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Institutional EYE

Commentary on Corporate Governance Issues

Selling less while raising more

If the government wants to continue to mobilise resources from divestments, it needs to ask itself three questions. First, is there clarity regarding the objectives in running particular PSU’s. Second, is the current Ministry-PSU linkage the best structure to ensure that PSU’s function efficiently and three is the divestment giving the government most bang for its bucks.

Raising money from sale of Public Sector Undertakings (PSU’s) is now a critical item in meeting fiscal targets. This government has raised Rs 2.71 trillion or 84.3% of the targeted Rs 3.21 trillion since 2014-15, meeting its divestment targets in the last two years. The tenacity with which the government is pursuing this one number is admirable.

During this period, no route to raise money has been off the table; the government has used buybacks (Oil India, National Hydroelectric Power, IRCON, etc.), offers for sale (NALCO, National Fertiliser, Neyveli Lignite, etc.), piggybacking on PSU IPO’s (Cochin Shipyard, GIC, New India, etc.), off-market transactions (HPCL-ONGC), strategic divestment (PFC-REC, Dredging Corporation), sale of SUUTI shares, sale through ETF’s (CPSE ETF and Bharat 22) and even sale of enemy shares. Nor is any amount too small; the Dredging Corporation of India employees brought in Rs 9.3 million through an OFS.

Despite the impressive amounts gathered from there sale, there are infirmities that ail the public sector. These come in the way of a more robust fund-raise. Some alternate sets of data point to this.

One, the trailing BSE PSU Index (Exhibit 1). Rs 100 invested in the PSU index five years ago in August 2014 would return Rs 88.0 today. A similar amount invested in the BSE SENSEX would have returned Rs 146.7 and in the BSE100 Rs 147.0.

Two, this is reflected in the price performance of PSU ETF’s. The CPSE ETF, which tracks 11 Central PSU’s has raised Rs 48,500 crores. And Bharat-22, its dizygotic twin, with 19 public sector companies and three SUUTI shares - Axis Bank, ITC and Larson & Toubro, has garnered Rs 26,400 crores. Their performance lags as seen in exhibit 2.

Three, governance is no longer an amorphous idea; it can now be measured on the IFC-BSE-IiAS Corporate Governance Scorecard. Excluding banks there are 16 PSU’s in the BSE-100 index. Their average and median score out of 100 is 52.3. Our research shows companies that scored above 60 had a median return of 39% over two years, (7% over one), while those with lower scores, generated a 3% return (negative 16%). This is a pointer that poor governance lies at the heart of middling performance.

There is limited clarity regarding the objectives and purpose. Oscillating between achieving the greatest good for the greatest number versus running a profitable business, muddles decision-making at the PSU level and confuses investors. It is perfectly legitimate to have national political level objective (development of a backward region), but these should be separated from those that control national resources (ONGC, Coal India), or building national champions (SBI). The government is better served pursuing just one goal. With clearer commercial focus and tighter financial discipline, the treasury can hope for a steady stream of dividends and of realizing a fair price from the sale of shares and even entire businesses. This money is then available for its broader (social) objectives. The alternative of running a febrile business which consistently needs funds to be injected, does not serve the divestment agenda.

Oversight of a PSU is a small part of a Ministry’s responsibilities. Shortish tenures leave bureaucrats insufficient time read the industry trends, let alone understand business nuances. An added downside is a very short institutional memory. Responsibilities towards the company give the appearance of being chores and need safe decisions: why else will PSU boards be dominated by former bureaucrats – which compound the problem of limited skills and to a less robust board oversight. Then there is the mistaken belief in Delhi that SEBI’s rules apply only to the private sector. Consequently, PSU’s generally weigh in favour of their parent ministry; conversely market discipline is frequently breached. And while market discipline may not ensure business success, but its absence will ensure failure. Suffice to say, the ministries have exhibited extremely uninspiring stewardship over our PSU’s. A

Finally, divestment is a specialized job. Deciding between IPO’s, offers for sales, follow-on offerings, bulk deals, QIP’s is not an easy task. Add to this the complexity of deciding which company is ripe for sale. Will selling HPCL to ONGC be more value accretive than merging the two and then selling the combined entity? Should the general insurance companies be merged, and shares in the holding company be sold or should one sell shares in the operating business? Different market cycles will give a different answer. Unfortunately, the decision is likely to be driven by the fear of the Central Bureau of Investigation or the Vigilance Commissioner, rather than what markets dictate.

There are ownership models that address the challenges that plague Indian PSU’s. They address governance issues and structures, a path towards gradual disengagement from non-core investments, beneficial asset monetization and generating returns for the state. Temasek (Singapore), Khazanah (Malaysia), Solidium (Finland), Forsta AP-fonden (Sweden), ADIA and Mubadala (Abu Dhabi, UAE), are some successful models. All of them involve at the core, putting in place a governance structure where ownership shifts from individual ministries to a government holding company or a fund and furthering their governments agenda. Parenthetically, the report of the Committee to Review Governance of Boards of Banks in India aka the PJ Nayak Committee had a similar recommendation for government owned banks. Such structures will bring the desired focus, accountability, specialization and sense of ownership to the task at hand. These are some examples of successful transitions and structures importantly within the ‘state’, that we should consider emulating.

This shift, even if begun today, will bear fruit in the medium to long-term. Meanwhile there is undoubted fiscal pressure to raise funds. There are assets including BALCO and Hindustan Zinc, that can be sold immediately - to Vedanta or even the public. Shareholding with SUUTI can also be monetized relatively quickly. These and other such ideas will serve for the short-term. For the long-term unless we bring about transformative change, the pipes will choke.

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A modified version of this article by Amit Tandon, appeared in Business Standard on 30 August 2019 under the headline ‘Selling less while raising more”

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