One year ago, in the Union Budget for 2011-2012, Indian finance minister Pranab Mukherjee had set a public sector disinvestment target of US$8 billion. The total so far has been less than US$3 billion. According to Mukherjee, the markets can be blamed in part for that. As he recently told the Rajya Sabha, the upper house of Parliament: “The uncertain global economic climate, mainly due to the fallout of the eurozone crisis, has adversely affected financial markets. This has been responsible for slowing down public sector disinvestment.”
The responsibility for what could happen next year, however, lies with the government. Recent events have underlined the fact that although the government is no longer the sole shareholder in these companies, it behaves as though it is.
On 12 March, U.K.-based The Children’s Investment Fund Management (TCI) sent a letter to the management of Coal India Ltd (CIL) threatening legal action against the directors for not protecting minority shareholder interest. Reuters quotes TCI partner Oscar Veldhuijzen: “The essence of our concerns is that we can no longer tolerate abuse of minority shareholders and poor corporate governance.”
The issue involves the selling price of coal. CIL had late last year informed its customers that there would be a hike beginning January 1, 2012. However, users complained to the government. Other public sector units, which are major consumers of coal, also lobbied their own ministries. According to TCI, the government then wrote to CIL asking the company to reconsider the price increase. Used to obeying government orders from its pre-public issue days, the hike was promptly withdrawn.
TCI says that the decision does not make commercial sense for the company. CIL’s prices for some grades are as much as 70% cheaper than imported coal, and the market should well be able to absorb a hike. TCI, which is known as an activist shareholder, has a 1% stake in CIL. This, however, makes it the second-largest shareholder. The government had disinvested 10% of the company in 2010 for US$3.4 billion.
Meanwhile, in what was probably the last gasp of disinvestment this year, the Oil & Natural Gas Corporation (ONGC) auctioned a 4.91% stake on March 1. The issue had to be bailed out by the Life Insurance Corporation (LIC), which is wholly owned by the government. The auction was for slightly less than US$2 billion, and LIC apparently took up 4.4%. There is a certain amount of confusion over the auction; the watchdog, the Securities and Exchange Board of India, has ordered a probe. But it appears that the smaller investors for the remaining 0.5% had to pay a higher price for their allotment. While the financial media is full of conspiracy theories, the auction hasn’t increased faith in either the companies being disinvested or in the process.
ONGC and CIL may be making waves currently, but there are several energy sector public units in which minority shareholder interests are being ignored. “Apart from Coal India, here are nine other public sector undertakings whose shareholders should sue their boards and the government of India as promoter for lack of corporate governance,” says R. Jagannathan, editor of news portal Firstpost.
In this environment, finance minister Mukherjee has reduced the disinvestment target for 2012-2013 to US$6 billion. The target for 2013-2014 will be even lower at US$5 billion, he told the Rajya Sabha. Apex chamber of commerce Assocham has meanwhile suggested that it be increased to US$13 billion for 2012-2013.