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Ironically yours: UPA govt using PSU companies to promote market reforms!

It may sound rather odd that India’s public sector (PSU), set up with great fanfare during the Nehru-Indira Gandhi era to champion the cause of the country’s socialist agenda, is now being projected as a symbol of success of the economy’s conversion into market capitalism. This is despite the fact that only a small portion of their equity is sold to the public by the government in the last two decades of India’s economic and market reform. And, the big buzz around these PSU shares belies their miniscule market presence.

As many as 30 per cent S&P Sensex and CNX Nifty companies are either originally public sector enterprises or some of their adult siblings which have nearly kept the government promoters out of their holdings making them truly public companies. Sensex is the 30-share sensitive index of the Bombay Stock Exchange (BSE). Nifty represents the National Stock Exchange’s (NSE) 50-share index. The movement of the two indices reflects the pulse of India’s market economy before the local as well as global investors. The PSUs and PSU-promoted enterprises represented in Sensex are: ONGC, NTPC, Coal India, Gail India, SBI, HDFC, HDFC Bank, ICICI Bank and BHEL. The Nifty list includes all those nine Sensex firms in addition to seven other state promoted enterprises – National Mineral Development Corporation (NMDC), Punjab National Bank, Bank of Baroda, Bharat Petroleum (BPCL), Power Grid Corporation, Axis Bank and Infrastructure Development Finance Corporation (IDFC), all blue chip enterprises. The shares of these enterprises are market leaders and contribute substantially to the gross market capitalisation of Sensex and Nifty companies. Their performances are constantly monitored by domestic and foreign financial institutions (FIIs) looking to invest in India’s secondary market, local and overseas mutual fund operators, stock brokers and analysts. They also strongly influence the government’s market-linked policies.

Most PSU scrips are largely insulated against price volatility mainly for speculative reasons. The price-earning (PE) ratio is low compared to those widely-held private sector enterprises despite attractive earning per share (EPS) of a good number of them and quantum of dividends paid. It would remain so until the government divests at least 40 per cent of its stakes in the market. Ideally, they should all become widely held public companies to unlock the intrinsic value of their stocks. That will benefit all investors, including the government, and the market as a whole.

Alternatively, the government should allow those equity heavy blue chip PSUs capital restructuring converting a part of the government equity into preference shares. This, in return, will allow those firms the flexibility to play the market by offering more handsome dividends, occasional rights and bonus shares. It will immediately push up share prices, which will benefit investors, including the government in absolute terms, and the market. All large brick-and-mortar PSUs are equity heavy for historic reasons which allowed them 50 per cent of their project cost for conversion into equity. While this helped them keep the debt servicing cost low, the return on subscribed capital became unattractive. As long as the government was the sole owner of both the debt and equity, it mattered little either way.

However, the situation had radically altered after the government stopped budgetary support for direct project finance and the PSU management assumed greater responsibility in running the affairs of the company and creating its own market value. Some of the companies such as NTPC did extremely well keeping the equity portion under control, building and expanding reserves. In three months since NTPC made the last public offer of shares, the stock gained by nearly 10 per cent to around Rs 158 as against the offer price of Rs 145 per share. The new shareholders also benefited from the dividend announced by the company soon after.

However, it would be wrong to replicate the practice and experience of those once government promoted development banking and finance enterprises on those high performing brick-and-mortar companies, the strategic importance of which on the national economy demands their continuance under some sort of government equity control as exist in some of the capitalist countries in Europe like Italy and France. IPA
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