Rational Expectations

I don8217;t agree with most of Sengupta8217;s recommendations as they ignore interests of competition and are essentially just aimed at consolidating the market position of the existing refining-marketing companies. Thus IOC is to get two of the existing stand-alone refineries and BPCL is to get one. But going by the current thinking in the government, it appears as if his recommendations may finally be accepted. The committee of secretaries agreed to the proposal in the last government and the ministry of finance is keen on it, as they stand to gain a fewthousand cr-ore from the move, by just asking IOC and BPCL to pay for the government8217;s stake in these companies.

Never mind that it8217;s not transparent and is against the concept of privatisation. After all, if there were objections to IOC bidding for the disinvestment of IPCL how can a PSU buy another PSU? And how is this privatisation? At least in the IPCL case, IOC was bidding in an open fight. In this case, if you go by Sengupta8217;s formula, there8217;s no contest planned.

What8217;s even more frightening though, is the possibility suggested by Finance Minister Yashwant Sinha at a conference held by the CII. Sinha told CII me-mbers that he was determined to achieve his disinvestment target of Rs 10,000 crore for the year, and that he had asked financial institution chiefs such as G.P. Gupta of IDBI and K.V. Kamath of ICICI to come up with novel means by which to do this. To be fair to Sinha, he did say he was planning to achieve this target without resorting to cross-holdings8217;, the method devised last year togive him several thousand crore by forcing oil sector PSUs like ONGC to take up stakes in other oil sector PSUs like IOC. Selling Cochin Refineries to BPCL or Madras Refineries to IOC, however, is not a cross-holdings8217; as the entire unit will be taken over by IOC/BPCL.So what other novel8217; or ingenious methods can ICICI come up with?

Obviously, by this logic, disinvestment is not as simple as deciding which firms have to be divested that8217;s what the Disinvestment Commission does 8212; and then carrying out the mechanical process of doing this. One possibility doing the rounds once more is a refined version of the earlier one of warehousing8217;. It also makes sense to ask the financial institutions to work on this, since it is essentially all about financial structuring as opposed to a straightforward sale of units.

Under this proposal, the financial institutions will buy8217; or warehouse8217; a fairly la-rge part of the government8217;s equity in a previously identified PSU. They will then advance the governmentsome funds against the future sale of these shares, and charge some interest on this. Through some legerdemain the government will book this as disinvestment, though strictly speaking this is a loan. At some point in the future, perhaps within the time-frame of a year or so, the financial institution will sell the government stake to some private firm. If there8217;s a profit, the government gets it and if there8217;s a loss, the government makes it up. There could be variants of this, with different profit and loss-sharing between the government and the financial institutions, but this is the essence of how the arrangement works.

The arrangement is unfair for several reasons. For one, it is not transparent. And in case share prices do fall, it saddles a future finance minister with the possibility of funding these losses. What it does do, of course, is to allow the current finance minister to go ahead with more divestment with relatively less opposition. The fact that it does nothing to change managements, andtherefore to stem losses, is of course unimportant if the ultimate objective is to raise funds.

Sinha also spoke of trying to get through two or three really big-ticket disinvestments. While he refused to talk of the possible names, one possibility is selling the government8217;s 50 per cent stake in auto-major Maruti. While this is potentially a very good idea producing automobiles is not exactly the government8217;s job anyway what is not clear is why the government is delaying the pro-cess especially since each delay costs it dearly. The fact that Maruti is no longer the technology leader 8212; remember how its sales fell when the Court said Euro I and Euro II norms had to be adhered to 8212; would surely have lowered its effective value. Similarly, profits of Maruti are certain to fall significantly this year 8212; it will spend huge amounts on the new models, and increased competition will keep the margins very thin. Again, that lowers the effective value the government can get for its stake.

Clearly the governmentneeds to do some serious thinking on the entire issue of disinvestment. Reconstituting the Disinvestment Commission, with or without Ramakrishna, is something the government cannot afford to delay.

More important, since Ramakrishna has already made enough recommendations to keep the government busy with disinvestment for the next few years, the new commission must have a role in the actual divestment process. Otherwise there8217;s no point going through the motions of appointing a new commission.