No point in holding on to SUUTI’s blue-chip holdings in a bull market

It’s that time of year when officials scramble to fix the fiscal hole, as the finance minister prepares to present the annual Union Budget in Parliament. Following the sale of Air India to Tata, reports suggest that the government is attempting to build on the previous major disinvestment announcements: oil refining company, Bharat Petroleum Corporation Ltd., and the country’s largest insurance company Life Insurance Corp. Of India Public Offering.

Yet, as the government moves forward, it is difficult to understand the reasons for such hesitation to pluck the fruit hanging down. They are shares of cigarette maker, ITC, Axis Bank, Larsen & Toubro and few other firms like Depository, NSDL, Stock Holding Corp of India, North Eastern Development Finance Corp, which have been warehoused by specified undertaking of UTI or SUUTI. Which the government controls after the split of its failed mutual fund, UTI. The government was forced to resort to this measure in 2002-03 to cover the loss of millions of unitholders when UTI, India’s largest mutual fund, collapsed. This happened after the government was forced to financially bail out the investors after the actual value of its net asset value or NAV became public.

The sale and auction of these shares, in installments or through an offer for sale, provides a relatively easy opportunity to raise a tidy sum and bridge the gap between the government’s revenue and expenditure. A quick back-of-the-envelope calculation shows that ITC shares owned by SUUTI alone can fetch the exchequer 20,000 crores.

It has been almost two decades since these shares, which were originally acquired by UTI, were handed over to the PSU. The government has progressively sold its stake in Axis Bank as part of its disinvestment programme, particularly in the last five years. Nevertheless, it remained for much longer to account for its over 7% stake in ITC. There is a potential risk of erosion in the value of their holdings due to increasing concerns of influential investors guided by environmental, social and governance or ESG norms. The old bogey of a hostile foreign hunter controlling an Indian cigarette company by buying a large chunk through disinvestment should be buried, if that’s what’s stopping the government.

On market deals, exchange traded funds and IPOs are a better and operationally easier route for the government to generate revenue quickly, rather than strategic disinvestment. Another way to monetize public and operational infrastructure assets, the National Monetization Pipeline, or NMP, is the best medium- or long-term bet. And that too if the constraints of the political economy do not prove to be too binding. All these help to quickly understand the value of blue-chip shares held by SUUTI and make the case for winding up of the venture originally designed as a medium-term resolution plan. That the SUUTI telecom operator may warehouse the government’s 35.8% stake in Vodafone, even after converting the interest arrears into equity, would not justify continuing the operations of the undertaking for a long time.