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Tuesday, September 8, 1998
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Disinvestment strategy risky
From T.V. Lakshminarayan
Tribune News Service

NEW DELHI, Sept 7 — A radical proposal being considered by the government to privatise public sector enterprises (PSEs) is fraught with risks as it would give ministers and bureaucrats unfettered powers to control the enterprises without being accountable to Parliament or any government agency.

The new privatisation proposal scripted by the technocrat Finance Secretary, Mr Vijay Kelkar, envisages the setting up of a specialised corporate body — special purpose vehicle (SPV) — which would buy government equity in excess of 49 per cent in major blue chip PSEs and offload them in the market at an appropriate time when the capital market is buoyant.

It is proposed that the government would own 49 per cent of the SPV directly and the rest 51 per cent capital would be contributed by institutions, known as Financial Partners (FP). The FP would comprise institutions or companies where the government stake is below 51 per cent. This would ensure that while the government does not have a major say in the functioning of the SPV it would benefit from the profits made by the corporate body from the sale of blue chip PSEs.

Immediately on offloading its scrips, the government would be reimbursed a "fair" rate by the SPV. The SPV would source its funds from the public enterprises (this is what they would be called once the government divests its majority stake in them). The PEs would be raising the funds by borrowing from the market.

In the final stage, the SPV would sell shares to private investors, who the government hopes would pay a premium over the prices at which the SPV bought the equity. The privatisation proposal known as "Privatisation: A Fast Track Approach" justifies this assumption on the fact that the shares being sold by the SPV would be that of private companies instead of the PSEs where the government had a majority share.

The new strategy, based on the experience of the Singapore government in the privatisation of Singapore Telecom, envisages sale of 10 navratnas, six top public sector banks and IDBI.

The core group of Secretaries, headed by the Cabinet Secretary, last week went into the proposal and decided to bring up this concept for consideration of the group of ministers.

According to sources in the Disinvestment Commission, the advisory body which recommends the divestment of government shares in PSEs, the new concept raises many concerns.

In the first place, while the strategy would dilute the government stake in the PSEs it would not necessarily mean that it loses controlling authority. Even as a 49 per cent shareholder, the government would continue to call the shots at the board meetings and as the biggest voter have a say in the election of the Board officials, including the Chief Executive Officer.

However, with the PSEs getting transformed into a private public enterprise, they would not be accountable to Parliament and the Comptroller and Auditor General (CAG). Thus it would be solely under the bureaucratic and political control of the ministry that can deal with the PEs without any checks and balances. The Central Vigilance Commission and the CBI would also be kept out as the employees of the "privatised" PEs would not be considered public servants.

It is estimated that the top PSEs make purchases worth thousands of crore of rupees and bureaucratic and political influence without any checks and balances could encourage corruption in the system. For example, IDBI alone disburses loans to the tune of Rs 20,000 crore to Rs 25,000 crore.

The new proposal also talks of the government being able to bridge its fiscal deficit through the SPV. The Disinvestment Commission has suggested that the proceeds of disinvestment should be placed in a Disinvestment Fund to be used for specific purposes like the Voluntary Retirement Scheme, social infrastructure and retirement of public debt. The Finance Minister too has made statements that the funds would not be used for meeting the budgetary deficit.

The SPV funding envisages borrowing money at market rates by PEs. According to financial experts, these funds accessed as loans would have to provide for about 15 per cent as interest at the going market rate and a large amount of the proposed profits in a booming market would be diluted. Also, the capital market in India is unlikely to see a boom in the near future if the market conditions in the rest of the world are any indication.

The disinvestment proposal says that there would be gains to the government to the extent of 79.2 per cent. This is based on the presumption that the price at which the SPV sells the shares would be such as to cover the cost of the shares and the carrying costs for a period of 18-24 months. According to financial experts, if the government were to sell its equity directly at the price that SPV can get instead of through the SPV mechanism, it would gain 100 per cent.

Sources in the Disinvestment Commission maintained that strategic sale in select PSUs as recommended by the commission was the best option for the government. They said that in case the overwhelming objective of the new proposal was to make available funds to the extent of Rs 5,000 crore to the government (the disinvestment target for this year), a simpler and better alternative would be for the government to float bonds in the market. The bonds could be made repayable within two to three years from the proceeds accruing from disinvestment.

The sources felt that the interest payable on these bonds would perhaps act as an incentive for speedier disinvestment through both strategic sale which does not depend upon market conditions and offers sale when the market conditions improve.back

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