Divestment 2.0

Divesting a PSU has proven to be a tricky affair in the past. For one those who want to make the decision are severely hounded by political groups on charges of ‘selling out’ to private investors. The earlier NDA regime was the first  government to take the matter seriously in the sense that they actually went about the process of divesting public sector units. The previous UPA government tried to pick up from where the NDA left off but being in a coalition with a communist partner has its disadvantages.

Thanks to the election however, the communists are no longer in a position to call the shots. The result: The government is now ready and capable of going about the business of divesting public sector units.

There are many Indian companies owned and run by the government that are attractive enough to invest in. Market investors have commented about their own frustrations about how the government can sell even a minority stake in these companies and use the money hence earned through private investment to everybody’S advantage thereby creating a valuable entity, but have refused to do in the past.

This new wave of divestment talk has revolved around the state being in control with a conservative model. It will keep a 51% controlling stake and put up the rest in divestment stake sales although in stages. Minority stake after minority stake will be divested over a consolidated period of time.

It’s a cash raising exercise on a massive scale. With a robust domestic demand and an increased foreign interest in Indian PSU’s, the amount of money coming in is guaranteed to be in the Billions.

The first few companies that are likely to be divested are Oil India and NHPC (National Hydroelectric Power Corporation) .There are many more that will be divested one by one.

 We have to note that not all PSU’s are profit makers. Many have run out of money and the government is on a massive recapitalization drive to make these enterprises divestment worthy. If investors feel that the state is trying to rip them off by selling stakes in companies that are not premier PSU’s then they are unlikely to invest in the same.

The steel sector too is all set to be divested. The Union Steel Minister has said that he’s okay with the sector being broken down and sold. This is one of the problem free areas for divestment.

But in the case of companies like Neyveli Lignite and other mineral based companies, the resistance to divestment is expected to be stiff. The ruling government of Tamil Nadu has openly made it clear that they oppose the divestment of PSU’s. It wouldn’t have been a problem except for the fact that the ruling state party is an alliance partner of the UPA at the centre. They’re pretty much ready to throw the spanner when it comes to divestment.

On the positive side the government has discussed the divestment of India’s largest insurer. The state owned Life Insurance Corporation of India. If the government is indeed serious and manages to make this happen, it’s undoubtedly blockbuster news.