PSU’s being used as cash cows
By Balraj Mehta
The Prime Minister, Manmohan Singh has become desperate as the growth rate of the economy has not picked up and actually fallen in December 2011. The eight core industries, which include coal, cement, natural gas, petroleum refinery and fertilizers, had recorded a growth rate of 6.3 per cent in December 2011. This is the second-lowest growth rate of the core industries in 2011-12 after October when the infrastructure sectors had expanded by just 0.3 per cent.
For the April-December period this fiscal, the growth was lower at 4.4 per cent compared to 5.7 per cent in the corresponding period of financial year 2010-11 in the wake of deceleration in investment.
The eight industries together contribute 37.9 per cent in the overall Index of Industrial Production (IIP). As per the data released by the commerce and industry ministry, crude oil production contracted by 5.6 per cent in December as against 15.8 per cent in the same month last year.
Natural gas production, too, contracted by 10.8 per cent compared with (-) 0.2 per cent year-on-year. In December, the petroleum refinery output slowed to 0.8 per cent (from 8.3 per cent) and steel to 2.2 per cent (from 9.4 per cent). On the other hand, coal output was up by 5.6 per cent in December this fiscal from 3.8 per cent year-on-year. Fertilisers segment expanded by 0.8 per cent (from 0.3 per cent), cement by 13.3 per cent (from minus 2.2 per cent) and electricity by eight per cent (from five per cent).
Concerned over slowing economic activities in the country, finance minister Pranab Mukherjee in Chicago had said one of the key objectives in the current year is to rejuvenate the markets and improve the business sentiments which have been at low levels for most of the last year. As per the latest CII survey, the Business Confidence Index (BCI) in the country declined by five points to 48.6 during the October-December quarter.
Prime Minister in this situation started working for “innovative measures and hit on disinvestment of public sector enterprises and transferring its assets to private companies, in particular foreign companies. The situation has now become complicated by the global economic recession and because of linkages of the Indian economy during the intervening period of economy reform which were only partly carried out. Desperate situations require desperate measures. But often the cure causes irreversible long-term damage at the cost of providing temporary relief. This is precisely what the Congress-led United Progressive Alliance (UPA) is seeking to attempt. In an ostensible bid to revive flagging investments in the economy, the government has decided to nudge several key public sector companies to employ their surplus cash reserves in “credible” investments.
In theory the idea is appealing. After all, it is a counter-cyclical measure-when the private sector is reluctant to roll out investments, the public sector can provide a stimulus and in the process hope to kick-start a revival. In practice, though, it will be difficult to pull off; worse, there is a risk that the public sector units (PSUs) will be financially hollowed out. For example, the government has identified that Coal India Ltd (CIL) is sitting on cash and bank balance in excess of Rs40,000 crore, while it has projected an investment of Rs4,275 crore and an additional sum of Rs6,000 crore to fund global acquisitions in 2012-13. CIL has been directed that if it is not able to step up investments, then it should use the surplus cash reserves to fund ideally more investments in coal or otherwise in roads, railways, waterways and power.
It is a patently bad decision. For one, it is very presumptuous of the government to assume that any surplus cash can be tapped for investments. An investment decision has to be commercially prudent, especially for the company. If CIL did not think it was prudent, it would not maintain cash piles with itself. Second, the government is nudging CIL into sectors in which it has little or no prior commercial expertise. There is every chance that it could end in failure. Either way, the decision is fraught with commercial risks and can jeopardize the company’s balance sheet. And now that it is a publicly listed company, such misuse of government equity power is also patently unfair to other investors.
Further, the principle underlying the decision, too, is questionable. The government, despite three decades of liberalization that has put in place transparent rules in the economy, continues to view PSUs as its personal fiefdom. In this instance, they are being used as a means to cover up the government’s fiscal follies.
“The buyback proposal came up for discussion but a decision on the proposal has been deferred,” sources said. The Department of Disinvestment (DoD), under the finance ministry, has identified about two-dozen cash rich public sector enterprises with a total balance of nearly Rs 2 lakh crore, and had sought opinion of respective ministries on disinvestment through the buyback mode.
On Tuesday, market regulator Sebi had allowed promoters with more than 75% stake in private sector companies and the government with more than 90% stake in public sector undertakings (PSUs) to reduce their holding through an auction to institutional players, a move that would bolster the government’s efforts to meet its disinvestment targets. The regulator had also allowed promoters of top 100 companies in terms of market capitalization to reduce their stakes through auctions to qualified institutional players or through buyback of shares in a proportionate basis. Market players believe that the Sebi decision, which they said was a step in the right direction, was taken primarily to help the government meet its divestment target. In addition, the new rules were tailor made to help companies to complete the process of selling shares within days, as against the normal process, like in a follow-on offering, that can take months.
As market conditions are not conducive for disinvestment through public offer route, the DoD had been planning to raise funds through other methods like buyback and cross-holding among PSUs. Under the buyback mode, the government can raise money by selling its equity in the company to the PSU itself. (IPA Service)
The government is treating the PSUs as cash cows and milching them without taking account its impact on long-term viability of these companies. The PSUs are paying the price for the UPA regime’s fiscal follies. (IPA Service)