Frankly, FM Nirmala Sitharaman, Shed PSU CONTROL, Not Ownership

There are politically acceptable ways to privatise India’s sprawling, inefficient public sector undertakings (PSUs).

I sat bolt upright as I heard Finance Minister Nirmala Sitharaman utter these words in the 97th para of her long budget speech in Parliament on 5 July 2019. What! Had Modi 2.0 just mounted its most audacious structural reform by agreeing to privatise India’s sprawling, inefficient public sector undertakings (PSUs)?

But my excitement was rudely cut short when I read the words that had gotten obliterated by the audio disturbance: “in case where the Undertaking is still to be retained in Government control”. And the last vestige of any joy disappeared when I heard a government secretary say,

I just slumped back in my chair, my heady high punctured.

Maruti: Massive Value Created When GOI Gave Up Control

Frankly Madam, I am delighted that finally, after seven decades of independence, our bureaucracy has learnt that ownership and control should not be conflated. This rather simple realisation could ignite entrepreneurial energy in first-gen founders if the principle is extended to them.

But for now, Madam, you’re grasping the wrong end of the stick. By all means, keep your ownership of PSUs, but please, pleeeeease, give up control.

If you don’t trust me, just go back and study how Maruti Udyog Limited (MUL), perhaps the most successful disinvestment ever, was done.

So Madam, please learn from the Maruti experience (as you can see, there was some wisdom in earlier governments too; not all of it is residing in Modi 2.0)

Shed control, not ownership.

But that’s the exact opposite of what you, Madam, have proposed…

Now, if you are looking for politically acceptable ways of doing this “difficult” manoeuver, here’s a model for you to follow.

It’s Politically Feasible to Privatise PSUs, But There Are Some ‘NOT TO DOs’

We must start by laying down a strict set of “NOT TO DOs,” ie the plan MUST NOT:

• be seen to be selling the family silver to big foreign investors or domestic industrialists (shun crony capitalism at all costs)
• force a cheap sale of government equity at today’s distressed values; there should be a fair and visible opportunity to recover the taxpayers’ past investments as the asset price rises (eg, see the Maruti story, above)
• work against the interests of the PSU’s workforce, who should be incentivised to support the privatisation; their terms of employment should be preserved, unless altered voluntarily
• be too rapid or disruptive in scale; it must begin with tiny, demonstrative case studies, and build momentum with each success; the full plan could stretch out over half a decade or so
• be left to the Raisina Hill bureaucrats; it should involve external experts with full political backing (just as ICICI’s KV Kamath was engaged in the Maruti disinvestment), directly from you, Madam, and Prime Minister Modi

So, How to ‘Do The Impossible’?

Here’s a typical, illustrative case study that shows how to “Do The Impossible”:

• First pick a small public sector unit, say with a current/distressed market capitalisation of Rs 25,000 crore
• assume that the state owns 60 percent of this PSU; now reclassify its capital structure such that the government’s equity shares are converted into 10-year Compulsorily Convertible Preference Shares (CCPS), which are separately listed; remember that CCPS are equal to “equity” under Indian accounting standards, so the government’s ownership shall stay fully intact after such a conversion, but it will lose its voting rights, thereby allowing a new owner to come in without the government crimping his management
• transfer 9 percent of these CCPS into an employee stock pool, and liberally grant options to the workforce; the government will continue to own 51 percent of CCPS (ie, equity), but without any voting rights

• only individual Indian professionals with stellar track records, either singly or in groups, would be eligible to bid for a 30 percent “management stake” in the asset; they should be allowed to tie up with credible private equity investors to transparently fund their bids
• if we assume that the winning bid would be at twice the current/distressed value, then a 30 percent management stake would cost approximately Rs 6000 crore (at a total market capitalisation of Rs 50,000 crore, but since 60 percent of that would have been converted into CCPS, one would need only Rs 6000 crore to get a 30 percent voting stake), which is a reasonable sum of money that individual professionals would be able to raise

There you go! The privatisation has been successfully pulled off, and all “NOT TO DOs” have been fully complied with:

• The asset has been acquired by individual Indian professionals, not by any large foreign or domestic business group
• the government has not been forced to sell its equity at today’s throwaway price; in fact, if the asset was to multiply 10 times in value over 10 years, the government’s 51 percent CCPS stake would be worth Rs 1.25 lakh crore (up from the Rs 15,000 crore of current/distressed valuation)
• ESOP holders, ie the PSU’s employees, would see their 9 percent stake go up to Rs 25,000 crore in value

Finally, after one such privatisation is successful, others will jump on to the bandwagon, and India would have solved its most intractable economic problem with full political endorsement!