On June 22 IndiaÆs Cabinet Committee for Economic Affairs had approved the disinvestment of 10% stake in two companies, National Aluminium Company and Neyveli Lignite. The government owns 87% in the former and. 93% in the latter. Both companies are listed. While announcing the sale IndiaÆs Finance Minsiter Chidambaram had clearly stated that the 10% stake sale was not privatisation but rather was a move to generate revenues for the government. The sale was expected to yield between $500-600 million. Investors welcomed the announcement and the share prices of both companies went up more then 5%.
The prime ministerÆs office (PMO) issued a press release on July 3 that sought to gain support for the deal by stating "the government will provide for sufficient allocation of shares to the employeesö. It was especially critical for the government that the DMK party - based in the state of Tamil Nadu where Neyveli Lignite is headquartered - support the sale. The DMK party supports the coalition with 16 members of parliament. It has the power, if it withdraw its support, to topple the ruling government.
The opposition to the sale was evident when about 20,000 NLC employees went on strike in protest.
The government then reversed its decision on July 6 with a spokesperson for the prime minister issuing a statement ô"there have been representations from some of the (coalition) constituents and allies ... about the process of disinvestment in some public sector enterprises. Taking into account their concerns, the prime minister has decided to keep all disinvestment decisions and proposals on hold pending further review.ö
The decision is widely perceived as another setback to the ruling governments efforts to initiate reforms. It could also exacerbate fiscal deficit concerns as the government may not realise any of the proceeds it had budgeted through the disinvestment process. To date the ruling government has not been able to sell any profit-making state enterprise.
The gravity of the issue can be gauged by the fact that late on Friday the PMO had to issue a denial to rumours that the Prime Minister, Manmohan Singh would be tendering his resignation over this issue.
Rajesh Narayan, who is managing director of the boutique financial services firm Edge Advisory, sums the situation up succinctly: ôIt is unfortunate, that at this stage of IndiaÆs liberalisation, politics is being allowed to play centrestage. What the country needs, especially after the recent stockmarket correction, is to send a loud and clear message to investors, both strategic and financial, that it is committed to the reform process.ö
On Friday Neyveli Lignite closed down 2% at Rs58 ($1.3). The Indian bourses also closed down, following global cues but reportedly also on adverse sentiment as foreign investors questioned the governmentÆs ability to see through hard decisions.