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The Union finance ministry is examining a proposal that seeks to dilute the
government’s stake in all listed public sector undertakings to at least 90 per
cent.
Our view is that ownership impacts the monitoring behavior of
the firm. By its very nature public sector ownership is more widely distributed
than a private firm’s. Since there is no way for any single owner to sell
(alienate) his or her share of the public sector, public owners stand to gain
or lose less from firm performance than do private owners, who can sell their
shares. These two factors combine to produce sub-optimal levels of monitoring
in the public sector. Thus, diluting just 10 percent will still leave ownership
very diffused and will not have a positive impact on monitoring and hence
performance. In the absence of a majority stake shake out this is just an
exercise to raise revenues with little impact on efficiency.
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