Strategies to unleash value in state firms

India has a vast financial resource that is locked up in her PSUS currently. But that value needs unearthing, before unlocking. For example, since January 2008 when the BSE PSU Index made a market top, the Sensex has multiplied more than two times, while the PSU Index is down more than 40 per cent. This meant that while the rest of the economy was growing, investors were less and less inclined to own PSU stocks. It’s clear that most PSUS have underperformed the market by a margin and now trade below their historical book value. Or to say it differently, among hundreds of government businesses, PSUS that have created shareholder value can be counted on fingers.

Following are the strategies that can be used to unlock value in PSUS:

Set clear targets for PSU management: Today PSUS manage multiple objectives. They have to spend time and resources on social sectors, employee welfare, and environment, while also on shareholder value creation, etc, but without clear priority. While PSUS like any other responsible corporate citizen should manage multiple stakeholders’ interest, priority should be given to shareholders’ value creation. They are juggling too many balls at one go and clearly, they have not been able to deliver a return on equity, which is required by shareholders.

Professional management & public money:

Maruti & Hindustan Zinc are the shining examples of creating value through public money and professional management. The government should divest its majority stake to a strategic buyer with full managerial control and retain a minority stake to benefit from future value creation. This will help bring in corporate culture and customer orientation among PSU employees. They have some incredible talent and incredible assets, and bringing in professional management will definitely help align objectives, increase productivity, and increase customer-centricity.

WHILE THE REST OF THE ECONOMY WAS GROWING, INVESTORS WERE LESS AND LESS INCLINED TO OWN PSU STOCKS. AMONG HUNDREDS OF GOVERNMENT BUSINESSES, PSUS THAT HAVE CREATED SHAREHOLDER VALUE CAN BE COUNTED ON FINGERS

Strategic divestment instead of market divestment:

Regular supply of PSU stocks through market divestment from OFS / ETFS / QIPS / IPOS is one of the reasons for derating of PSUS. Strategic divestment will get better realisation with control premium and result in rerating of all PSUS. Moreover, the new management will get operational control which can then leverage resources to unlock value for shareholders, the government, citizens, and the economy. The current practice of constant supply of shares through divestment from time to time has to stop as this makes strategic buyers reluctant towards bidding aggressively because they expect shares to buy below fair value than buying at fair value or above fair value.

Compensation & administrative flexibility: The talent management and retention practices in PSUS will need to be competitive. Top management of PSUS isn’t paid well, even though the overall PSU salaries bill is higher than private-sector peers. Moreover, PSU managers have little administrative flexibility. To address this, PSUS must truly become board-managed companies with appropriate administrative empowerment. More importantly, the bulk of compensation for middle-to-senior management should be paid through ESOPS to create alignment of interest between shareholders and the management.

Holdco of PSUS with clear value creation mandate: This vast network of PSUS can leverage each other’s capability to generate wealth. A holding company should be created for all the PSUS with a clear value creation mandate on the lines of (Singapore government-owned) GIC / Temasek. The holding company board should be sufficiently empowered and adequately incentivised for value creation. They should shield the PSU management from external influence. This holding company can then direct and manage PSUS in a manner which is in the best and larger strategic interest of India and her economy.

If these recommendations are considered, we can see that the value creation curve is likely to be J-shaped. The value unlocking will also mean unleashing of higher productive capacities held in the PSU system and, in turn, higher contribution to GDP. But for all this to happen, it requires patience and to keep on doing the right things all the time until the market recognises it.