The structure of asset sale

A vital question for the government, however, is whether it wants to pursue both equity disinvestment in PSUs and asset sale, simultaneously, and whether one company can figure in both programmes

One of the explicit message from this year’s Budget has been that the government would depend on private sector investment in more ways than one to support its growth agenda. Apart from expecting private investment in infrastructure and manufacturing, the government, for its own revenue, expects institutions and retail investors to pitch in with as much as Rs 1.05 trillion by buying stake in public sector undertakings (PSUs). These will be outright sale of equity either in the stock market or through strategic sale.

This is just one side of the disinvestment programme, the other being letting go some of the assets that have been created by the PSUs. This forms part of the larger privatisation programme where money is realised through sale of pipelines, manufacturing units, transmission lines, land and other tangible assets of government-owned companies. Proceeds thus realised are proposed to be used for further investment by PSUs. This in true sense will be a monetisation programme. 

Apart from outright sale, the other way of monetisation is to house the assets in infrastructure investment trust (InvIT) which ensures that costs, including debt, incurred on their creation moved from the balancesheet of a company to that of InvIT. Equity in the InvITs thus created could be offered to other investors. The PSU earns a return from the cash flows of these InvITs.

An alternative scenario is where the proceeds from sale flows to the government though it is not clear how it will be counted as government revenue, unless PSUs are asked to transfer as much through special dividends, in which case the company itself will not retain the cash. In such a case, the entire exercise cannot be called monetisation. It will be an outright sale for the benefit of government revenue. PSUs have nothing to gain from such an exercise but run the risk of losing revenue if the assets indeed are profitable and not a liability.

A vital question for the government, however, is whether it wants to pursue both equity disinvestment in PSUs and asset sale, simultaneously, and whether one company can figure in both these programmes. In one of the post-Budget interactions, for instance, Atanu Chakraborty, then disinvestment secretary, said ONGC was on the list of disinvestment ministry where the government would want to give up control by reducing its holding to less than 51 per cent. At the same time, a monetisation process is underway for ONGC wherein its 64 oil and gas producing fields with total in-place reserves of about 300 MMTOE have been put up for bidding. Though this monetisation is based on a revenue-sharing model, to some extent putting these fields in a different basket, while divesting equity in the company, will translate to value erosion for shareholders. 

In other words, if the very company that is sought to be divested undertakes monetisation of assets alongside, that company will certainly be valued lower. Besides, future earnings for that company would be subject to the impact of such monetisation.

It has been reported that the government expects Rs 3 trillion to come in through the monetisation programme. The private sector parallel is already available with even groups, like Reliance Industries Ltd and GMR, either looking to divest or getting in financial investors into their specific assets like pipelines and roads. Private sector companies, in fact, have been pursuing monetisation for the past few years though their reasons are more to do with debt reduction than fresh investment.

The NITI Aayog is believed to have carved out a list of such assets while the department of investment and public asset management (DIPAM) has issued expression of interest for appointing consultants for transaction advisory services for monetisation of land assets. 

On their part, some action by PSUs has already been taken. Companies, like Steel Authority of India, have gone ahead and sought expression of interest for some of its units even after running the risk of employee resistance. Even loss-making PSUs, like BSNL and MTNL, have leased out 13,051 and 392 mobile tower sites to private telecom companies. 

Whatever be the structure of asset sale, it is important that instead of Dipam and NITI Aayog driving the monetisation programme to fulfil the government intention of getting more private money, PSUs themselves draw out company specific strategy where their corporate vision is the sole determinant.