Strategies to Unleash Value in State Firms

Context: Value unlocking in Public Sector Undertakings (PSUs) to unleash higher productive capacities in the PSU system.

Problems associated with PSUs in India

• Low demand for PSU stocks: Investors are less inclined to own PSU stocks.
• Underperformance of PSUs: Since January 2008, when the BSE PSU Index made a market top, the Sensex has multiplied more than two times, while the PSU Index is down more than 40%.
• PSUs manage multiple objectives without clear priority:  Their focus area includes social sectors, employee welfare, environment, and shareholder value creation.
• Derating of PSUs: through market divestment of PSUs from Exchange Traded Funds (ETFs)/ Initial Public Offerings (IPOs).
• Issues in management: Top management are not paid well, and PSU managers have little administrative flexibility even though PSU salaries bill is higher than private-sector peers.

 Strategies to unlock value in PSUs:

• Set clear targets for PSU management: Priority should be given to shareholders’ value creation and delivering a return on equity.
• Create value through public money and professional management: Bringing corporate culture and customer orientation by divesting majority stake to a strategic buyer with full managerial control.
  • This will help align objectives, increase productivity, and increase customer-centricity e.g. Maruti & Hindustan Zinc.
• Take strategic divestment route instead of market divestment: To get better realization with control premium and rerating PSUs.
• Provide compensation & bring in administrative flexibility: PSUs must become board-managed companies with appropriate administrative empowerment.
  • The bulk of compensation for middle-to-senior management should be paid through Employee Stock Ownership Plans (ESOPs) to create interest alignment.
• Create holding companies for PSUs: With clear value creation mandate; on the lines of (Singapore government-owned) GIC / Temasek.
  • They should be sufficiently empowered and adequately incentivized for value creation.
  • They should shield the PSU management from external influence.

Conclusion: It requires patience and keeps on doing the right things to see the intended outcomes in PSUs.