Monetization Opportunities for the Government

Source-This post on Monetization Opportunities for the Government has been created based on the article “The government’s stake-selling agenda: If not now, then when?” published in “LiveMint” on 9 July 2024.

UPSC Syllabus-GS Paper-3– Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Context– Stock markets have consistently hit new highs, pushing total equity wealth to record levels. Promoters have taken advantage of higher valuations, selling approximately $4 billion worth of stock in just the last two months.

The government aims to raise about $6 billion through divestment in 2024-25, marking a significant increase from previous years. This shift is part of a strategy to effectively boost economic resources through asset monetization.

What has been the impact of the recent surge on PSU stocks and banks?

1) Market capitalization of PSUs nearly doubled from $404 billion in 2022-23 to $804 billion currently.

2) PSUs have achieved record-high returns on equity, with profits expected to reach about 2% of GDP.

3) Most stocks of PSUs and PSBs have seen a strong increase.They have outperformed both private companies and the overall market.

What opportunity does it present for the government to monetize its stakes?

1) Strengthening Finances and Infrastructure -The rise in PSU stock prices provides a chance to sell government stakes and invest the proceeds in the economy. Monetizing these assets will strengthen government finances, support infrastructure projects, and create jobs.

2) Enhancing Market Liquidity and Public Shareholding -Reducing the government’s stake in PSBs below 75% not only aligns with SEBI’s regulations but also enhances market liquidity. Despite a surge in market capitalization, public shareholding in PSU stocks remains low. This situation presents an opportunity for state-held listed entities to meet SEBI’s minimum public shareholding norms.

What are the challenges in the disinvestment process?

Disinvestment faces challenges such as multiple stakeholders, lengthy regulatory processes, global economic uncertainties, political opposition, and concerns about selling off national assets.

A detailed article on Disinvestment in India can be read here.

What should be the way forward?

1) Offer-for-sale (OFS) mechanism -The government can sell stakes quickly using the offer-for-sale (OFS) mechanism. This allows for faster transactions through special stock exchange windows.

2) Block Deals-It could opt for block deals to sell significant stakes at once or sell smaller quantities in the secondary market. Over the past decade, approximately $37.5 billion has been raised from minority stake sales out of a total of around $50 billion from divestments.

3) Strategic Focus on Stake Sales and Governance– The government should prioritize stake sales over relying solely on PSU dividends. It should focus on governing, not managing non-strategic businesses.

Question for practice

What opportunity does it present for the government to monetize its stakes? What are the challenges in the disinvestment process? What should be the way forward?