The willingness to hand over control through strategic sales has resulted in allegations of complicity between sections of the government and particular domestic or international business groups such as Reliance industries in the case of IPCL. Such allegations are also buttressed by the fact that if Reliance does manage to acquire control of IPCL, it would have a virtual monopoly over certain segments of the market for hydrocarbons. But setting aside such allegations, it is clear that the longer the government persists with its privatisation agenda, the greater are the concessions it has to make to private sector buyers of government equity.
 
These concessions are of three kinds. First, lower prices. While the first issue of global depository receipts (GDRs) by VSNL in March 1997 was prices at $13.93 and was oversubscribed 10 times, the GDR issue in February 1999 was priced at $9.25. Not only was the February price much lower than the March 1997 price, but it amounted to a discount of 12 per cent relative to the 10-day average price of VSNL GDRs on the London Stock Exchange at that time.
 
More recently, there has been much controversy surrounding the sale of 18 per cent equity in GAIL (acquired mainly by GAIL's potential competitors Enron and British Gas) at Rs. 70 per share, when the ruling market price was Rs. 79.80. While the government raised Rs. 1,095 crore through the disinvestment of 155 million shares represented by 22.5 million GDRs, it has at the minimum suffered a loss of Rs. 145 crore, besides giving GAIL's international competitors an initial stake which can be built up into a voice in the management of the company. However, it is not just the discount relative to prevailing market prices that reflects the low prices at which prime public assets are being sold. Even market prices most often do not reflect the real worth of the assets of many of these companies and definitely not the true value of these assets for some of the companies acquiring them.
 
The second concession the government has had to make is that it increasingly has to put the best assets of the public sector up for sale. Charts and 3 and 4 detail the percentage of shares disinvested by the government between July 1991 and March 1997 and the total extent of sale of the government's shareholding in these companies as on March 31, 1997. What is clear is that much of the disinvestment has indeed occurred during the years of reform and that among the companies in which a third or more of equity had been divested even by 1997 March were successful public sector giants like VSNL, Bharat Petroleum, IPCL, HOCL and Hindustran Petroleum. Even including the less profitable PSUs in which government equity has been divested, the average rate of return (gross profit to total capital employed) during 1994-95 to 1996-97 in companies subjected to privatisation stood, at 22.2 per cent, well above the average of 14.93 per cent for the public sector as a whole (Chart 5).
Chart 3 >> Chart 4 >> Chart 5 >>
 
Finally, the third concession which the government has had to increasingly offer for pushing ahead with privatisation is a willingness to provide management control to "strategic investors" from the private sector, even in instances where the investor concerned does not hold a majority of shares.
 
Unfortunately for the government, despite these concessions, equity sale has not proved an easy task. As Chart 1 shows, there have been only three years (1991-92, 1994-95 and 1998-99) in which proceeds from divestment in the budget have been of consequence. The government's "success" in these three years was however attributable to widely divergent reasons. In 1991-92, success was due to the decision to accept extremely low bids for share "bundles" which included equity from public sector units which would have otherwise commanded a handsome premium. In 1994-95, success can be traced to the willingness to offload a significant chunk of shares in attractive targets like BHEL (11.74 per cent), Bharat Petroleum (3.42 per cent), Container Corporation (20 per cent), Engineers India (5.99 per cent), GAIL (3.37 per cent), Hindustan Organic Chemicals (23.1 per cent), Hindustan Petroleum (9.47 per cent), ITDC (10 per cent) and MTNL (12.82 per cent) (See Table 1).
Chart 1 >>