Disinvestment in India: Trends and Challenges – Explained, pointwise

Introduction

In the Union Budget 2023-24, the Government has set a target of INR 51,000 crore for Disinvestment. This is the lowest target set by the Government in the last 7 years. The Government has not met the disinvestment target for 2022-23. So far, the Government has realised INR 31,106 crore to date, of which, INR 20,516 crore (~66% of the budgeted estimate) came from the IPO of 3.5% of its shares in the Life Insurance Corporation (LIC). Since 2010-11, the Government has been able to realize the budget target of Disinvestment only twice, in 2017-18 and 2018-19. While some experts have commended the Disinvestment policy of the Government, some other have criticized it, both for its policy approach as well as execution.

What is Disinvestment?

Disinvestment, or divestment, refers to sale of assets or a subsidiary by the Government like the sale of Public Sector Enterprise/Unit (PSE/PSU) by Union or State Government. The sale of Enterprise can be full (i.e., 100% of Government ownership is sold) or partial. Accordingly the disinvestment can be classified as minority disinvestment, majority disinvestment or complete privatisation.

In minority disinvestment, the Government retains a majority in the company, typically greater than 51%, thus ensuring management control. In the case of majority divestment, the government hands over control to the acquiring entity but retains some stake. In complete privatisation, 100% control of the company is passed on to the buyer.

Methods of Disinvestment

Initial Public Offering (IPO): It is offer of shares by an unlisted PSE or the Government out of its shareholding or a combination of both to the public for subscription for the first time.

Further Public Offering (FPO): It is offer of shares by a listed PSE or the Government out of its shareholding or a combination of both to the public for subscription.

Offer for Sale(OFS) of Shares by Promoters through Stock Exchange: This method allows auction of shares on the platform provided by the Stock Exchange. This method has been extensively used by the Government since 2012.

Strategic Sale: It refers to sale of substantial portion of the Government share holding of a PSE, up to 50%, or such higher percentage as the competent authority may determine, along with transfer of management control.

Institutional Placement Program (IPP): Under IPP, only Qualified Institutional buyers can participate in the offering. Qualified Institutional Buyers are those institutional investors who are perceived to possess expertise to evaluate and invest in the capital markets.

CPSE Exchange Traded Fund (ETF): Disinvestment through ETF route allows simultaneous sale of Government’s stake in various PSEs across diverse sectors through single offering. It provides a mechanism for the Government to monetize its shareholding in those CPSEs which form part of the ETF basket.

What are the reasons for undertaking Disinvestment?

Government Revenue: With disinvestment the Government can earn revenue which can be used for meeting expenditure obligations including on welfare measures. Proceeds from disinvestment of assets are used to finance the budget deficit, invest in the economy and various development/social sector programmes, and pay the national debt.

Improve Competition: The privatisation of State-owned companies paves the way for the entry of increasing number of businesses into the industry. This boosts market competitiveness and ultimately results in an improvement in market efficiency. Additionally, it assists businesses that are run by the public sector in modernising their technology in order to boost their level of competitiveness.

Reduce Government’s Role: According to economy and policy experts, the Government should be involved only in strategic sectors. For rest of the sectors, the Government should let the private sector efficiencies take control (subject to effective regulation). Government should focus more on the welfare sector.

Efficiency: It is commonly believed that interference by the Government in the PSUs impact their independence and functioning e.g., in PSEs, new investments can driven by political factors rather than pure economic logic. Similarly PSEs may employ more workers than actually needed. Private sector firms tend to be more competitive. Hence, reduction in Government control enhances overall economic efficiency. So it makes sense to privatize inefficient public sector enterprises.

Valuation: Dilution of Government shareholding, and giving the shares for retail trading opens up the market. It increases the liquidity of the shares and helps get better/realistic valuation.

What has been the trend of disinvestment in India?

The process of disinvestment began in 1991, post the economic reforms. The Industrial Policy Statement of 1991 stated that the Government would divest a portion of its holdings in selected PSEs, but it did not specify the extent of the disinvestment.

Between 1991-1998, the Government could realize only INR 17,557 crore (equivalent to ~INR 90,000 crore in 2022 prices). The pressure of coalition politics limited the political will to push for disinvestment.

In 1996, the Government established the Public Sector Disinvestment Commission (under G. V. Ramakrishna) for a 3-year term with the goal of developing an overall long-term disinvestment programme (like extent of disinvestment, mode of disinvestment) for PSEs.

Between 1999 and 2004, the Government implemented some of the recommendations of the Disinvestment Commission like reducing the government’s shareholding in selected PSEs to 26% in order to facilitate ownership changes. In 1999, the Government stated its policy would be to strengthen strategic PSEs and privatise non-strategic PSEs through disinvestment. In December 1999, the Department of Disinvestment was established.

During this period (1999-2004), the Government realized INR 27,599 crore (~ INR 93,300 crore in 2022 prices) in just five years (1999-2004).

Between 2004-09, the pace of disinvestment fell, again due to pressure of coalition politics. In this period, INR 11,591 crore were earned through disinvestment. The pace picked between 2009-14, with proceeds rising to INR 1.2 lakh crore.

The revenues through disinvestment have risen rapidly since 2014. Total INR 4.48 lakh crore have been earned. This represents ~70% of the earning through disinvestment since 1991.

As part of the May 2020 Atmanirbhar Bharat package to stabilise the lockdown-hit economy, the Government announced a Public Sector Enterprise Policy to encourage private sector participation and reduce government involvement in business. In the Union Budget 2020-21, the Government announced a new policy for strategic disinvestment in PSEs.

The government also launched the National Monetisation Pipeline (NMP) to generate new revenue streams by unlocking the value of previously unutilised and underutilised public assets.

What is the latest policy on Disinvestment?

The disinvestment policy will cover existing Central Public Sector Enterprises (CPSEs), Public Sector Banks, and Public Sector Insurance Companies.

The government has classified the public sector under 2 categories: Strategic Sector and Non- strategic Sector.

In Non-strategic sectors, the Government will exit from all businesses. It will keep only a ‘bare minimum’ presence in four broad strategic sectors, i.e. (a) Atomic energy, Space and Defence; (b) Transport and Telecommunications; (c) Power, Petroleum, Coal, and other minerals; (d) Banking, Insurance, and financial services.

The government will incentivize States for disinvestment of their Public Sector companies.

The new policy is significant as it goes beyond the past case-by-case approach and lays down a rationale for deciding the future ownership pattern of 439 CPSEs, including their subsidiaries. For instance, it is now clear that 151 public sector firms in non-strategic sectors (including 83 holding companies and 68 subsidiaries) will either be closed or sold. The policy also brings public sector banks and insurance entities into the ambit of disinvestment for the first time.

The Government will also monetize the surplus land with Government Ministries and Departments and PSEs. The Cabinet has already approved the creation of National Land Monetisation Corporation.

What are the challenges and concerns related to Disinvestment?

First, the Sale of profit-making and dividend-paying PSUs would result in the loss of regular income to the Government. Disinvestment has become just a resource raising exercise by the government. There is no emphasize on reforming the PSUs.

Second, the valuation of shares has been affected by the Government’s decision not to reduce government holdings below 51%. With the continuing majority ownership of the Government, the public enterprises would continue to operate with the earlier culture of inefficiency.

Third, Government is not willing to give up its control even after strategic disinvestment. In the Budget (2019-20) Speech the Union Finance Minister stated that government will change the policy of ‘directly’ holding 51% or above in a CPSU to one whereby Government’s total holding, ‘direct’ plus ‘indirect’, is maintained at 51%. It means government will still exercise its control over PSUs. This will reduce the interests of buyers.

Fourth, The process of disinvestment is suffering from bureaucratic control. Almost all processes starting from conception to the selection of bidders are suffering due to it. Moreover, bureaucrats are reluctant to take timely decisions in the fear of prosecution after retirement.

Fifth, Strategic Disinvestment of Oil PSUs is seen by some experts as a threat to National Security. Oil is a strategic natural resource and possible ownership in the foreign hand is not consistent with strategic goals.

Sixth, Loss-making units don’t attract investment. It depends upon the perception of investors about the PSU being offered. This perception becomes more important in the case of strategic sales, where the amount of investment is very high.

Seventh, Complete Privatization may result in public monopolies becoming private monopolies, Private monopoly has a tendency to exploit their position to increase costs of various services and earn higher profits.

Eighth, using funds from disinvestment to bridge the fiscal deficit is an unhealthy and short-term practice. This is not sustainable in the long term. Government should focus on increasing its revenue from more reliable resources and cut down Fiscal Deficit.

What are the NITI Aayog’s recommendations on Disinvestment?

First, The Aayog’s disinvestment proposals should go to directly to the Cabinet Committee on Economic Affairs (CCEA) instead of the respective Ministry. This would shorten the process.

Second, Government should consider appointment of Advisors and Asset valuers to speed up the process of disinvestment.

Third, an independent professional agency should be set-up to speed-up the Asset Monetisation Programme.

What should be the approach going ahead?

First, the Government should increase the operational autonomy of PSEs. It can be supplemented by strong governance measures like listing on stock exchanges. It will increase the transparency in their performance.

Second, the government must also try to provide the bidders with a fair valuation of the Government entities. It will boost their confidence in the disinvestment process.

Third, the Government should also reduce its involvement in the management and day-to-day operations of the PSEs. The Government should reform their boards and reorganize the structures. This will attract more buyers and get better valuations.

Conclusion

Disinvestment has several benefits. It can help enhance competition in various sectors and improve efficiencies. It also helps raise revenue for the Government, which can be spent on welfare measures. However, the Government should take care to ensure its presence in certain strategic sectors like banking, energy etc. It will ensure the social obligations and strategic interests intricately linked with these sectors are secured.

Syllabus: GS III, Indian Economy and Issues related to mobilization of resources.

Source: The Hindu, The Hindu BusinessLine, Economic Times, PRS, DIPAM