Stakeholders in BEML disinvestment process will have to put up with disruptions in their corporate existence

The new year 2021, started off with a global invitation to participate in the disinvestment of 26% (of 54.03% currently owned by the Government of India) of the equity share capital of the Bharat Earth Movers Limited (BEML) along with transfer of management control.

With 23 PSUs cleared for disinvestment in July 2020 targeting Rs 2.10 lakh crore, the Department of Investment and Public Asset Management (DIPAM) set the ball rolling on the disinvestment process for BEML. At current market prices, BEML’s 26% stake is expected to fetch about Rs 1,000 crore to the exchequer.

The release of the Preliminary Information Memorandum (PIM), complete with deadlines in respect of this profit making defence PSU, is making the current stakeholders - the employees, non-government shareholders, customers and the suppliers of the company - apprehensive flowing from the manner of BEML’s activity through three business verticals.

These verticals are: Mining and Construction, Defence and Aerospace, and Rail and Metro. The government may hand over complete management control to the buyer of the 26% stake, but strategic advantage will accrue only if the investor has similar verticals in his portfolio. Now, how many organisations with similar verticals exist in India or overseas? Are “roadshows” being organised to aggressively hunt for a suitable match?

An open competitive bid will focus on one or two of the three verticals leaving the balance in the lurch. Alternately, a venture capitalist or a consultant firm may purchase whole and subsequently hive off an unwanted vertical to distinct buyers by following the “Buy whole, sell strategic” policy distinctly transforming BEML’s verticals.

As regards its three verticals, the defence vertical with 14% of company turnover, is known for its Tatra trucks, mine ploughs, mounted gun systems and pontoon bridging equipment, high margin defence and aerospace sector, world-class test track and skills honed through several decades of partnership with India’s armed forces.

The metro and rail vertical, with 37% of company turnover, profitably supplies metro cars to several Indian cities through its well laid out facilities. It is known for its competency in rolling out world-class coaches. It has its own Rail Coach Factory.

The mining and construction vertical, with 49% of turnover, is known for its Walking Draglines, Electric Rope Shovels and large-sized R&D’s Electric Dump Trucks that cause international competitors - Caterpillar and Komatsu - much anxiety.

The second most important issue concerns BEML’s land parcels, approximating 2,950 acres of freehold and leasehold land spread across its various manufacturing facilities and offices. About 41% of this land is required for its current businesses, leaving 59% land parcels non-operational and excluded from the process of strategic disinvestment.

This makes the timing of the hive-off of land crucial to the strategic disinvestment process. Given the real estate cost, an audacious buyer might be attracted to the operational land parcels in prime locations in different cities finding it exceeds the company’s market-based valuation notwithstanding a three-year lock in period mandated for the divested shares.

Another major issue is BEML’s 6,300 employees, 4,600 contract labourers and five employee unions spread across its facilities. To make divestment palatable to the employees, DIPAM’s divestment procedures permit a competitive bid directly or through an employee consortium with concessions within a 10% band and an opportunity to match the highest price.

It is difficult to imagine BEML employees - dedicated managers and loyal workmen - to suddenly develop an entrepreneurial bug and bid for the company. Senior employees will pass through a disruptive phase when their traditional public sector work culture gets uprooted by a private-sector buyer at odds with the turnover-to-employee ratio in today’s BEML

The company’s other stakeholders - notably its customers, the Indian armed forces, Indian Railways, public sector behemoths such as Coal India, SAIL, NTPC, Metro corporations in Bengaluru, Delhi, Kolkata etc will have to reconcile to different customer perceptions and equipment prices with a reduction in competition. BEML’s numerous vendors too would have to go through a phase of adjustment.

So what is the best possible outcome for the privatisation of a profit-making defence PSU? The government, facing a challenging disinvestment target, needs the “Transaction Advisor” to bring in a competitive buyer. The company, stuck for several years in the Rs 3,000 crore annual turnover range, can look forward to a new investor to optimise its infrastructure and resources. Employees, customers and vendors need to reconcile to today’s governments keeping out of businesses, knowing another PSU cannot hand-hold them as the bidding process precludes public sector enterprise’s participation.

BEML will have to be prepared for the long haul when DIPAM’s divestment process gets delayed due to date extensions and corrigendum. Only a fortune teller can guess the outcome of a competitive bid but suffice is to say that the stakeholders in the BEML disinvestment process will have to put up with disruptions and uncertainty in their corporate existence.