On India’s disinvestment policy- Learnings from LIC must guide PSU stake selloffs

Source: The post on India’s disinvestment policy is based on the article “Learnings from LIC must guide PSU stake selloffs” published in “Live mint” on 31st October 2023.

UPSC Syllabus Topic: GS Paper 3 Indian Economy – Mobilization of resources (Disinvestment)

News: The article discusses LIC’s share price drop after its initial sale. It highlights the shortcomings in the government’s actions and suggests reforms to tackle these challenges.

What is India’s disinvestment Policy?

India’s disinvestment policy has evolved over the years, reflecting the changing economic landscape and priorities of successive governments.

Outline of India’s disinvestment policy:

Objective of Disinvestment: The primary goal of disinvestment is to promote efficiency, enhance competitiveness, and to generate funds for priority sectors such as infrastructure development and social programs.

Authority: The Department of Investment and Public Asset Management (DIPAM) oversees the disinvestment process, operating under the Ministry of Finance.

National Investment Fund (NIF): Established in 2005, this fund is where the proceeds from disinvestment of Central Public Sector Enterprises are directed.

Disinvestment target for 2023-24: ₹51,000 crore.
1) This target represents a nearly 21% reduction from the budget estimate of the previous year (2022-23) and is marginally higher (by ₹1,000 crore) than the revised estimate for 2022-23. It is the lowest disinvestment target set by the government in the last seven years.

Why did LIC’s share value decrease?

Initial Pricing: The shares were initially priced at Rs 949 apiece. Later, they dropped to Rs 605 on the BSE, indicating a possible overvaluation at the outset.

Investor Trust: Many investors have trust in government enterprises. With LIC’s dominant position in India’s insurance sector, this might have led them to overlook the high valuation during the initial share sale.

Government’s Role: The government might have aimed for a higher valuation to increase its disinvestment revenue. This could have contributed to the overpricing of the issue.

What are the issues with the government’s disinvestment strategy?

Disinvestment Goals: For the fiscal year 2023-24, there’s a concern about meeting the disinvestment target. As of now, only Rs 8,000 crore has been achieved, which is just 15% of the yearly goal.

Timing of Sales: The government has been waiting for stock market highs to sell shares, which might not be the best strategy.

Public Perception: After instances like the LIC share price drop, there’s a risk that investors may become wary of government stake issues, affecting trust and future investments.

What should the government do now?

Re-evaluate Pricing Strategy: Focus on offering well-priced shares, rather than maximizing immediate revenue, as seen with LIC’s initial share sale at Rs 949 apiece which later dropped to Rs 605.

Avoid Market Timing: Instead of waiting for stock market highs, the government should consider selling shares irrespective of market conditions.

Public Perception: A change of track in their approach is needed to show that they prioritize investor value over filling their coffers.

Value and Awareness: The government should prioritize selling equity at true value and launch campaigns emphasizing valuations based on a company’s earnings, ensuring both immediate revenue and long-term investor trust.

Terminology used:

Initial pricing: Initial pricing is the price at which a company sells its shares to the public for the first time during an IPO or Initial Public Offering. It’s set by the company and an investment bank, based on factors like demand and the company’s value. It impacts the funds raised and investor returns.

Question for practice:

Evaluate the impact of LIC’s share price decline on the government’s disinvestment strategy and investor confidence.