Family silver or a piggy bank? The Indian government needs to be clear about this as it goes into another round of disinvestment. Ever since 1991, the government of the day has tried to sell ownership in public sector undertakings (PSUs). After 18 years, there is still no clarity on why the government wants to do this.
THE PIECEMEAL STRATEGY
Guiding principle: Dilute minority stakes, expose PSUs to market discipline. And don’t talk about using the proceeds to plug the fiscal gap.
How to do it: Sell small stakes in high value PSUs like BSNL and Bharat Heavy Electricals Ltd. (BHEL).
Pros: PSUs become market-focussed. Government-managed PSUs act as a counter-balancing force to the private sector.
Cons: Because of government pay scales, policy talent needed to run these companies, save in the top 20 PSUs, will always be a problem. A lack of entrepreneurial drive will be a serious issue.
THE SMART SALE STRATEGY
Guiding principle: Government consolidates its shareholding in all PSUs into a mutual fund-like entity.
How to do it: Accumulate all the holding into a government entity, NatInvest. Appoint a board with top industry professionals. NatInvest buys and sells stakes in its portfolio.
Pros: Natinvest brings regular income to the government. Being a permanent institution, there will be less political opposition to stake sales in companies. PSUs benefit because a top quality board oversees their performance.
Cons: Expect a hue and cry in Parliament if the NatInvest sees its portfolio value diminish. Expect huge lobbying to be on the board.
(This story appears in the 17 July, 2009 issue of Forbes India. To visit our Archives, click here.)
Hi Shishir, While the smart sale strategy sounds like a good idea, it would have tax pitfalls. The PSUs when they pay dividends to Natinvest would have to pay dividend distribution tax. Assuming that all PSUs operate in a single tier structure, Natinvest would be able to take credit for this tax, while paying dividends to the govt. However, accounting and adminstrative costs would shoot up. The issue would also be how to treat the Natinvest entity? As a corporate structure or a pass through entity? Should it be taxable on its income? Lots of issues come to my mind, solely from a tax point of view. Am sure there would be legal issues as well. Given this, perhaps a hybrid of the smart sale strategy could be thought of, where a core group, which includes people drawn from the private sector act as advisors in the dinvestment process (ala the piecemeal strategy). A thought provoking article. Best Lubna
on Jul 13, 2009