The rocky road to the government’s ambitious privatization plans

Twenty years is a long time. This is what it took to execute the privatization of Air India. The process was launched in 2000, although the idea of ​​selling it was first proposed in 1988, following the successful sale of British Airways and other national assets by the Margaret Thatcher government in the UK United. “Air India was the holy grail of public sector privatization. The sentiment in government was, “If we can privatize Air India successfully, we can sell anything. Now that it’s done, it’s up to them to take advantage of it,” a market source said. business today request anonymity. The sale of Air India is to net the government ₹18,000 crore and would give the buyer, the Tata Group, ownership of Air India, its low-cost Air India Express unit and a 50% handling stake at the airline ground and cargo. subsidiary, Air India SATS Airport Services (AISATS).

Privatization is a complex process on several levels. The do’s and don’ts of the Air India experience may well serve as a template for future deals of this type. And the government badly needs the model. Consider this. ₹1.75 lakh crore is the revenue target via privatization in the financial year 2021-22. (This would include both privatization and divestment.) However, the goal seems far off, with only ₹9,329.9 crore in the bag so far (see Far from the Goal), and only two months into the exercise. Add to that the fact that nowadays asset monetization, divestment and privatization are often used interchangeably. (Government plans to raise ₹6 crore lakh through asset monetization alone.)
So, has the government bitten off more than it can chew? Not quite, say experts, who argue that for a country with the world’s fifth-largest economy and huge assets, it’s achievable, provided certain conditions are met. “According to our estimate, Life Insurance Corporation (LIC) of India should be valued between ₹9.5-10,000,000,” says Rajeev Shah, Managing Director and CEO of Ahmedabad-based RBSA Advisors. “Even if the government offers to sell 5% of LIC, it will provide ₹50,000 crore to the selling shareholders. The government will likely do so in installments over the next three to five years as the market absorbs such an IPO. »

Shah’s colleague, Ajay Ma-lik, who heads investment banking at RBSA Advisors, adds: “Several alternative asset management funds, sovereign wealth funds and development finance institutions are actively investing in India. The country has also attracted strong interest from major strategic investors from the United States, Europe, Japan and the Middle East. Therefore, financing ₹6 lakh crore, which is equivalent to less than $90 billion, is not a big deal.

“LIC’s IPO is basically a big positive,” says Deven M. Choksey, managing director of KR Choksey Holdings. “LIC is a great organization built over the past few years. A successful listing will give it an impetus to expand globally. Although much depends on the success of the LIC IPO, the problem is that the LIC Act of 1956 must be amended to allow foreign participation in the listing.

The same applies to the privatization of PSU banks, with required changes in the law on banking companies (acquisition and transfer of companies). “The law will need to be amended to facilitate the reduction of government equity below 51% in state-owned banks,” said Rajnish Kumar, former chairman of the country’s biggest lender, the State Bank of India (SBI). “Then the process needs to be started to uncover the true value of the banks to be privatized. Finally, employee support for the idea is needed.

CHALLENGES TO PRIVATIZATION

The defeat of the National Democratic Alliance government led by Atal Bihari Vajpayee in 2004 was also seen as a mandate against privatization. As a result, from 2004 to 2014, the United Progressive Alliance (UPA) waiver put any further privatization proposals on the back burner.

But things have changed a lot since then. “The government is very clear in its thinking that it has to do it in 10 years. It’s like a game of cricket where you play for 20 overs. The government is in a hurry to shut this down as quickly as possible. And I don’t think privatization will result in electoral losses. Those days are over,” says Choksey.
However, some fears persist. According to industry sources familiar with the divestment, the process presents challenges for those involved in the transaction, in terms of sometimes unnecessary government questioning and probing. “As a result, everyone involved becomes extremely risk averse and the process becomes tedious, with too much emphasis on things like good documentation,” says an insider familiar with the 2021 process. In the private sector, it takes three to six months to complete a transaction. In the case of the public sector, it can take one to two years.

Labor issues and litigation are other challenges. “When a foreign investor comes in, they would want to work with a clean slate. Labor issues could be dealt with by the government itself or by giving the investor full latitude to do so. disputes can be assigned to a separate company and the government can retain [aside] funds for it,” says Dinesh Pardasani, a partner at New Delhi-based law firm DSK Legal.

Such problems could be avoided with thorough due diligence. “The initial preparation could help identify potential entity-specific obstacles, which can then be resolved before the transaction is launched,” says Sandeep Negi, partner at Deloitte Touche Tohmatsu India. “This can be done internally or by an external agency.”

Another area of ​​concern is arriving at the correct valuation of a national asset. Recently, employees of Central Electronics Ltd (CEL) – which was sold to a private bidder around the same time as Air India – went to court alleging undervaluation of the photovoltaic cell maker. The sale has now been put on hold as the Department of Investment and Public Assets Management (DI-PAM) has reviewed it. “The government has the right intention and is taking all the right steps after thoroughly analyzing the matter. However, the ability to execute the deal should be given to investment bankers because it’s not about managing investments,” Choksey suggests.

A QUESTION OF TIME

Like most other things, assets also have a lifespan. And if it’s not sold at the right time, value destruction or migration is inevitable. For example, BSNL and MTNL were among the most profitable companies 20 years ago. But their value has shifted to private telecom players such as Bharti Airtel and Reliance Jio. Similarly, if Air India had been sold 10 years ago, it might have fetched a higher price. “If only India had put in place a mechanism to allow investment in data centers in the telecom sector at the time of the first coronavirus-induced lockdown in 2020, you could have investors investing large sums of money in the assets of BSNL and MTNL,” said a senior executive at a major merchant bank. Some experts believe that the time may be right to sell a company such as Steel Authority of India when the steel cycle is at its peak. Five years from now, when the bear cycle begins, it may not attract many takers. Similarly, in the case of Container Corporation of India, it could attract the interest of several potential buyers, as India is expected to perform well in logistics.

The nature of a business also determines the choice of a buyer. In December 2020, Bharat Petroleum (BPCL) – the second largest fuel retailer in India – attracted only three bids as two bidders failed to raise the necessary funds. Anyone buying a large fuel distribution company would certainly consider demand over 20 years. But it is quite possible that in the next 15 years, the world will turn to electricity and renewable energies. And that made investors reluctant to invest $20 billion in BPCL today. Recently, Vedanta Group offered to pay $12 billion for BPCL, according to reports.

However, all may not be lost for companies like MTNL and BSNL. Experts like Choksey believe that by using the right strategy, investor interest can be revived. “MTNL and BSNL have created such a strong wired network and reach over the years. Today, wired network is becoming important for high-speed data communication. You just need to upgrade the infrastructure to deliver a solid product. First, monetize their assets so that no third party benefits, then resell them,” he points out.

But some assets, like banks, will continue to be valuable in an emerging market economy like India. “The performance of the banking sector has an impact on economic growth, and economic growth profoundly influences the performance of a sector like banking. When it comes to valuation, there is no right or wrong time for maximizing it. Investors willing to invest in financial services will see this as a good opportunity,” says SBI’s Kumar.

SEPARATE NON-ESSENTIAL ASSETS

There is another fundamental problem that one encounters with divestment. When a PSU is divested or privatized, in most cases the government is unable to sell certain assets such as real estate and other ventures or joint ventures (JVs) at optimum value. Thus, it will have to design a mechanism to separate the non-essential assets of all these entities. There would be takers for the PSUs, but their non-core assets would have different investors.

The government is now trying to consolidate the real estate assets of UAPs. For each PSU, there will be a separate land company, which will be merged into a central land company to be monetized separately. “The real estate held by UAPs has been a challenge since the privatization of Videsh Sanchar Ni-gam Ltd in 2002. A decision can be made by the Registrar of Companies. The government has the power to demerge a UAP without having to go to court,” says a person familiar with the matter.

The consensus is therefore that there is no lack of interest or assets to be monetized through privatization. The challenge is elsewhere. “The question is whether we will be able to provide global funds and strategic investors with an adequate asset pipeline. This can only happen if parts of assets in infrastructure sectors such as railways, highways and the electricity sector are privatized or divested. What is ultimately required from the government is a negotiation pipeline, to improve its implementation capacity and strengthen its will to carry out these divestments,” says RBSA’s Shah.

It’s easier said than done.