helms. Mergers to Avoid Harsh Decisions:
The efforts of the government to merge loss making units into profit making ones are nothing but refusal to accept realities and increase the burden of good companies. There should be due diligence of product and manufacturing technology, needs of the markets and ability to service the same if allowed to survive. The government has supported sick units with cash / increased equity support without turnaround for decades. Some where this must stop. Shape up or get shipped out should be the mandate to the managements without interference from government and the ministers. Organization Culture: A good number of listed PSUs have out performed the markets. It is due to the nature of their business impacting the work culture. Generally, the organizational work cultures of PSUs have never been in sync with the global trends and competition, which has been the reason for decline of once glorious companies. The only way to change the mind set of employees is to have the same at the top. That is possible with free hand and liberal mandate with change of ownership. The government may keep say 25% stake only without operational control in strategically important companies and disinvest the rest in a strategic tie up at appropriate time to maximize the benefits. Lesson from Global Meltdown: There are 33 sick companies in ministry of heavy industries. The best of the global names in various businesses have gone under due to global melt down in last one year. There is no good reason why the government should not identify sick companies in central as well as state public sector domain and disinvest totally. At the least that will stop perpetual losses and negative contribution to the exchequer. Let us not forget that for every sick company in public sector there may be number of private sector competitors meeting the needs of the nation. Disinvestment has to be done with human face no doubt. Since the employees are highly skilled they should be able to take VRS and move on to better opportunities elsewhere. If the government does not want to face the inevitable there is just one question to be answered. For how long the tax payer’s money will be allowed to be drained through such unviable units? We must have a coherent long term policy framework for disinvestment and reinvestments irrespective of the political spectrum at the helm of government. Disinvesting for Leveraging Growth: The government has budgeted for realization of proceeds of Rs. 1,120 crores through disinvestment in companies in this fiscal. This will generate cash surplus which should go to National Investment Fund. NIF should be treated like a trustee for the funds till they are redeployed productively for strategic projects. However, the proceeds should not be diverted for meeting the fiscal deficit. Disinvestment as a strategy for meeting fiscal
deficit is ill advised. It must be the main strategic plank for making investments of the past more efficient and for greater leverage in strengthening the core competencies of the nation.
Vijay M. Deshpande Corporate Advisor, Strategic Management Initiative, Pune July 25, 2009 Scroll down for my other blogs Or visit www.strami.com