Here's Why The Government is an Unreliable Promoter

Every year, the Finance Minister lays out an annual target for receipts from divestment of PSU shares, a number missed by a wide margin by the end of year, nearly every time. This is regardless of market conditions, buoyant or sluggish. Among many contributing factors, a paramount one is that most investors, and indeed businessmen, regard the Government of India (GoI) as an unreliable promoter, capable of utterly capricious behaviour to the detriment of minority shareholders. In this, the GoI has been remarkably consistent, regardless of which dispensation is in power. It is this tendency that has resulted in the sustained underperformance of PSU stocks over the decades and made global and local businessmen wary of buying state-owned assets.

The latest, and glaring, example of this is the ongoing saga of fuel prices and the proposed disinvestment of BPCL. Global crude prices have shot through the roof in response to the crisis in Ukraine, yet retail prices of fuel had not been raised since November 2021, till recently. State-owned oil companies have bled billions in this period and some private oil retailers were on the verge of shutting shop. When asked why prices had not been raised, the Finance Minister scoffs at the question saying she couldn’t possibly think only about the fate of BPCL or oil marketing companies while deciding on such matters, having loftier issues such as inflation to keep in mind. This churlish response was both surprising—as it was her predecessor Arun Jaitley who had announced the deregulation of diesel prices to rapturous applause from the business community in October 2014—and disingenuous, as the real reason is obviously the key state elections which held the government back from raising fuel prices.

The stock of BPCL is down a quarter since fuel prices were frozen but that is at best a side issue as minority shareholders are by now used to the vagaries of owning PSU oil companies. The bigger problem is that any prospective buyer of BPCL would probably think several times before buying an asset where it has no control on product pricing, potentially standing to lose millions of dollars every time an important election comes around, if the price of crude were to misbehave for some reason. For decades, the government has run roughshod over other shareholders in publicly listed PSUs, sometimes taking arbitrary decisions totally inimical to their interests, often even forcing them to run down their balance sheets by buying stakes in other PSU companies to serve its own interests. No business in its right mind could bid for BPCL in such a scenario.

Similar questions plague the prospects of India’s largest IPO, the upcoming one of LIC. The country’s largest insurer has often been used as a pawn by the finance ministry to bail itself out of sticky situations. When the public issues of struggling insurance companies New India Assurance and General Insurance Corporation needed bailing out, it was inevitably LIC which was called upon to do the honours. Likewise, when the ailing IDBI Bank needed a lifeline, it was again LIC that was called upon to fork out thousands of crores, regardless of whether it made any financial sense. Examples of such forced investments are numerous, most ending up as disastrous bets. It is also an open secret that LIC is used as a market stabiliser by the finance ministry during times of crisis and panic, even if it is at the cost of sacrificing its own interests. And therefore, while the franchise is indeed valuable, it is questionable if LIC should be regarded as a clean insurance play, or an extension of the finance ministry which can be pressed into the service of ‘national interest’ at any time. Prospective investors of LIC need to be cognisant of such risks before getting too excited.

The same issues are likely to crop up in the proposed sale of stakes in two government-owned banks. Would they truly be allowed to operate as freely as their private sector counterparts? The issue is that while the government is happy to sell shares of its companies in the public market to raise money when required, it has nothing but rank disrespect for the rights of other shareholders. Almost as if minority shareholders ought to feel privileged about being conferred the right to own a slice of these jewels and dare not ask questions when their value is eroded serially by poor decision making. Unless this changes, and the government realises that it can do whatever it wants with 100 per cent owned PSUs—even if that risks running them to the ground like BSNL—it cannot take such liberties where the companies have other non-government shareholders. And with its shoddy track record, it certainly cannot go about asking suitors and investors to partake in its newfound divestment zeal, unless it can demonstrate that it is about to change its spots. After all, you can’t have your cake, and eat it too.

The central problem is one of trust, and it isn’t a new one. A decade ago, the government did an offer for sale of shares of the upstream oil company ONGC. Before the issue, there were global roadshows where ministers and bureaucrats announced, with great fanfare, how policies with regard to the company would be scrupulously aligned to the interests of all shareholders. What followed over the years was a series of missteps such as loss/subsidy sharing with oil marketing companies and then the purchase of a majority stake in HPCL. Ten years out, the stock still trades way below the price at which the shares were sold back in 2012. There, hangs a cautionary tale.

Should bidders or investors believe assurances from the government that such decisions will not be taken in future with regard to BPCL or LIC? After all, diesel deregulation was just such a promise from the same government, which lay in tatters for over four months till the government deigned to concede enough was enough.

Having dealt in broken promises and high-handed arrogance over the years, the government should now realise that, powerful as it may be, it is still not above the old dictum that actions speak louder than words.