Privatisation: Jargons simplified

What is privatisation? How does it benefit the government?
THE recent weeks saw six public offerings from the government to offload its holding in three privatised companies and dilute its stake in three companies, where it continues to hold a majority. This is not the first time the government has chosen to sell small portions of its holdings in public enterprises as a means to raise resources. During the 1990s, the Narasimha Rao government sold small holdings in a slew of PSUs, to mobilise resources. The initial, experimental steps in divestment did not have privatisation as the goal and the finance ministry had quite a struggle to sell the shares.
The NDA government, led by AB Vajpayee, when it assumed power in 1998, chose to abandon public offerings in favour of strategic sales and management transfers. It was felt that this mode of sale would help the twin objective of raising resources as well as improving the efficiency of firms.
For the first time a department was created and a minister was appointed for the purpose of giving the divestment programme direction. In due course, the department was upgraded to a ministry. Modern Foods was the first PSU to be privatised, in 1999-2000.
In the following year, aluminimum maker Balco was sold to the Sterlite group, despite stiff opposition from the state government. In ’02, the government sold a majority holding in IBP, CMC, VSNL, HTL, Paradeep Phosphate and Jessop. This was followed by divestment in Maruti, IPCL and several ITDC hotel properties in ’03.

The process hit a roadblock when the disinvestment ministry proposed the privatisation of HPCL and BPCL. For close to two years, there was no significant development, with the exception of the Maruti float in July ’03. Following the success of the Maruti public offer, the government, now more confident about approaching the market with more public offerings, decided to offload its residual holding in CMC, IBP and IPCL, as well as 20% in the Dredging Corporation of India. Then late one evening, a day before Christmas, the Centre took a bold decision to divest 10% each in Gail and ONGC. The six public offers were successfully placed and the government raked in more than Rs 14,200 crore.
What are the benefits of privatisation?
The government will mobilise resources, subject to the conduct of public enterprises and the discipline of private ownership. This will improve efficiency. In the process, the level of government interference in the economy will drop, and, in cases where government ownership and monopoly go hand-in-hand, the move will open up new areas to competition.
What are the methods by which a government can sell its holding in PSUs?
The more popular methods are public offers and strategic sales. In a public offer, government-held stock is sold to a diffuse mass of investors, none of whom acquire a large enough number of shares to acquire control. Margaret Thatcher popularised privatisation through public offers and almost all state-owned enterprises in the UK were privatised this way. Several other countries including France, Japan, Germany and Italy, and then China have adopted public offers as the means to privatise their state-owned enterprises.
In a strategic sale, the government transfers a majority stake, along with management control, to an identified management. The erstwehile Soviet Union used strategic sales rather widely. This was because it did not have a developed capital market, through which it could make public offers. The Indian government too, has privileged strategic sales on the ground that it fetches the government a control premium. It sold stake in IPCL and CMC through this route.

How do the two modes of privatisation compare?
Each method has its merits and demerits. Strategic sales ensure significant revenue for the government and a change in management, leading to greater efficiency in capital use and operations.
More importantly, the government’s role in sold state-owned enterprise is minimised.
On the other hand, public offers are best suited for PSUs where the government wants to bring down its holding but remains the largest shareholder. It is seen as the most politically-acceptable manner of diluting government stake.
More importantly, public offers promote the development of the country’s capital market and gives the equity culture a boost . For instance, in the UK, the share of people holding stock increased from 7% in 1979 to 24% in 1990.
Public offers also enable the issuer/seller — in this case, the government — to price shares in a manner that there are capital gains on allotment, particularly for small investors. In the recent public offers, the government opted to price stock differentially. This means that small investors were accorded a 5% discount on the discovered offer price.

Did the recent spate of public offerings bring new investors, including small investors, into the market?
Apparently, yes. Nearly 20 lakh applications were received from small investors for the six public offers. ONGC received the highest number of applications from retail investors, where the government received more than 7.6 lakh applications. The public offers also displayed that there is healthy interest among foreign investors in the Indian capital market. Most FIIs are willing to make large investments in quality Indian scrips.
There was a spurt in the number of demat accounts opened in the first two months of the calendar year, a clear indication that small investors are willing to invest in primary issues. The small investors, those investing up to Rs 50,000 in an issue, contributed to nearly a fourth of the disinvestment receipts this year.
Can we expect the government to bring more such offerings in the market?
Yes. This what disinvestment minister Arun Shourie said while addressing the press after the successful ONGC public offering of about 142.6m shares: “We are more confident about approaching the capital market now.�
In the months after the new government takes office, one may look forward to the public offers by aluminium major Nalco and oil heavyweight Bharat Petroleum, especially after the Supreme Court takes a view on the Public Interest Litigation against disinvestment. Both these public offerings had been cleared more than a year ago
A public offer by telecom major VSNL is also likely to come through too in the next few months. The company had been privatised way back in ’02, with the Tatas taking a major stake. The current government has already expressed its intention to offload its residual stake in the Tata Sons-controlled company via a public offering.