Are Public Sector Companies only meant for the ‘public’?

 

 

 

 

 

Jayant Pai | jayant@ppfas.com

A stock has to fulfil various criteria before fund managers deem it investment-worthy. One of them is the manner in which minority shareholders are treated. As we follow the principle of “One share One vote”, very often, the majority shareholder (usually, the promoters) has a distinct advantage.

This could be misused to pass resolutions which benefit them and militate against the interests of the minority. Even otherwise, often the majority shareholder is privy to certain information regarding the company, which minority shareholders may be unaware of. This knowledge could again be misused for personal gain.

However, in India there is one category where the majority shareholder takes decisions which harm both, themselves and minority shareholders. I am referring to Public Sector Companies (PSUs), where the Government of India is the majority shareholder.

Here are three examples of behavior which have the potential to destroy (or have actually destroyed) the intrinsic value of the company and in turn, the interests of the majority shareholder:

  • PSU Oil companies: They have consistently been prevented from pricing their products (especially diesel and LPG) based on commercial considerations. This in turn has eroded their profitability, adversely impacted their working capital requirements and rendered them hostages to budgetary handouts in the form of ‘Oil Bonds’. The ostensible reason for such irrational pricing is the protection of the middle class consumer. However, the perverse fallout of this is a proliferation of luxury vehicles which run on diesel. Also, many rich consumers piggyback on the LPG subsidy when they could easily afford to pay the full price of a cylinder.
  • Coal pricing: Recently, India’s leading coal miner was summarily told that they would have to fulfil their obligations to the power companies at any cost. This included importing coal and selling it at a loss, if need be. However, the same company has been prevented by the powers-that-be from undertaking mining in certain blocks due to various whimsical reasons. The directive to supply coal was in response to vociferous complaints by powerful captains of industry and meant to assuage their apprehensions. All shareholders in this company will have to bear the brunt of this development.
  • PSU banks: Over the years, they have been compelled to participate in irrational rural ‘Loan Melas’ and ‘Write-Offs’ of loans to farmers. This is a blatant example of pandering to rural vote-banks at the expense of the health of the PSU banks. It is a testimony of managerial prowess that many of these banks are still functioning despite such periodic setbacks.

In all these cases, there is an inherent conflict of interest between the commercial side (as a shareholder) and the political side of the Government. Often, the former has played second fiddle to the latter and hopes of any improvement have been consistently belied.

Today, despite reasonable valuations, there is a lot of apathy for these stocks. In fact, most have been reduced to only being the delight of traders. Investors who step in should do so with a clear idea that the landscape may not improve dramatically in the foreseeable future. If it does, it will be a bonus…

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