As it tries to disinvest its holding in PSUs, the Modi government is paying the price of not even making lip service to reform public sector undertakings
While the stock market hit an all-time high just yesterday, there is one part of the market, which is yet to enjoy Achche Din: stocks of public sector undertakings (PSUs). And this is making it difficult for a confident government to execute its ambitious disinvestment plans.
Take a look at the performance of the PSU indices on BSE and NSE. The week before Bharatiya Janata Party (BJP) won its massive mandate, the market sensed that Narendra Modi is likely to head the government and the indices shot up and continued to rally. Sensex is up by 27.04% from 8th May till now and Nifty is up 27.27% over the same period. However, the two PSU indices have not performed as well as the broad market indices. In fact, the PSU indices shot up initially when the market players expected the Modi government to get cracking on reforming various institutions.
The first blow to such expectations was a tax-and-spend Budget in July, which included an ambitious programme to disinvest shares of select PSUs. Secondly, very soon thereafter, the government unveiled a different set of priorities, launching Jan Dhan Yojana, Clean India and Make in India campaigns.
While the government is entitled to decide how to prioritize its actions, the stock market is in no mood to wait for it to act on PSUs. The shares of PSUs started drifting down. Indeed, not only has there been no talk of reforming the PSUs but public sector banks (PSBs) have continued to report large bad loans. PSU banks, however, are under no pressure from the ministry of finance and Reserve Bank to act against defaulting promoters. This was probably because the government depended on them for a successful rollout of opening 7.5 crore new accounts under Jan Dhan Yojana.
Now, when time is running out for disinvestment, the government has woken up to languishing stock prices of its PSU jewels. With just four months left to complete its disinvestment, the government is rushing to sell stakes at least in some companies. According to the current plan, Coal India, ONGC, Steel Authority of India Ltd (SAIL), and NHPC will hit the market soon.
Indeed, Coal India and ONGC could even hit the market for further divestment within next two weeks, according to some media reports. According to a business newspaper “the department of disinvestment was watching market conditions”, whatever that involves. It may follow it up with disinvestment in SAIL.
However, there is no clarity yet on stake sales in Container Corp, Rural Electrification Corp and Power Finance Corp.
While the government is preparing for the sale of stakes in ONGC and Coal India, it has taken no steps to assure institutional investors that it will allow these companies to be run professionally. This means that PSU stocks will not rise much, after the disinvestment. Who would want to buy such stocks in that situation? While ONGC’s share price has slid a bit because of declining crude oil prices, Coal India has continued to suffer from gross mismanagement, unclear business environment and a highly unionized labour. It has given no returns from the time it was listed over four years ago.
According to a newspaper report, the sale of stake in Coal India could take place in tranches, as the government felt the company’s shares were “undervalued” now. While the babus may have a sound understanding of market valuation of shares, it would have helped the valuations of PSUs, if the government actually did something to improve their performance or even talked about doing something, which would have improved the market perception about them.
Indeed, it could well be that the government will have to sell these shares not at the so-called “undervalued” prices but even lower, at a discount. The netas and babus may be unaware of how indifferent the market is to PSU shares. To make the disinvestment a success, they will have to be sold at a discount.
The government could have got a lot more from ONGC and Coal India when the market was hot – that is immediately after the budget. However, the government had priorities other than raising revenues then or was too confident about its disinvestment programme.
India can and should take advantage of present fall in price and obtain whatever it can, provided we have adequate and secure storage facilities. This will provide increased energy security
According to Fatih Birol, Chief Economist, International Energy Agency (IEA), the current fall in oil prices is unlikely to last for long. He is reported to have said, "there will be downward pressures on investments (upstream) even as demand for oil increases. This may result in prices rising again".
More details on this important issue can be found in "World Energy Outlook 2014" released by the International Energy Agency. It appears from this study that, by 2040, oil supply will rise to 104 million barrels a day.
It may be recalled that the Indian Cabinet Committee on Economic Affairs (CCEA) had proposed the gas price at $5.61 per mmBtu as against $4.2 in force until end October this year. The Rangarajan Committee had proposed a price revision at $8.4, which was approved by the previous government. This was ought to have been put into effect as of 1st April this year, and this was postponed until the final revised price of $5.61 has been fixed. There has been no official announcement as to why the rate was fixed in US dollar and not in rupees; nor has the government announced the rate of exchange between the US dollar rate and the rupee conversion factor!
In any case, as far as India is concerned, perhaps, it can and should take advantage of present fall in price and obtain whatever it can, provided it has adequate and secure storage facilities. This will provide increased energy security.
In the meantime, the good news on hand is that the Gujarat State Petroleum will be able to get gas from its KG block and this was announced in the TV channels, though full details have not been given out so far. These are expected shortly.
In another interesting development, early this year in April, Cairn India had submitted a revised development plan to ONGC to increase gas production from the Raageshwari Deep Gas fields in the Rajasthan Block to 100 million standard cubic feet or 2.83 mscmd, by fiscal 2017. At present, it is only producing 0.25 mscmd and hope to double up its production by 2015 last quarter, if not earlier.
Just to refresh memory, ONGC has 30% stake while the balance of 70% is held by Cairn India in the block. As a result, they have a production sharing contract (PSC) and the operator can get unconditional extension for five years if it is producing oil and 10 years in case of expected gas production. So far, Cairn has been successful in its attempts and is increasing its production. Their plans are afoot to exploit the full resource base of 300,000 boepd in their Barmer block.
Press reports indicate that ONGC, has been eyeing to raise its holdings from 30% by presumably delaying their concurrence on these developments so that they may secure an increased stake. The country is in dire need of both oil and gas and it is in fitness of things to raise such matters at the Board level and thrash it out rather than adopting such means to secure higher stakes. Development and expansion work should be hindered in any way. Cairn India has already floated tenders for construction of gas processing terminal.
In the next few weeks, news is on hand, that the government may offer 5% of its holdings in ONGC to carry on its plan for divestment.
ONGC has recently appointed Intec Sea of Malaysia to help it develop the KG-DW-98/2 block which is estimated to hold about 500 million tonnes of oil and oil equivalent gas.
This area is said to cover 7295 sqkm and sits next to the block owned by Reliance-BP-Niko Consortium in KG Basin. It may be remembered that this block was won by a consortium consisting of ONGC, Cairn Energy and Norway's Statoil. But now, it appears that Cairn Energy and Statoil are in the process of selling back their stakes to ONGC.
One serious development that may crop up in the months ahead when stake sales of this nature comes up for serious discussion. Who knows Vedanta or Cairn Energy Board may toss up new proposals and then seek to swap their stakes in KG basin for the Rajasthan holdings?
In the meantime, ONGC would do well to seek assistance from experienced private players in deep water exploration so as to get the best result and to ensure both oil and gas starting flowing from this KG basin.
Country needs the supply of gas and oil for national development and to reduce dependence on imports.
(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)
Rakesh Jhunjhunwala will buy 4.99% stake while a group of 12 individuals would purchase 56.25 crore warrants held by FTIL in MCX-SX for Rs88.42 crore
Financial Technologies (India) Ltd said it has entered into an agreement to sell its entire stake and warrants in MCX Stock Exchange (MCX-SX) for Rs88.42 crore.
FTIL said it has signed an agreement with Rakesh Jhunjhunwala to sell 2.70 lakh shares or about 4.99% stake in MCX-SX. Separately, the company has signed an agreement with a group of 12 individuals and companies to offload its entire 56.25 crore warrants in the Exchange.
The group includes, Edelweiss Financial Services Ltd, Trust Investment Advisors Pvt Ltd, Viral A Parikh, Nemish S Shah, Derive Investments, Kalpraj Dharamshi, Dhanesh Sumatilal Shah, Uday Shah, Madhuri Kela, Renuka Shah, SKS Capital & Research Pvt Ltd and Madhu Vadera Jayakumar.
With the current deal, Financial Technologies, which was declared, “not fit to hold stake in exchanges” has divested its entire investment in the exchange business.
The transaction is subject to fulfilment of certain conditions, including regulatory approvals, said FTIL in a statement. Post completion of the transaction, the company would have completely exited MCX-SX, it added.
In August, MCX-SX had said it has extinguished warrants held by Financial Technologies and transferred Rs56.25 crore non-refundable interest-free deposit issued against the warrants to the capital reserve.
The development will increase the exchange's net-worth to Rs160 crore from Rs110 crore and help meet SEBI minimum worth criterion of Rs100 crore, it said.