A recent news report
cites government sources that public sector undertakings (PSUs) have been asked to consider revaluing their assets, shown at historical cost, to reflect the current market value, in a bid to enthuse investor interest in the shares of these companies.
This reminded me of the fever in the 1980s, when boilers that had witnessed a thousand moons and steel rollers that had celebrated their sashtiabthapoorthy (60 years), were revalued with the help of chartered engineers and sold on paper to leasing companies, and were given back on rent to the original owner as ‘sale and lease back’.
Banks came forward to finance the leasing industry for these assets and accounted for a part of the gross domestic product (GDP) upswing in those years! And later, their non-performing assets (NPAs)!
This, ultimately, came a cropper when the tax authorities stepped in and uncovered many dubious cases which did not even go through the motions of a paper transaction but were fictitious book entries.
Some of the loss-making PSUs too were in the party and this newfound financial jugglery helped show profits or bring down the loss in the books.
The other type of revaluation was indulged in by companies that wished to create higher book net worth to address the debt:equity ratio expectations of the banks or to create higher depreciation charge in the books to underpay the minimum tax on book profits.
The regulatory catch up, over time, has effectively plugged all these shenanigans and denuded the world of finance and accounting of much of its sheen and excitement that helped many a chartered accountant (CA), who started out in their career then and had their baptism by fire!
It is interesting to observe that the mandarins in the government have hit upon this bright idea to ramp up the market perception of the public sector businesses.
PSUs are largely a creation of the industrial policy of yesteryears, when the government sought them to occupy the commanding heights of the economy. Many were monopolies that could easily thrive with restrictions on imports and competition.
The emergence of the PSUs brought into existence a dignified social infrastructure like colonies, schools and hospitals, which helped to attract workers to remote locations in those days.
The likes of townships of Thiruvereumbur near Trichy in Tamil Nadu, or of Neyveli, that came into existence to support the lignite and power units, are but limited examples of such social investments.
There are many such in various parts of the country that helped address the issue of a balanced regional development along with building the industrial backbone of the Indian economy.
This was much criticised in the later years and, in more recent times, held out as the wasted years of Indian social experiment and reviled as the reason for all the current problems of the Indian economy!
Yet, in the same breath, the assets of these corporations are lined up for monetisation or disinvestment or what have you!
Leaving aside the aspect of whether the current times are benefiting out of assets created in the distant past, the key question is whither the great maharatnas and navaratnas that got such exalted nomenclatures, reminding one of the court of King Vikramaditya, in the current market boom?
Barring the few units in oil and energy sector like coal, where the policy is still tilted towards government control and pricing power, companies which are exposed to competition and free imports are languishing and have slipped out of the pride of place they held in the stock indices.
Would a mere book entry, of showing assets at market value, help to rekindle investment interests in these companies?
Are stock prices just aligned with availability of assets that are largely real estate, and surplus land or proximity to railway sidings or ports to facilitate cargo handling?
It never was – and most certainly not in the current era, when the market has been stormed by companies that have little hard assets but command astronomical valuations because of the unique technology, scalability of business or brand appeal.
The recent entrants into the stock market, at stomach-churning valuations, are none that are industrial companies which are asset-heavy.
There was a short period in the early 1990s, when the theory of replacement cost was propagated and the price of a few stocks, especially the largest cement company then, were propped up. That is passé!
Market values of companies, based on the future earning potential and the value of assets, have little to do with this. Assuming any of the PSUs have surplus assets, it can be a one-time cash gain but not aid in boosting the share price or the investors’ interest.
Inherently, the PSUs need to improve efficiency and governance. While the maharatna
status was supposed to liberate these from the political clutches and ministerial apron strings, the reality seems quite different. The fact is, key appointments are still under political control, as evidenced by the fact that many PSUs don’t have the top man for the institution
The role of party politics seems rifer in recent years, though it is a matter of degree and perception and the past was perhaps no better. The way to shore up governance in PSUs can be by sourcing good talent to act as independent directors. Going by the media noting
, it doesn’t seem the case.
Assuming the PSUs go about this directive in right earnest, and appoint valuers after following the transparent norms for sourcing such niche services, and the new values surface in the financial statements, it may get the state governments salivating to adopt such values for the appurtenant private properties for stamp duty levy when any transaction occurs!
Also, the states may chafe at the lands, originally handed over to the PSUs for industrial use, getting monetised with no benefit accruing to them and they being left to press the alarm bell when fiscal deficits shoot through the roof!
The upcoming Budget is bound to make the usual drum beat on the monetisation and disinvestment agenda and it will be interesting to see how much of this subject gets discussed.
For the ever curious, to know which the gems in the court of the public sector kingdom were, the following may help.
(Ranganathan V is a CA and CS. He has over 43 years’ experience in the corporate sector and consultancy. For 17 years, he worked as Director and Partner in Ernst & Young LLP and three years as senior advisor post-retirement handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.)