It’s the season of mergers for India’s public sectors
Beating the private sector hollow, it is the year of mergers in India’s public sector. Six banks have merged with State Bank of India (SBI); at least two of the oil marketing companies (OMCs) are on track to become one; and two of the general insurance companies will soon become one entity within financial year 2017-18. There has never been a more radical change to the face of the Indian public sector, since they began to dominate Corporate India landscape since the early Seventies.
The consolidation has reversed a long spell of setting up new enterprises by each new government in New Delhi. In the next stage, the Centre is planning to merge some of its departments. However, this is likely to stretch beyond FY18. Taken together, the changes in the government are expected to be massive.
As of now, the presence of the departments is necessary to bring down the number of state-owned enterprises to a more manageable level from the current 298. The different ministries are stewards for the mergers. These changes are expected to redraw the face of the government into a more tightly knit entity. Companies that are being identified for mergers are being made to run with acting chairmen. The ministries hope it will ensure roadblocks to the plans do not come from chairmen keen to retain their positions.
Top-level government officers said some of the trends had become visible in FY16, when the government had merged a large number of schemes into congruent baskets, even though the process had begun earlier. The direction for the spate of mergers was provided in the Budget speech of Finance Minister Arun Jaitley this year. “We see opportunities to strengthen our central public sector enterprises (CPSEs) through consolidation, and mergers & acquisitions (M&As). By these methods, the CPSEs can be integrated across the value chain of an industry.”
The statement of intent got drowned in the other Budget announcements, but work on making the list slim drastically has begun in right earnest. Banks Board Bureau Chairman Vinod Rai, too, said recently he was in favour of the merger of two of the large banks from among the 27 state-run banks, in addition to the merger of the SBI Group.
Prime Minister Narendra Modi in his monthly meetings with the secretaries of different departments asked them to explore synergies within the public sector enterprises under their mandate. Jaitley has already said he plans to make four construction sector government enterprises — Hindustan Prefab, Engineering Projects (India), HSCC (India) and National Projects Construction Corporation — come together, possibly under NBCC (India).
The key difference in these successive rounds of mergers is that none of the companies are going to lay out money to buy their rivals. There will be no buyout as it happens in the private sector, since the mergers are blessed by political logic. There will be money spent instead on reconciling the wages and salary structures of the different worker pool of the merged enterprises and to make the technological systems on a par with each other in the new. The company boardrooms in each case will play a small role in their transformation. As their largest shareholder, it is the government which will determine the manner of change in identity. It will involve share-swap in several cases like in the case of OMCs, given all of them are listed. But it will be cash-neutral in all cases.
The government is happy that, so far, all these plans have got the approval of the markets and the rating agencies. S&P has noted that the SBI will earn a better position after the merger. “The SBI’s indisputable leadership in India’s banking sector — in terms of assets, loans and deposits —underpins its business position. The position could further solidify after the bank’s proposed merger with its subsidiaries.” This is despite Arundhati Bhattacharya-run SBI being able to shore up capital only moderately despite the mergers (higher capital allows a bank to take larger risks in its lending). Similarly, the rating agency has affirmed there is room to merge at least two of the OMCs in FY18 “We expect fuel-price reforms in India since late 2014 to continue, which should aid profitability, bolster cashflow and lower debt,” said credit analyst Vishal Kulkarni. In the case of the merger of six banks, which were progressively drowning their identity with the SBI over the years, the expected advantage is that the combined entity will be able to write cheques to finance large deals by the corporate sector, which none of them were able to separately. “Benefits of M&As in the corporate sector are often overstated, with buyers often paying too much. But this round could be different. The advantage will happen, provided the government creates economies of scale and explores synergies,” said Deep Mukherjee, visiting professor of finance at IIM-Calcutta.
Such a large-scale redraw of the public sector landscape will, however, stretch the government’s managerial capacity and could stoke labour resentment. Because of the scarcity of top-level managerial talent to harness a disparate pool in the new companies, the Cabinet has asked the Public Enterprises Selection Board to reach out beyond the government sector to select top executives for these boards.
Accustomed to setting up new enterprises, rather than pulling them into global leaders, sits difficult with the bureaucracy. More than one company chairman has tried to push the plans after his retirement. But a determined government is not willing to delay the timetable. Not this time around at least.