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The good are never free - The Public sector bank dilemma

The corporate decisions

Every firm out there has to make a few critical decisions that determine how successful they'll be. The investing decision (which projects they'll back and with how much money), the financing decision (how they will finance their growth - own capital, debt, equity), and the dividend decision (how they will share the surplus cash with the owners of the company).

In an ideal world, the majority stakeholders and the minority stakeholder would be aligned on these. Unfortunately for us, we do not live in a Utopia. And nowhere is the disconnect felt more strongly than in public sector companies. In today's post we look at a few critical areas where the majority and minority shareholder interests clash in case of public sector enterprises, and how they pay the price via their valuations.

The conflicts

Before we begin to dig into the conflicts, it is important to remember that a few of the conflicts may be the right thing to do for the government and even the nation as a whole, but might still be unfair to the minority investor. Consider for example the most benign form of conflict - loss making rural operations.

If you are a bank setting shop in the outskirts of a village with low population probably isn't going to do a lot of good to your financials. If you were a private sector bank working on an investment decision, you would probably exclude that region in your expansion plans. But for the government bringing financial inclusion to the masses is key - and hence the top PSBs may have to expand where the investing decision from a purely monetary point of view would have recommended otherwise.