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I.P.O. or Disinvestment or Privatisation or a mix of all, Shri R V Shahi, Former Secretary, Ministry Of Power

I.P.O. or Disinvestment or Privatisation or a mix of all
[R V Shahi's Weekly Column for Infraline, January 14, 2008]

There was a very interesting and intellectually rich debate on the occasion of the release of the book by former Disinvestment Secretary, Shri Pradeep Baijal, "Disinvestment : I Lose and you Gain". The book was released by the Finance Minister Shri P. Chidambaram and there was a special address by the former Disinvestment Minister Shri Arun Shourie. Both the eminent speakers presented their points of view, which was preceded by a detailed description of the various issues and cases presented in the book by the author Shri Pradeep Baijal. I attempt to summarise below the views and observations of the former Disinvestment Minister and of the Finance Minister before I co-relate the various issues related to disinvestment and privatisation in the context of public sector organisations in the power sector, both under the control of the Govt. of India and of the State Governments.

Main points brought out by Shri Arun Shourie could be outlined as below :

  • Disinvestment of public sector is a process which should be encouraged and facilitated by all concerned to have the gains of efficient operations of these organisations post such disinvestments, in overall interest of people at large.

  • Though Shri Arun Shourie did not clearly articulate that disinvestment and privatisation are synonymous, the examples (BALCO, ITC hotels, VSNL) he quoted related to such disinvestments of the public sector companies which, in effect, amounted to privatisation.

  • He gave these examples of privatisations of disinvestment and narrated the problems faced in the process - procedural issues, public criticism, role of media etc.

  • The role of public and media in particular was described in detail with the observation that in respect of disinvestment and privatisation, media also start highlighting various aspects without really verifying them and going into details. He narrated a few examples of how the substances of the cases and truth were different and how they were projected. This initiative, in the larger interest of people, requires wider support and if the media presented a distorted picture or half truth the process inevitably would get derailed

  • The role of industry bodies such as CII, FICCI, ASSOCHAM etc. is also crucial. They must contribute toward generating and evolving constructive thoughts and suggestions, mould the minds of policy makers for formulation of important policies on the one hand and disseminate the rationale of such policy instruments on the other for wider acceptance of all the stakeholders and public at large. Unfortunately, these industry bodies have more or less become the "Event Managers" of the government.

  • Role of corporates also has not been very healthy and helpful. As a general body, no doubt, they would wish public sector organisations to be privatised and handed over to them. But, when it comes to specifics, corporate rivalaries also find no limits on their actions and manipulations. He quoted examples as to how avoidable hurdles including legal problems get created by competing and rival corporate groups if they find that the disinvestment or privatisation is likely to be in favour of such groups which they don't like to succeed.

The Finance Minister, Shri P. Chidambaram, not only made a number of important comments and observations but also read out a few extracts from the book. I attempt below to summarise the observations made by the Finance Minister.

  • The entire book is based on the assumption that disinvestment and privatisation are the same and therefore these have been used and dealt with in the book interchangeably. This assumption is debatable and questionable.

  • The book also seems to be based on another fundamental assumption that the only way to improve the functioning and efficiency of public sector companies is through privatisation. This assumption is also debatable.

  • We need to recognise that in the past there have been problems in the process and procedure followed and therefore it is essential that due care is taken to not only formulate a transparent procedure but also meticulously follow it so that such problems are avoided. Obviously one needs to be extra careful when one is faced with the situation of a single bid. At least one attempt needs to be made to explore a few more bids and after that if again there is only one bid a view could be taken.

  • Merits of the issue apart, there is no consensus across the country that privatisation is necessary for improving the performance of public sector units and therefore this process should be supported. They are also made to believe, though not successfully, that disinvestment is privatisation.

  • Because of this confusion and mixing up of disinvestment with privatisation, even listing of public sector stocks and dilution of government holdings in already listed companies, which is quite different from privatisation, the whole process is resisted and criticised by many. There is a greater need of understanding the distinction between the two.

  • In the Common Minimum Programme of the present U.P.A. Government there is a clear stipulation to privatise loss making public sector companies.

  • Profit making companies, if not already listed, should be brought into the equity market. This will further improve their functioning and value.

It is indeed a fact that many of the political groups as also quite a few in the media have been using the phrase disinvestment of public sector to reflect that such a process means privatising public sector. Therefore, the debate invariably shifts from dilution of equity stake of the government (even when the controlling stake remains with the government) to handing over to private sector. A few examples of disinvestment such as a few hotels of ITC, BALCO and VSNL, which were really to the extent of disinvesting for handing over the management control to private sector, led to this type of an interpretation. Many of the political configurations started criticising even the disinvestment of certain portion of equity as if the objective was to either privatise straight away or later on. There was absolutely no need for such a big hue and cry when a portion of equity of Neyveli Lignite Corporation was proposed to be disinvested, while government stake remaining significantly higher than the controlling stake.

A very clear approach has to be evolved and more importantly articulated and disseminated. Such an approach should lay down the considerations and criteria for privatising a public sector unit which would mean handing over the controlling stake and management to the strategic investor. Similarly, it should lay down the criteria for part disinvestment of equity while retaining the majority stake with the government. Within the partial dilution again there would be two categories - (a) Infusion of additional equity by issue of fresh shares and thereby diluting the proportion of government equity, and (b) sale of existing government equity and thereby diluting the proportion of government holding. List of companies along with the reasoning matching with the predetermined criteria for privatisation, list of companies for dilution of government holding through infusion of additional equity and list of companies in which existing equity of the government would be partly sold - in each case justification matching the criteria - should be made available so that there is complete clarity. Lack of clarity creates the potential for distortion and incomplete or untrue dissemination of information among the people by certain political groups, vested interests or sometimes even by media.

The dissemination or communication exercise should aim at making the public aware of the government approach, strategy, process and more importantly the aspect of objectivity and transparency in the procedure. Bringing stocks of public sector companies in the market leads to enormous advantages to the government and therefore to the tax payers, to the management of the company through the process of enrichment of managerial inputs and therefore managerial effectiveness, to customers who get the advantage of improved working of the company and, infact, to public at large. Through examples of previous disinvestment (not necessarily privatisation) as to how there have been quantitative and qualitative changes and improvements in various parameters, the rationale can be established and therefore the support base can be expanded. As a matter of fact, wherever government resorts to privatisation through dilution beyond majority stake, and therefore has the reasons to do so for improving the undertaking and enabling its growth, the communication exercise could clearly articulate the advantages so that acceptability of this action, and of the process followed, is established.

It may be recalled that the central public sector companies under the Ministry of Power, Government of India, were totally aloof from outside equity capital market and all of them were closely and completely held by the government until 2003. When I was not in government and was presiding over BSES, I had seen what it means to untap the hidden potential of a company and unlock its true value. It would be wrong to presume that such an unfolding and unlocking is with the sole objective of infusing additional capital and increasing the net worth of the company. These are, no doubt, important inputs, but larger the investor base of a company, wider would be the focus of attention not only of institutional and corporate investors but also of financial analysists, merchant bankers and retail investors. Such a focus will not remain without reward to the company management. Their continued interest would obviously be essential to keep the stock of the company vibrant in the market but more importantly their attention will lead to investigations and discoveries of areas of weaknesses, concerns, threats and opportunities - vital inputs for enhancing the managerial decision making capability and enriching corporate governance.

Just a year before I joined as Secretary to the Govt. of India, Ministry of Power, in April 2002, I was invited to be an independent expert member on the Board of National Thermal Power Corporation (now NTPC). I recall, in the very first meeting of the Board that I attended, I brought out as to why NTPC should not go in for an IPO and list its stock. I used the same arguments which I have advanced above. Obviously NTPC was not in the dire need of additional capital keeping in view its good liquidity position and the projects in hand. My argument was based on the virtues of sharpening of managerial effectiveness and corporate governance post listing of NTPC. It took some time in the management team of NTPC for this idea to sink in. In the meantime I joined the Ministry, revived this idea, persuaded NTPC to discuss this in their Board and other senior levels of management. But, before bringing NTPC into the equity market, I thought that it might be a good idea to start this process, in so far as organisations with Ministry of Power are concerned, with Power Trading Corporation rather than with NTPC. The underlying consideration was that a lot of lessons could be drawn from the exercise launched for a small organisation PTC which then could be appropriately used when we take NTPC to the market. Power Trading Corporation's IPO initiative was a grand success. It raised the level of confidence that even in power sector, government controlled companies can approach the market and can expect to be responded not only favourably but overwhelmingly. This also provided learning opportunities to public sector companies because Power Trading Corporation was then primarily owned by NTPC, Power Grid, PFC and NHPC.

The next step was to bring the flagship company of the Ministry of Power, the Navratna NTPC, into the market through IPO. The proposal of the Ministry of Power, after required inter Ministerial Consultations, was submitted to the Union Cabinet for consideration and approval for issue of equity, through IPO equivalent to 20% of the equity capital of the company. It would be relevant to mention here that even on such a simple proposition, and knowing well that there are enormous advantages of listing an excellently performing public sector company like NTPC, there were a number of objections and questions from various departments of the government. Finally the Union Cabinet approved in early 2004 for addition of 20% equity through IPO to be implemented in tranches.

The exercise did not end here. In May 2004 there was a change in the government. While operationalising the decision we needed the inputs from the Disinvestment Ministry, and it is at that stage that again a question was raised as to the sale of equity of NTPC rather than additional equity through IPO. This issue took a few weeks to be resolved. We had to resubmit the proposal to the Cabinet. Ministry of Power had to work out a compromise formula. The new formulation was 50% additional equity and 50% sale of existing equity of 10% of equity which was to be brought to the market, as the first tranche of the 20% which had been approved earlier. Finally NTPC went to the market and this exercise again met with magnificent success. The issue was oversubscribed 14 times. NTPC's stock which was listed at Rs. 62 is trading at Rs. 270 and the company has occupied one of top three ranks in the country in respect of market capitalisation. And, I must highlight that the Board functioning of the company including corporate governance has improved significantly in last three years.

The task of bringing other public sector companies under the Ministry of Power into the equity market through IPO became somewhat easier because of the highly satisfying success of both Power Trading Corporation and NTPC. The PSU managements started recognising the merits of the initiative and the process. In the year 2006, we got the decision of the Union Cabinet, one by one, for other companies, viz. Power Finance Corporation (PFC), Power Grid, National Hydroelectric Power Corporation (NHPC) and Rural Electrification Corporation (REC). As we know, the process in the government is lengthy. Draft Cabinet note is circulated for comments by different Ministries and Departments, a process which takes time. These comments have to be answered and a final note needs to be submitted to the Cabinet. In each of these cases, the issue whether it should be additional equity through IPO or government should sell its equity stake needed to be settled with the Disinvestment Department. Power Ministry was always of the view that power sector needed fund and additional equity would be a major input because it will also enhance the debt leveraging capability. Finance Ministry needed money through sale of equity. Therefore, in each case 50% additional equity through IPO and 50% sale of government equity was the compromise formula that was worked out with the Ministry of Finance, and on this basis the proposals for IPO's of various public sector companies with the Power Ministry were decided.

IPO of Power Finance Corporation, after a few months of preparation, was launched in January 2007. It was oversubscribed over seventy times; opened with significant premium (initial price Rs. 85) and is now selling at Rs. 260. IPO of Power Grid next, was oversubscribed more than hundred times. Price offered was Rs. 52, opened at huge premium and is now selling at Rs. 150. REC and NHPC would be shortly going to the market, though they were also decided in 2006. They will all be as successful as others.

Apart from the delays in decision making, briefly explained earlier, another reason for the delay in launching of IPO in these cases, PFC and Power Grid, and now also for NHPC and REC, has been the extraordinarily lengthy process of placing the Independent Directors on the Boards of these companies. One of the SEBI's requirements, and rightly so, is that these companies must have specified number of outside experts as independent Directors on their Boards. This process takes eight to ten months, and quite often more than a year. Each case needs to go for approval of the Appointment Committee of the Cabinet upto the Prime Minister. This procedure definitely needs simplification. After all, these are not full time Directors on company's Boards. The Search Committee, which makes recommendations, itself is a high level group. The process could end in the concerned Ministry so long as the recommendation of the Search Committee is accepted. Similarly there is a scope to further improve the procedure of Disinvestment Department. Perhaps most of the things could be left to the Boards of the concerned companies as Ministry of Power had done in case of NTPC. In any case, they will have to work within the framework of rules and regulations of SEBI.

Apart from a number of reform measures which were initiated in the power sector in last few years, I would say, the initiative of bringing public sector power companies into the equity market through IPO was a very major and important step. This has really unfolded their true values and unlocked their hidden strengths and potentials. The outcome of various legislative and policy initiatives and results of numerous reform actions are now getting reflected by overwhelming response of investors, developers and lenders and particularly by the capital market. In last three to four years, stocks of power companies, including power equipment manufacturing companies, have risen more than those of other sectors. Even green field power project companies are getting huge response. Reliance Power IPO would be the trend setter for green field project companies when it establishes new records of high premium. Many others are also likely to be oversubscribed with exceptionally high premium. In the year 2008, power companies may raise almost Rs. 35,000 to Rs. 40,000 crores. These may include Reliance Power (Rs. 12,000 crores), Sterlite Energy (Rs. 8,000 crores), JSW Energy (Rs. 4,000 crores), J.P. Associates (Rs. 4,000 crores) and many others in the private sector. Besides, NHPC and REC in the public sector would be approaching the market in next few months.

In all the public sector power companies, we decided to enlarge the equity base by 20% additional equity (this was subsequently changed to 10% additional and 10% sale of existing equity). NTPC has used so far only about 10% in all. Even within the approval they have a scope to further access the market. From the time they went first till now, so many positive changes have happened in the sector and in NTPC. They should definitely hope to get the benefit of a revised valuation which should be a few times more than the prevailing price. Similarly other companies (viz. PFC, Power Grid and later NHPC and REC) should go in tranches to higher percentages of dilution. In fact, the UPA Government may discuss with the Left Group as to why gradually upto 49% cannot be diluted keeping the majority stake of 51% with government and its agencies. Any apprehension of 49% dilution getting mixed with privatisation must be addressed once for all. In infrastructure sector we have a long way to go. We need enormous amount of fund. This could be a major source of fund.

Central sector power companies have now demonstrated that domestic and foreign capital markets are highly positive on power companies, not only in the private sector but also on companies which are in government sector. The IPO initiative of disinvestment (if we wish to use that word) should be extended to the state sector power companies. I am sure, the response to their initiative, at least to over a dozen state government power companies, would be excellent. They must utilise this opportunity of mobilising resources, sharpening their Board level and company level functioning and governance and thereby embarking upon a high profile growth. We can imagine how much fund could get generated even if we diluted only 20% of a sector which has almost 1,25,000 MW of installed capacity under the ownership of Central and State Government companies.

Copy right : R.V. SHAHI