India is one of the worst places to run a business. In the International Finance Corporation's Doing Business 2013 report, India is ranked overall 132nd out of 185 countries in terms of the overall ease of doing business. The IFC ranks India at 184 (second-worst) in terms of enforcing contracts, 182nd in terms of construction permits, 173rd in starting a business, 152nd in paying taxes, etc. It takes 27 days to start a business in India, versus 19 in South Asia and 12 in OECD countries.
But once an entrepreneur does get a business up and running, the regulatory moat impedes competition. Promoters can also run listed companies like fiefdoms due to the tardy legal system and the absence of shareholder activism. Financial institutions, which are the only entities with the clout to be effective activists, are unwilling to push on this front.
Retail shareholders can at best hope promoters are ethical, in that they don't cheat shareholders. There is not much use expecting a promoter to be honest in the strict sense of the word. Nobody can run a business in India without cutting corners. As the IFC rankings imply, the system encourages dishonesty in order to survive and that attitude often spills over into the treatment of shareholders.
There is one type of business where the promoters' interests are guaranteed to conflict with that of minority shareholders. This is the PSU, or public sector undertaking. We have a 22 year history of PSUs listed on the exchange. In most cases, due to the monopolist policies of the License Raj, these businesses have high or dominant market share. Investors who bought those shares expected steady returns, given the huge advantages these concerns started with.
Instead, investors have received steady wealth destruction. The NSE's PSE index goes back till January 1995. In the 18 and half years since, the Nifty has returned a total of 414 per cent, or roughly 9.2 per cent CAGR. The PSE index has returned 164 per cent or roughly 5.3 per cent CAGR. Adjusted for wholesale price inflation of roughly 6.5 per cent through this period, the PSE return is negative.
The wealth destruction has accelerated in the recent past. Since November 2012, the government has raised roughly Rs 33,000 crore through disinvestments. The PSU segment has lost over Rs 2 lakh crore in market capitalisation since then, in a bull market at that.
Given that the government's portfolio of businesses covers a broad range of sectors, the common factor behind this underwhelming return must be lacunae on the part of the promoter. Indeed, the problems are obvious.
All PSUs face interference from functionaries, who are not themselves shareholders, nor in most cases, competent business managers. Wealth creation for the shareholders doesn't feature among the concerns of the various ministries setting the policy agendas for various PSUs. There is no question of shareholder activism. The institutional shareholders are also largely owned by the government.
If you think about it, the disinvestment concept was in itself, always a distorted process. Those PSUs were founded with taxpayers' money. Then, taxpayers were asked to pay all over again in order to become shareholders of these businesses.
Disinvestment is seen as a quick way to temporarily reduce the fiscal deficit. When the government needs quick cash for the Consolidated Fund of India, PSUs are told to buy into each other, thus liquidating reserves. This is a sweet deal the government receives the money and continues to be the beneficiary owner. PSUs have also borne large subsidies on behalf of the government, especially in the oil and gas sector.
About 10 PSUs will need to dilute about Rs 15,000 crore to meet the minimum public shareholding threshold of 10 per cent by August 8. Some are expected to miss the deadline. Some will take the Institutional Placement route and some will make offers for sale (OFS). The government won't have too much trouble meeting the disinvestment targets eventually, since it can arm-twist the institutions it owns into buying these shares. Retail investors should stay out.
In the long term, the history of PSU performance suggests one of the safest ways to beat index returns. Just avoid the PSU component of the major market indices.If you hold the Nifty basket without the PSUs, your returns will consistently beat the index, which is always dragged down by the underperformance of the government component.
But once an entrepreneur does get a business up and running, the regulatory moat impedes competition. Promoters can also run listed companies like fiefdoms due to the tardy legal system and the absence of shareholder activism. Financial institutions, which are the only entities with the clout to be effective activists, are unwilling to push on this front.
Retail shareholders can at best hope promoters are ethical, in that they don't cheat shareholders. There is not much use expecting a promoter to be honest in the strict sense of the word. Nobody can run a business in India without cutting corners. As the IFC rankings imply, the system encourages dishonesty in order to survive and that attitude often spills over into the treatment of shareholders.
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While many promoters display utter disregard for minority shareholders, the few who are ethical actually tend to receive serious valuation premiums purely on those grounds.
There is one type of business where the promoters' interests are guaranteed to conflict with that of minority shareholders. This is the PSU, or public sector undertaking. We have a 22 year history of PSUs listed on the exchange. In most cases, due to the monopolist policies of the License Raj, these businesses have high or dominant market share. Investors who bought those shares expected steady returns, given the huge advantages these concerns started with.
Instead, investors have received steady wealth destruction. The NSE's PSE index goes back till January 1995. In the 18 and half years since, the Nifty has returned a total of 414 per cent, or roughly 9.2 per cent CAGR. The PSE index has returned 164 per cent or roughly 5.3 per cent CAGR. Adjusted for wholesale price inflation of roughly 6.5 per cent through this period, the PSE return is negative.
The wealth destruction has accelerated in the recent past. Since November 2012, the government has raised roughly Rs 33,000 crore through disinvestments. The PSU segment has lost over Rs 2 lakh crore in market capitalisation since then, in a bull market at that.
Given that the government's portfolio of businesses covers a broad range of sectors, the common factor behind this underwhelming return must be lacunae on the part of the promoter. Indeed, the problems are obvious.
All PSUs face interference from functionaries, who are not themselves shareholders, nor in most cases, competent business managers. Wealth creation for the shareholders doesn't feature among the concerns of the various ministries setting the policy agendas for various PSUs. There is no question of shareholder activism. The institutional shareholders are also largely owned by the government.
If you think about it, the disinvestment concept was in itself, always a distorted process. Those PSUs were founded with taxpayers' money. Then, taxpayers were asked to pay all over again in order to become shareholders of these businesses.
Disinvestment is seen as a quick way to temporarily reduce the fiscal deficit. When the government needs quick cash for the Consolidated Fund of India, PSUs are told to buy into each other, thus liquidating reserves. This is a sweet deal the government receives the money and continues to be the beneficiary owner. PSUs have also borne large subsidies on behalf of the government, especially in the oil and gas sector.
About 10 PSUs will need to dilute about Rs 15,000 crore to meet the minimum public shareholding threshold of 10 per cent by August 8. Some are expected to miss the deadline. Some will take the Institutional Placement route and some will make offers for sale (OFS). The government won't have too much trouble meeting the disinvestment targets eventually, since it can arm-twist the institutions it owns into buying these shares. Retail investors should stay out.
In the long term, the history of PSU performance suggests one of the safest ways to beat index returns. Just avoid the PSU component of the major market indices.If you hold the Nifty basket without the PSUs, your returns will consistently beat the index, which is always dragged down by the underperformance of the government component.