The idea that defence and strategic national objectives are secured only through publicly owned enterprises runs counter to empirical evidence.

What is common to Hindustan Aeronautics, Mazagon Dock, Bharat Dynamics, Mishra Dhatu Nigam, Bharat Electronics and BEML? Well, they are all profitable public sector undertakings (PSU) under the Ministry of Defence with huge order book positions to supply products – from combat aircraft, warships and missiles, to super-alloys, radar systems and defence ground support equipment – for which there is very little competition from others. Yet, none of these, barring the last two, are listed and they never figure in official disinvestment plans. This is so even now, when the Government is all too keen to raise resources from sale of its stakes in PSUs, for which it has lined up the usual suspects that include MMTC, Rashtriya Ispat Nigam Ltd (RINL), NMDC, Hindustan Copper, National Aluminium Company and Steel Authority of India. Given the state of the markets, it would occasion no surprise if investors value these stocks at a discount to their intrinsic worth. While RINL’s initial public offer (IPO) has already been called off, differences in perception of valuation between the Government and merchant bankers are threatening to derail divestment in the others as well.

The reason for the proposed stake sales not generating much interest, of sort that Coal India’s Rs 15,000 crore-plus IPO did two years ago, is simple. The current PSU candidates operate largely in the commodities and natural resources space, which are now in the wrong end of the business cycle. Their shares are, hence, unlikely to command premium valuations, unless the Government is willing to bring down its stakes below 50 per cent. In that event, institutional investors may not mind paying more in the expectation that, as private enterprises, they merit a ‘control premium’ in pricing. Raising large sums from divesting small stakes is possible, if at all, today only in companies that are seen to be in niche businesses. This does hold in the case of defence PSUs, with Hindustan Aeronautics alone sitting on large orders and reserves of over Rs 10,000 crore.

At the same time, the argument that the nation is better off having these enterprises wholly in public hands doesn’t really wash, as Bharat Electronics and BEML are already listed: And that has not resulted in any dilution of focus in their defence-related production or design activities. For that matter, companies such as Larsen Toubro, Godrej Boyce and Walchandnagar Industries are no less important today to India’s defence, atomic energy or space programme, despite being fully privately held. Moreover, the world’s biggest defence companies – Lockheed Martin, BAE Systems, Northrop Grumman, Boeing or General Dynamics – are all listed entities. Companies can be listed and yet perform strategic functions to which outside investors are not made privy; this is something the latter would invariably factor in. Listing is also important in the long run for these companies too, as they seek to mobilise more resources, form joint ventures, make overseas acquisitions, and so on. Ownership structure, by itself, shouldn’t impair an enterprise’s core business purpose.