Table of Contents
THE CONTEXT: The discourse on privatization and public assets sale is not new in India. Some people favour it, and some oppose it. The sale of the loss-making national carrier Air India to the Tata Group is a move that evoked a mixed response. While some hailed it on the assumption that it would no longer spell a further loss to the exchequer, its opponents felt that a national asset was being sold at a throwaway price without transparency by the Union government. Critics of the government say that the government failed to fill fiduciary duty in the case of Air India selling.
THE ISSUES WITH THE AIR INDIA SALE
WHAT IS FIDUCIARY DUTY?
In brief, fiduciary duty is a requirement that a person in a position of trusts, such as a real estate agent, broker, or executor, must act in good faith and honesty on behalf of a client. Fiduciary duty is a legal obligation of the highest degree for one party to act in another’s best interest.
The person to whom a fiduciary owes their duty is the principal or beneficiary. Accordingly, the fiduciary must work to the best of their ability to benefit the principal and bring about a satisfactory result or capable stewardship of the principal’s assets.
THE ISSUE OF PUBLIC TRUST
- It is prudent to extend the doctrine of ‘public trust’ to the government’s management of public sector enterprises. There is a fiduciary duty cast upon the government to act reasonably and in a transparent manner while dealing with public assets. Unlike a private asset sale, a government selling public assets and assuming liabilities without proper planning will impose an enormous debt burden on citizens.
SET A DANGEROUS PRECEDENT FOR OTHER SALES
- The Air India asset sale needs scrutiny in light of the Government’s new National Monetisation Pipeline (NMP), where public assets will be monetised either as leases or outright sales. Air India’s asset sale and retention of liabilities set a dangerous precedent as it could result in selling public assets to government faithful and leaving the liabilities to citizens.
CRISIS OF TRANSPARENCY
- The privatisation of loss-making public sector enterprises may prevent the state from incurring further losses. However, unless the sale proceeds are substantial, genuine and transparent, a crisis of legitimacy may arise.
SIMILAR CASES WHERE FIDUCIARY DUTY IS NOT BEING FOLLOWED BY THE GOVERNMENT:
- One example is the anonymous electoral bonds scheme which taps corporate funding to help any political party and where the details are known only to the ruling party, which could fuel mistrust of such asset sales. A Right to Information filing by the Association for Democratic Reforms showed that with the State Bank of India as the sole authorised dealer of electoral bonds, out of ₹3,429 crores of the total value of electoral bonds generated by the bank (FY19-20), the ruling party at the Centre alone devoured a whopping ₹2,606 crores or 76% of the total bonds issued so far. This is also the period that saw some major privatisation of public sector enterprises.Here, the role of discreet political funding through anonymous electoral bonds needs to be assessed more closely.
- The recent award of a contract worth ₹1,126 crores to a Chinese firm (Shanghai Tunnel Engineering Co. Ltd.) to construct an underground rail stretch in Delhi and a contract worth ₹170 crores to another Chinese firmfor the supply of wheels to Vande Bharat trains cannot be seen in isolation. It is important to remember that China is an aggressor at the Line of Actual Control.
TYPES OF SALES
- Enterprise sale: In order to unlock the value of assets, liabilities are retained by the seller either by himself or through an SPV, and assets are sold for a competitive price; otherwise, the liabilities will surpass the value of the assets, rendering the enterprise value to negative.
- Asset sale: An asset sale involves selling a business asset to another party, i.e. the purchaser. This includes tangible assets such as equipment and inventory, and intangible assets such as business goodwill, its intellectual property (IP) and customer lists.
- Private asset sale: It involves the consent of the secured creditors (mostly banks) who give their consent to park the liability only when they are satisfied that the promoters or the shareholders of the private enterprise would be able to satisfy the liabilities either from the proceeds of the sale or otherwise.
- Public asset sale: The sale of assets controlled by the government (sovereign), has a few shortcomings as follows:
- Directly or indirectly government-controlled banks cannot conduct due diligence independently on the nature of the sale
- Banks also cannot report fairly on whether the sale proceeds are sufficient to satisfy the debt because the government has given an undertaking to repay the debt, or the government may even force banks into a settlement with lesser repayment or even a write-off.
THE PRESENT PRIVATIZATION POLICY OF THE GOVERNMENT
Fulfilling the government’s commitment under the Atma Nirbhar Package to coming up with a policy of strategic disinvestment of public sector enterprises, with the following feature
- Strategic Sector: Bare minimum presence of the public sector enterprises and remaining to be privatised or merged or subsidiaries with other CPSEs or closed.
- Strategic sector: Industries are considered strategic if it has large innovative spillovers and if it provides a substantial infrastructure for another forum in the same or related industry
- Following 4 sectors come under it :
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- Atomic energy, Space and Defence
- Transport and Telecommunications
- Power, Petroleum, Coal and other minerals
- Banking, Insurance and financial services
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- Non-Strategic Sector: In this sector, CPSEs will be privatised, otherwise shall be closed.
Non-strategic sector
- will include hotel and tourist services, transportation vehicle and equipment, industrial and consumer goods, trading and marketing, and transport and logistics
The policy of the government on the 18 strategic sectors Other sectors
18 strategic sectors under 3 different classificatory types are
- mining and exploration
- processing and generation and
- the service sector
Policy regarding PSU by the govt
- Govt will completely exit the non-strategic sector
- in the strategic sector govt will keep a maximum of 1-4 PSU and subsequently opt for strategic disinvestment
PRIVATIZATION OF PSU SINCE 2014, INCLUDING BANKS
The increase in the supply of PSU stocks and the constrained investor appetite had started affecting the prices. The trade-off between the political objective to privatize and revenue maximization was witnessed the most in this period. Resultantly, the government resort to Strategic Sales.
However, a departure from past govt is also disinvesting profit-making ventures with a rationale that disinvestment of profit-making enterprises by a public offering of shares is desirable as it leads to dispersed shareholding and avoids concentration of economic power.
However, in the case of the bank, an amalgamation policy was followed which reduced the number of the national bank from 28 to 12 by merging various banks.
- But even after this, there was no meaningful resolution of the NPA crisis.
- In fact, post the covid crisis, this problem will increase as small banks are facing the problem of balancing credit growth and risk.
- With the spectre of insolvencies looming at the start of pandemic-led lockdown, there was a flight of deposits from small banks to bigger ones.
- In view of this, the govt has focused on taking PSBs out of government control.
Overall approach
Since 2014, the Modi government’s strategic disinvestment approach was to sell minority stakes in public companies to raise revenue, while retaining management control. During the 2014-2019 period, the government raised Rs. 2,79,622 crore from the disinvestment of public sector enterprises (PSEs), compared to Rs 1,07,833 crore collected during 2004-14. However, this has changed now. Recently, five companies were up for 100 per cent disinvestment, including three large profitable companies such as Bharat Petroleum Corporation Ltd. (BPCL), the Container Corporation of India and the Shipping Corporation.
THE CRITICAL ANALYSIS OF PRIVATIZATION POLICY BY THE PRESENT GOVERNMENT
Is privatization of banks panacea for success
- Private players in the financial sector are prone to failure: this fact gave the world economic shock of astronomical proportion, which was over reachingly created by private bank
- Private banks fail all the time. In the 20 years from 2001 to 2020, as many as 559 private banks with assets of $721 billion failed in the US.
- The principle followed by private banks is when they make profits, it goes to shareholders: When they make losses, it gets socialised and falls in the lap of the government to make good the deposits either through insurance or taxpayer bailout. (Yes Bank, Federal Deposit Insurance Corporation (FDIC), bailed out the above bank.)
- Big private banks can fail at any time: There is a myth that if a bank gets large enough, it will not fail. While one can agree that the larger the bank, the greater its ability to absorb losses, this does not mean it cannot fail. The axiom “Higher you go, harder the fall” applies best to private banks. Yes, Bank, Citi Bank, and Washington Mutual Bank are all such examples.
Looking at the larger interest
- The move towards divesting ownership in strategic sectors will have long-term consequences. A diluted public sector would possibly mean that India missing out on the opportunity to capitalise on the global distrust against Chinese supply lines in the wake of the current crisis.
- Moreover, the valuation of PSU is at an all-time low. At the start of NDA-2, the valuation of PSU at the BSE was 22% which has reduced to 9.4% in Oct 2020.
- At present, because of the crisis presented by the pandemic, it is highly unlikely that more than 10 per cent of the shares of the LIC is subscribed, as the market may not be able to absorb more.
PSU MODELS IN DIFFERENT COUNTRIES
PSUs exist virtually everywhere. In Asia where PSUs have played an important role in shaping the economy. According to an OECD report, PSUs pull plenty of economic might —
- in China, they account for 30% of GDP,
- in Vietnam, 38%,
- and they account for roughly a fourth of GDP in India and Thailand.
- PSUs are also big employers in many of these countries — 15% in China, and 5% in Malaysia.
- PSUs play an important role in BRICS economies.
- According to a recent KPMG report, of the 2,000 largest companies globally, 260 are from BRICS economies.
- About 123 or 47% of the largest BRICS enterprises are PSU. The market value of PSU amounts to 32% of GNIs (gross national income) among all BRICS countries.
All the above example shows that privatization is not the only panacea for bringing efficiency, improving productivity, and building productive assets.
THE GLOBAL PRACTICES
Reshaping the PSU buy other countries
Three former planned economies have set up centralized holding entities — SASAC in China in 2003, SCIC in Vietnam in 2007 and Druk Holdings and Investments in Bhutan. In 2006, the Philippines pioneered the development of a PSU governance scorecard which has become an important tool for pushing PSU reforms. Since 2004, Malaysia has rolled out a comprehensive ‘transformation programme” to overhaul its PSUs.
An incorporated holding company Temasek to better manage its assets on a commercial basis was launched in Singapore. This allowed its Ministry of Finance to focus on policy making. At inception, Temasek’s initial portfolio was S$354 million, spanning 35 companies. Thereafter began the process of restructuring SOEs. Some were corporatized and privatized, others were allowed to go for big global expansions.
THE CHINA EXAMPLE:
In 2003, a holding company, the State-Owned Assets Supervision & Administration Commission (SASAC), was created to manage the SEO. The agency, which controls nearly 100 of the largest SOEs, lies “at the heart of China’s industrial deep state
THE WAY FORWARD: WHAT CAN INDIA LEARN?
ALTERNATIVES TO PRIVATISATION (WITH PAST EXAMPLES)
A fire sale privatisation, as is prescribed by free market evangelists, is an also less efficient method of value maximization, besides being completely impractical in India’s political economy. Neither disinvestment nor the few outright privatizations that have taken place seem to have really maximized value for the key shareholder — the taxpayer of India.
The case for privatisation is trickier and the trick lies likely elsewhere – in control. Within the Indian landscape, there are examples, albeit few, where significant (or even majority) government ownership has not prevented the company from creating enormous value for shareholders. Since Independence, while most government-funded enterprises were set up as public sector undertakings, mostly under enabling legislations, there were other models explored too.
- Maruti Udyog was set up as a Joint Venture of the government of India with Suzuki of Japan, with the latter initially holding a minority stake. But the cornerstone of the structure was on management control – government, despite its majority stake, allowed a very substantial amount of management and operational freedom to Suzuki to manage the company on commercial lines.
- A second model used often, mostly in financial services, has been that of indirect ownership — via other PSUs while allowing private sector-level management and operational freedoms. The Industrial Credit and Investment Corporation of India (ICICI), the erstwhile parent company of ICICI Bankwas set up as a joint venture of public sector banks, insurance companies and the World Bank.
- UTI Bank (known as Axis Banknow) was sponsored by the government owned UTI-1, a special purpose vehicle created out of the restructuring of Unit Trust of India.
- HDFC, the mortgage lender, was initially sponsored by ICICI, with minority shareholdings with IFC (part of the World Bank group) and the Prince Aga Khan foundation.
Apart from above, government should a progressive approach for privatization as given below:
NEGATIVE BIDS
- The government should permit negative bids: a bid where the government pays someone to take the company off its hands. Negative bids were an important part of the massive privatization which took place in Germany after the end of socialism and helped to get productive assets rapidly into the hands of efficient managers in the private sector.
MOU MODELS
- In South Korea, PSUs with high social obligation operates with private sectors with the help Of MOUs.
- But one of the most important things, that is forgotten in the outright privatization of CPSUs is that it is unaccompanied by the necessary reforms in the overall regulatory framework in which they operate. Reforms of the regulatory frameworks and the markets are crucial for the performance of both PSUs and private companies, ensuring a rule-based competitive structure covering entry, exit, bankruptcy and competition among existing companies, as manifested by the British privatization of the 1980s and 90s.
CRISIS OF LEGITIMACY
- The privatization of loss-making public sector enterprises may prevent the state from incurring further losses. However, unless the sale proceeds are substantial, genuine and transparent, a crisis of legitimacy may arise.
RECOGNISING THE ROLE OF STATES
- It is vital to recognise the role of States in establishing a public asset such as Air India, They have actively participated in the growth of the airline in the form of land and other infrastructure to its offices.
o States were not consulted in the whole process which is a breach of the spirit of ‘cooperative federalism’.
THE CONCLUSION: While the experience of other countries is available to India by way of guidance, it would have to evolve its own techniques, best suited to its level of development. The historic, cultural, and institutional context influences the way in which and the pace at which privatization is implemented. Where the market economy is not fully developed, ways would have to be found to safeguard the interests of consumers and investors, which would ensure a fuller play to the wealth-creating role of the entrepreneurs. Apart from it, along with profit-driven marketplace, the welfare policy interventions of public sector enterprises such as social uplift, full employment need to be advocated.It is prudent to extend this doctrine of ‘public trust’ to the management of public sector enterprises by the government, as selling public assets and assuming the liabilities without proper planning will impose an enormous debt burden on citizens.
QUESTIONS TO PONDER
- Why is fiduciary duty an important element of government functioning? How can government fulfil its fiduciary duty in its functioning, especially related to asset sale processing?
- How far do you think that the central government’s approach to the asset sale is facing a trust deficit, and it is resulting in liabilities being left to citizens? Substantiate your views with examples.