Sucheta Dalal :Why do our babus goof-up?
Sucheta Dalal

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Why do our babus goof-up?  



November 15, 1999

At the end of trading on Friday the Bombay Stock Exchange had slipped 9.7 points to 4629.6 -- and continued its slow downward drift towards the year-end Christmas and New Year holidays. As I have said before, the Christmas slump has become a regular feature of Indian markets ever since Foreign Institutional Investors became significant players.

It is a trend that Indian brokers and investors have begun to understand rather well. But it is still something that has apparently never dawned on successive governments and the global investment banks who advise it on disinvestment of Public Sector Unit shares.

Year after year we see the same bumbling. Whether it is the Congress, the United Front or the BJP in the saddle, the finance ministry wakes up to the urgency of completing divestment of PSUs only when it is time to prepare the Budget and the fiscal deficit gap has to be bridged in a hurry. Invariably, share prices in November are far lower than investment bankers's estimates in March-April of any given year. This has often led to chaos and international embarrassment.

The Videsh Sanchar Nigam Ltd's Global Depository Receipts was cancelled twice because the babus in various ministries did not give the flexibility to time the issue perfectly. The shares were ultimately sold at well below what they could have fetched. It was the same with MTNL. When the shares were sold they were well below the originally anticipated price.

This year, too, the disinvestment programme has two casualties. Gas Authority of India Ltd shares were sold last week at around Rs 70 through a Global Depository Receipt issue. The sale has been dubbed a scandal by former finance minister P Chidambaram who charged that the government has lost a cool Rs 550 crore through underpricing.

And now MTNL's overseas and domestic offering has been postponed until January since the market is depressed.

The fault, as usual, lies in bureaucratic meddling and delays. A lack of any sense of purpose or targets is also to be blamed. That alone explains why no government seems to learn anything about how markets work and why the divestment programme gathers steam only in November/December when the rest of the entire global investment community is getting ready for Christmas holidays. GAIL shares were indeed sold at a ridiculously low price. It seems fairly clear that the timing of the issue was dictated by the government's hurry to complete the divestment rather than worry about the price.

What makes the GAIL sell off at a low Rs 70 truly reprehensible is the fact that big chunks of the equity went to Enron Corporation and British Gas, which are both its competitors. A negotiated sale to either of the two companies, say market sources, would have fetched it anywhere between Rs 150 to Rs 200 per share. More importantly, if competing companies were going to be allowed to bid for the shares, then why bar domestic companies from acquiring a stake too? I am fairly sure that a domestic offering would have seen the Reliance group bid for a chunk of shares and pay a much higher price too.

Since Finance Minister Yashwant Sinha has provided for a hefty Rs 10,000 crore for what he calls "privatisation" process, he is bound to ignore the criticism from his predecessor and find other ways to sell PSU shares before February. Ironically, it is not as though Chidambaram would have shied away from selling GAIL shares cheap. In fact, he held back the issue only because the Divestment Commission had objected in writing. Chidambaram punished the DC by stripping it off its advisory powers.

Cross-holdings of PSU equity, which was the last ditch solution for fiscal 1999, is also out. The government had then followed Finance Secretary Vijay Kelkar's suggestion and asked PSU oil companies to buy each other's shares and pass the money to the government. The action drew universal flak. The share value of the said oil companies tumbled and market capitalisation dived a phenomenal Rs 24,000 crores. Earlier, the Congress government had set a record in messing the divestment process through packets and bundles.

This time, trial balloons floated in various newspapers, suggest that the government will revive the Special Purpose Vehicle or a National Shareholding Trust -- both ideas floated and inconclusively debated last year. Instead of oil companies, the target for raising funds through the SPV/NST route will be banks and financial institutions. But before the government decides to make shortsighted use of banks and institutions, it could do well to remember that the move might strengthen the opposition of bank unions to restructuring of sick banks.

So far the government has done everything but put in place a sensible programme to implement the recommendations of the Divestment Commission.

The Bharatiya Janata Party government, which shows signs of lasting a full term, cannot afford the bungling of the previous regimes. It is even more imperative for the BJP to be clear about privatisation and put in place a system to implement it. Otherwise, it could jeopardise the restructuring of the private sector as well.

Forget public sector even the private sector is not open to privatisation. The attitude of the Federation of Indian Chambers of Commerce and Industry and the Associated Chambers of Commerce and Industry in lobbying against the sale of Modi Rubber shares is a telling signal.

So far, banks and FIs have been whining about the need for legislative changes for efficient debt recovery. The Modi Rubber issue, which has been hanging fire for at least half-a-decade, shows that better debt recovery is not the only solution. FIs can force companies to improve efficiency by cutting costs, improving productivity and in those companies where they hold substantial chunks of the equity by bringing in a strategic partner or even demanding a change in management.

The sale of the Modi Rubber stake, when it finally goes through, is a litmus test for restructuring the private sector. It requires support from the government. If the government acts positively, only then can it implement privatisation of the public sector and restructuring of industry.

Tailpiece:

A statistical compilation by the Credit Rating and Information Services of India Ltd of its ratings indicates that corporate India is in better shape than before but is changing dramatically. The process of separating the grain from the chaff is happening at a super fast pace. There is nothing homogenous even about a single industry group-management performance is resulting in wide variations.

For example, earlier only 6 to 7 per cent of companies were in the highest AAA credit rating category. A similar number of companies were below investment grade. And a hefty 50 per cent were 'A' rated companies.

Today, according to CRISIL Managing Director Ravi Mohan, the number of companies below investment grade are up to a phenomenal 45 per cent. On the other hand, triple AAA rated companies were also up to 15 per cent. Those in the A category were approximately 25-26 per cent.

Shows how good management separates the men from the boys.


-- Sucheta Dalal



 



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