The Rocky Path to Government's Ambitious Privatisation Plans

Twenty years is a long time. That’s what it took to execute the privati-sation of Air India. The process was set in motion in year 2000, albeit the idea for selling it was first proposed in 1988, following the successful sell-off of British Airways and other national assets by the Margaret Thatcher government in the UK. “Air India was the Holy Grail of public sector privatisation. The sentiment in the government was, ‘If we can success-fully privatise Air India, we can sell anything.’ Now that it’s done, it’s up to them to leverage it,” a market source told Business Today requesting anonymity. The sale of Air India is to fetch the government ₹18,000 crore, and would give the buyer, Tata group, ownership of Air India, its low-cost unit Air India Express, and a 50 per cent stake in the airline’s ground and cargo handling subsidiary, Air India SATS Airport Services (AISATS).  

Privatisation is a multi-layered, complex process. The dos and don’ts from the Air India experience might well serve as a template for future such deals. And the government sorely needs the template. Consider this. ₹1.75 lakh crore is the revenue target through privatisation in fiscal 2021-22. (That would include both privatisation and disinvestment.) However, the target looks far off, with only ₹9,329.9 crore in the bag so far (see Far from Target), and only two months left in the fiscal. Add to that the fact that these days, asset monetisation, disinvestment and privatisation are often used interchangeably. (The government is looking at raising ₹6 lakh crore through asset monetisation alone.)
So, has the government bitten off more than it can chew? Not quite, say experts, who aver that for a coun-try with the world’s fifth-largest economy and humongous assets, it is achievable, provided certain condi-tions are met. “In our estimation, Life Insurance Corporation (LIC) of In-dia should be valued between ₹9.5-10 lakh crore,” says Rajeev Shah, Manag-ing Director & CEO of Ahmedabad-based RBSA Advisors. “Even if the government proposes to sell 5 per cent of LIC, it will provide ₹50,000 crore to the selling shareholders. The government will likely be doing that in tranches over the next three to five years as the market absorbs such a large IPO.”

Adds Shah’s colleague Ajay Ma-lik, who heads investment banking at RBSA Advisors: “Several alternate asset management funds, sovereign funds and developmental finance institutions are actively investing in India. The country has also received high interest from large strategic investors from the US, Europe, Japan and the Middle-East. Therefore, financing ₹6 lakh crore, which works out to be less than $90 billion, isn’t a big issue.”

“The LIC IPO is fundamentally a big positive,” says Deven M. Choksey, Managing Director, KR Choksey Holdings. “LIC is a superb organisation built over the past several years. A successful listing will give it a thrust to expand globally.” While a lot hinges on the success of LIC’s IPO, the catch is that the LIC Act, 1956, needs to be amended to allow foreign participation in the listing.

The same goes for privatisation of PSU banks, with changes required in the Banking Compa-nies (Acquisition and Transfer of Undertakings) Act. “The law will have to be amended to facilitate government equity to be brought down below 51 per cent in public banks,” says Rajnish Kumar, former chairman of the country’s largest lender, State Bank of India (SBI). “Then the process has to be run to discover the true value of banks to be privatised. Finally, employee support to the idea is needed.”

 

CHALLENGES TO PRIVATISATION

The Atal Bihari Vajpayee-led National Democratic Alliance government’s defeat in 2004 was also seen as a mandate against privatisation. As a result, from 2004 to 2014, the United Progressive Alliance (UPA) dispensation put any new proposals for privatisation on the backburner.

But things have changed a lot since then. “The government is very clear in its thinking that it has to do it in 10 years. It’s like a game of cricket where you are playing for 20 overs. The government is in a hurry to close this as fast as it can. And I don’t think that privatisation will result in electoral losses. Gone are those days,” avers Choksey.
However, some fears persist. According to industry sources familiar with disinvestment, the process presents challenges to those involved in the transaction, in terms of sometimes unnecessary questioning and probes from the government. “Consequently, everyone involved becomes extremely risk-averse and the process becomes tedious with way too much emphasis being given to things like the right documentation,” says an insider familiar with the 2021process. In the private sector, it takes three to six months to complete a transaction. In the case of the public sector, it can take anywhere from one to two years.

Labour problems and litigation are some other challenges. “When a foreign investor comes in, he would want to work with a clean slate. Labour problems could be handled by the government itself or by giving complete freedom to the investor to do that. Similarly, litigation matters can be assigned to a separate company, and the government can keep [aside] funds for it,” says Dinesh Pardasani, Partner at New Delhi-based law firm DSK Legal.

Such issues could be avoided through thorough due diligence. “Initial preparedness could help identify enti-ty-specific potential roadblocks, which can then be ad-dressed before the transaction is launched,” says Sandeep Negi, Partner at Deloitte Touche Tohmatsu India. “This can be carried out internally or by an external agency.”

Another area of concern is arriving at the right valua-tion for a national asset. Recently, employees of Central Electronics Ltd (CEL)—which was sold to a private bid-der around the same time as Air India—moved court alleging undervaluation of the photovoltaic cell maker. The sell-off has now been put on hold, with the Department of Investment and Public Asset Management (DI-PAM) re-examining it. “The government has the right intent and it is making all the right moves after thor-oughly analysing the subject. However, the opportunity of executing the deal must be given to investment bank-ers as it is not in the business of managing investments,” suggests Choksey.

 

A MATTER OF TIMING

 

Like most other things, assets, too, have a shelf life. And if not sold at the right time, value destruction or migration is inevitable. For instance, BSNL and MTNL were amongst the most profitable companies 20 years ago. But their value has shifted to private telecom players such as Bharti Airtel and Reliance Jio. Similarly, had Air India been sold 10 years ago, it may have fetched a higher price. “If only India had come out with an enabling mechanism for data centre investment in the telecom sector around the time of the first coronavirus-induced lockdown in 2020, you could have investors putting large amounts of money into BSNL and MTNL assets,” says a senior executive at a leading mer-chant bank. Some experts feel this may be the right time to sell a company such as Steel Authority of India when the steel cycle is at an all-time high. In another five years, when the downward cycle begins, it might not attract many takers. Similarly, in the case of Container Corporation of India, it may excite interest from several potential buyers as India is expected to do well in logistics.

The nature of a business also determines a buyer’s choice. In December 2020, Bharat Petroleum (BPCL)— India’s second-largest fuel retailer—attracted just three bids, with two bidders unable to raise the required cash. Anyone buying a large fuel distribution business would certainly factor in 20-year demand. But there is a fair possibility that within the next 15 years, the world would have shifted to electricity and renewable energy. And that has made investors wary of putting $20 billion into BPCL today. Recently, Vedanta Group offered to pay $12 billion for BPCL, say reports.

However, all may not be lost for companies like MTNL and BSNL. Experts like Choksey feel that using the right strategy, investor interest can be revived in them. “MTNL and BSNL have created such a strong wireline network and reach over the years. Today, the wireline network is becoming important for high-speed data communication. You just need to upgrade the infrastructure to offer a strong product. First, monetise their assets so that no third party takes advantage, and then sell them off,” he emphasises.

But some assets, such as banks, will continue to be valuable in an emerging market economy like India. “The banking sector’s performance impacts economic growth, and economic growth deeply influences the performance of a sector like banking. As far as valuation is concerned, there is no good or bad time for its maximisation. Investors willing to invest in financial services will see a good opportunity here,” says SBI’s Kumar.

 

 

DEMERGING NON-CORE ASSETS

 

There is another fundamental problem that is encountered during disinvestment. When a PSU is being disinvested or privatised, in most cases the government is not able to sell certain assets such as real estate and other businesses or joint ventures (JVs) at optimal value. So, it will need to devise a mechanism to dissociate non-core assets from all such entities. There would be takers for the PSUs, but their non-core assets would have different investors.

The government is now trying to consolidate the real estate holdings of PSUs. For every PSU, there will be a separate land-owning company, which will be merged into a central land-owning company to be monetised separately. “Real estate owned by PSUs has been a challenge right from the time of the privatisation of Videsh Sanchar Ni-gam Ltd in 2002. A decision can be taken by the Registrar of Companies. The government has the power to demerge a PSU without having to approach the courts,” says a per-son familiar with the matter.

The consensus, therefore, is that there is no lack of interest or assets to be monetised through privatisation. The challenge lies elsewhere. “The question is if we will be able to supply global funds and strategic investors with an adequate asset pipeline. That can happen only if parts of assets in infrastructure sectors such as the railway, highway and the power sector are privatised or divested. What is ultimately required on the part of the government is a deal-making pipeline, to enhance their implementation capacity and bolster their willingness further to see these disinvestments through,” asserts RBSA’s Shah.

That’s easier said than done.