BEML’s Disinvestment Gets Going

The Government’s policy on disinvestment of the Central Public Sector Enterprises (CPSEs),  aims to maintain a bare minimum number of CPSEs in four strategic sectors and privatize all CPSEs operating in the non-strategic sectors. The disinvestment and sale proceeds are intended to finance various social sector and developmental programmes of the government. Plan for disinvestment in BEML has taken off.....

The disinvestment-bound Bharat Earth Movers Limited (BEML) took a major step on July 15, 2021 by incorporating a wholly-owned subsidiary, called BEML Assets Limited, to manage demerger of surplus land and asset held by this state-owned company in the run up to its strategic disinvestment. All eyes are set on the impending strategic disinvestment which, to put it simply, implies the sale of a substantial portion of the company’s shareholding resulting in transfer of management control from the Government to the investors.

This move is a part of the government’s policy on disinvestment of the Central Public Sector Enterprises (CPSEs), announced by Finance Minister Nirmala Sitharaman while presenting the current financial year’s (2021-22) budget on February 01, 2021. According to this policy, the government will maintain a bare minimum number of CPSEs in four strategic sectors and privatize all CPSEs operating in the non-strategic sectors. The four strategic sectors are:

  • Atomic Energy, Space and Defence;
  • Transport and Telecommunications;
  • Power, Petroleum, Coal, and other minerals;
  • Banking, Insurance, and financial services.

Established in 1964, BEML is one of the nine CPSEs, or Defence Public Sector Undertakings (DPSUs),which operate in the defence segment of the Space and Defence strategic sector in which the government intends to reduce the number of CPSEs to the bare minimum. The company is engaged in design, development, manufacturing, sale, and after sales activities related a wide range of Mining & Construction, Rail & Metro, and Aerospace & Defence & (A&D) products.

The A&D product range includes various types of recovery vehicles, missile and rocket launchers, trailers for transportation of tanks, pontoon bridges, and crash fire tenders. The company has nine manufacturing plants located at Bengaluru, Kolar Gold Fields, Mysuru, Palakkad and Chikamagaluru. Ove the years, BEML has exported products made at these plants to 68 countries.

According to the provisional figures for 2018-19 -the latest available on the website of the Ministry of Defence (MoD)-BEML’s Value of Production (VoP) and Profit After Tax (PAT) during the year was Rs 3,450 crore and Rs 100 crore  respectively. The same year, BEML paid a dividend of Rs 29.18 crore which came down to 24.98 crore in 2019-20. According to the company’s website, the dividend paid in 2019-20 was the lowest since 2016-17. The return on investment for the government is arguably in commensurate with the capital invested by it in the company.

This is equally true of the Garden Reach Shipbuilders & Engineers Limited (GRSE) and Mishra Dhatu Nigam Limited (MIDHANI), the other two DPSUs that are lined up for disinvestment during the current year, as disclosed by the Minister of State for Defence in his reply to a question answered in the Rajya Sabha on March 15, 2021. Both these companies have performed far below BEML between 2014-15 and 2018-19 in terms of VoP and PAT. However, considering that two other shipyards -Goa Shipyard Limited (GSL) and Hindustan Shipyard Limited (HSL)- too have performed as poorly as the GRSE, it is intriguing that these shipyards are not on the disinvestment list, at least for the present.

Be that as it may, the belief underlying the disinvestment policy is that practically every government company has the potential to perform better if the government’s shareholding is reduced as this creates space for the private sector to infuse capital, bring instate-of-the art manufacturing technologies, introduce best management practices, and spur economic growth by creating new jobs. The disinvestment and sale proceeds are also intended to finance various social sector and developmental programmes of the government. The strategic community expects proceeds from disinvestment of the DPSUs to be transferred to a non-lapsable pool of funds for modernization of the armed forces. Whether that is going to happen remains to be seen.

It may be recalled that the fifteenth Finance Commission has recommended creation of a ‘Modernization Fund for Defence and Internal Security’ by, among other things, transferring the proceeds of disinvestment and sale of land to the proposed fund. However, the indications are that the commission’s recommendation regarding the source of funding may not be accepted in totality. The Standing Committee on Defence was informed by the MoD in March this year that the proposed fund shall be credited with only 50 per cent of the proceeds from monetization of the surplus defence land, and that too after the entire proceeds were initially deposited in the Consolidated Fund of India.

The surplus land held BEML does not fall in the category of surplus defence land and, therefore, the proceeds are unlikely to be transferred to the proposed modernization fund. Since, however, the proposal is yet to be finalized, it is possible that the government may decide to transfer some percentage of the proceeds of the sale of surplus land held by BEML and other DPSUs, as also a part of their disinvestment, to the modernization fund. At any rate, the decision to hive off the surplus land for sale or disinvestment is not dependent on what is decided by the government as regards transfer of funds to the modernization fund.

Meanwhile, incorporation of BEML Assets Limited to manage sale of hived-off surplus land and assets has  set the ball rolling for disinvestment of its core business as a part of the government’s strategy to meet the current financial year’s overall target of Rs 1,75,000 crore, scaled down from the previous year’s target of Rs 2,10,000 crore, against which only Rs 32,845 crore could be raised largely because of the economic slowdown caused by the Covid-19 pandemic. The government will have to pull out all the stops to reach this ambitious target as disinvestment is not an easy task.

The then Minister of State Shripad Naik admitted while replying to the above-mentioned question in the Rajya Sabha in March that ‘completion of a transaction depends on market conditions’ and, therefore, it was not possible to predict a timeframe for completing the disinvestment process. The complexity and uncertainty of this process can also be gauged from the fact that even before the pandemic broke out, the government could realize only Rs 50,304 crore against the disinvestment target of Rs 1,05,000 crore in the financial year 2019-20. It is anyone’s guess whether the results would be better this year. Much would depend on the speed at which vital decisions are taken by the government at the critical junctures during the disinvestment process.

Not much is known about how demerger and sale of surplus land and non-core assets of BEML is progressing, but some unconfirmed reports indicate that the disinvestment process, for which SBI Capital Markets Ltd. was engaged as the transaction advisor to BEML, has made substantial progress. Some unconfirmed reports suggest that of the several potential buyers who had responded to the Preliminary Information Memorandum (PIM) issued in January this year for picking up 26 per cent stake in the company, four have been shortlisted for the final round of bidding after due diligence.

These four potential bidders are believed to be Ashok Leyland Ltd., Bharat Forge Ltd., Tata Motors Ltd., and   Hyderabad-based Megha Engineering and Infrastructure Ltd. However, these companies have issued no statement confirming or denying the reports. The Department of Investment and Public Asset Management (DIPAM) and the Niti Ayog, which are associated with the government’s disinvestment drive, too have been tight-lipped about it. Whether these reports are true or not, there is no doubt that it is a golden opportunity for the private sector companies operating in analogous business of manufacturing vehicles, mining equipment, coaches, and the like.

Earlier in March this year, it was reported by the Mint that, buoyed by the reports of a robust order book of Rs 11,620 crore and the impending disinvestment, BEML’s stocks had jumped 18 per cent on the bourses. The order for Rs 4,700 crore for the supply of metro coaches constitutes a large part of the order book. This is a very promising segment of BEML’s business as the metro network is set to expand exponentially in the coming years. This is also true of mining and construction equipment. Hopefully, the plant and machinery used for the manufacturing equipment across the three segments of its business would constitute the core assets of the company when the bids are invited for its disinvestment. The government can expect fierce competitive bidding from the companies interested in expanding their business in these segments.

While the prospects look bright, it would be advisable to be realistic about the outcome of the impending disinvestment. The mixed outcome of disinvestment of six of the nine DPSUs to varying extent in the past is instructive. Unsurprisingly, disinvestment in two of the best performing DPSUs in terms of VoP yielded the best results in the past by generating a total sum of Rs 22,257.99 crore, but the public offer of 15 per cent stake in the Mazagaon Dock Shipbuilders Ltd. last September fetched a modest sum of Rs 974.15 crore, despite a healthy order book and zero debt. (See Table)

One last word needs to be said about BEML’s disinvestment. The government presently owns 54 per cent of the company’s stake and, as per the information available on DIPAM’s website, another 26 per cent stake, along with transfer of management control, has been offered for competitive bidding through the PIM issued on January 4, 2021.This is not in consonance with what the Minister of State for Defence said in response to the aforesaid question in the Rajya Sabha, according to which the “Policy of disinvestment of minority stake without transfer of management control is being followed for priority sector including defence to unlock value, promote public ownership, to meet the minimum public shareholding norms of SEBI and for ensuring higher degree of accountability”. Something seems amiss.

  Sh. Amit Cowshish is a former Financial Advisor (Acquisition), Ministry of Defence

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