Governments come and go, but one thing remains a constant – their love for tobacco. Irrespective of who rules, the industry is among the heavily taxed and thanks to human frailties it remains an exception to the law of demand. The arguments for taxing it ranges from being a deterrent to filling the coffers.
So far so good.
But how can governments which want to promote a healthy life style for its citizens through high taxation on smokers justify their ownership of a cigarette company? That too a firm not started by the government, but a stake that landed on its lap by default.
Yes, it is the ITC debate that is back on the table. Swadeshi Jagran Manch, an organisation founded by S Gurumurthy, a man of clean habits, to promote native entrepreneurship and prevent multinational companies from gobbling up the locals, wants the government to raise its holding in the biggest cigarette maker. This is when the state is struggling to fund roads, hospitals, schools and there is a real threat of it breaching the fiscal deficit target.
Why? The argument goes like this: UKs British American Tobaccos (BAT) decision to turn down ITCs ESOP scheme was a “plan to destabilise the Indian management to achieve its longterm objective of taking over the company and re-converting ITC into a tobacco company, maximising returns for the parent company,” ET reported. The question is why shouldnt BAT do it?
If 80 percent of its profits come from cigarette sales while revenues is just about 40 per cent, it shows other businesses are a drain on the capital. No wonder, ITC, a consumer good company with no debt, is trading at 28 times its March earnings when peers such as Hindustan Unilever and Britannia are trading at more than 50 times.
It is a mystery as to why governments — from Vajpayee to Manmohan Singh to Narendra Modi — are holding on to stakes in firms that found their way to governments vault while bailing out Unit Trust of India. In 2002, when the state-run UTI was teetering the government bailed it out by paying investors what the investment institution promised.
In return, the government got many assets, including stakes in ITC, Axis Bank, Larsen & Toubro that are held by an entity SUUTI.
Over the years SUUTI sold some to realise the values. Why not a strategic stake sale in listed firms where there are willing buyers like BAT. Even a beginner to investing would tell you that a chunky sale would fetch a premium if it goes with control. So is the case with Axis Bank and other ownership. If BAT is interested in ITC, a Uday Kotak may be interested in buying Axis. Government ownership is pampering vested interests and harming taxpayers.
SUUTI made a profit of Rs 3,940 crore selling shares in L&T. It also sold shares worth Rs 5, 521 crore by transferring Axis, ITC and L&T shares to Bharat ETF, data from its website shows.
Neither the United Progressive Alliance nor the National Democratic Alliance administrations have come up with a convincing answer. The only speculation could be lobbying and vested interests.
A sale of SUUTIs holdings in ITC, Axis and L&T could fetch at least Rs 50,000 crore if not more. Other than these three, it also owns stakes in companies such as Crisil, Tata Global Beverages, Bloomberg data shows.
If theres a lesson on how to deal with exits after bailing out corporations with taxpayer money, look no further than Uncle Sam.
When the US used hundreds of billions of dollars from the Troubled Assets Relief Programme during the global financial crisis to bail out firms like Citigroup and General Motors, there was an uproar. But the state soon sold out, and in many cases even made a profit.
It is a pity that a government struggling to fix its finances and aiming to boost foreign currency reserves does not think about selling down the SUUTI holdings to strategic investors to maximise value. It may be time to wind up SUUTI.
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ET Markets
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