Disinvestment, Privatization of PSBs and $ 5 Trillion Lift-Off!
| S Kumar Saha, Business Editor, IOP, Mumbai - 01 Apr 2021

A déjà vu Moment to Combat Covid-19!

Privatizing more PSUs is once again the flavor of the season. But data reveals govt is ignoring some hard truths. There are only a handful of sectors where a disproportionate market share and the nature of business give government firms a case to command a premium.So, merely privatising PSBs will get you nowhere. A whole lot of intricate sector-specific reforms must also be carried through to get useful results.

By S. Kumar

I was going through a novel by an American writer in recent past in which the writer mentioned an announcement in 1961 by then US President John F Kennedy of the US’ goal of landing a man on the Moon in less than a decade. It was achieved because of the inspiring message which was complemented with a generous commitment- a new body NASA was established in 1958 and it prized merit and recruited extensively from outside of government; substantial private sectors participation without political touch with minimal Bureaucratic interference and decision-making breakneck speed.

Our Government should know that the private sector is the main driver of an innovative economy, it should meddle very little. Pecuniary or non -pecuniary- propel individuals to take the risks of innovating. Fiscal policies like taxation and IP laws are the most a govt. should do to promote innovation. Innovation, Education, Efficiency of labour and capital allocation, Physical and institutional infrastructure are some main factors and of these improvements in institutional infrastructure and efficiency of resource allocation are hugely important rather relatively quickly!

In entire past two decades, FDI into India has totaled about $720 billion and in last five years it has $60 billion annually totaling $300 billion. Foreigners to invest more in India will require fundamental improvement in the ease of investing, investors enquire whether there is adequate infrastructure, legal protections, skilled labourer, domestic and export demand for the intended of goods and services, those are basic yardsticks that the investment flows into India, not mere assurances that the investment process has been made easier. A $2 trillion increase in GDP will require at least $600 billion increase in an annual investment so $5 trillion dream of govt is like squeezing a stone in the hope of water especially aftermath and effect of Covid-19 and above all bizarre economic policy of the present govt.!

Disinvestment target achievable

For the public listing of LIC, amendments will have to be made to the LIC Act. The government will also need to consider how surpluses are paid. LIC currently pays 5 percent of its surplus to the government, and the balance to existing policyholders. This will need to be changed, say experts. A separate team of legal advisors will decide on the embedded value of LIC, which the insurer does not publicly reveal. Unlike corporates, for insurance companies the embedded value or the implied values of new business are important matrix to determine valuations. The government, in December, chose Milliman, a consulting firm, to carry out LIC’s valuation. 

Experts thus prefer to look at a valuation multiple based on assets under management (AUM), which offer a perspective into the sum total of all renewals that have come over the years and withdrawals paid to policyholders. LIC’s total assets was Rs 31,96,214.81 crore in FY20, against Rs 31,11,847.28 crore for the previous year. A listing at the markets will not just mean an obvious increase in transparency, but also the reporting of quarterly performance, and greater accountability to a new set of shareholders. LIC, by its very existence and massive AUM, has always been considered the buyer of last resort by the government to bail out companies or issues. The government is likely to offload around 10 percent in LIC, though this is yet to be fixed. 

According to the estimates made by various analysts, the size of the upcoming LIC IPO would be between Rs 70,000 crore to Rs 1 lakh crore, according to a previous note from Motilal Oswal Securities. According to the government’s estimation, the LIC IPO valuation is pegged between Rs 13 lakh crore and Rs 15 lakh crore. However, most analysts and experts estimate this figure to be around Rs 8 lakh crores to Rs 11.5 lakh crore.

There is no doubt that the LIC IPO will attract the best of institutional investors, global and domestic. Thus, if the LIC IPO goes through alongside the expected stakes sale in BPCL or CONCOR or even Air India, the government will easily be able to cross its disinvestment target of Rs 1.75 lakh crore set for FY22.

There is also speculation about which government-backed general insurer is going to be privatised. In previous years, there were plans to merge three state-owned general insurance companies—National Insurance Company, United India Insurance Company and Oriental Insurance Company—by the end of March 2020. But this is yet to take place. Now the government has done a turnaround and decided to possibly privatise one of them, with the exclusion of New India Assurance, which is a healthier operating insurer.

Government will have to complete several processes before selling stakes, which will be time consuming and complex!

Finance Minister, on February 1, announced the move to privatise two public sector banks (PSBs) and one general insurance company. Positive indeed that she said “privatise” and not “divest”. “Other than IDBI Bank, we propose to take up the privatisation of two public sector banks and one general insurance company in the year 2021-22. This would require legislative amendments and I propose to introduce the amendments in this Session itself,” she said in her Budget speech.

“The privatisation of these banks will not happen tomorrow. It all depends on the will power of the government to push for these measures. If this is done taking bank unions together and ensuring that there are no or few job losses, the process can be done quickly,” says Krishnan Sitaraman, senior director at Crisil.

After all, the government had managed to introduce the Insolvency and Bankruptcy Code relatively quickly in 2016, though it was a complex but game-changing legislation. While Rupen Rajguru, head of equity investment and strategy at Julius Baer India says that "The intention that the government has shown is strong and the language is clear. The government appears to be fine with letting go of the management control" The government’s policy on this score has been outlined with great clarity by the principal economic adviser who has said the government is “clear and unapologetic” about privatisation of public sector enterprises as a part of reforms. Given current market conditions, this can take time, but any delay will not be on account of “lack of intent”.

Privatisation as one element of the overall reform policy is fine, but adopting it as the foremost plank in banking sector reform, mainly because right now it is politically easy thing to do, is fraught with adverse consequences.

To get a sense of the total picture, it is useful to refer to what Raghuram Rajan had to say over a year ago in the book What the Economy Needs Now, edited by Abhijit Banerjee and others. Rajan’s overall point is that ‘simple’ solutions like privatising all PSBs may be no panacea. To this, a further point needs to be added: consolidation and privatisation of PSBs can have little to do with setting Indian banking right, as these actions may be necessary, but will not be sufficient by a long chalk.

The best proof that the problems of Indian banking transcend issues of ownership lies in the plight of YES Bank. The cardinal malaise of Indian banking is a lack of adequate governance, stretching across public and private ownership, and it stems from the nature of Indian politics and entrepreneurial culture. Politicians will not allow PSBs to be run professionally, and promoters of private banks, too, often try to run too fast and cut corners in the process.

Plus, there are issues of personal probity, which have come to light over the actions of former leaders of some of the largest private sector banks like ICICI Bank and Axis Bank. There are right now just a few mega PSBs - SBI which has absorbed all its associate banks, Bank of Baroda which has taken in two other banks and four large banks like Union Bank, PNB, Canara Bank and Indian Bank, which absorbed six others.

The government would like to privatise the weakest banks, but an investor/buyer would prefer to pick up stakes in the strongest PSBs. Of the 12 banks, excluding large bank State Bank of India, others such as Bank of Baroda and Punjab National Bank are among the largest, and have digested the mergers that took place in 2019. These, along with Canara Bank, can be seen as good candidates.

As a group, PSBs have struggled in terms of asset quality and capitalisation, compared to private sector banks. The gross non-performing assets (NPAs) ratio of India’s banks stood at 8.5 percent, of which for PSBs it was 11 to 11.5 percent, while for private sector banks it was 4 to 5 percent. Capitalisation of PSBs has been weaker than private sector banks, and is estimated to be Rs 2.6 lakh crore, according to Crisil. The one area where PSBs have been relatively sound is in their resource mobilisation of deposits, where deposit growth has been strong for most PSBs and investors have not lost their deposits.

Privatizing more PSUs is once again the flavor of the season. But data reveals govt is ignoring some hard truths. There are only a handful of sectors where a disproportionate market share and the nature of business give government firms a case to command a premium.

So, merely privatising PSBs will get you nowhere. A whole lot of intricate sector-specific reforms must also be carried through to get useful results. 

Image (Representational) courtesy - Twitter 

(The writer is a senior journalist and political critic. The views expressed in this article are his personal.)


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