Twin targets

Print edition : October 31, 2014

The Vedanta office building in Mumbai. According to CITU leder Tapan Sen, the 2010 Cairn India-Vedanta deal in Rajasthan smacked of corruption. He alleged that favourable circumstances were crreated for Vedanta to buy Cairn India's stake in the Mangala oil rig in Rajasthan. Photo: DANISH SIDDIQUI/REUTERS

Two of India’s biggest public sector companies, SAIL and ONGC, are on the disinvestment block at prices that raise doubts about the timing and the intent of the government.

Prime Minister Narendra Modi’s announcement about disinvestment of public sector enterprises (PSEs) as part of his “tough measures” to revive the Indian economy, despite the tough talk, amounts to only tailing the disinvestment policy of the United Progressive Alliance (UPA) government. After the first National Democratic Alliance (NDA) government from 1998 to 2004 went full throttle to privatise many profit-making PSEs, eventually held as economic imprudence, successive UPA governments adopted a cautious approach —that of selling off PSE stakes gradually.

Now, the Modi-led NDA government intends to push the biggest ever disinvestment plan for PSEs. In doing so, it has shortlisted many profit-making companies for disinvestment, ostensibly because profit-making companies may bring in more money. Two of these PSEs are Steel Authority of India Limited (SAIL), India’s premier steel manufacturing company, and Oil and Natural Gas Corporation Limited (ONGC), the biggest crude oil producer of India.


The proposed dilution of stake in SAIL was originally proposed by the UPA-II government in 2013. The Cabinet Committee on Economic Affairs (CCEA) proposed selling off 10.82 per cent of the stake either through offer for sale or through an auction. But poor market conditions and internal resistance by the SAIL management and the Steel Ministry forced them to put only 5.82 per cent of shares on sale at Rs.66 per share.

The sale, which is supposed to generate Rs.1,587 crore for the government, is being strongly espoused by the present government. The CCEA has directed the Department of Disinvestment and the SAIL management to organise road shows to attract investors.

A source in the Steel Ministry told Frontline that a few roadshows have already been held and it plans to conduct more in the international market in places such as London, New York, Singapore, and Hong Kong. He also said a part of the shares would be divested in state-owned companies.

A significant section of the NDA government is of the view that the offer-for-sale route is more practical than the auction route in view of the time frame it has given itself to meet the disinvestment target of Rs.58,425 crore.

However, a senior official in SAIL told Frontline on the condition of anonymity that the SAIL management is not too happy with the disinvestment plan. “I do not think that selling off our shares will impact the workers of SAIL immediately, but I fear that our valuation has not been done correctly. We feel undervalued.”

He said SAIL had a history of opposing disinvestment ever since it was mooted in 1991 as part of the new economic policy. The SAIL management in 1991 had argued that the government should not sell SAIL’s shares until the conditions were favourable. It was of the view that SAIL should be not be opened for disinvestment until the decontrol of steel prices, as that would give them the edge in the share market as the largest producer of steel at that time.

This understanding may be true even today. When the UPA government decided to disinvest SAIL, its share prices were at an all-time low, hovering between Rs.60 and Rs.65. Ideally, the government should have pumped in more money for its infrastructural development and production process and should have waited for its share prices to go up before it made such an announcement. This would have been a profitable affair for both SAIL and the Government of India.

However, in a hurry to meet the disinvestment target, the government fixed SAIL’s share price at Rs.66, which many thought was low. Many critics of the move blamed it on crony capitalism as it put the private steel companies at a distinct advantage; it also gave the private players an opportunity to buy SAIL’s stake at a cheaper price.

“Imagine the kind of infrastructure SAIL has. The Bhilai Steel Plant has heavy infrastructure that stretches for a distance of at least 10 kilometres. In addition, SAIL has converted villages into full-scale towns with all modern amenities. Even if we sell the land where the steel plants are located, it will fetch the government much greater revenue than what will come from such indirect privatisation,” said K. Ashok Rao, president of the National Confederation of Officers’ Associations (NCOA) of Central Public Sector Enterprises.

The fact that the government’s plan for SAIL is being looked at with a degree of suspicion has a history to it. In 1991, when SAIL was listed on the stock exchange, its share price reached a high of Rs.240, but the then government refused to raise its reserve price beyond Rs.12 in its initial phases of disinvestment when 5 per cent shares were divested. When the need of the hour is to first make SAIL’s shares stronger, the government is going ahead with its disinvestment. Today, SAIL holds 80 per cent of the stake, but under the new, controversial rule of the Securities and Exchange Board of India, which holds true for all PSEs, it has to mandatorily put at least 25 per cent of the shares for divestment.


The NDA government also plans to disinvest 5 per cent of ONGC’s shares and garner a revenue of Rs.19,000 crore. It now holds 68.9 per cent of the shares after the first round of disinvestment during the UPA-II government.

A senior official told Frontline that disinvestment is clearly the government’s prerogative, but the management has cautioned the Oil Ministry against indiscriminate disinvestment. Out of the five issues the ONGC management raised, the two most important ones were undervaluation and the profits it could garner as a result of its massive investment in oil rigs, both nationally and internationally. It fears that it may have to share its future profits unnecessarily with private investors, given the fact that all the investment was done by ONGC.

“We expect that by 2030 we will be able to dig in 60 million tonnes from international fields alone. It is right now around 7.5 million tonnes. Two of our biggest investments are in India. Daman and redevelopment of Mumbai on the western corridor are worth Rs.5,700 crore and Rs.5,800 crore respectively. On the eastern front, we expect to get somewhere between 70,000 and 90,000 barrels of oil a day. I am not even counting natural gas. Gas in the KG basin should begin to give us profits from 2018 onwards,” the official said.

Similarly, the other fear of ONGC is undervaluation. The government has a bad record of valuing its own companies, which was proved in SAIL and also in the Comptroller and Auditor General’s report in 2006.

The Union government’s reasoning that the profits of both SAIL and ONGC have gone down over the past few years are true. But many in these companies and independent experts feel that the government itself is to blame for it. “What happened during the 2010 Cairn India-Vedanta deal in Rajasthan smacks only of corruption. The Mangala oil rig in Rajasthan was the largest onshore discovery of crude oil—25 per cent of the total crude oil in India. When Cairn wanted to withdraw, ONGC, as a 30 per cent stakeholder, was the natural inheritor of the oil rig. Instead, the government did not permit ONGC to take over and created favourable circumstances for Vedanta to buy it off,” said Tapan Sen, general secretary of the Centre of Indian Trade Unions.

Instead of putting in more infrastructural expenditure and positive energy, the government has always been distant. Despite this, the PSEs have shown a positive growth, though a slow one. PSEs were the ones that had kept the country’s economy afloat during the times of economic recession. In the past few years, privatisation has become the easy route for private industries to work in fields already developed by the PSEs.

“Unlike private companies, the PSEs also pay dividend to the government, apart from tax. Similarly, the debt-equity ratio of PSEs is less than 1 per cent on an average. ONGC and SAIL have also maintained a low debt-equity ratio for many years. Their role in corporate social responsibility has been exemplary. Private companies, on the other hand, maintain a debt-equity ratio which is higher than 1 per cent. Their role in CSR has been pathetic. Yet, the government thinks that selling off these companies is better. What kind of prudence is that?” asks Tapan Sen.

The PSUs are perhaps the first victims of the economic climate fostered by neoliberalism. It has not only led to an unprecedented crony capitalistic structure but also turned profit-making government enterprises into sick units owing to the lack of government expenditure. In turn, what was ideally supposed to be a level playing field for both PSUs and private companies, as projected in 1991, has turned into a perfect batting track for private companies. SAIL and ONGC are only cases in point.

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