SCI: Privatisation to redefine the industry

The Government fresh from its recent controversy — free privatisation of VSNL and IBP — last week began work on another big-ticket PSE sale of Shipping Corporation of India (SCI). It now owns 80% of SCI's paid up capital of Rs. 282.300000000. What is now on offer is 51% of SCI's stake. The disinvestment programme passes through a number of well defined stages. "Expressions of interest'' for the 51% stake were received from a number of Indian and foreign shipping companies, including from GE Shipping, Essar, Videocon Shipping, Shreyas Shipping and Malaysia International Shipping. Although still at a preliminary stage, SCI's privatisation is already engaging plenty of attention. When completed, it will be a defining moment for Indian shipping with the country's dominant company now in the public sector passing off into private hands. As more than 50% of SCI's equity will change hands, there will be no ambiguity as to who will call the shots post disinvestment. Under current SEBI rules, the successful bidder will have to make an open offer for another 20% of the SCI's shares at the same price as the bid. Post-sale the government will still be retaining about 29% of SCI's equity. Given the strategic importance of shipping, it seems unlikely that in the foreseeable future it will let its shareholding drop to below 26%, the minimum needed to block any special resolution. Therefore, the Government may not gain through the open offer. It is expected that once SCI moves into private hands, its valuations, now at a PE of 5, will move up. Indian shipping companies have been undervalued by the stock markets compared to the European and the American counterparts. The expectation that sans government ownership the valuations will automatically go up is at best a general statement and need not be valid in the SCI's case. Among other reasons, it ignores the fact that SCI's role as the nodal carrier of crude for the Indian Oil Companies (which at present canalises all petroleum imports into the country) will change considerably. With the Cabinet deciding to do away with the administered price mechanism (APM) on petroleum products and in general bringing about deregulation in the oil sector, not only the fortunes of government companies in the petroleum sector, but those like SCI's will be affected. One obvious outcome imports will be decanalised and with no monopoly over the transportation of imported crude, there will be pressure on the business flowing from the SCI's tankers fleet. At present, the latter contributes to two-thirds of SCI's revenue. Actually, world over the tankers business has been one of the worst sufferers of the considerably enhanced risk premium on insurance after September 11. Then there are industry specific issues. High up in the shipping industries' tale of woes is the absence of a friendly tax regime. Just the other day SCI's Chairman, P. K. Srivastava, was reiterating a long-standing request of the shippers to move to an internationally acceptable tonnage tax from the present system of corporate tax (dividend tax and minimum alternative tax). Simultaneous to SCI's moving into the private sector, the Government has also permitted foreign direct investment up to 100% in shipping. Enhanced competition is a certainty. As privatisations go, SCI's may not yield a bonanza for the Government. The Government has set stiff rules for bidders a net worth requirement of Rs. 8000000000 and a foreign stake of not more than 25%.These are entirely justified keeping in view the strategic importance of SCI. That role will alter, possibly diminish but cannot possibly vanish in the foreseeable future.