Economic Highlights

New Delhi, 2 January 2010

PSU Disinvestment

APEX BODY WARNS AGAINST IT

By Shivaji Sarkar

While the market is abuzz with expectations of public sector divestment, the apex public sector organization, Standing Conference of Public Enterprises (SCOPE), has advised the government against flooding of public sector listings.

It has told the government: “There should be no flooding of offers of public sector companies in stock markets or else it would eat into their valuations”. Two PSUS - NHPC and Oil India – have already gone public. The NTPC, Satluj Jal Vidyut Nigam, REC and many others are in the queue.

The Finance Ministry has taken the decision to disinvest 20 per cent government stake to compensate for its severe fiscal deficit. The deficit has risen by 73 per cent estimate to Rs 3.06 lakh in the first eight months against Rs 1.77 lakh crore a year ago. The total deficit may exceed budget estimate of Rs 4.01 crore.

Another reason that has possibly made the government take the decision is the year-end rallying beyond 17,000 sensex points at Bombay Stock Exchange. The bourse on the other hand has reportedly rallied with the expectations that 18 PSUs are likely to come up with plans to hit the market with initial public offers (IPO). Some consider this as a trap to entice the government to come up with the offers, which it could not do earlier under the pressure of the Left parties.

This is where the government has to take extreme caution. The bourses despite many regulatory mechanisms at best remain least regulated. A recent study by SMC Capitals that has also come at the-year end says that “greed” is becoming the driver for the stock market.

The study found that the ratio of market cap to bank deposits, which fell to a low of 74 per cent – 0.74 times of total bank deposits - in Feb 2009, bounced back to the pre-Lehman collapse level of 138 per cent by November. This means that market cap is 1.38 times that of aggregate bank deposits. In January 2007, the market cap was at 152 per cent or 1.52 times the deposits. The bull race had taken the market cap to touch 235 per cent or 2.35 times as the Lehman scandal hit the market.

The government needs to treat these as severe warnings. The study notes that the deposits available with all the banks in the country put together could not even buy half of the BSE stocks. This raises a critical question how the stock assets are valued. It only hints at the high speculative values jacked up beyond the real strength of a scrip.

The government also has to look at the figures of February 2009, when in the wake of a Lehman scam the market cap steeped down to 74 per cent. This means the entire BSE listed stocks could be bought with the bank deposits and still 26 per cent of the deposits would be left. It is also important to note that small players are virtually absent at the stock market. The big fish manipulates it to suit their needs for bull (high) or bear (low) phase.

Though the SCOPE has suggested a phased scheduling of the IPOs, in reality it wants the government to shelve the decision during this critical phase of world economy. It has apprehensions about the manipulations in the market that is what it means by “eating into their valuations”.

The stock traders function in a cartelized manner. They fix and dictate values of each of the scrip. The market is fully manipulated. Chances for fair play are limited. Since the government controls SCOPE, it has limitation in tendering its frank advice. It couches its critical advice in phrases and words so that the political bosses do not feel offended. But what it has suggested only means that the government needs to put off the decision of disinvestment.

It has not said in so many words, but the SCOPE officials have reportedly pointed to some of the controversial previous divestments like the Centaur Hotel, which had appeared to have developed into a sort of scam.

Dilutions of stakes in organizations built up with the blood and sweat of the people also need to be reconsidered because the government is only the custodian of the assets. The dilution of the government or better to say people’s stake would reduce its holding to less than 67 per cent post-issue. The decision would finally hit the people. Share dilution has its impact on the control and governance of the companies. This becomes an easy route for elements who want to usurp the people’s wealth and create private monopolies. Ultimately, they even dictate the price of products so that they could be the profiteer from it.

The proceeds from the share sales would also not go back to the coffers of the PSUs. It would be used by the government to fund social sector reforms. The government has said that the fresh issue would be used to augment the capital base of PSUs to meet its future capital needs. But the way the government has been playing with such funds it only creates doubts about the intentions.

The government needs to learn from the food sector as well. Having virtually done away with the public sector distribution system (PDS) and allowing private cartels to enter the food market, it has not left itself with any instrument to regulate the prices either of food grains, pulses, vegetables or other commodities. The PSUs are engaged in public utilities like power, gas and steel. If the government’s control on these organizations loosens it would virtually leave the populace to be devoured by sharks as they would be able to dictate the prices and increase their profits. (An example is the BSES that was handed over power distribution in Delhi. It hiked power rates, sent inflated bills and rarely listened to the Delhi government’s advice).

Democracy elects a government to protect the people. Failure of that trust and duty is a sacrilege. The government needs to listen to the advice of SCOPE and stop itself from playing the dangerous game. Heavens would not fall if the PSUs are not disinvested. --INFA

(Copyright, India News and Feature Alliance)