India disinvestment: on again?

India''s finance minister signals that disinvestment may resume.

Recent events suggest that the current Indian finance minister, P. Chidambaram, may be relaxing his stance over the disinvestment of "non-navratna" public sector undertakings (PSU's). Navratna means jewel in Hindi and companies in these non-divestment sectors include energy, power and heavy engineering PSU's.

On at least three occasions over the last week - most recently at a press conference on November 16 - Chidambaram said the ruling coalition is now in agreement on the sale of minority stakes in some non-navratna companies. He further expressed optimism that some sales could even be executed during the current fiscal year ending March 2006.

India's stock markets have reacted positively to the news, with stocks such as BHEL and Neyveli Lignite registering gains of more than 5% since November 9 when he first made a statement on the subject.

Under the current Congress-led government - elected in summer 2004 - disinvestment has so far been a non-starter. Earlier this year, Chidambaram suggested that disinvestment would be on the back burner. Indeed, in his first budget, presented in March, he did not project a single rupee of receipts from disinvestment.

Chidambaram has always realised the government needs privatization proceeds to fund the budget deficit. During his first term as India's finance minister back in 1997, Chidambaram explicitly stated that India's disinvestment strategy was important to improve the country's fiscal situation.

Indeed, Chidambaram is oft credited with framing many of the policies, which allowed the subsequent government divestment minister - journalist turned politician Arun Shourie - to accomplish a great deal.

However his hands have been tied during his second term by the left wing allies of his coalition government. His seeming internalization of the left's viewpoint has also given the international rating agencies cause for alarm. Standard & Poor's, for example, has said that, "government debt is the main obstruction in the path of further improvements in India's credit rating".

V. Anantharaman, Standard Chartered's Indian head of corporate advisory services, explains how a consensus has been built. He says strategic sales of navratna assets appear to have been ruled out.

Instead, the government may offload some equity in companies like ONGC and BHEL through the secondary market. Safeguarding employees' interests - one of the chief concerns of the left - will, to some extent, be addressed through this route, since it is unlikely the government will now sell down below 51% and give up management control.

For non-navratna companies, Anantharaman anticipates that strategic sales are back on the agenda and believes 2006 will be a controlled, measured year for sales. He even believes that deals such as the one structured for Punjab Tractors could emerge again. A private equity consortium had backed a management buy in of Punjab Tractors - a first for a disinvestment in India.

Nevertheless, Anantharaman is pragmatic about deal flow and comments that there may be three to five deals a year rather than 20 to 30.

In the past, fee levels for government divestments were whittled down to the bone by fierce competition between investment banks to win league table credit. As a result, a number of banks have publicly stated their withdrawal from government privatizations. Anatharaman hopes policy makers will be practical enough to realize that paying bottom dollar may not necessarily get them the right bank and will change its procedures once it gets the new divestment schedule up and running.