(I apologise in advance if the use of this old Biblical analogy hurts anyone’s feelings, but honestly, I cannot think of a more appropriate phrase.)
Privatisation of public sector units (PSUs) is the government’s stated policy.
Policies are usually contested and this one is no exception. Labour unions oppose it to protect their own interests. Opposition parties must oppose (by definition) so they call it 'selling the family silver' or 'enriching the crony capitalists'.
Let’s not get into all that and just look at how the government could go about implementing this policy.
The critical issues are: which, when and how (to privatise).
But first—an interesting trend is appearing: some PSUs are becoming very valuable. I have picked out some numbers relating to five such PSUs and put them into this chart:
I hasten to add that this is not my list of PSUs to be privatised. It is just that the numbers relating to these PSUs help illustrate my point.
The PSUs have a few things in common:
- Government ownership is well above 51% and, hence, there is room to disinvest without losing control over the company.
- Market-capitalisation numbers are fairly hefty, which means that selling shares would bring the government sizeable amounts of money.
- Share prices, along with price-to-earning (P/E) ratios have shot up in the past three years.
The last point is noteworthy.
(A note which you may skip: P/E ratio is the share price divided by the company’s earnings per share. If a company has 1 lakh shares, and earns Rs5 lakh in a year, its earnings per share is Rs5. If the share price is Rs100, it means that the P/E ratio is 20.)
A high P/E ratio indicates that either the share is overpriced, or that the market expects more growth in the share price.
The average P/E ratio of the Indian stock market is a shade below 25. The P/E ratios of these five PSUs are at least twice as much. This seems to show that these shares are priced well above the market norms. So, are these proverbial lambs fat enough, meaning, is it time for the government to sell some of its shares?
Or is there a scope to fatten them further?
Let me offer you a naughty thought.
HAL (Hindustan Aeronautics Ltd) had a pending order-book of Rs94,000 crore as of 31 March 2024. These orders are very largely, if not entirely, from the government of India—Tejas fighters and the like.
From the chart above, you will see that the stock market values HAL at Rs3,56,000 crore, of which the government owns 71.64%, i.e., Rs2,55,000 crore.
Suppose the government adds a little ‘tip’ to one of the payments for the HAL orders, say an additional Rs100 crore over and above the contract price, HAL would book an extra profit of Rs100 crore. At a P/E ratio of 49, this would increase HAL’s market-cap by Rs4,900 crore, of which the government’s share would be Rs3,510 crore.
35 for 1! Not a bad deal, what?
Of course, the P/E ratio, market-cap, etc, may not move in exact mathematical correlation with the company’s profit. However, it stands to reason that since the market has already shown a marked positive sentiment towards HAL’s future prospects, the additional profit of Rs100 crore would be viewed as 'more good news'. Hence, one can expect that the P/E number will hold, if not get even better.
A point to note is that the government is exempt from the provisions relating to related-party transactions laid down in the Indian Accounting Standards. If the government pays an extra amount to a PSU, nobody needs to know.
There must be many ways for the government to pass on a little bit of largesse to PSUs which are 'doing well', so that they are seen to be doing even better. Generously priced contracts, some fees thrown in, some charges waived... the babus in North Block will figure the best route(s).
Thereby, the selected PSUs will show better results, their share prices will go up even further and the government’s shareholdings will be valued a lot more. When privatisation does happen, it will fetch many times the amount which the government had 'given away' to the PSUs.
Hold on! I am not saying that the government is doing this. It is just a naughty thought, remember? I am just saying that it could be done.
Coming to the 'how to sell' bit, I would like to bring to your notice the suggestion of KS Badri Narayanan in his article of 6 January 2024 in Businessline magazine:
“… the government can consider selling stake in small dosages in the secondary market instead of OFS (offer-for-sale mechanism) that often disrupt price movement of the stock.”
So, here is the disinvestment strategy that could work smoothly, silently and profitably for the government:
- Select a group of PSUs which are profitable, have good P/E ratios, and get business from the government.
- Pump a little extra into them every now and then by paying a little more than is actually due, without attracting undue attention, and thereby keep the share prices on the rise.
- Sell the shares in little trickles, through LIC, without upsetting the market or attracting undue comment.
Will this be unethical?
Of course not!
It will be a win-win all around. The government will gain, the PSUs will increase their reputations, and the other shareholders will benefit from the price increases.
In any case, the government’s money belongs to all of us people, right?
(Deserting engineering after a year in a factory, Amitabha Banerjee did an MBA in the US and returned to India. Choosing work-to-live over live-to-work, he joined banking and worked for various banks in India and the Middle East. Post-retirement, he returned to his hometown Kolkata and is now spending his golden years travelling the world, playing bridge, befriending Netflix & Prime Video and writing in his wife’s travel blog.)
