The Union finance ministry has floated the idea of the government speeding up the disinvestment process by introducing a special purpose vehicle (SPV). It will unload to this SPV as much of its holding in selected companies as to retain a minority 49 per cent stake in them. The SPV, which will be owned by public financial institutions, will pay the government the Rs 5,000 crore that it had targeted in the budget as revenue from disinvestment. The institutions will recoup their investment when the SPV disinvests to the public or strategic buyers when market conditions allow a proper price to be recovered.
Disinvestment and privatisation are a must if the government is to avoid a debt trap. Only through substantial earnings from disinvestment can the government rein in its public debt and reduce the burden of interest payments which is threatening to soon gobble up the entire proceeds of public borrowing. Individual ministries, so long as they continue to wield control over the companies under them, can safely be expected to stall the disinvestment process at every step, even after agreeing to go along with it. So it makes sense to have a sharp break whereby the controlling ministry loses all control over a company which the government has decided to privatise.
But this is not what the government is planning. The ministry concerned will still continue to hold 49 per cent stake while the SPV, owned by the likes of UTI, GIC, LIC and IDBI, will control the remaining 51 per cent. Will the SPV then call the shots and ask the respective ministries to mind their own business which does not include the particular business? Unlikely. Take the case of Industrial Finance Corporation of India (IFCI). The government holding in it is less than 50 per cent and it does not come under any of the various regimes governing public sector enterprises. But who calls the shots in it? The finance ministry, of course. If you told the heads of State Bank of India and UTI that since they hold the balance between the public and the government, they should once in a while call the shots in key matters affecting IFCI, they may get worried. The finance ministry happens to be their boss also. The Indian public financial institutions are yet to show that they are not sleeping partners in private
companies in which they hold substantial stakes. For them to defy central government ministries is an even taller order.
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So the SPV, far from taking companies out of ministerial interference may end up not just perpetuating it but also making the companies concerned quite unaccountable. This is because, as has been pointed out by G V Ramakrishna, such companies will be outside of the purview of Parliament, CAG, CVC and the high courts. The bane of public sector companies is that they have to please all these masters. But the solution is not to put them in limbo, answerable neither to the government nor to any private controlling interest. What would happen if a fraud like the import of urea by National Fertiliser took place in one of the companies owned by the SPV? Technically, it would not amount to misappropriation of public funds but a fraud on a private company perpetrated by a few of its senior managers.
This brings us to the question: whose money will be at play in the SPV and whose bidding will it do? The money will ultimately be that of the holder of an LIC policy or Unit-64. Yours and mine. But the public financial institutions which hold it in a fiduciary capacity will be forced to part with it for paper which they may not want and which they may have to hold on to indefinitely. Even the price for such paper will be dictated by the finance ministry which may not get the `reserve price' for an issue from the public but will surely get it from the institutional owners of the SPV. What will this do to the health of the institutions and the value that they are able to offer to their stakeholders? How happy will the holder of Unit-64 feel in the knowledge that UTI has had to put in a couple of thousand crores without being able to ask too many questions? If the whole idea of privatising is to get the government off the public sector companies' backs so that they can be run professionally, what will the SPV do to the professionalism of top managers in the institutions who may have no choice but to agree to fund the SPV?
If the government were serious about disinvestment and privatisation it would go about the task diligently but without rushing things when the market is flat on its face. The SPV idea looks like a very short-sighted exercise to earn some revenue to help balance the budget. The first round of disinvestment, in which institutions were also asked to bid for bundles of shares of diverse companies, did not prove a success. Apart from whether the government secured the right value for the shares it unloaded, the diversified public stake in most of those companies remains small, the public is hardly scrambling for their shares and they continue to be under the tutelage of their controlling ministries. To inflict the same thing on the institutions on a far larger scale will amount to scripting disaster for them.
If there is anything worse than the government not disinvesting, it is doing so insincerely and in a hurry. For the process to succeed, it is vital for it to be seen to do so. For that it is necessary to disinvest a small stake in an Indian Oil or a Maruti to the general public at an attractive price which creates great shareholder enthusiasm because of quick capital appreciation and then use this enthusiasm to go forward further.