What makes PSU a Navratna?

Navratna is the most coveted status among public sector units (PSU). There are number of PSU’s and a total of 79 miniratnas and navratnas. Of these, as of Oct 21 2009, only 18 are classified as Navratna’s.

What is so good about the Navratna status?

A Navratna status makes a PSU a corporation in its strict form. It provides autonomy for decisions upto 1000 crores. Now, that’s a big deal. Might not be tantamount with the autonomy Mukesh Ambani, Anil Ambani or Ratan Tata have but an autonomy nevertheless.

There are 3 categories of PSU’s. A category-1 PSU, category-2 PSU and a Navratna.

What does a Navratna or a Miniratna status mean financially?

1. Miniratna category –1 Can make decisions up to 500 crores
2. Miniratna-category 2 – Can make decisions up to 250 crores
3. Navratna’s – Can make decisions up to 1000 crores

Navratna’s don’t need a government guarantee to carry out any activities. They do no depend on the budgetary support. Navratna can make a decision on projects or joint ventures which cost up to 15% of the net worth and limited to Rs. 1000 crores. The overall ceiling is 30% of the net worth of the company.

For a PSU to become a Navratna it has to be a Miniratna of Category 1. What makes a Miniratna (Category 1&2) :

Criteria for a PSU to become Minratna :

1. A profit making company for the last 3 consecutive years
2. Networth should be positive.
3. If a company fulfills 1 & 2 above, then it is a Category 2 Miniratna.
4. If a company fulfills 1 & 2 above and has a Pre-tax profit of 30 crores or more, then it is a Category 1 Miniratna.

How does a Miniratna Category 1 PSU become a Navratna?

1. Having Schedule ‘A’ and Miniratna Category-1 status.
2. Having at least three ‘Excellent’ or ‘Very Good’ Memorandum of Understanding (MoU) ratings during the last five years.
3. Having a composite score of 60 or above out of 100 marks based on its performance during the last three years on the following six identified efficiency parameters(performance indicators):

Performance Parameters	Maximum marks
Net Profit/Net Worth	25
Manpower cost / cost of production or services	15
Gross margin as capital employed	15
Gross profit as Turnover	15
Earnings per Share	10
Inter-Sectoral comparison based on Net profit to net worth	20
Total	100

The calculations for the above parameters can be found here.

Each Performance indicator above has a range and have marks associated with it. Based on the parameters and the scores the final score is arrived.

When the final score is above 60, it is placed before the Apex Committee for recommendation.

Here is the list of 18 Navartnas in India :

1. Bharat Electronics Limited
2. Bharat Heavy Electricals Limited
3. Bharat Petroleum Corporation Limited
4. Coal India Limited
5. GAIL (India) Limited
6. Hindustan Aeronautics Limited
7. Hindustan Petroleum Corporation Limited
8. Indian Oil Corporation Limited
9. Mahanagar Telephone Nigam Limited
10. National Aluminium Company Limited
11. NMDC Limited
12. NTPC Limited
13. Oil & Natural Gas Corporation Limited
14. Power Finance Corporation Limited
15. Power Grid Corporation of India Limited
16. Rural Electrification Corporation Limited
17. Shipping Corporation of India Limited
18. Steel Authority of India Limited

Of the 18 Navratna’s Coal India Limited and Hindustan Aeronautics Limited are not listed on the bourse. Coal India Limited is planning for an IPO.

PSU's Short-term pain, long-term gain

Govt’s move to hike public shareholding in listed companies could lead to lower share prices in the interim.

The recent move by the government to have companies maintain their public shareholding at a minimum 25 per cent, while being good in a few ways, could see an oversupply of stocks in the market place. It could even lower share prices for companies.

In fact, with companies expected to fulfil the norm by divesting at least five per cent every year, the markets may see a supply of paper worth Rs 1,50,000 crore in the next few years. Of this, analysts expect issuances worth around Rs 59,000 crore in the next 12 months. This could create a situation of oversupply and investors, therefore, need to reassess their portfolio and arm themselves with a strategy to combat this, say experts.

Of the estimated supply of new equity into the market, public sector undertakings (PSUs) will dominate the show, followed by the Indian private sector and then the multinationals. Here, experts recommend a cautious approach, while taking an investment call.

LOW ON PUBLIC OWNERSHIP
Company	Promoter stake (%)	FPO amt (Rs cr) *
PUBLIC SECTOR
MMTC	99.30	38,424
NMDC	90.00	17,603
NTPC	84.50	15,952
Hind Copper	99.60	11,335
SAIL	85.80	9,904
PRIVATE SECTOR
Wipro	79.50	4,569
Rel Power	84.80	3,834
JP Power Ven	87.70	1,966
DLF	78.60	1,911
Mundra Port	80.20	1,540
MULTINATIONALS
Oracle Fin	80.50	993
Gillette India	88.70	703
Alfa Laval	88.80	351
Fres Kabi	90.00	319
BOC India	89.50	270
*Estimated, based on current market cap; Top companies by market cap wherein public float <25%, according to category Source: JPMorgan

Broader market pressure
Overall, there is expected to be weakness in the market place as the supply of paper could hamper sentiments. According to a JPMorgan research report: “The change in regulation, coupled with the capital-intensive phase that the Indian economy is in, implies that, over the medium-term, equity issuances as a percentage of outstanding market capitalisation could be three-five per cent.” This is more than the long-term average of issuances, forming two per cent of the market capitalisation.

The five per cent issuances-to-market capitalisation ratio is not seen as a major issue. But the problem is that it comes at a time when risk-aversion is high among overseas players.

The month of May has already seen an outflow of Rs 9,400 crore, and there is pressure on the domestic institutions to support the markets. JPMorgan analysts believe global risk appetite will, however, have to be supportive for absorption of the fresh equity issuances, given India's dependence on external capital.

While there is an expected pressure in the short-term, the move will improve market strength over the long-term. According to Vallabh Bhanshali, chairman of Enam Group: “This will help PSU divestment, as it will be fast-tracked. Higher proceeds from divestments will improve government finances and, in turn, help the reducing fiscal deficit. In the short-term, what may happen is that the primary market will crowd out the secondary market. However, investors should not worry about the impact as, generally, both the markets move in tandem.”

Motilal Oswal, chairman of Motilal Oswal Securities, says: “There is sufficient liquidity and many overseas investors have evinced an interest in picking up shares of Indian PSUs. So, over the long-term, this should be seen as a positive move for investors.”

There could then be a flurry of issuances from various sources. The most likely would be qualified institutional placement (QIP) and follow-on public offers (FPOs). However, the latter option will be rather difficult.

“We have seen most of the FPOs bomb and only some have scraped through. This route will not be successful,” says Prithvi Haldea, chairman of Prime Database, a company that tracks capital market issuances by the corporate sector. Therefore, the extent of dilution would be lesser than expected.

Stock impact
The impact of this notification is expected to be diverse on various stocks. While existing investors are likely to feel the pinch in the form of a decline in share prices, they could use this opportunity to increase their presence in such quality stocks as Wipro, Mahindra Holiday, Sun TV Network and Godrej Properties. And, it would also be pertinent to look at the extent of supply hitting the market.

Analysts expect multinationals to go private and delist from the stock exchanges, rather than dilute their holdings in Indian arms. For this to happen, they may come out with attractive buy-back offers. Should this (delisting) occur, investors will get a good chance to move out at attractive returns.

The problem would exist for the bigger companies who will have to reduce their holdings by a substantial amount. In the present weak global scenario, this would be a daunting task, and push their share prices visibly lower. However, investors are advised to gauge the fundamentals of these companies, before taking a call.

And, as Bhanshali says: “One should not be worried about the short-term impact on valuations, and should see this from a long-term perspective.”

Centre to list 35 PSUs, targets Rs 1.5 lakh cr

The government is hoping to reap a bonanza from the disinvestment of public sector units (PSUs). The minister of state for heavy industry and public sector enterprises, Mr Arun Yadav, said on Wednesday that the government would list 35 public sector companies on the stock markets over the next five years.

This could help the government to get Rs 1.5 lakh crore. He said that the ministry is waiting for the finance ministry’s approval. “Once we get the nod from the finance ministry, we will start the process,” Mr Yadav said at the First Public Sector Enterprise Summit organised by CII.

Last year, the Cabinet had decided that government would divest its stake in all listed PSUs were its stake is more than 90 per cent.

In case of unlisted PSEs, which have made profits in the past three years, the Cabinet had decided to list them on the stock exchanges. According to an initial estimate, there could be some 60 PSEs that have to divest following this cabinet decision. There were 10 PSUs where government holding is more than 90 per cent and 50 unlisted PSUs with positive networth.

Last fiscal, the government raised Rs 25,000 crore from stake sale in Oil India, NMDC, REC and NTPC. This year the government has set a target to raise Rs 40,000 crore through the divestment process. The offers from the government to hit the markets this year are Coal India, SAIL, EIL and MMTC. “Some PSEs have outperformed the market and investors are indeed looking forward to listings by PSEs,” said Ms Usha Narayanan, executive director of Sebi.

Many companies fail test on minimum public holding

Need to raise nearly Rs 2 lakh crore in primary markets.

BL Research Bureau

As many as 180 listed companies may have to tap investors for a cumulative sum of nearly Rs 2 lakh crore if the Ministry of Finance proposal to increase public holding in listed stocks to 25 per cent is to be implemented. This is higher than the total amount raised through IPOs and QIPs over the last three years.

Going by a Business Line analysis of promoter holdings, sectors such as power, steel, metals/mining and IT alone may be required to make offers totalling Rs 1.5 lakh crore.

PSUs first

Not surprisingly, public sector companies, with very high government shareholding, such as MMTC, NMDC, NTPC, Hindustan Copper and SAIL top the list of companies that may have to make offers to expand public holding in their respective entities. Others such as Wipro, Reliance Power, Jaiprakash Power Ventures and DLF may also have to come up with significant fresh issues.

The term public holding is assumed to cover shares that are not held by promoter and promoter group. The above companies had promoter holding of 75 to 99 per cent.

Diversify public holding

The Finance Minister, in his 2009 Budget speech, had indicated that public shareholding in listed companies must be increased to develop a ‘deep non-manipulable market'. The Ministry of Finance has since been considering increasing minimum public shareholding in listed entities to 25 per cent. This can be done by promoters offering to sell a part of their stake to the public or by expanding the capital base through fresh shares so that the promoter's stake is reduced to 75 per cent.

Phased dilution

A recent Crisil study on this subject has pointed out that companies have two alternatives to raise money — they may need to raise as much as Rs 1.6 lakh crore if promoters opt to sell existing shares or raise Rs 2.1 lakh crore if they dilute their stake through fresh issues.

The sums involved are so large it could be between three-four times the Rs 53,400 crore raised by India Inc through IPOs and QIPs in 2009. The offer value would be about 3.5 per cent the current market capitalisation of stocks traded in the Indian bourses.

While the thought of all those IPOs hitting the market may seem difficult to digest today, the proposal could well be implemented in a phased programme to ensure that there is sufficient liquidity in the market. The SEBI is also said to have requested the Finance Ministry for a phased implementation and also provide some relief to companies that come out with a public offer for the first time.

Top Public Sector Companies

• Air India
• Bharat Coking Coal Limited
• Bharat Dynamics Limited
• Bharat Earth Movers Limited
• Bharat Electronics Limited
• Bharat Heavy Electricals Ltd.
• Bharat Petroleum Corporation
• Bharat Refractories Limited
• Bharat Sanchar Nigam Ltd.
• Bongaigaon Refinery & Petrochemicals Ltd.
• Broadcast Engineering Consultants India Ltd
• Cement Corporation of India Limited
• Central Warehousing Corporation
• Chennai Petroleum Corporation Limited
• Coal India Limited
• Cochin Shipyard Ltd.
• Container Corporation Of India Ltd.
• Cotton Corporation of India Ltd.
• Dredging Corporation of India Limited
• Engineers India Limited
• Ferro Scrap Nigam Limited
• Food Corporation of India
• GAIL (India) Limited
• Garden Reach Shipbuilders & Engineers Limited
• Goa Shipyard Ltd.
• Gujarat Narmada Valley Fertilizers Company Limited
• Haldia Petrochemicals Ltd
• Handicrafts & Handloom Exports Corporation of India Ltd.
• Heavy Engineering Corp. Ltd
• Heavy Water Board
• Hindustan Aeronautics Limited
• Hindustan Antibiotics Limited
• Hindustan Copper Limited
• Hindustan Insecticides Ltd
• Hindustan Latex Ltd.
• Hindustan Petroleum Corporation Ltd.
• Hindustan Prefab Limited
• HMT Limited
• Housing and Urban Development Corporation Ltd. (HUDCO)
• IBP Co. Limited
• India Trade Promotion Organisation
• Indian Airlines
• Indian Oil Corporation Ltd
• Indian Rare Earths Limited
• Indian Renewable Energy Development Agency Ltd.
• Instrumentation Limited, Kota
• Ircon Internationl Ltd.
• ITI Limited
• Kochi Refineries Ltd.
• Konkan Railway Corporation Ltd.
• Krishna Bhagya Jala Nigam Ltd
• Kudremukh Iron Ore Company Limited
• Mahanadi Coalfields Limited
• Mahanagar Telephone Nigam Limited
• Mangalore Refinery and Petrochemicals Limited
• Manganese Ore India Limited
• Mazagon Dock Limited
• MECON Limited
• Mineral Exploration Corporation Ltd.
• Mishra Dhatu Nigam Limited
• MMTC Limited
• MSTC Limited
• National Aluminium Company Ltd.
• National Building Construction Corp. Ltd.
• National Fertilizers Ltd.
• National Film Development Corporation Ltd.
• National Hydroelectric Power Corporation Ltd.
• National Informatics Centre Services Incorporated
• National Insurance Company Ltd
• National Mineral Development Corporation Limited
• National Projects Construction Corporation Limited
• National Research Development Corporation
• National Small Industries Corporation Ltd
• National Thermal Power Corporation
• Neyveli Lignite Corporation
• North Eastern Electric Power Corporation Ltd
• Northern Coalfields Limited
• Nuclear Fuel Complex (NFC)
• Nuclear Power Corporation of India Limited
• Oil & Natural Gas Corporation Ltd.
• Oil India Limited
• Power Finance Corporation Ltd.
• Power Grid Corporation of India
• Praga Tools Limited
• Projects & Development India Ltd
• PTC India Limited
• RailTel Corporation of India Ltd.
• Rashtriya Chemicals & Fertilizers Ltd
• Rashtriya Ispat Nigam Limited
• RITES Limited
• Rural Electrification Corporation Ltd
• Sardar Sarovar Narmada Nigam Ltd.
• Shipping Corporation of India
• Sponge Iron India Limited
• Steel Authority of India Limited
• Tamil Nadu Newsprint & Papers Ltd.
• Telecommunications Consultants India Limited
• The Fertilisers and Chemicals Travancore Limited
• The State Trading Corporation of India Ltd.
• Videsh Sanchar Nigam Limited
• Water and Power Consultancy Services (India) Limited

Navratna companies - Most Successful Public Sector Enterprises of India

Navratna title is given to most successful nine Public Sector Enterprises (PSEs) of India in the year 1997. Now the number of Navratna companies rose to 19. These Navratna companies are profit making and globally competent companies of India. These industries and companies are pride of India, have their mark of presence in the global economy. We have listed these 19 Navratna companies as following :

• Bharat Electronics Limited : BEL is one of the electronics companies in India and it got the status of Navartna from the Government of India. As of April 1, 2008, BEL's order book is estimated to be around Rs.9,450 crores.

• Bharat Heavy Electricals Limited : BHEL is largest engineering and manufacturing enterprise in India. Its products are power generation, industries, transportation, renewable energy, oil and gas and transmission. This PSU has good track record for last fifty years.

• Bharat Petroleum Corporation Limited : BPCL is one of largest oil and gas company in India bearing the status of Navratna. It is one of finest oil companies in India, in the arena of petroleum industry.

• Coal India Limited : CIL is the world's largest coal miner and best PSU owned by the Government of India. The headquarter of the CIL is in Kolkata, India. Its a coal mining and production industry.

• GAIL (India) Limited : GAIL was known as Gas Authority of India Ltd. Its one of largest gas transportation PSU of India.

• Hindustan Aeronautics Limited :HAL is one of Asia's largest aerospace companies and pride of India in the arena of aerospace and defense.
  

• Hindustan Petroleum Corporation Limited : HPCL is one of giant oil companies in India. HPCL got the Navratna awards from the government of India. It's also a globally recognizedcompany of India.

• Indian Oil Corporation Limited : Indian Oil is a PSU of the government of India having the Navratna status. It's major products are petrol, diesel, kerosene, LPG and petrochemicals.

• Mahanagar Telephone Nigam Limited : MTNL is Government of India owned telephone service provider. Most recognized company in the telecom arena. First 3G Mobile service was stared by MTNL in India. '

• National Aluminium Company Limited : NALCO is the Aluminium manufacturing industry of India. It's is recognized globally for its latest and finest technology in Aluminium manufacturing and also largest industry in aluminium complex and encompassing bauxite mining.
  

• National Mineral Development Corporation Limited : NMDC Limited is the largest iron ore producer in India. This is government owned PSU,that also got the status of Navratna.

• Oil India Limited: Oil India (OIL) is the pioneer in exploration and production of hydrocarbons in India, and traces its roots back to Oil India Private Ltd.

• Power Finance Corporation Limited : Its a major financial PSU in power sector in India. It's advances the loans like - rupee term loan, foreign currency loan and short term loan.

• Power Grid Corporation of India Limited (PGCIL) : PGCI is the largest transmission utilities in India and is a Navrantna Public sector Enterprise.

• Rural Electrification Corporation Limited : The major task of this Navratna Public Sector Undertaking is to finances and promotes electrification projects in rural parts of India.

• Shipping Corporation of India (SCI) : SCI was incorporated in the year 1961. It operates and manages vessels that services both national and international lines.

• Steel Authority of India Limited (SAIL) : SAIL is one of the highest profit making PSUs in India. It was founded in 1954. With the annual production of 13.5 million metric tons, SAIL is the 16th largest steel producer in the world.

• National Thermal Power Corporation : NTPC Limited is one of largest power generation company in India.

• Oil and Natural Gas Corporation Limited (ONGC) : ONGC was incorporated in 1993, with in span of few years it become Asia's largest and most active companies involved in exploration and production of oil.

Profit From PSUs

This article is the cover story in the October 2009 issue of Wealth Insight magazine that seeks to unveil the opportunities that can arise from a more liberal disinvestment government agenda, which will open various investing opportunties for investors in the near term. We showcase the article in the light of the Prime Minister Manmohan Singh underlining the crucial need of doing so on October 15. He said: "The government is encouraging the listing of public sector enterprises as this unlocks the value of a company, improves its corporate governance standards and also helps it in raising resources for funding future expansion plans."

We unveil here the 10 best investment options in the PSUs space, one per day.

Indians are once again being swamped by the talk that dominated the first 50 years of our country’s existence. The words being mouthed are public sector undertakings (PSUs). The difference is that the conversation has shifted from the political world to the world of investors, and yes, from erstwhile negative connotations to profitable ones.

While back in those days we had politicians ordering us to accept it as a fact that PSUs are good for everybody’s well-being, today, it is the stock market trader, private analyst, and the media that are saying wealth is waiting to be unleashed on the smart Indian investor, once the current political power centre signs on the dotted disinvestment line.

What disinvestment refers to is the dilution of government stake in PSUs, in favour of the public that would bring new PSUs to list on stock markets, or already-listed ones will see further stake sales.

While shareholders are expected to benefit from the unlocking of value of the PSUs, the PSUs themselves will benefit from the greater adoptability of private management practices. Most of all the very fact that a PSU is listed increases its transparency and accountability quotient, making it responsible to shareholders and to the market regulator.

The situation prevalent in the last century has almost no bearing on the current one (from that of welfare maximization to profit maximization). Nevertheless, from an imperfect past, PSUs have traversed the entire gamut of performances to stand today at the forefront of the creation of a new and modern India, again. Here then, is the new PSU story:

POSITIVE POLITICAL PULL

With a patchy record on disinvestment in its first 5 years in power, the UPA government is looking to underline its importance as a liberalizing force.

Just days before Budget 2009 was presented, it was announced that the state must raise a sum of ‘at least’ Rs 25,000 crore each year by selling between 5-to-10 per cent of its share in PSUs. But good government intentions mostly get derailed and actual receipts from targeted amounts have always fallen short.

PRESSURE POINTS

There are a number of immediate and long-term factors that have predisposed the government towards disinvestment:

Money-Making Opportunity: Disinvestment call can no longer be ignored by the government. Most immediately, under the current economic situation, divestment will help India relieve the fiscal deficit pressure.

Market Pressure: Another compulsion for disinvestment is coming from the Securities and Exchange Board of India (SEBI) — it wants new norms in place that stipulate a minimum of 25 per cent of a company’s shareholding to be present in the public realm. Its intent is to enable a systemic transformation that will address the problem of the shallow nature of Indian stock markets. PSUs disinvestment can provide the depth and width to the capital markets, leading to lesser speculation and volatility.

Raising Reach: There is an increasing amount of frustration in the Indian households, where there are a limited number of money-making investment vehicles available. The percentage of Indian household savings currently invested in the capital markets adds up to just 5 per cent. India’s household savings have risen to above 37 per cent, and the divestment agenda will get these fallow funds into the productive zone.

PSU POWER-PLAY

PSUs boast of some very strong fundamentals. They were intentionally intended to do so as they had a mandate to achieve the commanding heights of the economy. Check out the big numbers:

Generating Growth: In 1997-98, central public sector enterprises (CPSEs), whose records are best tracked, generated a net profit of Rs 15,000 crore. By 2007-08, the same had charged up to Rs 80,000 crore. Over the last 10 years, the net profit generated has grown at a CAGR of 19.37 per cent.

Even in 2008, the 18 Navratnas performed quite well, with the average total income growing (YoY) by 13 per cent to Rs 6,871,624.97 million, which translated into a net profit of Rs 614,750.86 million (net profit grew by 9% YoY).

Sustaining Size: The top 18 PSUs have an income that tots up to a mammoth 15 per cent of India’s gross domestic product (GDP). Out of top 10 companies in India, 6 are PSUs. They stack up powerfully on the bourses too, where one out five companies in the Nifty 50 are PSUs. PSUs serve shareholders well too, paying over 33.5 per cent of their net profits as dividends.

Garnering Gains: The numbers involved from a disinvestment exercise will be huge. For instance, the market value of 55 listed PSUs is $311 billion. The government holds an average of 80 per cent stake in them and as such its share is over $250 billion. According to a Morgan Stanley report, the government can pocket as much as $163 billion if it dilutes its stake by 51 per cent (both listed and unlisted PSUs).

OUTPERFORMERS

Investors must scrutinize exactly how a disinvestment drive in a particular company may affect its overall performance. While there is no separate road-map to gauge the amount of profits that a divested PSU may deliver, applying some orthodox, and other, methods can throw up a fair idea.

Here are a few suggestions:

Monopoly Power: To start off, the biggest indicator to a PSU performance is that, in an age of democracy, they are monopolies. Aside from the command and control capabilities, their strength in powering overall economic growth is also comprehensive. These PSUs were dreamed up during the Socialist proclivities of the newly-independent Indian rulers. The result was that PSUs got to span areas or sectors that today form the core of the India growth story. It is a well-known fact that the government always gives precedence to a PSU while allocating projects. Such patronage could prove crucial in driving valuations. It would pay therefore, to identify the movers and shakers in this space.

Changing of Guard: After the divestment process, will the management remain within the public sector or will there be a passing on of control to private hands? If the government is divesting a small stake, all it is going to do is increase the floating stock in an already listed company, while it will do nothing to improve its working ethos.

In case of a passing of control to private management, the agreement should be scrutinized for clauses banning retrenchment of surplus manpower. A free hand for the new management is imperative to change the outlook of the company in the markets.

Investors must also check whether a new policy-change era lies around the corner. Free market competitiveness is not really a strength PSUs are known for; just look at BSNL vis a vis Airtel, Vodafone and others.

Diversified in Detail: The government’s share of the core sectors’ pie translates into a 17 per cent control over the oil sector, 16 per cent in power, 16 per cent in banks, 10 per cent in minerals & mining, 10 per cent in trading, 8 per cent in industrial capital goods, 8 per cent in petroleum products and 5 per cent in ferrous metals. This indicates the wide range of activities that PSUs are carrying out and that spells good for the kind of diversification that no corporate can boast of.

Productivity Enhancer: A routine research effort will unveil whether the PSU bound for divestment is a technologically superior corporate. If it is running on obsolete technology/ machinery then the chances of it improving its valuation gets reduced considerably. But there still are some PSUs where a little bit of change in technology, work systems, marketing etc., will go a long way in increasing value and that must be looked out for.

Product Profile: Exactly what kind of products the PSU is using/creating is also crucial to the unlocking of value. If the PSU is a raw material supplier, its fortunes will depend on how well the buyer of the commodity is doing.

Incentive to Advance: Perform- ance-linked incentives that have been introduced in the public sector are value-creators too. Incentives apart, the public sector pay packets can now be said to rival their private sector counterparts to a large degree and that should go a long way in raising performances.

We unearth here the best investment opportunities in PSUs space. We will showcase 10 PSU Gems over the next few days:

1. Bharat Electronics Limited (BEL)
2. Bank of India
3. Bharat Heavy Electricals Ltd. (BHEL)
4. Balmer Lawrie & Co.
5. Indraprastha Gas

Disinvestment of public sector units in India: EY

The public sector contributes about a quarter of India’s domestic output and employs about 19 million people, both in the centre and the states. Bulk of this output, mostly in industry and services, is contributed by close to 250 public sector enterprises, owned and managed by the Central Government. Besides, there are 1,100 state level public enterprises that are relatively small in size, largely intended to meet social welfare objectives and to secure resources from public sector banks and develop financial institutions. While, the contribution of these publicly owned and managed enterprises, to national development has been widely acknowledged, their poor financial return has been a matter of concern.

The process of privatisation was initiated in 1991-92 with the sale of minority stakes in some PSUs, primarily to raise resources to bridge the fiscal deficit. In order to raise resources and encourage wider public participation, a part of the Government’s shareholding in the public sector was offered to public investment institutions, financial institutions, general public and workers.

The disinvestment policy of 1991 aimed to focus public sector investment on strategic, high-tech and essential infrastructure. Boards of public sector companies were made more professional and performance improvement was sought, by providing greater autonomy and accountability. PSUs, which were chronically sick and unlikely to be turned around were referred to the Board for Industrial and Financial Reconstruction (BIFR) and social security mechanisms were created to protect the interests of workers. The disinvestment process of the early 1990s came to an abrupt halt following the collapse of the stock markets. Since, the stock markets remained subdued for much of the 1990s, the disinvestment targets were largely unmet. After a change in the Government in 1996, although there was a rethink on the disinvestment policy, there was no reversal in policy. The Disinvestment Commission constituted during this period recommended: Restructuring and reorganising of PSUs before disinvestment, Strengthening of PSUs, which were performing well and Utilisation of disinvestment proceeds for restructuring of PSUs.

The Disinvestment Commission’s recommendations led to some prominent profit making PSUs being declared as “Navratnas” or jewels. These PSUs were granted greater managerial and financial autonomy. However, the process of disinvestment did not pick up as share prices remained largely subdued due to a series of irregularities in the financial markets.

After the NDA government came to power in 1998, the disinvestment process took a new turn with substantial portions of equity in select PSUs sold to strategic partners – marking a transfer of managerial control to private enterprises. The primary focus was on improving efficiency and productivity of PSUs, although much of the disinvestment proceeds were eventually used to bridge the fiscal deficit.

A separate ministry was created and sales were organised through auctions and bids to avoid interference of respective ministries and bypass the stock markets, which continued to be sluggish. Every effort was made to ensure transparency at all stages of the disinvestment process, to avoid controversy and allegations of corruption, usually associated with such sales.

Disinvestment in public sector undertakings:

Year	Target (Rs. Crore)	Proceeds (Rs. Crore)
1991-92	2,500	3,038
1992-93	2,500	1,913
1993-94	3,500	-
1994-95	4,000	4,843
1995-96	7,000	362
1996-97	5,000	380
1997-98	4,800	902
1998-99	5,000	5,371
1999-00	10,000	1,860
2000-01	10,000	1,871
2001-02	12,000	5,632#
2002-03	12,000	3,348
2003-04	14,500	15,547
# Figures inclusive of amount realised by way of control premium, dividend/ dividend tax and transfer of surplus cash reserves prior to disinvestment etc. Source: Ministry of Disinvestment

In the context of corporate governance and efficiency of use of resources in a socialist economy, PSUs are unlikely to be efficient because of soft budget constraints whereby firms do not go bankrupt for their poor performance, primarily because they can restructure their contracts to hide their inefficiency. Managers’ efficiency objectives may also come in conflict with political interference in operational matters, to meet narrow political goals. Even in market economies, large firms of strategic importance may well be protected, to avoid significant systemic risks.

In principle, natural public monopolies such as railways, highways, water, sewage etc. where competition is weak or absent and payback periods are longer – increasing risk and uncertainty for contracting parties – public ownership should prevail. On the other hand, industries driven by rapid changes in technology such as telecom and consumer goods industries should be privatized to meet the twin objectives of financing the fiscal deficit and achieve efficiency and productivity gains. Financially unviable and loss making PSUs should be substantially restructured or closed down with a fair share of the proceeds being offered as compensation to workers.

One of the possible reform measures, practiced in countries like Japan, involves reduction of government holding in PSUs to less than 50 per cent by transferring shares to mutually complementary firms, tied around a public sector bank or financial institution. For example, interlocking of equity holding among steel, coal and electricity firms or petroleum exploration, refining and petrochemical complexes. Such a measure would eliminate both procedural audit as well as regular political interference.

To ensure public accountability, managers may be asked to demonstrate efficiency of resource use. In addition, there could be a specified timeline for budgetary support or government guarantee for loans. Banks would have the incentive to monitor the performance of PSUs because they would have substantial equity and loans at stake.

Share pricing may complicate PSU divestment

The price discovery of the shares of public sector companies are not very efficient in view of the low floating stock. Just a few buy orders can skyrocket their share prices and vice versa.

If wishes were horses, the Indian government could raise up to Rs1.24 trillion by divesting stakes (with the government retaining about 75%) in listed public sector companies with a very low floating stock in the stock bourses. That is, if one only refers to the prevailing share prices as the benchmark for pricing the shares for divestment of government companies.

But this is a simplistic calculation, because the price discovery of the shares of these public sector companies are not very efficient in view of the low floating stock. Just a few buy orders can skyrocket their share prices and vice versa.

For instance on Wednesday, till 1pm just one trade was reported in the BSE at the MMTC counter, a company which trades in metal commodities. The MMTC share price gyrated in a range of Rs25,900 to Rs28,700. The 52-week high-low price band for the MMTC scrip was even more disparate, swinging from a low of Rs9125 to Rs39,090.55.

The market capitalization for the PSU company that reported a net profit of Rs200 crore in financial year 2007-08, was Rs1,40,848 crore with the government owning more than 99.93% of the equity. If 25 % is offered to the public as per the new budget proposal, the government can pocket Rs34,268.32 crore from just one divestment proposal in a metal trading company.

Ditto with NMDC Ltd and NTPC Ltd, where the government owns 98.38% and 89.5%.

Top 10 companies add Rs32,000cr in a week

The coveted club, which comprises of four private sector and six public companies, added Rs32,354 crore to their market valuation to Rs16,04,896 crore.

The country’s top-10 firms added Rs32,000 crore to their market capitalisation last week, with public sector oil firm Oil and Natural Gas Corp (ONGC) contributing the major chunk.

ONGC added Rs20,052 crore to its market-cap, taking the total valuation to Rs2,42,687 crore during the week ending 3 July. Shares of the company surged 9% to settle at Rs1,134.65 on the BSE at the end of Friday’s trade. The coveted club, which comprises of four private sector and six public companies, added Rs32,354 crore to their market valuation to Rs16,04,896 crore.

The total market-cap of the elite club stood at Rs15,72,541 crore in the previous week.

The club saw five companies ONGC, National Thermal Power Corporation (NTPC), Bharti Airtel, Minerals and Metals Trading Corp (MMTC) and State bank of India added Rs39,414 crore to their market-cap, respectively.

Meanwhile, the other five firm including Reliance Industries, National Mining Development Corp (NMDC), Bharat Heavy Electricals (Bhel), Infosys Technologies and Larsen & Toubro lost Rs7,060 crore in their market cap past week. The country’s most-valued firm, Reliance Industries Ltd, lost Rs441 crore from its market valuation, which stood at Rs3,18,832 crore at the end of Friday’s trade. RIL had a market valuation of Rs3,19,273 crore in the previous week.

Trading firm MMTC jumped to fourth place from fifth adding Rs6,228 crore, while private telecom services provider Bharti Airtel slipped to fifth position from earlier fourth, even after adding Rs1,466 crore to its market cap. At the end of the week, total market valuation of MMTC stood at Rs1,57,565 crore and Airtel at Rs1,55,144 crore.

Mining firm NMDC lost Rs4,024 crore from its market cap, while SBI added Rs3,917 crore.

The total market valuation of NMDC stood at Rs1,42,947 crore and SBI at Rs1,14,955 crore for the week ended 3 July. Power equipment supplier Bhel lost Rs952 crore and IT bellwether Infosys lost Rs1,438 crore from their market cap. The total market valuation of Bhel stood at Rs1,06,816 crore and Infosys at Rs1,03,202 crore. Engineering and construction major Larsen & Toubro saw its market value erode by Rs205 crore to stand at Rs94,251 crore.

Govt richer by Rs 3.5 lakh crore as PSU shares soar

The government became richer by over Rs 3.5 lakh crore in 2007-08 as the value of its shares in state-owned listed companies soared by 65 per cent during the year.

“The total market value of shares held by the government in these companies (35 PSUs listed on stock exchanges) had gone up by Rs 3.63 lakh crore (64.81 per cent) as on March 31, 2008, compared to March 31, 2007,” the Comptroller and Auditor General said in a report tabled in Parliament on Thursday.

The gains which the government shares registered during the course of 2007-08 are more than one-third of the total expenditure of Rs 10 lakh crore proposed for the financial year (2007-08).

According to the report, the total market value of shares held by the government in 35 listed companies stood at Rs 9.22 lakh crore as on March 31, 2008. But the value of these shares dipped by around 50 per cent to Rs 4.84 lakh crore on December 1, 2008, following the stock market meltdown.

The report added that the market value of the shares during 2007-08 increased by around 58 per cent to Rs 11 lakh crore against the book value of around Rs 3 lakh crore. The large listed-companies include ONGC, NHPC, SAIL, GAIL and NMDC.

ONGC top profit making PSU in India

PTI reported that ONGC and the newly incorporated National Aviation Company of India Ltd were placed on the extremes in a recent survey of central PSUs, with the oil firm making the highest profits and the aviation giant incurring the biggest losses.

The Public Enterprises Survey 2007-08 said that fiscal year 2007-08 was a good year for the Oil and Natural Gas Corp, which earned a profit of INR 16,702 crore, almost thrice its nearest rival Steel Authority of India Limited.

On the other extreme was National Aviation Company, formed as a holding company after the merger of Air India and Indian Airlines in 2007, incurred a loss of INR 2,226 crore during the year. The other big loss making Central enterprises were National Textile Corporation INR 1,515 crore and Eastern Coalfields INR 1,004 crore.

In addition to ONGC and SAIL, the other state run firms that posted impressive profits during the year were NTPC INR 7,415 crore, Indian Oil Corporation INR 6,963 crore and National Mineral Development Corporation INR 3,251 crore.

In terms of overall ranking, NMDC was placed on the top followed by Mangalore Refinery, SAIL and Manganese Ore Ltd.

The India government survey said that the number of profit making CPSEs went up to 159 from 154 a year ago and also their profits to INR 91,140 crore from INR 89,578 crore during the period.

Name of the Enterprises Net Profit (Rs. in Crores)

1. Oil & Natural Gas Corpn. Ltd. 12983.05

2. Bharat Sanchar Nigam Ltd 10183.29

3. Steel Authority of India Ltd. 6816.97

4. National Thermal Power Corporation Ltd. 5807.01

5. Indian Oil Corporation Ltd. 4891.38

6. Rashtriya Ispat Nigam Ltd. 2008.09

7. Gail (India) Ltd. 1953.91

8. Nuclear Power Corpn. of India ltd. 1704.59

9. Shipping Corporation of India Ltd. 1419.91

10. Coal India Ltd. 1324.92