India Invigorates Privatization Program

India’s Finance Minister committed to disinvesting from 10 major companies in sectors as diverse as energy, aviation, transportation, iron and steel and banking in the coming fiscal year which will end on March 31, 2022. Nirmala Sitharaman, made this announcement as part of her third annual budget speech before the India’s Parliament on February 1st.

These 10 companies account for about $82 billion in annual revenue. Most are majority owned by India’s Union (central or federal) Government, although some are also traded on the National Stock Exchange and the Bombay Stock Exchange.

Backdrop

When Mrs. Indira Gandhi was Prime Minister of India from the late 1960s, the governments initiated a massive nationalization program – taking over 14 large banks, several oil companies and others. Later, the government also forced many other foreign companies to divest substantial parts of their shareholding at prices way below market valuation – companies such as Unilever, Colgate Palmolive, Johnson and Johnson. A few such as IBM and Coca Cola famously abandoned India all together (they returned years later and now IBM has more employees in India than in the USA).

After a decade of stagnation, inflation and some humiliation, India made a radical change in 1991 and opened up to some foreign companies and to the private sector. Investors bankrolled huge successes in telecommunications and aviation over time which were both run by the government. Today Indigo Airways, modelled after Southwest and is the largest airline outside the USA and China. Telecom successes include Airtel, Vodafone-IDEA and Reliance Jio. Despite these successes, the will to privatize slowed down considerably.

Until now.

Not letting the Covid-19 crisis to go waste, Sitharaman promised a “once in a century” budget.” The former employee of PwC in London delivered a number of new ideas in what many are calling the most radical rightward shift by India since 1991.

Disinvest

The biggest player to be let loose will Bharat Petroleum Corporation Ltd. Descended from the India units of Royal Dutch Shell (Burmah Shell) and Standard Oil (Esso), today’s BPCL is a Fortune 500 oil refining, exploration and marketing conglomerate with revenues of $46 billion last year. Consumers and foreign visitors see its gas stations all over the country.

Next up are two aviation companies, Pawan Hans (Wind Swan) which provides helicopter services all around the country and the hapless Air India with revenues of $5.3 billion and $3.7 billion respectively. Previous efforts to sell Air India failed in part to the carrier’s excessively bloated headcount and its debt load. An employee led group and the Tata organization (which once owned Air India) are currently interested in buying the airline. Air India operates nonstop flight to India from San Francisco, Chicago and Newark, NJ.

IDBI Bank began life as part of India’s central bank, the Reserve Bank of India. Today the erstwhile industrial development function has faded and its 18,000 employees operate almost 2,000 retail branches with recent revenues of over $3.5 billion. This bank is one of three that will be privatized in the next 14 months.

Established by the government In 1988, the Container Corporation of India run dozens of Inland Container Depots (ICDs), offer containerized transport on the (government owned) Indian Railways, and operates similar services at airports and harbors. The largest marine shipping company in India, is also government owned. The Shipping Corporation of India. The sixty year old company owns and operates crude oil tankers, product tankers, Container vessels, passenger-cum-cargo vessels, LPG / ammonia carriers and offshore supply vessels. 63 percent of its shares are still controlled by the government and it operated over 70 ships.

Smaller entities on the block include BEML (formerly called Bharat Earthmovers Ltd) which is 54% owned by India’s ministry of Defense and makes vehicles for Mining & Construction, and Rail & Metro in addition to defense. Its grossed $424 million last year. India’s largest maker of “pig iron” and “coking coal” is the Neelachal Ispat Nigam Ltd. (Blue Mountain Steel Undertaking) and its annual revenues of $281 million flow in turn to other government owned companies (don’t ask!) including MMTC Ltd and Industrial Promotion and Investment Corporation of Orissa Limited.

Sitharaman also promised that two additional, but yet unnamed banks will be privatized. Media in India is betting on Bank of Baroda ($12 billion in revenue) and Punjab National Bank ($9 billion in revenue) but the Finance Ministry may choose different banks based on criteria yet to be determined

Initial Public Offering

For decades, you could only buy life insurance from one company in India – the Life Insurance Corporation of India, which also provided billions in revenue back to the government. The government plans an initial public offering for this entity whose annual revenues exceed $78 billion.

At the same time, India is now permitting foreign companies to own 74% stake in Indian insurance companies, up from 49%. This is expected to bring a flood of foreign investment and has been a long-standing demand of the U.S Chamber of Commerce.

The future

Today, India’s government is the largest (and often the only stockholder) in over 300 companies across diverse segments of industry and commerce. The divestments above are a first step. Seetharaman also laid down a policy that over time, the union government will divest fully from all sectors with the following “strategic” exceptions:

•            Defense
•            Space
•            Energy (nuclear energy, conventional energy, coal, key minerals)
•            Transportation
• Telecommunication.

Even in these strategic sectors many private companies have operated with great success, but they will continue to encounter government-owned competitors. And of course there are many companies owned and operated by India’s 28 states that are not affected by the central government in India’s federal structure.

Time will tell whether the government has the resolve to carry through with these bold decisions. I don’t know if this was a once in hundred year budget, but I support the idea that it is once in 30 years.