In India, a Turbo Boost for Privatization

The successful divestment of the government's stake in carmaker Maruti has quieted critics and excited investors, both local and foreign

By Manjeet Kripalani

Indian Privatization Minister Arun Shourie was meeting in Bombay last month with city officials about telecom infrastructure when he excused himself to take an urgent call. Upon returning three minutes later, the usually solemn and somber Shourie was beaming. An initial public offering of roughly half the government's holding in auto maker Maruti Udyog -- about 27.5% of the outstanding shares and valued at around $215 million -- had been oversubscribed in the first three hours of selling. Demand was pouring in from all parts of the world, with 10 times more buyers than there were shares. Declared a happy Shourie: "This is a vote for India, for Maruti, and for the capital markets."

It's not just Shourie's mood that changed that day. The successful privatization of Maruti -- Suzuki owns 54% majority share -- has given a shot in the arm to India's slow, painful privatization efforts. Since 1996, successive Indian governments have tried to initiate an ambitious plan to sell off more than a 100 government companies. But groups with vested interests, especially labor, have stalled the efforts, accusing ruling parties of selling off the family silver.

As a result, fewer than 20 companies were sold, raising barely $2.5 billion. But the triumphant divestment of the government's stake in Maruti has quieted many skeptics, making privatization a vote-getter instead of a vote-loser. Also, it surely boosts the ruling Bharatiya Janata Party's (BJP) chances of maintaining power in next year's national elections.

JUST THE START.

  The key: the return of the local retail investor and the participation of middle-class India, the BJP's core constituency. Low deposit rates of 4% and a risky stock market had shorn those investors of havens for their savings. But well-managed state-sector companies like Maruti are perceived as solid investments with good returns -- almost like government securities. For the first time, "the government needn't be defensive about privatization," says Subir Gokarn, chief economist for Crisil, India's premier rating agency. "It's putting good assets in the hands of the public, and that's positive."

Indeed, the Indian public is anxious for more. The government's divestment of most of its Maruti stock has made almost certain the smooth sale later this year of three other state entities -- aluminum-maker Nalco and oil refiners/sellers Bharat Petroleum and Hindustan Petroleum. Combined, the three are expected to bring in more than $2 billion. The schedule for more such privatizations in 2004 will soon be decided. The mood is so buoyant that state-owned companies are independently declaring themselves open to the idea of privatization. In early July, Bharat Sanchar, India's $5 billion telecom company, surprised investors when it announced its desire to go public.

The transparent process inspired confidence

Bankers in Bombay say the appetite among investors for stable private companies is enormous. And the state-run outfits that have used the last few years to restructure operations and become profitable are now attractive to buyers. That's why overdue listings, such as that of $1 billion software-services giant Tata Consultancy Services, are expected to do as well as Maruti.

The Maruti sale also reflects a revival of interest in India on the part of foreign investors, who have largely limited themselves to the booming software industry over the last five years. Their absence can be blamed largely on India's slow reform and chaotic politics. Yet of the $215 million raised by the Maruti issue, about a third came from foreigners investing in India for the first time. The confidence-builder? The transparent, methodical process.

First came last year's sale of 4% of Maruti to Suzuki Motors, which already owned 50%, allowing it to become the majority player, followed by the sale of the government's 27.5%. The latest Maruti sale, which still leaves some 18% in government hands, also shows that domestic suspicions about foreigners controlling assets in India are waning. Maruti is considered one of the country's crown jewels, yet the fact that it's now majority-owned by a multinational has scarcely raised an eyebrow. By Manjeet Kripalani

THE REAL TEST.

  Foreign interests are looking to buy more than state-owned enterprises. Since June 1, foreign institutional investment in Indian equities has been $726 million -- considerably more than the $671 million invested by foreigners in the first five months of 2003. The upbeat global markets of the past few weeks have helped, and now brokers such as Bombay-based Kotak Securities, which advised the government on Maruti, say they're inundated with inquiries about investment opportunities in India.

Says Neem Kumar, head of research for Credit Lyonnais Securities in Bombay: "The Maruti IPO is a reflection of the underlying boom in India." He points to a combination of factors -- low inflation and interest rates, high foreign exchange reserves, improved corporate earnings, high dividend payouts, and a good monsoon season -- that have made Indian companies attractive to foreign investors.

There are still some skeptics, of course. Even the elated Shourie, who for years has been a political lightning rod for the ire over privatization, refuses to be too confident. "In India, anything is fine until the next hurdle," he says. Prithvi Haldia, who runs financial analysis firm Prime Database in New Delhi, says the critical test will be Maruti's post-listing endurance. "The company's sales won't increase because of its IPO," he points out. "It's the performance that matters."

EYES ON EXPORTS.

  Maruti was unprofitable for several years, thanks in large part to a three-year spat between the government and Suzuki over control. But Maruti again became a moneymaker last year and has regained lost market share. It has 54% of India's passenger-car market and 80% of the small-car market -- the bulk of India's auto sales -- and is also exporting cars to Europe. Suzuki chief Osamu Suzuki, who visited India to ring the bell marking Maruti's listing on the Bombay Stock Exchange on June 10, says India will be the research and development hub for Suzuki in Asia, as well as an export base for small cars.

Optimism aside, the window of opportunity for India to show the world it's serious about privatization is short. With general elections next year, politicians could find it expedient to divert their support for privatization in favor of, say, affirmative action, which is traditionally a bigger vote-getter.

Minister Shourie may well have pushed through a several additional divestments by then. The time is right. And the more companies there are in the hands of the retail public, the less likely that the government would derail privatization efforts.

Kripalani is Bombay bureau chief for BusinessWeek

Edited by Beth Belton

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