Making firms attractive to investors

The commanding heights of the domestic economy as the public sector undertakings (PSUs) were once famously lionised in the Nehruvian socialist past have come a long way since the liberalisation of the Indian economy unleashed by the non-family but non-pareil Prime Minister Narashima Rao in the early 1990s. It is an open secret that in the extant competitive market economy India had embraced with little qualms despite occasional outpourings of sympathy for support to the PSUs lest the restive army of employees should take them amiss, the NDA government of Vajpayee vintage resolved to bolster only the best performing central public sector enterprises (CPSEs). It is not for nothing that the Vajpayee government in its first non-Congress but BJP-led coalition regime in its six year tenure during 1998-2004 (first for 18 months and another tenure for four years as it cut short its span by a year) boldly unveiled a policy of strategic disinvestment as it scarcely suffered any paroxysm of false pangs on that score.

Strategic disinvestment was guided by the basic economic rationale that the government has no business to continue to engage itself in manufacturing/producing goods and services in sectors where the competitive markets have come of age and the economic potentials of such entities might be best discovered in the hands of strategic investors. This is presumably so as the latter command the best of factor endowments in their favour, such as infusion of requisite capital, technology upgradation and efficient management practices. Over and above all this salubrious combination of factors, the government of the day also gets the best value for money by monetising its investment in CPSEs so that its competing priorities for building the much-neglected social infrastructure could be addressed partly. Having spent humongous sums of outlays on building the physical infrastructure and heavy industries in the initial decades of Independence, it is also but fair to address and redress the gaping holes in the country's social infrastructure, such as primary health and education of its teeming population on the threshold of "a new India" through strategic disinvestment of segments it no longer needs to nourish as they could flourish in the able and capable hands of the private investors.

The Modi government, since its taking over the reins in 2014 felt emboldened to unveil ambitious disinvestment of PSUs in budget after budget, though the market conditions could not allow it to mop up much of the targeted gains. In its meeting held on February 17, 2016, the Cabinet Committee on Economic Affairs (CCEA) approved the procedure and mechanism for strategic disinvestment of CPSEs. Administrative department or the line ministry is mandated to lay down process and timelines on the transfer of assets and management control so that there are no ambiguities or delays when the time to transfer the assets comes. Share purchase agreement/shareholders agreement is executed with the strategic partner for smooth transfer of assets and liabilities. Five guidance notes were issued for a uniform process to be followed by all the stakeholders. So on record, things seem to be honky-dory but the management of the larger economy, interspersed with two spells of back-to-back droughts, demonetisation of high denominational notes and the ham-handed way the goods and services tax (GST) was rolled out with multiple rates, cess and exemptions meant that the mood of the market was not for grabbing PSU stocks and it was mostly cross-purchase of one PSUs shares by another for squaring up accounting purposes!

Be that as it may, two important reports placed in Parliament by the Comptroller and Auditor General of India (CAG) on general purpose financial reports of CPSE (compliance audit) and professionalisation of boards of CPSEs by the House Panel on Industry, have not come a day too soon as they laid bare the chinks in the armour of the PSUs with warts and all. Dealing with 406 government companies and corporations and 173 government-controlled other companies, the CAG report for the year 2016-17, said 212 government companies and corporations earned profit of Rs 1, 58,373 crore during 2016-17, of which 75 per cent (Rs 1, 18,273 crore) was contributed by 49 government companies and corporations in just three sectors, viz., petroleum, coal and lignite and power! Return on equity (RoE) in these 212 CPSEs was 13.78 per cent in 2016-17 as compared to 14.83 per cent in 2015-16.

Interestingly, 111 government companies and corporations declared a dividend of Rs 82,491 crore during 2016-17. Out of this, dividend received/receivable by the government amounted to Rs 47,226 crore, which signified 14.57 per cent return on the total investment by the government of Rs 3, 24,270 crore in all government companies and corporations. A point to note is that 16 government companies under the Ministry of Petroleum and Natural Gas alone contributed Rs 34,918 crore, representing 42.33 per cent of the total dividend declared by all government firms and corporations.

While as many as 157 CPSEs incurred losses of Rs 30,678 crore during 2016-17, there were 188 government companies and corporations with accumulated losses of Rs 1, 23,194 crore as on March 31, 2017. Of these, the net worth of 71 companies had been completely eroded by their accumulated losses. As a result, the aggregate net worth of these companies had become negative to the extent of Rs 71,935 crore as on March 31, 2017.

Even as the CAG indicted CPSEs for other lapses such as departure from accounting standards, corporate governance and corporate social responsibility, its criticism that the Public Procurement Policy Order, 2012 aimed at boosting procurement from micro and small enterprises was not implemented as some of the CPSEs did not meet the target of 20 per cent procurement from MSEs shows that the small and medium enterprises (SMEs) remain handicapped for want of support from PSUs even as they provide employment and earn foreign exchange by exports.

The House Panel on Industry has rightly picked holes in not putting in place a well-designed evaluation mechanism for the Independent Directors (IDs) in CPSEs. It has sought a scrupulous mechanism for performance evaluation of Independent Directors. The IDs may be accorded an enhanced role in the overall evaluation of the management of a CPSE by amending the extant Department of Public Enterprise Guidelines to make their yearly meeting. It also voiced concern over the vacancies of IDs in the boards of almost all CPSEs and the total of such vacancies as on 2017 stood at 380. It warned that the vacancies of IDs on the boards of CPSEs pose a serious threat to the efforts to professionalise their boards, which in turn is required to shore up their performance.

Together read with the CAG report highlighted earlier, the situation obtaining in the country's CPSEs is none too a good augury for advancing the cause of either disinvestment or strategic disinvestment of PSUs if the festering problems are not overcome with sagacity and swiftness before they are presented for a beauty contest to private investors in these days of market turmoil and mayhem when values vanish like bubbles in thin air, policy wonks wryly say. IPA

(The author is a commentator on economic issues. Views expressed are strictly personal)