Vijay Kumar Gaba: PSE

Showing posts with label PSE. Show all posts

Wednesday, March 11, 2020

Who is accountable for PSUs' conduct

The government of India has been the greatest value destroyer for the investors in Indian Equities. The Nifty PSE index, comprising most listed PSU stocks, now trades at the same level as it was in 2006, implying no return for 13yrs, if we consider point to point investment period.

The CPSE ETF comprising top 22 Central government undertaking stocks, launched in 2014 is giving negative return to its investors.

Many large Public Sector companies are now trading at multi year low prices, adjusted for all dividends and other corporate actions.

The government of India therefore has legal and moral duty to explain to the investors, why it should continue to manage these businesses. They have obviously not managed these great businesses like MTNL BEL, Coal India, etc well and destroyed huge wealth for the nation as a whole and individual investors as well.

The Supreme Court may like to examine, whether the government should be permitted in the first place to raise equity from investors through sale of minority stakes, given that the Constitution of India requires the government to be "Socialist" and not indulge in profit making at the people's expense. Or at least it must consider extending the provisions of the Companies Act relating to oppression of minority shareholders and mismanagement to the listed government companies.

The market regulator must consider bringing the concerned ministers and bureaucrats from the respective operating ministries and departments within the regulatory framework for disclosures and investors protection.

In an unrelated but important matter, the finance minister publically admitted that the RBI and the government were aware of the mismanagement and impropriety issues at Yes Bank since at least 2017. Considering that Yes Bank is a constituent of Nifty and Bank Nifty indices. The National Pension Scheme (NPS) is permitted to make equity investment only in ETFs based on benchmark indices. This means the government deliberately let the money of the subscribers to NPS (mostly government employees and small poor investors) to be invested in Yes Bank at a price of over 300, despite knowing that it is a bad bank. This is a blatant breach of trust, which needs to be investigated and punished.

If the government wants to build clean, accountable and strong corporate and financial systems, it will have to begin the work from itself and show the path to others. The other way round has never worked; it never will.

Thursday, January 16, 2020

Common investors may avoid PSEs for investment

As per media reports the government is seeking huge dividends (Rs190bn) from oil PSUs to meet its fiscal shortfall (see here). It is also reported that some companies might have to borrow money to pay the required amount of dividend as the cash balance with them may not be sufficient to meet the demand. Obviously the payout will at the expense of cutting capex and impairing the future growth potential.

In summer of 2016 also, the "Finance Ministry" had directed all profit making PSUs to use their surplus cash to buy back shares and pay handsome dividend, besides considering issuing bonus shares or going for stock split. (see here) Since then the benchmark Nifty50 has gained over 42%, while the Nifty CPSE has lost over 9%, underperforming the benchmark by massive 51%.

I have said it many time before, and I would like to reiterate this again - for a common investors, finding any reason for investing in a public sector enterprise (PSE) is extremely challenging; notwithstanding whatever government suggests or claims.

From the experience of MTNL, NBCC, Coal India, etc. it is clear that despite their dominant monopoly status, these companies are vulnerable to failure due to policy intervention; simply because the government in India is socialist by the constitutional mandate and an enterprise majorly controlled the government cannot have even profit optimization as its primary objective.

Most of the PSEs in India’s suffer from one or more the following limitations, that makes them unfit for investment by a common investor.

(a) The management lacks transparency and accountability.

(b) The management is corrupt, incompetent and/or instable.

(d) The companies operate under a highly inconsistent policy environment.

(e Many companies do not have control over pricing of their products, which is dictated by the government usually under political considerations.

(f) Some companies like power distributors are often forced to deal will bankrupt customers.

(g) The senior executives are appointed on the basis other than expertise in the area of operation.

(h) Most of the companies may be saddled with excessive bureaucracy without any control over the appointments, promotions and compensation.

(i) Most companies are egalitarian in their operating mission and more often work for social cause rather than optimization of profit.

(j) The companies need political sanctions for managing their capital structure.

Moreover, the ground reality of our economy today is that we are hugely dependent on foreign capital to ensure growth. It is therefore inevitable that government will have to keep relaxing foreign direct investment norms and open more and more areas of the economy to stiff global competition. Under these circumstances, many public sector undertakings with their inefficient capital and wage structure may crumble.

Besides, the majority shareholder (government) has consistently and blatantly oppressed the minority shareholders in these companies – by not allowing them to fix the prices of their products, raise capital when required, make investments where and when desirable and disallowing the managements to restructure their costs (especially employee cost) during downturns.

Under these circumstances, there is little rationale for a common investor to invest in PSEs or CPSE ETF. However, for the professional investors who understand the risk and know how to take advantage of trading cycles, it may be a different ball game altogether.

Friday, July 19, 2019

Use PSE for public good

Some food for thought

"I may neither choose who I would, nor refuse who I dislike; so is the will of a living daughter curbed by the will of a dead father."

—William Shakespeare (English writer 1564-1616)

Word for the day

Ideogram (n)

A written symbol that represents an idea or object directly rather than a particular word or speech sound, as a Chinese character.

First thought this morning

I chanced upon a twitter handle @theworldindex. It has some very interesting data about various countries in the world. Though there is no way to authenticate the data, but intuitively I can say it does not sound too off the mark in many cases. The following is some data I found interesting to note and actionable for the government.

Chart of the day

Use PSE for public good

There are hundreds of not for profit organizations that have been set by government in post independence period. These organizations are funded and managed by the state. Most of these organizations have done commendable work in the area of poverty alleviation, equality, inclusion, social justice, research & development, health, education, science & technology, business development, regional development etc.

Similarly, there are hundreds of commercial public sector undertakings owned and managed by the central or state governments. The primary objective of establishing these commercial undertakings in public sectors was to kick start the industrialization in the independent Indian state, since the British left behind an abysmal industrial infrastructure, poor private enterprise and dearth of capital. Government started with investing majorly in infrastructure and core industries like steel, power, oil & gas, cement, heavy engineering, railways, road transport, shipping, civil aviation, telecom, insurance, banking etc. Substantial investment was also made in strategically important defence equipment manufacturing and allied services. Later coal and many private banks were also nationalized. In due course the government made material investment in food supply chain (fertlizers, sugar, food distribution), consumer products, retail & wholesale trade, to achieve price stability, better availability, equitable distribution etc.

As the objectives were gradually met, in early 1990s an in-principle decision was taken to divest the stake in non-strategic undertakings in public sector. The process was begun with disinvestment in some loss making non-strategic undertakings. VSNL, CMC, Maruti, BALCO, IPCL, Hindustan Zinc, etc were sold to private sector. Stake in many profitable undertakings were diluted through public offerings and strategic sales, e.g., banks, insurance companies, MTNL, energy companies, etc.

Besides, the monopolies of the government in sectors like roads, power, telecom, oil & gas, civil aviation, ports, defence manufacturing etc. have been diluted to allow larger private participation (both domestic and international). The private sector has built adequate capacities in sectors like civil aviation, telecom, roads, power etc. to leave the role of government redundant. Most government enterprise in sectors, where free private competition is allowed, struggle to stay profitable because of their inefficient organizational structure and tedious decision making processes. There is no point letting these enterprises continue in operation, especially when the very objective of their existence has already been achieved. MTNL, BSNL, Air India, NALCO, STC, MMTC, SAIL, NBCC, NCL, RINL, Pawan Hans, SJVN, TCIL, Hindustan Paper, Hindustan Copper, Bharat Pumps, BHEL etc. are some of the examples.

In my view, it is high time that the government must constitute a High Power Council (on the lines of GST Council) comprising of representatives from all stakeholders (Political parties, state governments, employees unions etc.) to study and recommend a total overhaul of public sector enterprises in central, state and joint sectors. The Council may recommend sale, dilution, closure, asset sale, and/or change in objectives of these enterprises.

I would like to offer following suggestions in this regard:

(1) The farm sector in India needs massive investment in technology, R&D, land reforms, training and reorganization. In that sense the situation of farm sector is very much similar to what the situation of industrialization was at the time of independence. Private capital is available but not willing to flow in farm sector due to a variety of regulatory and practical constraints. The government should kick the process of investment in farm sector. The government should acquire all farm holdings below the viable size and consolidate these into large sized farms. The respective land owners and/or and landless farmers tilling the acquired land should be employed at minimum wages plus a share in profit. The money for this venture may be raised by selling most of the industrial undertakings in the public sector, as their purpose of being in public sector has already been served.

For the larger farm holdings, the government should encourage the farmers to partner with the food processing industry on cooperative model. The factories must be taken to farms.

(2) Companies like MTNL, BSNL, Air India, STC, MMTC etc should be converted into social organizations.

(i) MTNL and BSNL may be merged. The work force may be rationalized or adopted in other government departments where vacancies are lying for years.

The merged entity may be mandated to provide cheap 5G data to MSME, Educational institute, tech startups in metros; and connect all villages to national digital highway. All educational institutions (primary schools to IITs/IIMs) may be connected digitally and Right to Uniform Education may be implemented through this digital platform.

(ii) Air India may exclusively be used as feeder to the private airlines. It may bring people from smaller and far away destinations to the major hubs for onward journeys. It may be used as air ambulance service for ferrying critical patients to the major cities. It may also be used as a cheaper cargo service dedicated for Indian ecommerce ventures. A small cess of Rs50 per domestic air passenger can contribute Rs85-100billion for Air India's social programs.

(iii) STC and MMTC have tremendous experience of operating in foreign countries. Their expertise could be used for a variety of purposes. For example, they can be sourcing and C&F agents for Indian trading startups. They can also work as foreign placement agencies for Indian workers. They can operate foreign tours for Indian travelling overseas, to save them from being cheated by unscrupulous travel agents.

(3) The government must consider limiting the number of public sector banks to just 5, one for each region. All other banks may sold and proceeds may be used to build two large development financial institutions, one for funding large infrastructure projects and the other for funding technology innovations.