November 2019: Privatisation to help sweat assets better
In 2019
- December 2019: Benjamin Graham revisited
- November 2019: Privatisation to help sweat assets better
- October 2019: Infosys: Whistle blower complaint and free cash flows
- September 2019: Corporate tax cut to boost the investment cycle
- August 2019: Characteristics of a high quality company
- July 2019: Economic slowdown and higher taxes take a toll on markets
- June 2019: Economic slowdown blues
- May 2019: Investors should look at growth rates after adjusting for inflation
- April 2019: Micro-economics is more important than macro in investing
- March 2019: A difficult financial year
- February 2019: Stock prices are slaves of earnings
- January 2019: Nifty performance hides pain in broader market
In the month of November 2019, the government announced that the Cabinet Committee of Economic Affairs had cleared strategic disinvestment (transfer of government stake including management control) in 5 companies. Two of these are Tehri Hydro Development Corporation (THDCIL) and North Eastern Electric Power Corporation (NEEPCO) in which the government stake in these companies would be sold to NTPC. For Bharat Petroleum (BPCL) the government will sell its entire 53.3% stake to a strategic buyer and also transfer management control. However, BPCL’s shareholding of 61.7% in Numaligarh refinery would be divested to a PSU prior to the strategic sale. The entire 63.8% government stake in Shipping Corporation of India would be divested while the government will retain a 24% stake in Container Corporation of India and sell the balance 30.8% stake along with management control.
This is a significant departure in the disinvestment policy of the NDA government in that till now it had been satisfied with the same path as its predecessors which is that of selling small piecemeal stakes in public sector companies but ensuring that the government retained a majority 51% stake. The last time that a government attempted strategic disinvestment or privatization in India, was when Atal Behari Vajpayee was the Prime Minister, ie almost two decades back. The selling of small stakes in different PSUs which has been the norm until now, was unimaginative and quite often LIC would bail out the disinvestment by putting in large amounts, to save face for the government in power.
This move to privatize 3 PSUs is fundamentally different from the piece meal disinvestment of the past, in that by changing ownership and hence management, one could potentially infuse new life into the underlying enterprise. From telecom to banking to airlines, we have enough and more examples of how public sector companies have trailed their private peers. The tax payer has had to time and again, bail out PSU companies – one wonders whether in this day and age, the government should be in the business of owning airlines, steel companies and many other such commercial enterprises. It is our belief that this transfer of ownership and management will allow the underlying assets to be “sweated” better and should have a salutary impact on the company in question as also the economy.
Further, the valuation that one can expect to get for a strategic sale where you transfer ownership, would likely be at a significant premium to the prevailing market price, while piecemeal disinvestments were often done at a discount to the prevailing market price. This is of value at a time when the fiscal deficit targets are likely to be missed for the current year. We hope however that the privatization that has been approved by the government is a philosophical change in stance by the government towards greater efficiency and not merely to plug a fiscal gap in the budget. Seeing it in the context of the recent drop in corporate tax rates, gives us hope that the government is shedding its overtly socialistic stance on national economics and moving towards a regime that is more supportive to the economy over the long term.