There is urgent need to reboot the disinvestment process

The disinvestment process in India has gone through its twists and turns. At some stage, the government, especially during the earlier NDA regime, took the courage to undertake strategic disinvestments. These disinvestments, in general, worked well for the buyer as well as the government.

On the other side, there have been piecemeal disinvestments without any strategy, with the only purpose being to balance the fiscal deficit in a manner that the targets set by the government, especially during the last 4-5 years, are met. This kind of disinvestment without reforms or taking into account the possibility of wealth generation by investors who have subscribed to these offers, have created a situation where a number of deals have had to be subscribed by LIC, PSU banks, or so on. The entire disinvestment process is in the need of a reboot.

There have been several instances of large disinvestments in the last few years where it has led to losses not only for the people who have subscribed to these issues, but also for the remaining majority holding with the government.

There's no better example of this that NTPC and ONGC, where periodic disinvestments have happened at lower and lower rates, and discredited the entire process. On the other side, in terms of capital guzzlers in the private sector, we have the private sector banks where each new fund raising meets with strong response as investors in the previous one have made a lot of money, and are confident of money to these banks.

The biggest problem with the disinvestment process is the involvement of the bureaucracy, where the list of shortlisted companies for disinvestment gets leaked, and the entire process of cabinet approval to actual sale of shares, involves a time gap which leads to the stock prices moving down, with realizations for the government being 10-15% lower than what they should have been.

In the recent past, we have read that the government is considering divesting 10% of Coal India, which lead to the stock price collapsing from Rs 440 to Rs 360 in just a few days. Coal India shares were sold a few months back and investors were sitting on decent profits. This news flow destroyed lot of wealth.

It is clear that strategic disinvestment is not very easy to execute, given the pressure points that exist, Unions, and the hue and cry around the same. However, it is important to make the entire process more efficient so that the assets that essentially belong to taxpayers of India via the President, realize the best possible value and at the right time. In my view, the way to do it is this:

-- At the beginning of every financial year, the government should take a blanket cabinet approval for the disinvestment of 10% of all the listed PSUs. The approval should be valid for the entire financial year.

-- The government should set a range of disinvestment target for the year. For example, for a year like the current one where the target is Rs 69,500 crore, the range could be Rs 50,000 to Rs 90,000 crores. There shouldn't be a fixed target.

-- The government should appoint professional fund managers under the disinvestment department, whose job it will be to get the most efficient pricing for the sale of the government assets from the approved list initially decided.

-- Instead of selling stock in bulk on any given day for one particular PSU, the fund managers will look out for opportunities to sell the stock at the most opportune time. For example, at a time when oil prices are falling, there is a natural fancy and demand for oil marketing companies like HPCL, BPCL, IOC, and so on. Any FII, MF, insurance company that wants a chunk of these stocks when the demand is high, can approaches the fund manager, and he can negotiate the best possible price for the sale at that time. If there is no bulk buyer, the fund manager can also sell small chunks of these stocks in the market when the prices are high.

-- Every quarter, the government can disclose the amount disinvested and money raised. Since there is a wide range of disinvestment target, the fund managers are not under pressure to sell at any given price, and if the opportunity presents itself, they can actually move towards the higher end of the range.

-- Merchant bankers/investment banks who currently take fees from the government for undertaking the FPO process, can approach the fund managers whenever they have any demand from the client. No fees need to be paid to them, they will earn via the brokerage earned on both sides.

-- The other job of the fund management team will be to gather market intelligence about the thinking process of investors, what they are looking for as reforms or value creating opportunities across sectors, what could increase value of PSUs, etc, and provide the same to the finance ministry and respective operating ministries.

This entire process will bring about more efficiency in the entire process. Stocks will be sold where there is more demand, and better prices will be realized. The markets will not be impacted negatively due to expectations of a large disinvestment, which is likely to come about, and the government will not have to rely on LIC to bail it out every time.

Even if the efficiency gains are 10%, which is not very difficult to achieve, the net gains for the government in a year like this one, could be Rs 5,000 – 9,000 crores. No mean figure for setting up an outfit manned by professionals, where the overall cost might not be more than Rs 5 crore per year.

Reboot and revitalize the disinvestment process, dear government.

Sandip Sabharwal is a fund manager who runs an investment advisory company. He can be reached at his website.