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Moving On To Privatisation

Economist Vijay Kelkar’s thoughts on disinvestment, published on this page on February 2, merit attention, in the context of the government’s decision to mop up large amounts through disinvestment, and the corporate governance norm that 25%, at least, of a listed company’s equity must be owned by the public. He calls for dynamic determination of sectors where public ownership would be desirable, these sectors changing, over time, with the growth of both the private sector’s entrepreneurial ability and the government’s regulatory capacity. In sectors where both are well developed, the government can exit completely, leading to privatisation. This is eminently sensible. Dr Kelkar goes beyond this, to suggest that the disinvestment programme could convert large public sector enterprises (PSEs) into widely-held, professionally-managed companies. We endorse this view as well.

There is no reason why SAIL or BSNL would not be run as successfully by professional managers as Larsen & Toubro. Similarly, many public sector banks that already are extremely well run could perform even better, once released from government ownership and often insidious control. The resources raised by selling stake in PSEs to a broad mass of shareholders could be ploughed into areas and sectors that are essential for the economy but not viable or attractive for the private sector. Dr Kelkar suggests limiting accumulation of shares by any individual entity or a related set of entities for a few years, to allow a professional management team enough room to settle down in the job of running the company, without worrying about takeovers. The downside of is that retail investors would be denied a swift, hugely-profitable exit. But this would not be such a disaster for long-term investors — their upside could be considerable when the moratorium on acquisition goes and people start accumulating shares.
    
In theory, the nature of ownership should not affect the performance of a professionally-managed company. In practice, India’s political economy foists huge inefficiencies on the PSEs. Privatised, they would shed these constraints and flourish under professional management, supervised by shareholders, the market and regulators.