Strategic allies may get to buy govt's stakes in divested firms

NEW DELHI: Close on the heels of an early exit from privatised Modern Food India Ltd, the government has started the exercise of building in provisions into draft transaction document which would give strategic partners an option to buy out government’s residual holdings in divested PSUs at the end of one year of transfer of control.
In the case of State Trading Corporation the strategic partner would have a call option on the government’s residual holding of 26% at the end of first year.
Potential bidders for Shipping Corporation of India are also keen on a call on the government stake at the end of first year. However, in this case, the government is unlikely to accede to this demand. At best, the government may allow a call at the end of 18 months instead of 24 months.
The government is unlikely to make early exit a common feature in all privatisation transactions. In several public sector undertakings, the government would want to hold on to the shares, more for political reasons than business considerations. The government’s presence on the board of directors would also tend to give employees comfort that their rights would be protected.
In all the transactions completed in the past, the government has built in provisions which ensures it retains its 26% for at least two, if not three, years.
Disinvestment minister Arun Shourie has said in the past that the Union government was not averse to early exit — ahead of the date when the call or put options become available — in certain privatised enterprises if it was convinced that the new management was managing the company well. The cabinet committee on disinvestment at one of the meetings earlier this year had authorised the government to make early exit from privatised PSUs.
In most public sector undertakings which have been privatised, the government holds 26% stake. In addition, the government has certain rights as a shareholder such as voting against certain resolutions in the board meetings. Where asset stripping is involved or where big loans or advances are to be given to a third party, the board of the privatised PSU has to seek affirmative voting by the government to the such resolutions.
For the acquiring company, an early exit by the government would clear the way for restructuring of the public sector undertakings and even a merger with an existing business of the acquiring company if it makes strategic sense.