The process I recommend would have the following benefits a) no charge of crony capitalism b) a pure auction method of sale to all investors c) improves corporate governance and disclosures in the interim d) unleashes the full force of animal spirits in the markets and the economy e) improves prices of PSUs today itself f) allows PSUs to raise capital today itself for any expansion with low dilution g) gives a chance to domestic and global investors to keep dry powder of money when the sale happens g) tax payer/govt get maximum value maximisation h) the best bidder based on fierce competition gets to run the company.
Caveats: for strategic industries, a fit and proper test would be required after any acquirer acquires say 5% stake. Also, it is important to dramatically improve disclosures of the PSUs so that investors do not stay away because they don't know what they are buying.
Here is the link to the piece and the full text reproduced below.
"After nearly two decades of attempts at privatisation, just a handful of companies have been truly privatised till now. Many of those handful have been mired in litigation, not just because labour protested, but because there were more than whispers of crony capitalism. The conspiracy theories were even more muddy than the reality, making privatisation a bad word.
Because of the legacy issues, the Modi
government 1.0 was cautious. Some neither-man-nor-beast-privatisations were
carried out. These included mechanisms like selling exchange traded funds with
underlying public sector stocks. The problem with these was that the government
maintained full control over the companies, thus failing to unlock the
potential of efficiencies of privatisation. As a result, the privatisation
premium was not realised by the government and there was no improvement of
corporate governance in the companies.
As citizens, as consumers, we have paid
the price of public sector monopolies or even non-monopolies. Older readers of this
paper would remember the 8 year wait to get a landline phone connection. Even
more recently, the funding of Air India has resulted not just in tens of
thousands of tax payer money being wasted, but also in second order harm like
the collapse of Jet Airways. It’s hard for private sector to compete with a
competitor who just got a multi-billion dollar gift from the tax payer, and a
gift which ensured poor records on every metric of flying or service.
In almost all sectors except banking,
and just a handful of others, the government should exit business completely.
After the corporate tax rate cuts, this will be the next big bang reforms of
this government. By all accounts, the Modi government 2.0 is keen on pushing
this agenda and has the full political spine to carry this out without a whiff
of scandal. This piece discusses some ideas of how to maximise value for all –
government, taxpayer, consumer and importantly the animal spirits of corporate
India, which could use some fillip.
This author recommends a multi step
process to maximise value for India’s economic growth. First, comply with the
law on minimum public shareholder. Every listed public sector undertaking (PSU)
must first achieve a 10% public shareholding and then a 25% public
shareholding. Since most PSUs are already compliant with the first milestone,
it could be achieved quickly for the remaining handful of companies. The second
milestone could be set at say one year from today. No complicated means of
divestment is necessary. The intention can be announced today and a time bound
divestment should be carried out in the open markets of stock exchanges. So an
announcement to divest say 0.1% per day for a period of 100 days would serve
the purpose instead of an unnecessarily complex process seeking bids. This
could be announced today, so that the divestment is completed from day 365 to
day 465. The timeline would give domestic and international funds time to
garner the necessary funds to keep their powder dry and apply at the
appropriate time. The advance notice and the gradual sale would ensure that the
best price is unlocked for the government.
This without more action, will of
course be inadequate, because the idea is to privatise and not to be merely
compliant with the law on public shareholding of PSUs. For that, the government
should adopt a means of divestment not yet tried out. First the same advance
notice for a staggered sale over the market place, but with a longer timeline
and with larger quantities available for sale. So an announcement and terms of
sale should be announced today for sale after say 2 years. At the end of 730
days, the government will divest 1% per day, every single day till the government
holding becomes zero. This method has the benefit of setting the terms of the
sale today, so no one can allege that a sale was carried out to favour one
business entity. It also allows domestic and international players to prepare
to purchase the company and allows a bidding war in a fiercely competitive manner
through the transparent exchange market. This process is likely to increase the
value today itself and not after 730 days. As people see the value being
unlocked and see the opportunity to get a piece of the pie, they are likely to
start buying the PSU shares starting immediately. The increased valuation would
improve the dull valuations of all stocks and in particular PSU stocks. The
higher valuation today will also ensure that the assets are not sold at a
fraction of their fair market value, like many PSU stocks are today valued. The
higher valuation would also allow the PSUs to accept more equity capital and
invest in expansion. This could drive both demand side and supply side of the
economy.
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While theoretically the concept of a strategic
sale of say 70% in one go is attractive as it may offer a better price, it
comes with many burdens. The first is the allegation of selling out to a
specific buyer by setting terms which are onerous, and thus acrimonious
litigations to which the government is a party. Second, buyers come in with
scepticism as they have a take-it-or-leave-it approach. Third, a gradual
improvement of governance and disclosure norms over a period of 2 years is
likely to improve confidence in the numbers put out by the company, a process
not available with a strategic outright sale. Fourth, while a strategic sale
may make sense if one company is being sold per year, it is not an ideal way to
sell 200 or more PSUs at one go. For this to work, the government must carry
out a very detailed process analysis and state the terms of sale, improve
corporate governance by adding credible people on the boards of the PSUs and
figure a way to minimise labour protests through providing alternate employment
where necessary. Additionally, there is no reason the same process cannot be
conducted for unlisted PSUs as well, with additional disclosures."
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