How divestment can benefit India

While it's for analysts to evaluate who the final winner was when the Union government buckled under pressure from the Left and reversed the Cabinet decision to disinvest part of BHEL's equity, one thing is certain.

It is the nation, which paid the opportunity cost in this whole exercise. And sadly, the desirable policy approach (not the sale, per se) got sidetracked in the maze of relatively unimportant events.

After independence, the political environment was charged with issues like mitigating the misery of the deprived and teeming millions, eventually leading to the eradication of poverty and building of a prosperous India. The underlying policy stance was that political freedom must free India of economic subjugation.

The managers of the Indian economy, following a comprehensive assessment, pursued the path of the public sector assuming the commanding heights. The philosophical undertone was to engage the public sector in the development of capital goods and infrastructure industries, where investment requirements were large, gestation periods long, and the private sector fought shy of getting seriously involved.

It is another story that the public sector eventually drifted into producing bread and bicycles, crockery and cogs, and even trade and ticketing, seriously distorting the original vision and threatening the credibility of the policy approach and the wisdom of investment.

The "temples of modern India", as Nehru described public sector undertakings, were built with fanfare and hope. Whereas some of the public sector enterprises have succeeded substantially and continue to challenge both domestic and trans-nationally competitive compatriots, most of these institutions have, in varying degrees, served their purpose and outlived their utility.

Everything, including a strategy and business model, has a life span and to overlook this is to invite economic ruin. The strategy of governments managing businesses has been questioned globally and withdrawal has become a universal phenomenon. I shall not get into an argument on "whither public sector" and restrict myself merely to harnessing opportunities, value unlocking, and the cost of missed opportunities.

The nation (the Left included) is keen on high economic growth, leading to prosperity. In the attempt to drive and sustain high GDP growth, the discernible, albeit vividly visible, stresses are physical infrastructure and social inadequacies.

Investment requirements are enormous and immediate. Resource mobilisation has become a serious issue. Infrastructure still needs public investment and to disregard the reality is to endanger the high growth trajectory of the nation's economic resurgence.

Unlocking value and leveraging are universal. Raising finance by mortgaging assets, discounting receivables, and insisting on interest-free deposits from the user, all simultaneously, are the order of the day in optimising value creation.

One could argue whether such leveraging by governments -- where the utilisation of resources for productive purposes, generating revenues to meet the eventual liabilities, and also making profit from investments out of leveraging are question marks -- will eventually lead to greater indebtedness rather than higher value creation.

However, not unlocking the value of an asset and keeping it like gold in the locker is difficult to appreciate. To defer even the partial divestment of the government's holding, particularly when the character of the ownership does not undergo transformation, is like living in unfounded fear.

In case the holding of the government does not fall below 51 per cent, the character of the ownership does not change under any Indian statue even marginally, and the rights and privileges (better not talk of obligations) of the owner remain intact, as in the case of 100 per cent holding, including parliamentary scrutiny, job reservation, oversight, and interference by the CAG, CVC, CBI et al.

Divestment through the market obviates the possibility of someone blocking even the special resolution necessary to change the character of the organisation.

The vibrancy of the Indian capital markets has raised the valuations of most of the listed companies, including those in the public sector, as never before -- the market is trading on a P/E multiple of over 19.8 per cent, which is history. The interests of the investors, both global and domestic, in the Indian capital market are unprecedented.

Currently, India is a favourite with portfolio money from across jurisdictions, thanks to the quality and efficacy of the market and macro and micro economic fundamentals. The appetite of the investors is huge. Oversubscription within 15 minutes of over $2.5-billion issues (ONGC, TCS and NTPC are examples) validates the assertion.

The public sector has been built by the people (people's money, energy and support), is of the people, and for the people. At a point of time when it is possible to utilise the locked value of an asset for the greater benefit of people, what holds back the process is possibly is the narrow sectarian short-term interests of a small minority of the workforce.

It is possible for the government to raise Rs 15 lakh crore from the divestment of only 24 per cent of the public sector, listed and unlisted, in the next five years, and investing the same with similar contributions from the private sector will change the physical infrastructure of India, have cascading effects on various sectors (one Golden Quadrangle Road project revived the steel and cement industries), lift India's GDP growth to 10 per cent, and maintain the attractiveness of the capital market because it will continue to have the potential to deliver a return of over 20 per cent. History teaches opportunities do not last for ever.

The author is former chairman, Securities and Exchange Board of India, and former chairman, Life Insurance Corporation