GoI, unwanted corporate partner
In most countries, joint corporate ownership with the sovereign power would be considered a rocksolid guarantee of stability for the company. In India, government participation is seen as a deal breaker. To put it another way, the Government of India (GoI) is considered an unreliable, even maverick, corporate partner. That’s the core message from the zero interest in Air India’s stake sale last week, as transaction advisor EY has bluntly advised the government.
Why would prospective buyers recoil from the GoI continuing to hold a 24 per cent stake in Air India? No doubt, the government’s record as a shareholder of what we call public sector companies scarcely enhances confidence. From constant ministerial demands for the perks and privileges (cars, free trips, use of guest houses are among the more harmless if irritating demands) to arbitrary interference in corporate functioning to fulfil policy and electoral goals, the GoI is everybody’s nightmare shareholder: Meddlesome, venal and, worst of all, unaccountable. Even in these deregulated times, for instance, state-owned oil marketing companies dread pricing diktats from South Block, banks are haunted by the prospect of enforced loan waivers and maintaining unprofitable no-frills accounts and the profitable Maharatnas live in constant fear of higher dividend demands to shore up profligate state spending.
Air India is a model of such government-induced mismanagement, as any prospective buyer would know. It has been done in by hugely expensive aircraft purchases that weighed down the airline with debt (of which prospective buyers have to bear a part), and its ability to compete with nimble private airlines was whittled away by chief executives chosen, inexplicably, from the bureaucracy rather than the market.
Its status as the “official” airline for government servants, which may well continue with the GoI’s residual holding, is unlikely to enthuse private investors either. Ministers and MPs delaying flights, demanding premium services for extended family and hangers-on and mistreating staff are not helpful in an industry in which competition is acute and margins excruciatingly thin. The airline’s pampered public sector unions representing a bloated workforce, which understandably cheered when the disinvestment exercise failed, is a headache no buyer would shoulder. Today, this accumulated incompetence and bungling makes it unattractive even if the government were to exit altogether, as it is reportedly planning to do.
Investors probing deeper will also discover that GoI has been a troublesome joint venture partner in other companies. Those with long memories will recall the quite pointless managerial controversy that the government unleashed against Japanese carmaker Suzuki, the joint venture partner in Maruti, then (as now) India’s largest car-maker, in the late nineties.
Armed with a 50 per cent share, successive industry ministers — K Karunakaran and Murasoli Maran — backed by feisty bureaucrats foisted their choice of, first, chairman and then managing director, on Suzuki — and yes, both were bureaucrats with bad chemistry with Suzuki representatives on Maruti’s board. The buzz then was that this was partly done to counter the power of Suzuki nominee R C Bhargava (currently Maruti’s chairman), who apparently wielded considerable clout in the then Prime Minister’s Office. Who knows if this was true, but the GoI’s pettiness was embarrassing: The spat included disagreements over technology transfer (Suzuki declined), a capacity expansion (the bureaucrat-CEO refused), AGM showdowns, threats of nationalisation and court cases. And all this was happening against a background of heightened competition from America, Europe and Korea.
Later, the Vajpayee government took the sensible approach. Suzuki’s choice of MD was endorsed in return for a withdrawal of the court case, and the Japanese carmaker was granted a bigger say in operations. Its choice of managing director was approved (Jagdish Khattar), the company was listed and the government eventually exited altogether. It is fair to say Maruti has more than held its own since.
Management rows such as this cannot enhance investor appetite for GoI joint ventures. If they still have doubts, they could ask Anil Aggarwal of Vedanta. Having bought Balco and Hindustan Zinc in the early 2000s, he is still waiting for the GoI to make good on its contractual agreement to acquire 100 per cent control. The United Progressive Alliance did not do so over – ostensibly – disagreements over valuation (why this was not written into the original contract is hard to understand). In 2014, the National Democratic Alliance suggested that it would divest the GoI’s 49 stake in Balco via auction. In 2018, the first highlight on Balco’s home page offers this factual statement: “Government of India (GoI) divested 51% equity in the year 2001 in favour of Sterlite Industries (I) Limited. Remaining 49% is with GoI”.
When Vedanta bought Cairn Energy, state-owned ONGC, which owned 30 per cent in Cairn oilfields in Rajasthan, abruptly terminated its original contract to pay all the royalty and cess, which drastically altered the valuation of the merger deal. ONGC was on strong ground because its principal shareholder, the GoI, withheld approval of the Vedanta-Cairn deal until these new terms were accepted and the arbitration withdrawn. A textbook study of conflict of interest if there ever was one, all courtesy GoI.