Ma’am Sitharaman, You Must Shed Control, Not Ownership, of PSUs

It is time we learnt from the Maruti experience – Shed control not ownership advises Raghav Bahl. 

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“Government is considering [audio disturbance] to go below 51% to an appropriate level on (a) case-to-case basis. Government has also decided to modify (the) present policy of retaining 51% Government stake to retaining 51% stake inclusive of the stake of Government controlled institutions.”
Nirmala Sitharaman, Finance Minister 

I sat bolt upright as I heard Finance Minister Nirmala Sitharaman utter these words in the 97th para of her long Budget speech in parliament on 5 July 2019. What! Had Modi 2.0 just mounted its most audacious structural reform by agreeing to privatise India’s sprawling, inefficient public sector undertakings (PSUs)?

But my excitement was rudely cut short when I read the words that had gotten obliterated by the audio disturbance: “in case where the Undertaking is still to be retained in Government control”.

Shed Control of PSUs, Keep Ownership

And the last vestige of any joy disappeared when I heard a government secretary say:

“We’re shedding the thought that 51% is needed to retain control. The marriage between control and 51% is separated for the first time. We have decided to go below 51% … but retain control.”
Atanu Chakraborty, Secretary, DIPAM

I just slumped back in my chair, my heady high punctured.

Yet frankly Madam, I am delighted that finally, after seven decades of independence, our bureaucracy has learnt that ownership and control should not be conflated. This rather simple realisation could ignite entrepreneurial energy in first-gen founders if the principle is extended to them. But for now, Madam, you’re grasping the wrong end of the stick. By all means, keep your ownership of PSUs, but please, pleeeeease, give up control.

Maruti: India’s Most Successful Disinvestment

  • It was a joint venture between the Government of India (GOI) and Suzuki Motor Corporation of Japan. It was unlisted.
  • GOI was the majority shareholder, but Suzuki was allowed to exercise control over the company even though Suzuki owned only 26 percent.
  • In 1982 and 1992, Suzuki was allowed to increase its shareholding, first from 26 to 40 percent, and then to 50 percent.
  • But GOI, which had nearly equal ownership, ceded more control to Suzuki, winning several valuable concessions in exchange, including access to larger export markets and the manufacture of global models in the Indian plant. Consequently, the joint venture’s valuation increased exponentially.
  • This was followed by a master-stroke. The company did a hefty rights issue of Rs 400 cr. GOI renounced its shares in favour of Suzuki.
  • Bingo, the JV got a dollop of capital to multiply its ambitions, and Suzuki got a controlling stake. But wait...
  • GOI also got a massive Rs 1000 cr as “premium for shedding control”. And it got Suzuki to underwrite an offer of sale to the public at a price of Rs 2300 per share.
  • Eventually, MUL got listed (and became India’s most precious auto company), and GOI made a terrific ROI – all because it kept the ownership, but gave up control, allowing its entrepreneurial partner to create a huge amount of value in the joint venture.

If you don’t trust me, just go back and study how Maruti Udyog Limited (MUL), perhaps the most successful disinvestment ever, was done.

So Madam, please learn from the Maruti experience (as you can see, there was some wisdom in earlier governments too; not all of it is residing in Modi 2.0). Shed control, not ownership.

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