PSUs are running amok with grand ventures

Recently, Indian Oil Corporation Ltd and NTPC Ltd announced a joint venture to produce green hydrogen. In defence, Hindustan Aeronautics Ltd is reaping the benefits of a long order book that reflects government priorities, instead of what the company is good at. In the maritime sector, Cochin Shipyards Ltd is staking a claim to build zero emission feeder container vessels without any visibility as to how it will do that.

The striking aspect of these decisions is that these public sector undertakings, or PSUs, are making such announcements that are market moving without explaining to their private sector shareholders whether they have the technical capability to execute these new projects. 

Most of them have the money to spend, of course, being largely debt-free entities. Yet, the only shareholder that seem to know of and possibly approve these plans is the government of India, which holds majority stakes in these companies. That is the antithesis of good corporate governance, especially for companies run overwhelmingly on public funds. 

A private sector company will face serious shareholder blowback if it tries these capers. There have to be approvals explained in the annual general meetings, whose decisions are parsed carefully by investment research firms. 

There is a remarkable lack of such audits at state-owned firms. The lack of such controls is possibly why these companies jump to take up large projects whenever the government comes up with a new policy idea. 

For instance, in the successive Open Acreage Licensing Policy, in the petroleum sector, most of the bidders in the ninth round of auctions are apparently government-owned firms. 

Not only that, state-owned Oil and Natural Gas Corporation has made announcements of discoveries that can potentially add 45,000 barrels per day to its production—about a tenth of its total daily production. The problem is that the discovery did not impress analysts since these were already in the offing for a long time, going as far back as 2018. 

While it is a no-brainer that the Indian sedimentary basin is a difficult territory, such fortuitous announcements by government-run companies only make price discovery for others complicated. 

Given the government's enthusiasm for creating domestic champions in all sectors, there is no doubt that the ranks of state-owned companies will expand, unlike the expectations from a previous era that their numbers would dwindle.

The expanding ranks means their impact on the economy shall deepen massively. The combined market capitalization of PSUs at over ₹34 trillion bear out some of this story. The challenge is to ensure that public interest means the same as government interest. 

The stakes are no chicken feed. These state-owned companies have investible resources of ₹22.8 trillion, as per the Public Enterprises Survey FY22. But are the returns commensurate in their existing lines of business? 

For instance, the return on assets for ONGC is 11.03%. For IOC, it's even lower at 1.98% and for NTPC about 3.79%. Essentially, the assets are not being milked adequately for investors to be enthusiastic about their performance. 

The erratic signals that consequently emanate have an impact on market discipline. The recent enthusiasm of the markets about rail companies like Indian Railway Finance Corp. bear this out. IRFC, the financing arm of Indian Railways, is highly over-leveraged so the markets should be avoiding it like the plague, yet its scrip has soared. 

This unusual behaviour is because the market expects finance minister Nirmala Sitharaman to provide for high capital expenditure for the Railways. In other words, it is not the company’s performance but signals from the state that will determine its fortune. Not the best signal for the sector.