A matter of choice for privatisation

Maruti Udyog Ltd, India's No 1 carmaker, will soon be free from the government's clutches.

Finance Minister P. Chidambaram and Minister for Heavy Industries, Santosh Mohan Dev, held hectic parleys last month on the sale of the government of India's 10.27 per cent residual stake in the country's auto major. The floor price of the share has not yet been finalised.

Experts are to determine the price and time (of sale) for which another meeting will be held soon, Dev told the media. That is a clear indication of how fast the government wants to quit Maruti, which is a successful joint venture with Japan's Suzuki Corporation.

The decision to disinvest (the third and final sale of the government's stake) in profit-making Maruti was shown the green light by the Cabinet Committee on Economic Affairs in December last year. The government wants to sell 296,79,709 shares of Rs5 each through the process competitive bidding. The government expects to fetch a lucrative premium over the current market price of the Maruti scrip [The share price is hovering close to Rs800]. The selloff is expected to boost the government's coffers by Rs24 billion to Rs28 billion.

There's no apparent reason for me to reiterate that it makes good business sense for anybody to sever links with loss-making units. But Maruti posted record sales and a high net profit.

During the 2006-07 financial year, Maruti sold a record 674,924 cars, including exports of 39,295 units. This was the highest ever annual sales made by the company. It represented a growth of 20.1 per cent over the previous year. For the fiscal 2006-07, net profit stood at Rs15.62 billion, up 31.4 per cent over the previous fiscal, it said.

Total income for the fiscal year under review stood at Rs152.52 billion (net of excise), a growth of 22.2 per cent over the previous financial year. The board recommended a dividend of 90 per cent for fiscal 2006-07. Doesn't that make the government's share in Maruti worth holding on to?

India owes a lot to privatisation for its enviable growth rate. During 14 years of relentless economic change, the process of privatisation has raised close to $12 billion for the government. But a careful (not mindless) selection of companies (for dilution of government stakes) is also required.

The government lined up two 10 per cent stakes for sale in two concerns - National Aluminum Company (Nalco) and Neyveli Lignite. Opposition came from the regional political allies of the ruling Congress party and workers' unions and the government decided to halt all sales of stakes in state-owned companies.

In case of Nalco, the opposition was not without reason. In the fourth quarter of financial year 2006-07, Nalco posted a net profit of Rs5.91 billion versus Rs6.08 billion in corresponding quarter of previous year. The company's turnover went up from Rs53.24 billion to Rs65.16 billion at the gross level. The opposition against sale of stake in a profitable company was justified and the government had to beat a hasty retreat.

Last July, Prime Minister Manmohan Singh, under stiff opposition, was forced to announce that privatisation plans would be stopped, pending further review. The divestment process came virtually to a standstill.

Investors feared that the stoppage could signal a bigger setback to the economy by not only impeding the privatisation of hundreds of state-owned companies, but also by hindering the entire process of economic restructuring.

However, in case of Maruti, there seems to be no resistance against the sell-off. As a result, the government is about to lose its profitable stake in a dividend-paying company. Does that speak well of its financial prudence? Probably not.