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Skip Navigation LinksHome :: Back Issues :: Privatization plans bump along apace

March 2002

Privatization plans bump along apace


Privatization in India has accelerated under firm government leadership but the process has been complicated by doubts about the involvement of state companies as buyers and government provisions to prevent monopolies developing. Foreign buyers have been notably absent, not least because of restrictions on the size of their holdings and other government provisions. Looming in the background is also the threat of a growing populist political tendency.




       
Arun Shourie
Arun Shourie, India's minister for disinvestment, faced a verbal barrage in parliament a year ago when he announced the sale of a 51% stake in Balco, a profitable aluminium company, to Indian company Sterlite.
The opposition Congress Party alleged that Balco had been sold for a song and its workers went on strike, forcing a plant closure. A combative Shourie offered to annul the sale if Congress could find a buyer willing to pay more. It was many weeks later, after the Supreme Court upheld the sale, that the new owners of Balco, now saddled with a Rs2 billion ($41 million) loss, were able to move in.
On February 5 this year Shourie announced the sale of two big state companies - VSNL, a telecoms company whose monopoly over international telephony ends in April, to the Tata group; and Indo-British Petroleum (IBP), an oil-marketing company, to state-owned Indian Oil Corporation (IOC), India's only Fortune 500 company.
He also announced that Bharat Petroleum and Hindustan Petroleum (HP), two of India's most valuable oil-refining and marketing companies, would be sold three months after the oil sector was deregulated in April. Surprisingly, there was none of the political noise that forced Singapore Airlines to pull its planned bid for Air India last year. Two weeks later the government did the unthinkable. It sold a 74% stake in Paradip Phospates, a loss-making fertilizer company, to Zuari Chambal-OCF, the only bidder, for Rs1.5 billion, Rs240 million less than the reserve floor price fixed by global advisers Deloitte Touche Tohmatsu.
In the strongest thrust towards privatization yet, the BJP-led coalition government has sold eight state companies and a dozen hotels to strategic investors in the past two years. Pradip Baijal, disinvestment secretary, says the government will raise Rs70 billion in the fiscal year ended March from privatization sales. So far it has got around Rs55 billion, the most in any single year in the past decade.
A formidable list of companies is slated for privatization this year: HP; Bharat Petroleum; Indian Petrochemical Corporation (IPCL); Maruti, India's biggest car company, where the government is in negotiation with Suzuki, its equal joint venture partner, to sell a controlling stake; Hindustan Zinc; Hindustan News Print; Jessop, a loss-making heavy machinery company; and the State Trading Corporation, a big food distribution company.
In mid-February Lazard and SBI Capital Markets were appointed advisers on the sale of Shipping Corporation of India, India's biggest shipping company. A flotation by aluminium company Nalco is likely later this year. The politically challenging privatizations of Air India and Indian Airlines, the international and domestic carriers, scheduled for this fiscal year, are unlikely to happen soon given the aviation industry slump after September 11.
The markets are enthused. Under India's takeover rules, both Tata and IOC must make an open offer to retail investors for 20% each of their respective acquisitions of VSNL and IBP. IBP's share price is four times what it was a year back, a welcome change from the days when retail investors lost money on privatization shares. Top picks among state company shares went up by 30% to 50% in the first two weeks of February. The benchmark Bombay Stock Exchange Sensex index rose to over 3600 for the first time in nine months. Foreign portfolio investors invested $294 million in the stock markets in the month to February 22, twice the inflow in January.
The market senses that the old approach of selling off minority stakes is being replaced by a wholesale move of management of state companies to the private sector. As Baijal says: "The sale of strategic stakes has fetched far higher prices than that of minority shares."
The price of the government's residual holding in Computer Maintenance Corporation (CMC) rose after it sold a majority stake to Tata Consulting Services, India's biggest software exporter, last year. Ajay Sondhi, managing director and country head at UBS Warburg, says: "This could well be the turning point for Indian economic reforms."
Murmurs of disapproval about state-owned IOC buying up IBP at an unusually high price died down after IOC was barred from bidding for HP and Bharat Petroleum later this year. Competition is being fostered in a sector that will be deregulated from April.
Rating agency Standard&Poor's says the news on privatization is good but unlikely to change India's rating profile until the problem of the government's fiscal deficit is dealt with.
Rajeev Gupta, head of investment banking at DSP Merrill Lynch, explains why privatization looks interesting now. "The big deals are coming to the market now," he says. "Secondly we see the government defining its exit through a put option to the private partner in companies where it retains a minority stake. Thirdly, the government's veto list or conditions on which it will privatize has got shorter." DSP was an adviser to Kuwait Petroleum in the IBP deal, and plans to pitch for the HP and Bharat mandates, he adds.
Shanti Ekambaram, investment banking head at Kotak Mahindra, a Goldman Sachs affiliate, says that the sale of Paradip Phospates indicates that in India economics is finally being separated from politics. "For the first time the cost of delay was what swung the decision to sell on a bid under the reserve price. That sort of thing tells the market that the government is serious about sell-offs," she says. Kotak is advising the government on negotiations with Suzuki over Maruti.
Strategic sales of Indian state companies
  Company Face value of equity sold (Rs mn) Sum raised (Rs mn)
1 Modern Foods 96.3 950
2 Balco 1125.2 8265
3 Computer Maintenance 77.3 1520
4 Hindustan Teleprinters 111 550
5 Lagan Jute 7.7 25.3
6 Indian Tourism Development Corp - nine hotels 77 1806
7 Hotel Corporation - three hotels 146 2425
8 Indo-British Petroleum 74 11,536
9 Videsh Sanchar Nigam 712 36,890
10 Paradip Phospates - 1517
  Total 2428 65,485
 
Source: Ministry of Disinvestment

In Shourie and Baijal, Indian privatization at last has a winning team. Backed by prime minister Atal Behari Vajpayee and India's most stable government in years, they have set a cracking pace. "As a team they [Shourie and Baijal] work well," says one banker. "They are informed, manage the process well and have a clear reputation." He adds wryly: "Our calls even get returned."
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