India Intelligence Report

   Govt to Sell 10% of Nalco, NLC



  • Govt decides to sell 10% stake in NALCO and NLC to raise Rs. 2500 crores

  • Communists oppose the move and ask for immediate roll back of decision

  • Analysts see that the Government is trying to be assertive with the communists

The Cabinet Committee on Economic Affairs (CCEA) agreed to allow the Government to disinvest 10% of two profit making public sector non-navratna companies to raise resources for the National Investment Fund (NIF) mostly to fund social sector expenses. With this decision, the Government plans to disinvest small stakes in the National Aluminum Company Ltd (Nalco) and the Neyveli Lignite Corporation (NLC). This announcement is in addition to the previously announced disinvestment of stake in the National Thermal Power Corporation, the Power Finance Corporation, and the National Mineral Development Corporation.

Announcing this decision, Finance Minister P. Chidambaram was cautious on the Government’s approach to disinvestment. He said “The sell-off process will depend on the prevailing price and the advice of the lead managers. The government will choose the appropriate time. We will not rush it.” After the 10% sale, the government’s interest in NLC will be reduced to 83.56% and 77.15% in NALCO. Further, there is a provision in the NALCO sale to split the shares before listing and the Government’s planned ratio was not disclosed as consultations with several ministries such as mines, expenditure, and heavy enterprises is required to arrive at the right number. Chidambaram disclosed that 75% of the returns on the disinvestment would go to the NIF and the rest used to revive ailing PSUs. The disinvestment will fetch Rs. 2500 crores (USD 543 million).

Chidambaram also said that the Government will stick to the outcome of a meeting with the communists on November 21, 2005 when it was agreed that small stakes in non-navratna non-profit making public sector utilities (PSU) may be disinvested to fund social projects. The communists, whose support is essential for the survival of the federal government, oppose disinvestment of any kind but especially the navratna PSUs. The navratna PSUs, loosely translated as the nine jewels, are the most prestigious Government owned companies that are considered prestigious, strategic, and vital to the nation.

Analysts see this as newfound assertive behavior of the Government and also a signal to investors worldwide that it is committed to economic reforms. Starting from the Prime Minister, it has shown its displeasure at political grandstanding over several internal and foreign policy matters.

Meanwhile, communist parties and their acolytes in trade unions had choreographed opposition the disinvestment plan and accused Chidambaram of impropriety and working for personal gain. They say that this decision will benefit Vedanta Resources which owns former PSU Bharat Aluminum (BALCO). So the assumption is that since Chidambaram is on Vedanta, he stands to gain personally. The communists, on predictable lines, demanded immediate withdrawal of the CCEA decision, claiming it violated the national common minimum program (NCMP). Unions struck out and production of finished aluminum stopped completely in NALCO's 950 ton smelter plant in Orissa but allowed 153 executive rank officers and 106 casual workers to run six power plant units, which produced around 650 mw power.

Nalco’s net profit rose 26.7% to Rs 1,565 crore in 2005-06 on a turnover of Rs 5,324 crore. However, NLC’s profits dipped from Rs 1,215 crore in 2004-05 to Rs 702 crore in 2005-06.