Divestment Debate

Merits and demerits of the proposed stake sale in BHEL

After years of contemplation, the proposed divestment of stake in state-owned engineering major BHEL was cleared by the Cabinet Committee on Economic Affairs in May this year. Although the government has since offered to put the decision in indefinite "abeyance", the divestment continues to attract protest and debate. Industry experts comment on the BHEL divestment and its long-term strategic value for the company...

Do you think BHEL's divestment makes long term strategic sense for the company?

P. Abraham
BHEL, a navratna company, is one of the best managed and internationally renowned public sector units of the country. It is a highly profitable company and its stocks are priced quite high in the market. The government currently holds 67.7 per cent equity in the company and the remaining is held by the public, financial and other institutions. Even after the divestment, the government will continue to hold the majority stake of 57.7 per cent. This divestment per se does not mean privatisation. A minimum of 15 per cent of the 10 per cent divested will be reserved for the employees, who would be proud owners and would participate in its management. Investors at large would have a say in the management, so that they can function as a "watchdog" of the PSU. The proposed divestment is in no way altering the structure and management of the company. It, therefore, makes long-term strategic sense for it.

P.N. Bhandari
Ten per cent disinvestment in BHEL is a very innocuous exercise and there is no justification for the hue and cry by the leftist groups. Their opposition cannot be supported by any sound logic. Huge funds are required for a variety of socio­economic schemes and they would suffer if enough funds are not raised through divestment. A close scrutiny may reveal that many of the PSUs are recording profits because of their monopoly. But we have to keep in mind the environment in which the PSUs have to function. They are literally captive to government rules and regulations. Can any PSU function on totally commercial lines? Because of built-in handicaps, they can rarely attain their maximum level of commercial efficiency. Many of the PSUs are potentially loss-making, though right now they may be showing profits. Hence, their divestment while they are showing profits would yield higher returns.

S.C. Mahalik
Sale of substantial equity to a strategic investor to enable control of the company makes long-term strategic sense. A new management brings new operational, financial and managerial practices to increase efficiency and maximise profits. BHEL does not fall into this category as it is proposed to divest only 10 per cent of the equity held by the government. The objective is nothing more than putting some money in the kitty of the newly formed National Investment Fund meant to be used for turning around sick PSUs. This is a minimalist approach.

Dhruba Purkayastha
More than strategic sense for the company, it makes economic sense for the government to divest stake in BHEL, as I see no compelling social reason for it to be in the business of manufacturing and marketing electrical/power generation equipment as there is enough private competition in the sector. Divestment of BHEL is likely to enhance the operational autonomy of the BHEL management, which will be strategically important as BHEL competes in other markets.

Ashok Rao
It is much more important to examine if BHEL’s divestment makes sense for an underdeveloped third world country. Therefore, let’s get a few facts correct. BHEL is the only one of its kind in the third world. Its competitors and collaborators belong to the G-8 countries and two or three others. Such an achievement should be considered a national asset and not a “company”. There is acute worldwide recession in the equipment manufacturing industry. As a result, large companies have collapsed or merged leaving just a handful, which have very high export intensity (65-80 per cent). Despite this, BHEL has held its share of the Indian market between 80 and 100 per cent during 1995-96 and 2003-04, even though most of the projects in India are based on international competitive bidding due to the intermediation of foreign funds.

The Indian market for turbine generators and boilers is bigger than the whole of Africa or Latin America, the Middle East or Europe (excluding Germany and the UK). No company except a national enterprise like BHEL would dispatch ITS engineers and workers before daybreak when water entered the Srisailam power plant during the night. Normally, the station would have been under water for weeks while an LC was being opened and other formalities being completed. The almost bankrupt SEBs get equipment and services on a back-end credit in the form of unpaid bills. Service is not stopped so that the people of the country are not inconvenienced. The price of the equipment in India is the lowest compared to all other third world countries because BHEL can hold prices. It should be obvious, except for ideologically committed vested interests, that BHEL should remain a national enterprise with clear national goals and objectives. In any case, as a citizen of India, I would like to know why are my interests in such a “golden goose” being sold? And with whose consent? Do the people of India not have a right to a national consensus in selling the national jewels, the navratnas?

BHEL is a national enterprise with a comprehensive capability in engineering, manufacture and after sales service of almost all electric generation, transmission and distribution equipment. Within a few years, MNCs will corner the shares and reduce this enterprise into an ancillary. Divestment of BHEL is not an innocent exercise with the left parties being projected as villains.

S.L. Rao
BHEL is already a quoted company on the stock markets. So sale of shares in the market is not new. Obviously the government will earn a lot more if it were to seek control, but that is not going to happen. BHEL might well be in need of a fresh infusion of capital for expansion. If that is so, the government is unlikely to contribute, and is unlikely to permit issue of fresh equity if it does not want to dilute its percentage holding.

BHEL has not suffered too much from the interferences that ministries have indulged in with other public sector companies. At the same time, it is sitting on a gold mine, with India as a huge market for its equipment, and China and others waiting to be explored. BHEL could have been more aggressive than it has been both in India and in new markets. It has succeeded at least to some extent due to the price preference in India for public sector undertakings from other PSUs, and generally the preference for an Indian supplier. That is now beginning to erode. BHEL must become aggressive and entrepreneurial. These attitudes are not helped by government ownership, however competent the workforce and management.

BHEL will face difficult times, with the growing involvement of world majors in India and, of course, the Chinese entry. Skilled staff will become more difficult to retain. New technology tie-ups are also necessary. The slowness of government decision making and the severe constraints on competitive remuneration to staff are disadvantages of government ownership. This is the reason to argue for divestment, to help BHEL become more competitive. This can be done even while retaining government ownership and control by equity dilution though it will obviously earn the government less than by selling control. Equity dilution is what the GoI is proposing to do. Divestment in this argument makes strategic sense for BHEL if it can distance itself from government procedures. It can then expand, get new technology explore new market opportunities and improve people retention.

Mohit Saraf
The central government on July 11, 2005 offered to put in indefinite “abeyance” the cabinet’s decision to divest a 10 per cent stake in BHEL and freeze all divestment in profitable PSUs. The decision seems to be politically motivated as the divestment made long-term strategic sense for the company, for the following reasons...

Transparency and accountability are necessary precursors to success for any enterprise. The BHEL divestment would have enabled wider public and financial institution participation as well as ensured a role for small and retail investors. In addition, the proposed disinvestment entailed a 1.5 per cent stake being made available to employees of BHEL. The dynamic involvement of employees, FIs and the public would have led to the release of creativity necessary to ensure that BHEL’s large financial resources were used towards its growth rather than accumulate as reserves on its balance sheet.

Critics of the proposed divestment have always feared that the company might be taken over by private parties in the manner BSES was by Reliance Industries. This fear exists because BHEL is the leading producer of power project equipment and is on a strong growth trajectory. Its high visibility in the market puts it in the high risk zone for being taken over if there is a large float of its shares in the market. However, the possibility of the same in the case of BHEL was remote as the government was planning to divest only 10 per cent of its 67.72 per cent holding in the company. Hence, even after the proposed divestment, the government would have been the major shareholder and would have retained control.

What are your suggestions to ensure the success of the exercise? How should the proceeds of the issue be used?

P. Abraham
The government proposes to utilise the divestment proceeds partly towards the National Investment Fund, for revitalisation of sick units and partly in welfare sectors, where private investment is not forthcoming. From this angle, the proposed divestment is well balanced and rational. The government should, however, give priority to divestment or even prioritisation of sick units, instead of making further investments.

Moreover, BHEL requires substantial investments to retain its competitive edge in this highly capital intensive industry, as it has to compete with dominant global players such as Siemens, ABB, and GE. BHEL needs to maintain its design, engineering and manufacturing capabilities to international standards by acquiring best technologies in the world. It needs to continuously upgrade its products and related technologies, make investments in R&D, and maintain growth momentum. The proceeds obtained from the divestment should therefore be reinvested in asset modernisation.

P.N. Bhandari
The government may highlight that it is not the big industrialists who will benefit by the limited divestment. Substantial shares can be reserved for workers and small investors. The government may also like to assure that its shareholding will not go below 51 per cent in profit making PSUs. The funds generated through divestment should be kept in a separate fund for creation of infrastructure, which generates employment for the workers, clearance of their dues and paying VRS. Facilities could also be created for retraining of retrenched VRS workers or for engaging them in self-employment projects, and for concessional medical insurance cover to workers affected by downsizing. Neither the leftists nor the rightists can oppose divestment if the funds are used for projects that primarily benefit the workers. What is needed is proper packaging of the divestment policy so that it appears to be pro-worker.

S.C. Mahalik
Sale of PSU equity to the highest bidder in a strategic sale has kicked up so much dust, warranted or unwarranted, that the best course for divestment seems to be the UK’s Thacherite method of offloading equity in the stock market with adequate reservations for employees of the PSU concerned and small investors at a discounted price. The so-called “family silver” can then be shared by the average Indian instead of being enjoyed by the ruling class of politicians and bureaucrats. There is no reason why government stake in service and manufacturing companies, which have little or no security concerns, should be more than 26 per cent, that is, retaining the ultimate veto to block any resolution to be carried through in the board of directors.

Dhruba Purkayastha
Ten per cent divestment of BHEL is not likely to face any problem of subscription in the capital markets. A phased programme of divestment is a good start as it helps in managing the process of privatisation better. Employee shareholding will further help in creating distributed ownership. As far as proceeds from the divestment are concerned, these can be ring-fenced for specific uses.

Ashok Rao
The government should conduct an advertisement campaign to educate the people about what actually is being sold. Then there should be a parliamentary debate (as was done in the UK). The people have a right to know how and why divestment and creation of multiple owners with multiple objectives (I am a shareholder and surely my objectives are not the same as the FIIs or those on whose behalf the FIIs are holding the shares) would serve the company better.

S.L. Rao
BHEL can raise further resources by going in for fresh share issues, without the government selling any shares. But the government is also looking to raise resources by selling BHEL’s shares. Both can be done in one go and the government can sell some shares while BHEL goes in for a fresh share issue. Any money so earned should go into expanding capacities, updating technology and improving compensation. For the exercise to succeed, the communists must stop playing West Bengal politics in India and do what is good for the competitiveness of BHEL.

Mohit Saraf
Higher allocation of equity to retail investors would have made divestment of BHEL a success, as explained above. Collective ownership as a result of participation of retail investors and FIIs would have increased accountability and helped the management take decisions in the best interests of the company, notwithstanding political pressures. Along with the divestment plan, as a confidence-building measure, the government should have also announced plans to ensure greater autonomy to BHEL. The proceeds of the divestment should be used towards creation of future capital assets and satisfaction of current revenue needs. They should be used towards furthering the social obligations of the government, such as health and education, and also to provide funds for the revival of ailing PSUs.