| BUSINESSWEEK ONLINE : MARCH 1, 1999 ISSUE | ||||||||
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| INTERNATIONAL -- ASIAN BUSINESS
So Much for India's Privatization (int'l edition) A government ploy infuriates investors--and hurts reform To India's government, it was a quick, smart way to raise money. But to critics the move looked like a holdup. Facing a $22 billion budget deficit, the government last month forced the country's three big oil and gas companies--90% state-owned--to buy each other's shares from the state's holdings. The deals involving Indian Oil (IOC), Gas Authority of India (GAIL), and Oil & Natural Gas (ONGC) put $1.23 billion in the state treasury but deprived the companies of precious capital. And although the deals technically reduced the state's holdings, the government remains the companies' major shareholder. What makes this stock shuffle so disastrous is its effect on India's privatization program. Prime Minister Atal Bihari Vajpayee's ruling Bharatiya Janata Party (BJP) has vocally backed a big sell-off of state-owned companies to raise capital for the government, force the state companies to restructure, and create a more vibrant stock market. The three oil companies were prime candidates for leaving the fold. But now investors figure the government just wants to keep milking them for cash, not arrange a genuine sell-off. In fact, after details of the stock swap became clear, the few publicly traded shares in the three companies plunged, wiping out nearly $3 billion of their market capitalization. The debacle is a clear signal of investors' skepticism about the privatization program, which appears to be on hold. INDIFFERENCE. This is a major blow for reform and another sign that the BJP's ability to handle the fiscal crisis is in doubt. In the eight years since economic reform began, India has not fully privatized even one state-owned company, largely because of weak-willed governments, bureaucratic resistance, and stubborn labor unions. Any notion that the BJP would be more aggressive has been dashed. Problems plagued the privatization process from the start. In August, 1997, the previous United Front government decided to appoint a commission to chart the course of privatization. After a year's delay and four reports, the commission suggested various divestment schemes, involving everything from small-fry companies such as breadmaker Modern Food and hotelier India Tourism Development to profitable giants such as ONGC and IOC. But except for selling 40% of telecom giant Videsh Sanchar Nigam (VSNL), Mahanagar Telephone Nigam (MTNL), and Container Corp., the government has ignored the commission's recommendations. Disgruntled foreign shareholders are showing their ire. In February, just as VSNL was proceeding with its second global equity issue as part of the government's disinvestment plan, the government proposed that VSNL and MTNL also swap shares, much as the oil companies had. That scared investors, and the government raised just about $160 million from the issue, almost 25% less than planned. ''Foreign investors have been hoping and waiting for real economic reform. This is not real economic reform,'' says Manish Modi, who invests in emerging-market stocks for Pioneer Investments in Boston. Amitabh Kumar, VSNL's acting chairman, defends the deal, saying his company got a fair price for its shares. A Finance Ministry official says the cross-holdings are necessary if India is to create an integrated energy company able to compete in a deregulated market. Oil-company executives are not openly against the cross-holdings, but privately they complain that they would rather invest the money in their businesses. Investors doubt that India's privatization problems can be fixed. ''Despite the BJP government being the most committed to privatization, progress has been disappointing,'' says Ajay Sondhi, who heads Warburg Dillon Read's Bombay office. Feuding between the Finance Ministry and the Prime Minister's office over economic policy and privatization, the politicized hiring of investment bankers, and the government's penchant for cross-holding schemes are all obstacles. There is a better way. Foreign bankers suggest privatizing government companies on the model of Britain and Sri Lanka. If they're sold off to small investors at bargain-basement prices, it would do wonders for the stock market. But for now, the Indian government seems less concerned with investors--domestic and foreign--than with its own desperate measure to fix a budget deficit. By Manjeet Kripalani in Bombay _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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