Create a Sovereign Wealth Fund with Government stake in public sector enterprises to reform the disinvestment programme and save Indian equity markets from Corona madness

USE PUBLIC SECTOR EQUITY TO SAVE EQUITY MARKETS

(meeting the challenge of Corona virus induced earthquake in Indian markets)

Equity prices are falling like ninepins all over the world. India cannot remain unaffected. Indian stock markets have lost over 35% of their market capitalisation in last three weeks amounting to over Rs. 40 lakh Crore, which incidentally is more than the entire budget of the Government of India for 2020-21. COVID-19 has shaken confidence of investors in equity. Many see it as the end of the world. They want to simply sell at whatever price equities can be sold.

Foreign investors have sold over Rs. 30 thousand Crore of stocks in last 15 days in India. They were owning over Rs. 30 lakh Crore of stocks before the desperate sell-off started. There wealth is at least Rs. 10 lakh Crore lower to not more than Rs. 20 lakh Crore now. As most of these foreign investors are from the western world (though deploying wealth of non-resident Indians as well)- North America and Europe- and these parts of the world are in still worse shape as far as the risk of COVID-19 is concerned, it is quite likely that they would continue to desperately sell for some more time. They would destroy their own value in the process and would destroy the market capitalisation of Indian markets as well.

Current mania in the market is extra-ordinary madness. The Sellers are not looking at all at the fundamentals- profitability, top line, product brand etc- of the companies listed on the stock exchanges. Many simply want to run with whatever price they could get. As buyers are few, the markets are in a free fall.

There are companies, which continue to do well, even in the current difficult circumstances. There are companies, which might actually benefit from the current situation. Off course, there are companies, which stand to lose massively from the devastation being caused by COVID-19. What is remarkable is that no one is making a careful assessment to identify companies which are fundamentally sound and are quite likely to ride through the turmoil caused and buying those stocks at their current valuations. Such purchases are likely to turn out to be massively cheap later.

This market turmoil has also put the Government’s disinvestment programme in a complete disarray. The Government has deferred the disinvestment of shares planned for March. There is no likelihood that the disinvestment programme can begun in earnest for at least six months. Strategic sale of BPCL and two other companies- CONCOR and SCI- is also likely to get derailed for some time at least. It is unlikely that the Government would commence sale of LIC anytime soon with financial companies getting routed the most. It is impossible to sale Air India (survival of healthier airline companies appears at stake) now. It would be difficult to even gift Air India, as was being planned earlier, with more than 50 thousand Crore of debt being taken off the books of Air-India.

The Government has two massive tasks before it. First, preventing the madness which has overtaken the equity markets to preserve the real businesses and values of Indian companies. Second, re-organise the disinvestment programme taking into consideration the reality of the situation.

I think both these objectives can be served if the Government of India were to create an Indian equities value preservation Sovereign Wealth Fund (ISWF). This Fund can be created by transferring the Government of India stake in all the listed companies and also some valuable unlisted companies. There are 37 non-banking public sector entities like IOC, GAIL, NTPC etc. and 18 public sector banks, a total of 55 entities listed on the BSE. Their market capitalisation was over 10 lakh Crore until a short while ago. The market capitalisation of unlisted entities would also be about the same. Even if the combined market capitalisation of these entities together is about 15 lakh Crore presently, the proposed sovereign wealth fund (SWF) would have an enormous heft.

Capitalisation of SWF of such large capital will allow the SWF to borrow from the market adequate amounts, in excess of 10 lakh crore, easily. This war-chest can be used to buy equities of fundamentally strong companies available less than their intrinsic values. A simple rule- generating at least 10% of the net worth in profits in last three years- can be the first criterion to identify fundamentally strong Indian companies. This criterion can be supplemented by additional filters like minimum market capitalisation of Rs. 1000 crore as on 29^th February 2020 or the price to book value being less than 2. Such fundamentally strong but undervalued companies must be the target of buying by this SWF. Equities to the extent of 5 to 10% in such companies, whether public or private sector, can be purchased, by the SWF. These investments can be expected to generate good returns for the SWF when the tide turns. Given the total capitalisation of less than a lakh crore now, this measure will also be a very strong reassuring signal to the market and the desperate foreign institutional investors not to panic. It would also stop short sellers from taking undue advantage of the situation.

Once the market stabilises, which it would definitely do- may be in a month, or three months or six months, the SWF can sell the equities purchased to pay back the debt taken. This operation would be a kind of Troubled Asset Relief Programme (TARP) launched in the US in the wake of global financial crisis in 2008.

The Government can also resume its divestment programme soon. In fact, the Government would get an additional avenue to generate disinvestment revenues. The Government can sell a part of its stake in the SWF. Assuming that SWF will have valuation at least equal to the value of equities transferred to the SWF, the valuation of SWF would be at least about Rs. 15 lakh Crore. By selling a 10% stake in the SWF, the Government can generate Rs. 1.5 lakh crore of disinvestment resources.

The SWF, although borne in the crisis situation, can actually become the vehicle for a very professionally run public sector asset management and divestment programme in India. For this to be a reality, the SWF has to be entrusted to real investment professionals for management, something on the lines of assets managed by professionally run SWFs like TAMASEC or Private Equity firms like Blackstone. Of course, there can always be good political oversight.

There will need to be some administrative re-alignment in the Government of India to make this happen. The administrative control of the Ministries and Departments over the public sector entities, including the Department of Financial Services, would need to be ended. The Department of Public Asset Management (DIPAM) would also not be required. All the listed companies and even the unlisted ones like LIC today are not monopolies in their space. These compete with private sector. There is no social or public purpose being serviced by these companies being managed by the concerned administrative Ministries. These companies need to be managed as efficient business entities. The SWF would ensure that the management of these companies is also truly professional. As and when the SWF determines that investment value in a particular company is optimum for it to be sold, the company concerned could be fully divested.

As all these public sector companies now compete with private entities, there is need to give these companies and their executives a clear level playing field. The oversight arrangements, like CAG audit, on account of such entities being treated as a ‘State’ or Government Company and CBI jurisdiction etc. by treating their executives as public servants should also be eliminated.

Present situation is quite difficult. We are at a critical turning point. Inaction can lead to wholesale destruction of not only equity values but also the underlying businesses. Such crises demand, not only big policy reforms, but also use of a kind of business sense to turn the crisis into an opportunity. As they say, let us not waste a crisis. Let us use this occasion to reform the management of public sector enterprises and leverage the value embedded in the 55 listed public sector entities and some unlisted entities to create a Sovereign Wealth Fund of about $200 billion size to buy 5-10% equity stake of about $150 billion in fundamentally strong Indian private and public sector companies to protect and preserve equity markets of India which might also turn out to be not only a saviour in a crisis but generate handsome return for the Government.

SUBHASH CHANDRA GARG

NEW DELHI 18/03/2020