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.