The Hindu : Business : Parking divestment proceeds

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Monday, Jan 31, 2005

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Parking divestment proceeds

Sound in theory, the idea of a dedicated fund to park disinvestment proceeds will call for plenty of political will to be implemented.

THERE ARE moves to revive the disinvestment programme, arguably the most contentious of all economic reform programmes. While no specific decisions to disinvest have been taken, the Finance Minister, P. Chidambram, has announced the setting up of a National Investment Fund (NIF). From the beginning of the next financial year (April 2005) all disinvestment proceeds will be credited to this fund which, the Government claims, will function independent of the Consolidated Fund of India. The Government will entrust the management of the NIF to professional fund managers, for now restricted to the public sector fold.

The expectation is that the Government will be able to earn a return on the fund that is higher than what the companies would have paid by way of dividends (on the portion of the shares divested).

The benchmark proposed is the dividend to market price ratio. Despite the high dividends that some PSUs have been declaring — as in the case of the oil companies under the Government's egging — the ratio of dividend to their market price cannot be very high. At present, as Mr. Chidambaram has said, it is only 2 per cent.

The fund manager's task to earn a return significantly higher than that may not be difficult. However, it has to be kept in mind that no professional fund manager is likely to guarantee a return. All mutual funds carry the warning that their investments are subject to market risks. The point is that the NIF will reflect to a greater extent the capital appreciation of shares rather than the dividends paid on them.

The idea of a separate fund outside the budget is not new. The Disinvestment Commission under G. V. Ramakrishna in its first report had suggested a similar fund nine years ago.

The Government says it will deploy the money earned from the corpus of NIF predominantly for social schemes and to some extent for financing the capital expenditure programmes of profitable PSUs. There are orthodox ideas espoused in many countries where the public sector programme has taken strides, but these are rarely practised.

The temptation to use the sale proceeds to meet revenue expenditure has been very strong. Most governments have succumbed to it. India has been no exception. In fact capital receipts under disinvestment have been a critical source of funds to bridge budgetary gaps in India in the recent past.

Modest corpus

It is hoped that this time at least the Government will show the necessary resolve and leave the corpus of the NIF entirely for its fund managers to generate a return. Two points are highly relevant here. One, it is only the earnings (and not the corpus money) from the fund that will go towards financing social and other objectives. In an extraordinarily good year like 2003-04, the disinvestment proceeds came to around Rs.14,500 crores. In many other years it was considerably lower. For the current year, the Union budget had targeted just Rs. 4,000 crores. (So far only about 70 per cent of that has come in entirely from the NTPC public offer.)

Hence, the NIF corpus should be large enough and its fund managers should perform admirably to get a sizable return. Otherwise, for all its good intentions, the Government will not get the resources to fund social sectors in a meaningful way. Cynics will always argue that the idea of a dedicated fund is meant more to mollify the ideological opposition than to provide funds for social sectors. Incidentally, in a few countries disinvestment proceeds have been used to restructure other PSUs, which are in line for sale.

The other point about the likely size of the NIF is that the Government's policy on disinvestment by itself will act as a deterrent to the build up of a large corpus.

In line with the National Common Minimum Programme the UPA Government will not concede management control. Its shareholding will always remain above 51 per cent. This rules out strategic sale, where the control of the PSU passes on to the private sector. Besides, large sized issues of the ONGC type may not come by too often.

The Government is, of course, contemplating a first time listing of some profitable PSUs. These, as past experience with the already listed PSUs suggest, take time.

The latest government announcement on PSU disinvestment does not give a time-bound road map for the step-by-step disinvestment.

One last point: while framing conceptual issues such as the NIF, the Government has not cleared "advanced" disinvestments proposals such as Maruti and BHEL.

C. R. L. Narasimhan

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