Disinvestment : The Main Agenda

By now, it is quite clear that the Government does have divestment of its stakes in PSUs high on its agenda for the next few months. That may well allow investors to buy into a whole range of offers from listed as well as new PSUs. Government plans to raise over Rs 25,000 crore in 2009-10, not only to reduce fiscal deficit but also for expansion of public sector enterprises.

The government holdings in listed public sector companies are worth Rs 8.80 lakh crore and if the government dilutes its stakes to 51% in these listed companies, it could lead to an inflow of Rs3 lakh crore at current market prices.

A dilution of 10% stake in top 10 PSUs can bring in a whopping Rs 85,000 crore. Thus, the government could earn a substantial sum by diluting its stake in just listed PSUs to 51%.

Why Divestment?
Government-funded stimulus measures and a soaring subsidy bill have swelled the fiscal deficit. With the economic slowdown impacting revenue receipts, divestment is clearly one route to raising funds to improve the fiscal picture. The fiscal deficit for the year 2008-09 at a whopping Rs 3,30,000 crore, is 21% of the total market capitalisation of the BSE PSU index.

Which companies are likely candidates? Here's a line-up:

The IPOs that may flag off the divestment process may well be NHPC, RITES and Oil India, which have already filed their respective draft prospectuses with SEBI over the past two years.

• NHPC: NHPC is the country's largest hydro power generator, engaged in planning, development and implementation of hydro-electric projects. Based on the offer document, the government stake will come down to 86.3 per cent post-issue. The earnings per share (EPS) for the FY09 is Rs 1.01.
• RITES: RITES, under the Ministry of Railways, provides transport infrastructure consultancy, engineering and project management services. The PSU plans a fresh issue, bundled with an offer for sale that may bring down the Government's stake to 72 per cent. The book value/share and EPS for the year ended FY07 were Rs 133 and Rs 30 respectively.
• OIL India: Oil India is engaged in the exploration, development, production and transportation of crude oil and natural gas onshore. The company comes under Ministry of Petroleum and Natural Gas. The Centre's stake will fall to 89 per cent post-issue. The offer document mentions an EPS of Rs 73.6 for the last financial year.
  Long on the stake sale shortlist, the following PSUs are possible candidates which may seek listing through an IPO/offer for sale route.
• Coal India is among the largest coal-producing companies in the world and is the only un-listed navaratna PSU (except for HAL, which comes under strategic area). CIL had a turnover of Rs 38631 crore in 2007-08. It is expected to hit the IPO market in near future.
• Telecom major: BSNL and steel maker, RINL (Vizag steel), Cochin Shipyard, Telecommunications Consultants India and Manganese Ore are the other likely candidates that may tap the market. These entities have been on the divestment shortlist for quite a while.
• Stake dilution is also possible in listed PSUs with a high proportion of government holdings. A 5-10 per cent stake sale in these companies will bring huge gains for the government, even without losing the management control. NMDC, BHEL, NTPC, SAIL, Neyveli Lignite, MMTC, RCF are likely follow-on offer candidates.
• Public sector banks that have a high proportion of government holdings are ripe for a dilution of stake, given their capital needs. While the stake dilution in PSBs will not help the government in terms of receipts, as fresh issues may be needed to bolster the banks' capital adequacy requirements, it will save the government equity infusion from time to time.
• Central Bank of India (80 per cent), Canara Bank (73 per cent), Indian Bank (80 per cent) and Bank of Maharashtra (76 per cent) are banks with high government stake. The unlisted United Bank of India is also considering an IPO in the near future.

Our View

1. Disinvestment will be extremely positive for the Indian equity markets and the economy.
2. It will draw lot of foreign and domestic money into the markets. It will allow PSU to raise capital to fund their expansion plans.
3. Removal of capital constraints will enable PSUs to compete better with the private sector.
4. There has been some evidence of the performance of PSU improving after their listing on the stock market as they are subject to the market discipline and managers are held accountable by investors.
5. Funds raised from divestment process will reduce the strain on government finances. It will allow the government to stimulate the economy while resorting to less debt market borrowing.
6. Private borrowers won't be crowded out of the markets by the government and will have to pay less to borrow from the open market.
7. However, the real benefits for divestment come from transferring management control to the private sector. This will boost the efficiency of the firm and improve resource allocation in the economy. Unfortunately, the UPA government has made it clear that it won't cede control of the PSUs as part of the disinvestment process.