DISINVESTMENT: Policy and Initiatives by NDA Government

  • by Gaurav Bansal

With the regime change last year, the disinvestment policy was expected to be revised after hitting the nadir (lowest point) in previous UPA Government’s 10 year rule. The following article is an a analysis of Disinvestment policy in past one year.

Three approaches to disinvestment

There are primarily three different approaches to disinvestments (from the sellers’ i.e. Government’s perspective)

1  Minority stake sale(Minority Disinvestment) A minority disinvestment is one such that, even after selling the stakes, the government retains a majority stake in the company, typically greater than 51%, thus ensuring managerial control.Generally these are done via public offers i.e. offloaded to the public by way of an Offer for Sale (but can also be offloaded to financial institutions )
2 Strategic sale(Majority Disinvestment) A majority disinvestment is one in which the government, post disinvestment, retains a minority stake in the company i.e. it sells off a majority stake. Historically, majority disinvestments have typically been made to strategic partners.Again, like in the case of minority disinvestment, the stake can also be offloaded by way of an Offer for Sale, separately or in conjunction with a sale to a strategic partner.
3 Complete Privatisation Complete privatization is a form of majority disinvestment wherein 100% control of the company is passed on to a buyer(s).

 

1) Fiscal Year 2014-15

  1. a) In Banks
  • To be in line with Basel-III norms, as there is a requirement to infuse 2,40,000 crore as equity by 2018 in our banks. To meet this huge capital requirement, we need to raise additional resources to fulfill the obligation.
  • In this background, in Dec-2014, the Cabinet approved allowing PSBs (Public Sector Banks) to raise capital from markets through FPO (Follow-on Public Offer) or QIP (Qualified Institutional Placement) by diluting Government of India holding up to 52% in phased manner.
  1. b) in PSUs (Central Government)
  • In the last fiscal (i.e. 2014-15), the government had raised around Rs 24,200 crore through stake sales in Coal India Ltd and Steel Authority of India Ltd (SAIL).
  • CIL disinvestment was was the biggest equity offering ever in the country (a 10 % stake in CIL, fetched government, the Rs.24,557 crore, whereas selling of shares in SAIL led to earning of mere Rs.1,719 crore). But on the downside as much as Rs.11,360 crore, which is half of the total sum raised, came from insurance companies led by the LIC, with the latter accounting for a bulk of the applications in this category. This is nothing more than money moving from one hand of the government to the other given that the LIC is wholly owned by the Centre.

2) Fiscal year 2015-16

The NDA-II government’s first full Budget in February announced an ambitious, but achievable amount of Rs 69,500-Crore plan to sell stakes in government companies. It will be the country’s biggest disinvestment program so far. Of this, the government has budgeted

  • Rs 41,000 Crore through minority stake sales in profit making public sector units, and
  • Rs 28,500-Crore via strategic disinvestment in sick PSU’s

Some 65 sick Central Public Sector Enterprises (CPSEs) as of march 31, 2014 like Air India (AI), Fertilizer Corporation of India, Hindustan Shipyard, HMT, Mahanagar Telephone Nigam Ltd (MTNL), Bharat Coking Coal and ITI will be taken up under strategic disinvestment. (A CPSE is considered sick if it has accumulated losses in any financial year equal to 50 per cent or more of its average net worth in immediately preceding year)

The Govt aims to launch at least one issue per month to meet this target, provided market conditions remain favorable.

The government is expected the disinvestment programme for 2015-16, as early as the first month of new fiscal year. The disinvestment department is in a position to start early as it has secured the Cabinet approval for stake sales in 10 companies, including Power Finance Corporation, Bharat Heavy Electricals Ltd (BHEL), Rural Electrification Corporation and NHPC.

Besides smaller issues, the disinvestment department also has approval for 10 per cent stake sale in IOC and 5 per cent in ONGC, which may fetch it around Rs 21,000 crore at current market prices. But the time is not conducive for stake sale in oil firms such as ONGC or IOC because of the global situation and also because of subsidy issues.

3) Comment w.r.t 2015-16 plan

If conducted strategically and with good institutional support, the disinvestment is a win-win situation for government, company as well as shareholders.

  1. Firstly, it is likely to help in improving the functioning of PSUs by bringing better management practices and corporate governance from private sector. Further, listing on stock exchanges will lead to an increase in transparency, accountability, and public scrutiny of PSUs.
  2. Secondly, it helps to unlock the value of PSUs. According to a study, Market capitalization of five companies which have been listed since October, 2004 has increased by 3.8 times from the book value of Rs.80,000 crore to Rs.3 lakh crore in 2010.
  3. Thirdly, the revenue raised by disinvestment has helped in reducing fiscal deficit, to finance selected social sector schemes and to meet the capital investment requirements of profitable and revivable CPSEs. A National investment fund has already been created for that purpose.
  4. It helps to promote people’s ownership in CPSEs.

Thus, this resurgence in disinvestment by the new govt, should be welcomed .

Though the target may be achievable, given the improving macro-economic factors and buoyant investor sentiments, the historical disinvestment approach has been laden with issues like price volatility, sporadic offerings and concentration towards end of the fiscal. The Disinvestment Programme, since it began in the early 1990s, has managed to meet the budgeted targets only thrice.

Thus to make this a reality we need to ensure the following:

  1. Firstly, a stable policy outlook and a clear growth road map are required for making PSUs attractive for investors and to ensure wider participation in disinvestment programmes. The government has already embarked on the process to streamline coal allocation in a transparent manner, which has cleared the uncertainty haze in the power sector. Similarly, a well-defined subsidy sharing mechanism and a road-map for their eventual phasing-out would make oil and gas sector far more attractive for investors.
  2. Secondly, a focused approach to maximize yield and minimize cost also needs to be adopted. In this backdrop, the disinvestment programme should be revolving around the seven Maharatna companies which form 62 per cent of the total market capitalisation (M-Cap) of all listed PSUs and contribute 8.5 per cent to GDP.
  3. Thirdly, There are several unlisted PSUs with total net profit of over Rs 20,000 crore which can be tapped to diversify offerings. With numerous profit-making companies in attractive and upcoming sectors like defence, railways, general insurance, and nuclear power, there are a variety of options that can be explored to further invigorate the disinvestment drive. Also, hiving off attractive but under utilized assets like land, telecom towers, etc of unlisted PSUs is another possibility.
  4. Fourthly, Take innovative disinvestment routes. There have already been a few innovative steps from the department of disinvestment in the past few years which have addressed some of the legacy issues with the Indian disinvestment programme. The recently frequented OFS (offer for sale) route has helped reduce time and increased transparency.
  5. Then we need to deal with trade unions who resists any sell-off and threatens to go on strike as seen in the recent case of CIL.
  6. Finally, a well spaced out and uniformly spread-out disinvestment programme (instead of undertaking all disinvestment in the end of fiscal year) would not only help investors plan accordingly, but also help government raise higher amounts by weeding out price volatility.

While exercising this policy, most important leakage occurs due to corporate corruption in political circles to receive the favorable deals, as the sale of stakes is similar to sale of natural and other scarce resources, such as in telecom spectrum case or allocation of coal blocks. Thus, government must ensure complete transparency in the bidding and award process to make sure that, such leakages do not occur as it happened during the previous Government regime in allocation of resources.