India puts up roadblocks to own stake sales

MUMBAI Fri Apr 6, 2012 4:41am IST

Labourers load coal onto trucks at a coal yard on the outskirts of Jammu March 23, 2012. REUTERS/Mukesh Gupta

Labourers load coal onto trucks at a coal yard on the outskirts of Jammu March 23, 2012.

Credit: Reuters/Mukesh Gupta



MUMBAI (Reuters) - India is not making life easy for itself as it looks to sell-off stakes in state companies to help plug a yawning budget gap, with New Delhi's own policies battering sentiment towards government enterprises even as it readies more for market.

This week the government ordered state-run Coal India (COAL.NS) to sign guaranteed supply pacts with power producers at below-market prices, raising the hackles of British activist investor The Children's Investment Fund Management (TCI).

TCI, which owns 1 percent of Coal India, world's largest coal miner, plans legal action against for not protecting minority shareholder interests.

The coal order follows a proposal in last month's budget to lift tax on oil production that will knock $978 million from Oil and Natural Gas Corp's (ONGC.NS) pre-tax profit. That came weeks after a messy government selldown of a $2.5 billion stake in ONGC that ended up mostly in the hands of a state insurer.

"It will be difficult for the government to find buyers of shares in the public sector firms after the recent decisions," said Juergen Maiar, a Vienna-based fund manager with Raiffeisen Euroasien Aktien, which owns Indian shares worth $300 million, including a stake in ONGC.

"The interference by majority shareholders is not new, but how can the government set a very high divestment target and take decisions that will definitely hit companies' profit," said Maiar, who does not plan to add to his state holdings.

The budget made headlines with provisions that could retroactively tax long-completed mergers, potentially putting Vodafone Plc (VOD.L) back on the hook for more than $2 billion in tax, despite a win in the Supreme Court in January.

The British mobile operator had fought a 5-year legal battle against the tax demand over its acquisition of Hutchison Whampoa Ltd's (0013.HK) Indian mobile assets in 2007.

Uncertainty over another budget proposal that could tax foreign institutional investors has also spooked overseas funds, which typically buy the majority of large Indian equity sales.

"It's counterintuitive to see the government making life difficult for public sector companies, and foreign investors for that matter, while it is in desperate need for cash and foreign funding," said Michiel van Voorst, a fund manager at Robeco in Hong Kong, which manages $400 million in India.

India, expected to struggle to meet a target to cut its fiscal deficit to 5.1 percent of GDP from 5.9 percent, aims to sell 300 billion rupees of state shares this fiscal year after raising just 140 billion rupees in the year just ended, less than half its 400 billion rupee goal.

The target looks harder to reach after Bharat Heavy Electricals (BHEL.NS), India's biggest power equipment maker, this week withdraw plans for a share sale expected to raise roughly $1 billion for the government. BHEL has been hard-hit by delays in the construction of power plants due to red tape and a lack of coal.


The cash-strapped government uses state companies both to raise funds and as policy instruments.

"Our hands are tied and feet are shackled, and then we are asked to run and win the Olympics," said a senior executive at a large state company, who declined to be identified given the sensitivity of the matter.

TCI partner Oscar Veldhuijzen said Coal India could earn a further $20 billion in pre-tax profit a year if it priced coal at market rates.

"They are sort of hiding themselves behind the definition of public interest. In our opinion, it is very clear that the government is not acting in the public interest," he said. "They are destroying the appetite in the capital market for PSUs (public sector undertakings)."

Just as Coal India, which raised $3.5 billion in 201

0 in India's largest IPO, must sell output at below-market prices, state oil companies carry a heavy and unpredictable burden selling subsidised products.

New Delhi has waited more than a year to sell a chunk of Indian Oil (IOC.NS), India's largest oil retailer, which haemorrhages money selling subsidised fuel. It posted a record loss in the September quarter, and its shares are down 33 percent since shortlisting banks for the offering in late 2010.

While petrol prices are deregulated, state refiners are under pressure from an embattled government not to raise prices.

State companies are run for the government's benefit, said David Cornell, managing director in Mumbai for UK-based fund manager Ocean Dial Advisers, which manages about $150 million in Indian assets.

"They just happen to list on the expectation of future improvement in the treatment of minority shareholders, but when the government is short of money it's not going to happen."

(Editing by Alex Richardson)

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see
Comments (3)
crmurthi wrote:
In the last 2 years the government has been committing serious mistakes in the monetary policies under duress from non-financial votebank centric divisions of the government, much to the discomfiture of the Ministry of finance and India Inc. This was primarily done to control the volatile inflation and drop in GDP. At the same time the government in their effort to cover up the scam ridden ministers,party functionaries and babus, fell a prey to policy paralysis. This weakened the regulatory institutions, which gave a fillip to the mandi and market mafias. They manipulated the market with the result that the monetary measures proved futile. The India Inc. were wary of investment in India and went in for reliable greener pastures beyond the shores. FII and FDI saw a drop, looking at the lack of governance. The conditions deteriorated with more scams surfacing. The recent state elections mauled the INC forcing it to become subservient to powerful state actors causing further decay in quality of governance. The government today is a disjointed ministry with a powerless head,observing blissful silence.
Under such dire conditions the only sane minister of Finance,Pranabda, had to present a budget. In his efforts to try and correct the wrongs of the last 2 years, he had to propose some unethical and regressive measures,inviting criticism from many quarters including foreign governments. I think he was helpless amidst the dark clouds looming over deteriorating economy, which was the result of the scams. It is also possible that Pranabda tried to create funds for financing the proposed populist vote gathering measures like Food Security bill.

Apr 06, 2012 10:06pm IST  --  Report as abuse
DrKartikay wrote:
Overwhelming dependence for overseas oil, is a big worry for India. Coal remains an easy, viable option before the Govt. to erect fast energy, and other infrastructure projects.
Thus, this step of the GOI, is in the right direction, even if it may go against the MNCs’ interest, or short-term economic principles.

Apr 06, 2012 10:12am IST  --  Report as abuse
Subrabhama wrote:
When the GOI went ahead with privatisation of PSUs with an offer of shares to non-resident investors, especially institutional investors like Public Funds, they thought it was money for grabs which may be used to fill the budgetary coffers. Little did they relaise that many of them are sharks and, unlike domestic investors, will not care much about the policies of the PSUs and the ‘public’ interest which they serve. These funds, like the Children Investment Fund, are interestd only in dividends and all policies which tend to reduce their dividend earnings are anathema to them. They engage in litigation. Coal India and its policies which are and have to be state-directed come into conflict with the shareholders’ greed. As on date, there is no law on this subject in Indian courts unless there are allegations of financial fraud. Therefore it is not clear how the courts will view them in India – in the US and EU it is different. Incidentally, Satyam Mahindra is also being dragged into litigiation in the UK for a similar ‘loss.’ These development will clearly suggest that privatisation is not the road to high heaven if the country wishes to continue with its ‘mixed economy.’ Sadly, the reformers in the government will not agree with this criticism – indeed they are in a trap!

Apr 08, 2012 2:40pm IST  --  Report as abuse
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