1. Companies

Lessons from the strategic sale of PSU's by the Vajpayee government

Professor of Financial Economics and Part-time Value Investor, Transfin.
Jan 1, 1970 12:00 AM 5 min read
The privatisation or strategic sale of central government Public Sector Undertakings (PSUs) by the erstwhile NDA-1 government led by Atal Bihari Vajpayee has proved, in retrospect, that the family silver was sold to pay the butlerSoon after assuming office in 1999, the NDA-1 government embarked on a full fledged privatisation programme of central PSUs, spearheaded by the then Disinvestment Minister Arun Shourie. The late Pramod Mahajan and Arun Jaitley also played an important role in the then strategic divestment programme. In less than two and half years, betwen 2000 to 2002, NDA-1 government sold off controlling stakes along with transfer of management rights, in nine profit making and asset rich central PSU companies to "strategic private partners", mostly to their arch rivals and competitors of such PSUs. It has also made slump sale of 18 hotels at various important locations belonging to the public sector ITDC (India Tourism Development Corporation Ltd).
There is nothing like a 'strategic thinking' behind the strategic sale of PSUs to private sector players. Government then and now is broke in its finances. The government also does not know how to efficiently manage large PSUs. So, the government finds a short-sighted solution to fix its finances and to fix the management of these PSUs through strategic sale. In some cases, even well managed PSUs were sold to the private sector entities, who got hugely benefited from the government largesse.   
But there was a strategic thinking when these important central PSUs were established decades back to strengthen then weak industrial base of the country in different sectors. Now it has become fashionable to discredit the state led economic development model of Nehru era. But in those days, there was not sufficient private capital or entrepreneurship to make the required investments.
Some of those vital PSUs which played a stellar role in establishing the industrial base for India, were handed over on a platter to private companies by the Vajpayee government. Valuable national assets were sold off in a hurried discount sale without obtaining a national consensus on the subject.
Sold for a song: 


The zeal and the speed with which these nine PSUs were sold off to the private sector players was astonishing. The NDA-1 government earned a total of Rs 5,544 crore to the exchequer from the strategic sale of these nine giant PSUs and ITDC hotels. Every single privatisation was controversial and attracted allegations from the worker unions that the PSUs were being sold for a song.
Balco was the first "big ticket" disinvestment, and it remains highly controversial to this date. There were allegations that the assets of the company were grossly undervalued. The valuation of the company's assets, including the sprawling township, aluminium plant and a 270-MW power plant at Korba in Madhya Pradesh was completed in just 19 days, indicating the zeal with which the deal was struck. The 51% controlling stake in BALCO was sold to Anil Agarwal's Vedanta Group for Rs 551 crore. With an investment of just Rs 551 crore, Vedanta Group has got control over assets along with mines, that according to some are worth several times over. Since Balco is an unlisted company, its present market value is not known.
Hindustan Zinc is the second largest zinc-lead miner in the world. The 26% controlling stake in this metals major was sold again to Anil Agarwal for a bid price of Rs 445 crore. As part of the ‘call option', the government further divested another 19 per cent stake at the same price to the private entity in November 2003. Through this two-phase transaction, the government sold a total 45 per cent of its stake in the PSU for Rs 769 crore. The present market capitalisation of Hindustan Zinc is a whopping Rs 87,500 Crore (as on 1st Nov). That means, the 45% stake sold by government is now worth approximately Rs 40,000 crore, 50 times higher than the sale price. This PSU sold for an enterprise value of around Rs 1,800 crore, now makes a net profit of Rs 8,000 crore per year, thanks to a huge rally in metal prices during the last decade, though the analysts would like us to believe that the company is making such huge profits entirely due to the private entity's efficiency in achieving better mining operations. The year of divestment, 2002 was an abysmal year for Indian economy and the world economy. In the previous year of 2001, there were attacks on the World Trade Center in US which led to a global recession. Metal prices were quoting at their rock bottom level. Hence, a turnaround in commodity price cycle as well as better mining operations by the private entity, both have led to the unlocking of value in Hindustan Zinc.
From above, it is also clear that the strategic divestment in the nine profit making PSUs was done at an unfavorable time leading to realisation of only meager proceeds by the government. 
Killing the Competition:
Indian Petrochemicals Corporation Ltd (IPCL), one of India’s leading petrochemical products company with three major petrochemical manufacturing complexes at Vadodara, Bharuch and Nagothane, was then making a net profit of around Rs 500 crore per annum. The 26% controlling stake in IPCL was sold to Reliance Industries Ltd (RIL) for a consideration of Rs 1,491 crore. IPCL has latter been merged with Reliance Industries Ltd. IPCL was then the only major competitor to RIL in the petrochemical space. After the sale and merger of IPCL, Reliance Industries is now a virtual monopoly in petrochemical sector with more than 80% of market share.
Telecom PSU, Videsh Sanchar Nigam Ltd (VSNL) and software PSU, Computer Maintenance Corporation (CMC) were sold to Tata group. VSNL had a surplus land of 773 acres in major cities like Delhi, Chennai, Kolkata and Pune worth Rs 15,000 crores. After 16 years, this surplus land has now been hived off into a separate company, but its monetistion is yet to start.  
Though there were determined efforts by the NDA-1 government to privatise premier oil marketing PSU companies like HPCL and BPCL and aluminium major NALCO, the same could not be done due to strong resistance from the labour unions in these companies.
It was alleged that the "big private players" used the "ideology-driven disinvestment moves" of the NDA-1 government to corner these prized PSU companies for throw-away prices.
Lessons from the earlier strategic divestment: 
Better option is always to retain the family silver and nurture it. If strategic sale is a must, then there are some important lessons to be learnt by the Modi government from the earlier strategic divestment, for undertaking the next wave of disinvestment.
Air India, Bharat Petroleum Corporation, Container Corporation of India, BEML, BHEL etc are on the block. Taking the example of the disinvestment of Hindustan Zinc, Government should sell only a small stake of 15 to 25% to the private entity, along with transfer of management control. After value is unlocked by the private player, government can sell the balance stake at a much higher price. For each PSU earmarked for divestment, the timing should be right in order to fetch the right price. The industry cycle in which that particular PSU is operating should in its peak.


In the name of strategic divestment, government should not kill competition and market forces, as was the case in the divestment of IPCL. If market place competition is killed, downstream industries and consumers will suffer. Competition Commission of India (CCI) has a responsibility and a legitimate role to play to protect market place competition and strategic divestment of PSUs can not be an exception to this cardinal principle.