Doubts against easy disinvestment of government undertakings

- Given the volatility of the market, the process of selling shares in BPCL and LIC will not be easy.

Following the sale of Air India, the Government of India hopes to raise money through the sale of other government undertakings. However, looking at Air India's sale agreement, it appears that the government has been forced to compromise financially in the deal. Instead of incurring a daily loss of over Rs 50 crore behind Air India, the government may have considered it a compromise. With a debt burden of Rs 21,000 crore, Air India still has a debt of Rs 2,000 crore with the government. This figure may be negligible against the government's total debt. After the sale of Air India, now for the government, Bharat Petroleum Corporation Ltd. (BPCL) and the disinvestment of Life Insurance Corporation of India (LIC) has become a test exercise.

To make up for the shortfall in the exchequer, the central government has for the last few years been raising funds by partially selling its stake in public sector undertakings. Public sector undertakings now include government banks.

Rising global crude oil prices could lead to a rise in domestic fuel prices, which could hamper the privatization of BPCL. Globally, Brent crude rose 17 per cent a month to a seven-year high of ૮૫ 6 a barrel. According to a Petroleum Ministry official, sales of petrol, diesel and LPG are currently hitting state-owned oil companies and losses could be recovered only after prices soften. Global crude oil prices are expected to rise to 110 a barrel. Under the current price structure, oil companies are facing a decline in sales margins. In such a scenario no group would understand the practicality in acquiring BPCL as it may be their turn to keep the price low by making a loss to survive in the competition.

Crude oil prices were low when BPCL's sale was announced. Currently, crude oil prices are high. Government oil companies are not allowed to raise prices freely. If state-owned oil companies keep the prices of their products low, investors who invest in BPCL's products will not be able to keep track of how competitive they can be.

The government plans to raise Rs 1 lakh crore by selling its 10 per cent stake in LIC. To make the sale of LIC's stake a success, the government plans to attract foreign investors, domestic institutional investors as well as policyholders and retail investors. According to reports, six companies are in the queue for IPOs in the December quarter. It is estimated that companies will be able to raise Rs 50,000 crore through this public offering. The government plans to bring LIC payments in the latter part of the current financial year. The government expects that the mindset of investors will not weaken at the time of LIC's filing. The impact of any downturn in the secondary market does not seem to be felt in the primary market.

The government is currently moving ahead with the sale of stakes from LIC as the privatization of two public sector banks is likely to go a long way. By the end of last financial year, LIC had an estimated investment of Rs 3 trillion in the stock market. Taking into account the income from these investments and investments made in other real estate, LIC's valuation is said to be higher than the annual budget of a country. It is currently being evaluated to bring LIC's IPO. As per the data released in 2012, LIC's total assets in that year stood at Rs 31,114 lakh while its net income stood at Rs 5 lakh in that year. Thus, LIC's valuation will also be higher.

Some global brokerage houses have recently downgraded Indian equities, citing a lack of risk-based returns. On the other hand some other global research firms have increased China’s weightage. The weightage for Chinese equities has been increased by research firms, saying that China's equities have never been as cheap as they are now compared to India. The weightage for China has been increased in view of the reduction in challenges and attractive assessments. Given this fact, it will be interesting to see how much money global investors invest in Indian companies in the coming days. In the weak presence of foreign investors, the government will have to rely heavily on domestic institutional investors and retail investors to disinvest LICs.