Why the distress sale of PSUs amidst booming govt revenue?

Last month, the Centre issued a statement saying that the revenue collection for FY22 exceeded by ₹5 lakh crore from the budget estimates – ₹27.07 lakh crore against estimates of ₹22.17 lakh crore. It also said the indirect tax “GST has seen an exemplary growth” as the CGST revenue increased from ₹4.6 lakh crore in FY21 to ₹5.9 lakh crore in FY22. These were intended to signal a robust economic recovery.

At the same time, the Centre is rushing to sell or disinvest in PSUs whose valuations and buyers have been questioned at a time when the market is highly volatile. The latest example is Pawan Hans Limited (PHL), the premier helicopter service in India owning 43 helicopters – none of the private service providers come anywhere close to it – for just ₹211 crore. There are several reasons why this deal raises eyebrows.

Distress sale of Pawan Hans

On April 29, the Centre announced that its entire 51% stake in PHL, which provides strategic and emergency services to oil PSU ONGC and to the rest of the country, is being sold off for ₹211 crore to Star9 Mobility Private Limited registered exactly six months earlier on October 29, 2021. The ministry said, this was the one of three bidders which bid above the reserve price of ₹199.9 crore.

Why this sudden rush when, going by the unexpected jump in revenues, the economy is on the recovery path and revenue collection is far above the expectations? Why couldn’t the government wait for better bids – as it had done thrice earlier?

ONGC owns the rest 49% of PHL and is expected to sell off its stake to the same buyer at the same valuation. The PHL employees’ union told Fortune India that they had expressed interest in the privatisation process and sought it to be merged with ONGC when the privatisation talk began in 2016 – but the Centre did not entertain their ideas. At that time, ONGC was not supposed to offload its stakes as PHL is critical to its operations in high sea oil rigs. In fact, they say PHL was set up in 1985 to provide offshore services. At present, PHL connects inaccessible areas in the northeast region, Lakshadweep, Andaman and Nicobar Islands, Daman, Jammu and Kashmir, anti-Maoist operations in Gadchiroli (almost all of which private operators refuse to service), besides providing rescue and relief services during national calamities and other emergencies.

The Centre’s statement said the ONGC had earlier decided to offer its entire stakes to the successful bidder as if the oil PSU acts of its free will. Had that been the case, ONGC wouldn’t have wasted its financial resources by buying bankrupt Gujarat State Petroleum Corporation (GSPC) in 2017 – GSPC had declared a loss of ₹17,061 crore that year – or borrowed ₹24,881 crore from the market to pick up Centre’s stakes in another oil PSU, HPCL, in 2018. Once a cash-rich and debt-free “maharatna”, ONGC is now cashless – cash and bank balance dipping from ₹9,956.6 crore in FY16 to ₹302.6 crore in FY21 – and heavily indebted – its current borrowings zooming from zero in FY16 and FY17 to ₹8,695.1 crore in FY21. These details are provided in its annual report for FY21.

As for the buyer, Star9 Mobility Private Ltd, it is a consortium of three companies – Big Charter Private Limited, Maharaja Aviation Private Limited and Almas Global Opportunity Fund SPC. The official website of Almas Global says it is registered in the tax haven Cayman Islands and is into “investment”. Maharaja Aviation Pvt Ltd provides air transport service and claims to own three helicopters. The Big Charter Pvt Ltd is a “transportation/trucking/railroad company” and its official website (only found on LinkedIn) doesn’t declare how many helicopters it owns.

PHL employees say, none of these is known to provide offshore services and has just three helicopters and is taking over the “maharaja” of helicopter services in India for a pittance. Curiously, the Centre’s statement declaring the sale doesn’t provide any information about the credentials and competencies of the consortium and its three constituents (only reveals their names). The Department of Investment and Public Asset Management (DIPAM), the nodal agency for disinvestment and privatisation, doesn’t disclose even that; all it provides is two documents – one is the “preliminary information memorandum” of December 2020 for inviting expression of interest (EOI) and the other, dates for filing EOI to its “global invitation”.

As for the poor valuation of the PHL, the Centre’s statement says it was making losses for the last three years (FY19, FY20 and FY21) and that it has an ageing fleet of helicopters. It doesn’t tell why a profit-making PSU turned loss-making from FY19. PHL employees, talking to Fortune India, attribute it to several key factors since 2016, when the privatisation decision was first taken: (i) ONGC banned more than 5-year-old helicopters for a crew change at its offshore oil rigs (ii) at the same time, the aviation ministry refused permission to buy new helicopters (capital expenditure) because it had decided to privatise the PSU (iii) pending government dues and (iv) demoralised employees (due to the privatisation decision).

Rush for LIC IPO

The same rush is evident in the LIC IPO too. Initially, it was supposed to be floated in the second week of March 2022 – even after the Russia-Ukraine war broke out in February and turned the stock market volatile. This was apparently to meet the shortfall of ₹64,469 crore (an actual receipt of ₹13, 530.7 crore) in the disinvestment target of ₹78,000 crore for FY22 (RE). Since the government was to offload a 5% stake, market experts assumed the LIC’s price band would be around ₹2,000 per share. Then it was postponed to May 4, 2022, because of market volatility.

When it was finally announced, LIC was priced at ₹902-949 band and the IPO size was cut from 5% to 3.5%. The government said the LIC price valuation was “fair and attractive” but market experts have questioned it for one particular reason: the low valuation of LIC compared to its peers, despite it being the market leader with more than 60% share. They point out that at this price band LIC’s embedded value (EV) works out to around 1.1x, while that of junior players like the SBI Life and HDFC Life is far higher at over 3x and that most private life insurance companies are trading at 2.5-5x of their EV. Multiple reports quoting market experts have said the lowering of LIC price brand was because of poor response, including Fortune India’s “LIC IPO size cut by one-third, valuation by half”.

The lowering of stake sales to 3.5% also indicates market pressure to lower the LIC price band. The past two days have seen headlines suggesting a strong response from “anchor investors” (institutional buyers like foreign portfolio investor, mutual fund, insurance company etc. which invests before the IPO is made available to the public) and that 71% of “anchor allotment was made to domestic mutual funds (MF).

This would also indicate a poor response from foreign investors. Days before submitting the red herring prospectus in February 2022, the Union Cabinet had cleared an amendment to the Foreign Exchange Management Act (FEMA) to allow 20% FDI into the LIC. The amendment was carried out in April 2022. The Centre’s initial plan was to offload 10% and then take it to 20% over the next couple of years. But now it is offloading 3.5%.

Privatisation of CEL

The question over LIC’s valuation comes close on the heels of the privatisation of Central Electronics Limited (CEL), a profit-making PSU developing critical frontier technologies for defence and space, to a minor finance firm Nandal Finance and Leasing Company owned by furniture and interior decorator company in November 2021, as Fortune India had reported earlier (“Why profitable strategic PSU CEL’s sale leaves scientists aghast”). It was sold at ₹210 crore. When the employees went to court, the deal was put on hold.

Ghosts of privatisation of Hindustan Zinc

Not just the CEL, PHL and LIC IPO, the entire disinvestment and privatisation drive, first initiated by the previous BJP-led government under Prime Minister Atal Behari Vajpayee, has been under a cloud for gross undervaluation and other acts of omissions and commissions.

The Comptroller and Auditor General of India (CAG) had exposed these in its 2006 report which looked at the privatisation of 1999-2003: From not valuing mines (only one operational mine of Hindustan Zinc was valued and three others were handed over free), fully developed township and land (BALCO), plant and building of several PSUs (Modern Bread, VSNL) to using “far too conservative assumption” for 7 out of 9 PSUs using “discounted cash flow” method – which drastically reduce the PSU valuations – instead of “asset valuation” method that the Disinvestment Commission had recommended.

One of these deals has come back to haunt.

The Centre handed over the management of Hindustan Zinc Limited (HZL) to Sterlite Opportunities & Ventures (SOVL) in 2002. In November 2021, the Supreme Court asked the CBI to register an FIR into the gross irregularities in HZL’s privatisation, after dismissing the latter’s closure report filed in 2017 (saying that it found nothing amiss). But CBI officers (from its investigating wing) opposing the closure report (by the prosecution wing) provided the court with a rich haul of documents that proved otherwise, forcing the court to order an FIR and regular investigation.

These documents, that decided the court verdict for a proper investigation were, among others: (i) SEBI had disqualified SOVL from participating in the bidding (ii) CAG had objected to selling HZL’s shares at ₹40.51 when the market rate was ₹119.1, “resulting in a loss of about ₹650 crore” (iii) the CBI investigation had found the global advisor using the “discounted cash flow”, instead of the “asset valuation” method to reduce the value of PSUs, had disappeared and was untraceable and (iv) the global asset valuer had “failed to consider” goodwill, technical know-how and various assets, including three operational mines, to the tune of ₹80,000 crore.

More than 5 months later, the CBI finally registered an FIR in late April 2022 and began its probe – after fighting hard in the court in the interim to get the court to reverse its order.[xxi] None of these privatisation and disinvestment cases inspire confidence, they rather raise serious questions.