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Divestment’s Tough Climate Call: The hurdle in govt’s fund-raising path

There is money to buy the central public sector enterprises, but buyers will need a firm assurance that the disvestment programme will keep environment issues front and centre of their corporate plans.

Among the many reasons for Prime Minister Narendra Modi’s meeting with private equity and venture capital fund managers last month was to get a sense of how they read the government’s divestment plans.

At this stage, the divestment of BPCL, the Mumbai-based oil and gas producer, is likely to take place only in financial year 2022-2023, although it was originally slated to be complete by this financial year.

But this postponement raises the level of difficulty in terms of attracting investors for BPCL as well as other mineral and energy companies that the government plans to disinvest (please see table).

That’s because, increasingly, global investors are demanding demonstrable corporate commitment to meet climate-related targets.

Few central public sector enterprises (CPSEs) have laid out such commitments beyond the odd corporate social responsibility programme.

Yet global funds of all sorts are putting in jammers against investment in companies in the mineral and old energy sector, a trend that will intensify, as a joint report by BCG and the Global Financial Markets Association notes.

This raises the stakes for the Modi government, which is keen to sell majority shareholdings in CPSEs now.

On December 13, the finance ministry issued ‘guidelines’ for a new public sector enterprises policy. The department of public enterprises under the ministry will now identify the CPSEs ‘either for closure or privatisation in the non-strategic sectors’.

And within the strategic sectors, which includes CPSEs in energy and minerals, ‘only a bare minimum presence…is to be maintained’.

So the government’s intention is clear.

The potential divestment candidates are part of a group of 66 companies, from a CPSE universe of 366, classified as Schedule A; 58 of them are listed in the stock markets.

The criteria for drawing up this list were paid-up capital plus long-term loans, net sales, profit, number of employees and several qualitative factors such as national importance, complexities of problems, and the level of technology deployed.

All other CPSEs have to be closed down eventually.

Data from the Bombay Stock Exchange shows that of the latest 15 offerings to the market from the government, half were from the energy and minerals sectors. These are Oil India, Coal India, Manganese Ore, NTPC and so on.

The list of potential candidates is similar — Gail, NMDC, Ferro Scrap Nigam Limited, Rashtriya Ispat Nigam, Neelachal Ispat Nigam or Kudremukh Iron Ore Company, among others.

The government intends to retain about four companies in each strategic sector, but there are so many CPSEs in each of these sectors that it will have to cede management control instead of only floating minority shares in the market.

Since 2004, however, there has been no such strategic sale of government assets in the market. Domestic capital has almost no experience of how to pick up these government companies and gradually transform them into successful private sector entities.

The sale price of these companies is massive. Gail has a market cap of Rs 56,881.33 crore (BSE), NMDC Rs 38,303 crore and even Bharat Earth Movers Rs 7,057.29 crore.

In other words, India’s private sector will need to borrow from banks and financial institutions to buy these companies. But India’s State-owned banks, except the State Bank of India, do not have the capacity to evaluate these purchases. And the leading private sector banks have not written out such large cheques so far.

Life Insurance Corporation has often stepped into the divestment breach, but since it too is headed for a listing, that option can be ruled out.

This leaves recourse to foreign capital and technology. But the irony is that the government’s willingness to consider foreign ownership of CPSEs has come just as companies from abroad are turning skittish about investing in such sectors.

Activist investor groups such as Follow This have sharply cut the scope for investors from Europe or the US to stray too far from the climate agenda.

To attract foreign capital, therefore, CPSEs slated for disinvestment must offer verifiable climate ameliorative and board-approved long-term programmes. This is a difficult task because except for industry leaders such as NTPC, others have not approached this task in earnest.

There is scope to do so still, since major investors such as those led by Fidelity International, which have promised to engage with Asian banks and energy producers to ensure they have a road map to meet climate change targets, would be interested in offering advice.

The US Office of the Comptroller of the Currency, for instance, issued a draft guidance statement advising banks to ‘identify, measure, monitor and control the potential physical and transition risks associated with a changing climate’.

Since it is a regulator, the tone is mild. But nudges from others are stronger and those have had effects.

A Bloomberg report from last year notes ‘green bonds and loans from the global banking sector exceed the value of fossil financing so far this year…Bloomberg data covering almost 140 financial-service institutions worldwide shows at least $203 billion in bonds and loans to renewable projects and other climate-friendly ventures compared with $189 billion to businesses focused on hydrocarbons’.

So there is money to buy the CPSEs, but those buyers will need a firm assurance that the disvestment programme will keep the environment issues front and centre of their corporate plans.

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