Last week, Finance Minister Pranab Mukherjee made a statement on the proposed rights issue by the country’s largest lender, State Bank of India (SBI). The finance minister’s statement drew little attention in the media, even though it was significant and symptomatic of how the interface between the government and state-owned or state-controlled undertakings has remained untouched by the economic reforms that have been taking place since 1991.
In his address at the annual general meeting of the Indian Banks Association in Mumbai, the finance minister had said that he would look at the question of the government subscribing to the rights issue proposed by SBI. The statement had immediately raised hopes in the capital market that the bank would indeed go ahead with its plan for an equity base expansion.
On its part, the bank has been keen on a rights issue to strengthen its capital base. This is necessary for the bank to take care of the norms for provisioning its bad or doubtful debt. The problem, however, is with the current ownership pattern of SBI. If the government does not wish to subscribe to the proposed rights issue its total shareholding in the bank will come down, either below the majority mark of 51 per cent or very close to that figure.
Given the nature of the political debate over disinvestment and privatisation, the government remains wary about diluting its shares in public sector undertakings like SBI below 51 per cent. Indeed, the SBI Act stipulates that the government’s shareholding in the bank cannot go below that level. Moreover, the policy note on disinvestment, circulated by the United Progressive Alliance a few years ago, is not in favour of the government diluting its share in profit-making public sector undertakings below 51 per cent.
Hence, the government agreeing to consider subscribing to the rights issue of SBI is a significant development. In other words, the country’s largest lender, with a substantial public shareholding, is not completely free to decide on expanding its equity base simply because the government as the majority shareholder continues to dictate terms on a key issue such as this.
There is nothing wrong in principle with the majority shareholder of a company deciding on how to run or manage its operation. However, the problem is with the perception that the government has created by disinvesting its shares in public sector undertakings. The government has favoured the policy on disinvestment on the ground that this allows a public sector undertaking to be listed on the stock exchanges, allows its management to perform in a competitive market environment, benchmark the functioning and efficiency levels with other privately held companies and distribute the capital gains from such shareholding among retail investors.
In reality, however, a public sector undertaking cannot function completely free from government controls as long as the president of India owns its majority shares. Economic reformers may not like this in the current Indian context, but in a corporate environment, the majority shareholder of a company should have the rights to run it the way he likes. Thus, the government will indeed decide on whether as the majority shareholder it should subscribe to the bank’s rights issue and whether it should allow the bank to go ahead with the rights issue. Reformers need not shed tears over the loss of management autonomy for SBI.
Note that this issue troubles other public sector undertakings as well. Coal India Limited, a listed public sector undertaking with government majority shareholding, can go ahead with its decision on raising coal prices only if the government allows it to do so. Even its plan to mobilise more revenues from coal e-auctions may come to a halt, because other central ministries do not like the idea, since power-generating companies under them are now incurring higher costs on their coal purchase through e-auctions. Coal India Limited may rue the lack of management autonomy it has on such key issues. It has a huge wage bill to take care of, but it has no freedom to raise prices in spite of higher costs.
The oil marketing companies, which too are majority-owned by the government, suffer from a similar problem. They may be theoretically free to raise petrol prices, but that freedom is only on paper. Until the government, which owns majority stake in them, allows them to raise the prices, they would not be able to recover their losses through an otherwise logical price increase.
The key issue common to SBI, Coal India Limited and the state-controlled oil marketing companies is the government’s majority ownership. On paper, the government may give them operational freedom to take key decisions on many issues, but it has retained the key lever of control by keeping more than 51 per cent stake in each of them. Thus, true autonomy for SBI, Coal India or for that matter any other state-controlled company will remain a mirage until the government reduces its equity stake in them below 51 per cent. That, whenever it happens, would be a decisive reform initiative.