Days after debt-laden BSNL floated the possibility that around 31% of its 174,312-strong workforce would be laid off, the central government is reportedly musing its divestment plan for the erstwhile “Navratna” public sector undertaking (PSU), along with another state-owned telecom firm, MTNL. This comes nearly a month after BSNL failed to clear the salaries for the month of February in 2019.
The Prime Minister’s Office (PMO) has, in principle, agreed to bail these PSUs out after a meeting with associated ministries and NITI Aayog this week, asking the department of telecom (DoT) to allocate the firms 4G spectrum, extend immediate financial aid, and reduce the eligibility for voluntary retirement scheme for employees to 50, according to an official source.
These were 3 of the 10 suggestions communicated by a government-established expert panel to the BSNL board last month; it was constituted after BSNL’s revenue share dropped by 20% following Jio’s entrance in the telecom sector in 2017-2018 and the PSU started incurring heavy losses.
According to a Business Standard report, the PSUs have been also ailing because of high revenue-to-debt ratio due to a high number of government employees that were transferred by the Department of Telecom to them at the time of their formation.
What’s the revival plan?
BSNL, which has the lowest debt—of Rs 14,000 crore—among all telecom operators, has sought 4G radio wave-spectrum across India through equity infusion of Rs 7,000 crore. The total spectrum will cost the firm Rs 14,000 crore.
“Upon receiving necessary approvals, we will be able to launch high-speed 4G-Long-Term Evolution (LTE) services very soon,” BSNL chairman Anupam Shrivastava said, adding that the telco is initiating pan-India trials on the existing 3G spectrum in the 2100 Mhz band.
Both state-run telecom firms have asked for permissions to monetise their land assets as well as introduce the lucrative VRS scheme for employees on the Gujarat model. Under the Gujarat model, an amount equivalent to 35 days of salary for each completed year of service, and 25 days of salary for each year of service left till retirement is offered.
The firm has 1.76 lakh employees across India while MTNL has 22,000 employees. Experts say that the DoT is unlikely to go through with the layoff proposal until the elections are over.
One of many cases
A number of other PSUs across various sectors including power, oil, infrastructure, banking, and aviation are experiencing similar financial doldrums and many of them are also looking at a similar fate, while some others have already undergone mergers. Such is the crisis that the Department of Investment and Public Asset Management (DIPAM) is also looking to monetise non-core assets like oil/gas pipelines, telecom towers of MTNL and BSNL, besides PSU real estate.
According to a report in BusinessLine, DIPAM, the finance ministry’s arm managing PSU divestments, is even weighing the possibility of reducing the government’s stake in PSUs to below 51% without ceding management control.
PSUs are firms where the government holds a stake of 51% or more; in many state-owned firms like LIC, GIC and SBI, the government holds over 80% stake. However, highly placed sources have said that the promoter, which in this case is the government, can retain management control even if it holds less than 51% stake, even as low as 25%.
Indian PSUs are feeling the heat especially as the government struggles to meet tax collection targets and are demanding a second interim dividend from these companies, as in the case of cash-strapped ONGC which has refused to budge. Not only is the recurring demand for dividends a textbook case of bad optics, but it is also debilitating for the health and fiscal discipline of such public sector units.
According to reports, the government is set to receive Rs 2600 crore more, from Coal India as second interim dividend.
What’s happening with ONGC?
As the Centre fails to meet tax collection targets, economists are wary that the disinvestment proceeds may also fall short of the targeted Rs 80,000 crore by at least 25%, thus making it impossible for the government to achieve its fiscal deficit target of 3.4% of the GDP as committed to in the Interim Budget.
To bridge this deficit, the government has asked PSUs like IOCL and ONGC to hand over a second round of dividends, to which IOCL complied (as per a March 19 meeting). Note that both companies have already contributed almost Rs 30,000 crore to the Exchequer along with BHEL, Kochi Shipyard, NALCO, NHPC.
Earlier last year, the government had approved dilution of its 51.11% stake in Hindustan Petroleum (HPCL) in favour of ONGC in the oil and gas sector.
The Opposition claims that the public money of ONGC (Oil and Natural Gas Corporation) was used to buy out a Rs 20,000-crore scam-ridden collapsing GSPC for Rs 7,700 crore.
Responding to the second demand, ONGC which continues to languish in heavy debt and has paid Rs 8,400 crore dividend in the first round already, has declined to dish out any more. The board has tabled it for re-consideration on May 23.
Divestment to realise “true value”
DIPAM joint secretary Venudhar Reddy Nukala on March 27, informed that the government is keen on reducing dependence on public institutions including insurance companies and banks, during initial public offering (IPOs).
Speaking at the IPO roadshow of state-owned Rail Vikas Nigam Ltd (RVNL) in Mumbai, Reddy said, “We believe in taking all our PSUs to the market so that their true value is achieved,” just two days before RVNL launched its Rs 481.5 crore initial share sale for a week. The company has priced its shares in the price band of ₹17-19 per share.
The IPO will see the central government divest around 12.16% of its stake in the railway infrastructure company. Shadow-bank International Leasing and Financial Services (IL&FS) now has a debt of one lakh crore rupees due to economic mismanagement and lender’s defaults.
On the financial front
Bad debts declared by banks, declared as Rs 2.5 trillion before the asset quality review, turned out to be Rs 8.5 trillion. After this, Finance Minister Arun Jaitley and Financial Services Secretary Rajiv Kumar said that the centre would take a series of necessary steps to save banks under prompt corrective action (PCA), possibly by merging them in the same manner.
“In the previous financial year, the investment from LIC and PSU banks was approximately ₹25,000 crore in our proceeds of ₹1 trillion. This financial year, we have achieved around ₹85,000 crore from divestments, and investments of only₹5,000-6,000 crore has come from PSU banks and insurance firms,” Mint reported Reddy as saying.
The government has greenlit Life Insurance Corporation’s takeover of the debt-ridden IDBI Bank as well.
Earlier this week, the government-forced merger of Vijaya Bank and Dena Bank with the Bank of Baroda led to the formation of the country’s second-largest public sector lender and third largest bank in the country.
This comes nearly four months after the government announced the decision to agglomerate the third-largest lending entity in the country to rectify bad debt. The merger is scheduled to bring the combined entity a capital infusion of Rs 5,042 crore from the Ministry of Finance, by way of preferential allotment of equity shares of the bank.
It also follows another high-profile merger in recent years, of the State Bank with five of its associate banks—State Bank of Patiala, State Bank of Bikaner and Jaipur, State Bank of Mysore, State Bank of Travancore and State Bank of Hyderabad and also Bhartiya Mahila effective April 2017.
Divestment is easier said than done
DIPAM’s approach to reducing dependence on LIC and other PSUs to get traction for public offerings suggests that some of the recent PSU IPOs have struggled to attract substantial bids of interest. This is the reason behind the extension of IPO processes by an additional three days after the original three-day book building process.
Earlier this month, state-run MSTC Ltd extended its IPO by three days and cut its price band marginally after failing to get enough bids from institutional buyers, Mint reported. Last September, another state-owned firm, Garden Reach Shipbuilders and Engineers Ltd, extended its offer by three days, besides revising its price band after lukewarm investor interest.
But Air India knows this struggle the best. The state-owned full-service carrier had been posting losses since its merger with Indian Airlines in 2007 and was estimated to have a debt burden of over ₹55,000 crore when its disinvestment process commenced.
Air India had to abort its attempts at disinvestment as the airline did not find a buyer; the process came to an end in May last year following which the airline started new international services, increased frequency on the Delhi-Tel Aviv sector and started late-night domestic flights at fares lower than day flights — allowing it to somewhat bounce back.
The problem with bail-outs
Disinvestment cannot be the go-to solution to salvage failing PSUs, claim economists and analysts. Not only because it hands over substantial power to private firms who offer to bail them out, but also due to its toll on the PSU’s existing employees, since divestment essentially puts all important decisions, like hiring new people and inducting aircraft, on hold until the process is complete.
In February, several thousand BSNL employees and officers held a three-day strike to protest privatisation, demand allotment of 4G spectrum to the telecom entity and immediate implementation of the wage revision. This culminated in salary delay of nearly 1.76 lakh employees in February.
Why govt should give mergers a go first?
Mergers and consolidation should be given a shot before settling for disinvestment. Industry experts are of the opinion that consolidation of firms in the same sector brings efficiency; only the prospects of monopoly and manageability of mega entities need to be verified.
The issue of consolidation in the power sector, for example, gained prominence after the government recently approved REC’s takeover by the Power Finance Corporation (PFC). Both are non-banking finance PSUs which fund power sector projects.
But Power Minister R K Singh recently ruled out consolidating all state-owned power sector firms like NTPC, NHPC, SJVNL and PFC into a single entity, saying it would be the biggest company of the world but will not be manageable. Discussions regarding the merger of some of these companies ( like SJVNL’s takeover by state-run power giant NTPC) are underway, he added.
Why the BSNL saga matters
Meanwhile, the Opposition has been quick to politicise BSNL’s “incipient sick” status, whose predicament echoes that of numerous PSUs besides the ones mentioned above.
“The suit-boot-loot Modi government bails out select crony companies but has left the largest public sector telecom company Bharat Sanchar Nigam Ltd (BSNL) and its sister company Mahanagar Telephone Nigam Ltd (MTNL) in dire straits,” Congress spokesman Randeep Singh Surjewala said, soon after the government announced the VRS scheme for BSNL and MTNL employees which stand to have a revenue impact of Rs 6,365 crore and Rs 2,120 crore, respectively, as per government estimates.
Among other proposals that the BSNL board accepted were the reduction of retirement age from 60 to 58 years and voluntary retirement age to 50, in a company where the average age of the workforce is estimated to be 55 and above. Laying off employees shouldn’t have to be a cost-cutting means for a once-Navratna PSU. But the move has come to be accepted by the board in an insipid covert agreement, that stands to destroy the future of 54,000 families.
“Now BSNL and MTNL are facing the financial wrath of pro-rich, anti-people Modi government,” Surjewala further said, alleging that the ruling Centre’s policies to “help private telecom giants has resulted in financial chaos in BSNL and MTNL.”
Surjewala also added that the hard-earned savings of 38 crore LIC policyholders worth Rs 9,000 crore was used to save IDBI Bank, while India’s leading public sector banks including State Bank of India and others were being used to “bail out” a bankrupt private company Jet Airways.
Prarthana Mitra is a Staff Writer at Qrius.
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