Corporate Dec 31, 2013
By Raghav Bahl and Vivian Fernandes
The government's disinvestment programme is a failure. So far, it has raised just 3 percent of the Rs 40,000 crore it intended from the sale of equity in public enterprises in this fiscal year. Ministries do not want to let go off the companies. Disinvestment decisions are announced in advance, leading to a drop in stock prices and this in turn is used as an excuse to delay equity sale. In unlisted companies, antiquated valuation methods are used for public offerings of equity.
Is there a bigger, bolder idea here, without riling the usual prophets of doom? Yes, there is. We can create a trillion dollar India Sovereign Fund, without spending a single penny from the government's fiscal book! Let me show you how.
The government should transfer its corporate investments to a fund-grandly called India Sovereign Fund-managed by a board of professionals with a two-point mandate: 1) to create value by improving the governance of portfolio companies; and 2) to monetise that value by buying and selling equity in the Fund (instead of directly in portfolio companies). This should be done not when the government needs money, but when market conditions are right.
The fund's board will be answerable to Parliament, through the finance ministry. Given the political sensitivities about selling 'family silver', the Fund can be tasked with retaining 51 percent state control in all portfolio companies (at least until India's liberal democracy has matured to the stage that Parliament is willing to privatise, at which point this Fund could indulge in outright sales - but for now, we will hold our horses at a mandatory control of 51 percent by the state, to allay the fears of left-leaning Indian politicians).
Frankly, this is not such an original idea. Singapore's Temasek sovereign wealth fund offers an example. It was created to manage investments made by the state in the first decade of Singapore's independence. The finance ministry transferred its assets to a holding company so that it could focus on policy-making and regulation. The initial portfolio included a port converted into a ship repair business, a bird park, a shoe maker, a detergent producer, a nascent airline and a steel mill. Since inception in 1974, Temasek's annualised shareholder return has been 16 percent and its portfolio was valued on 31 March at $267 billion. Temasek is also the inspiration behind China Investment Corporation launched in September 2008 with $200 billion of starting capital, drawn from the country's foreign exchange reserves. China Huijin, an investment corporation that held shares in Chinese banks, was also transferred to the fund.
So what could India Sovereign Fund look like? My friend Prithvi Haldea has done some calculations for me. According to Prime Database, his Delhi-based tracker of equity and debt offerings, the market value of government holdings in 45 listed Central-government owned enterprises was Rs 7,82,150 crore as of last week, or $126 billion.That of 26 public sector banks was another Rs 1,77,790 crore, or $29 billion. So a fund managing the government's holdings in 70 public sector enterprises would have a value of $155 billion.
The government's stake in the industrial companies ranges from 51.11 percent in Hindustan Petroleum to 90 percent in Coal India. In banks, it holds as much as 90 percent in State Bank of Mysore. Just as an aside, a five percent divestment of this Fund would yield the government Rs 48,000 crore - and exceed its target for the current year. But the idea that I am proposing is much more innovative than a sterile sale of equity.
The government also has companies whose equity it owns entirely. According to the latest public enterprises survey, as of March 2012, there were 225 operational companies in which the Central government held majority or complete control. Of these 161 were profit-making. Their net after tax profit, accounting for losses made by the rest, was Rs 97,513 crore, or $19 billion, at Rs 51 to the dollar. I further understand that this profit could have gone up substantially after 2012.
Most of the profitable companies are listed, so if the unlisted ones are included, the Fund's value could swell to $180-200 billion. Unfortunately, investors do not have much confidence in the government's ability to create value, giving these companies a price-earnings multiple of 7, while the 30 Sensex companies quote at 17 times earnings. What's more, some of the unlisted companies like Air India sit on a huge land bank and assets like bilateral flying rights.
Conceivably then, better management by an autonomous, professional holding company would enhance the current value from $180-200 billion to $ 225-250 billion or so.
Now let's think out of the box. If the average or median value of the India Sovereign Fund is, say, $325 billion over the next six to eight years (assuming that asset and income values will grow over this period, from the current base of about $225 billion), then this Fund could raise $325 billion in equity if the government places fresh shares and brings its stake down to 51 percent, and another $ 650 billion in debt (at a conservative 1:1 debt/equity ratio) in 'opportunistic tranches'. That is, during periods when interest rates are down it raises debt, and when equity values are high it raises equity.Thus, it could raise nearly a trillion dollars of fresh investible resources over the next six to eight years.
This trillion dollar hoard should be used to invest in downstream public-private-partnership, or PPP assets, in critical infrastructure and other industries (where the government is a shareholder, like the Delhi airport) thereby preserving the essential nature of India Sovereign Fund as a holding company of government investments. So the pool of public equity will grow, and the ability to leverage it will expand, leading to the creation of a virtuous cycle (and perhaps a two trillion dollar Fund over 15 years!).
Is this a sand-castle? A pipe-dream? A sleight of hand? No, no and no. All we need is a bold new government in 2014, one that is willing to bet on innovation and gumption.
More From R Jagannathan.