Disinvestment | Timeline

Low capacity utilisation, lack of innovation and various other factors necessitated the beginning of Disinvestment process in India in the year 1991 when 31 selected PSUs were disinvested.

It was from 2001 to 2004 when maximum number of disinvestments took place in India. These took the shape of either strategic sales (involving an effective transfer of control and management to a private entity) or an offer for sale to the public, with the government still retaining control of the management.

In the recent Union Budget, unlike previous years, Disinvestment target for the current financial year has been slashed by over 55% to Rs 78,000. Although the finance minister’s budget speech in February 2021 listed BPCL, Air India, Shipping Corporation of India, Container Corporation of India, IDBI Bank, etc for disinvestment. The only transaction that has materialized is Air India going to the Tata Group.

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Presently, the Government of India (GoI) has stated that it’ll disinvest 5% of the shares of the Life Insurance Corporation of India (LIC).

Mains Marathon

Disinvestment refers to the act of selling or liquidation of assets or the process of dilution of a government’s stake in a PSU (Public Sector Undertaking).

The money obtained from such share selling through disinvestment is kept with a special fund called National Investment Fund and to invest the same to generate earnings without depleting the corpus. Disinvestments, in most cases, are primarily motivated by the optimisation of resources to deliver maximum returns.

What is Strategic Disinvestment?

Strategic disinvestment is the selling of more than 50% of government shares in a public enterprise.

The disinvestment commission defines strategic sale as the sale of a substantial portion i.e. 50%, or higher percentage of the Government shareholding in a central public sector enterprise (CPSE). It also involves a transfer of management control.

As a part of strategic disinvestment, a part of the control of the company and or management is passed from the government to the private shareholder. The strategic disinvestment leads to engagement of the private sector and thus, making the PSUs more efficient and profitable.

  • Fiscal health: The government faces a massive shortfall in revenue and capital receipts. Given this, the share sale is aimed at helping the government narrow its widening fiscal deficit. Disinvestment would provide revenue to the government and thus would improve fiscal health
  • Economic slowdown: Disinvestment would boost the economy through more revenue to the government, which could be invested in the economy further and more efficient PSUs.
  • Inefficient PSU: Many PSUs are facing loss and are on verge of closure. While government presence may be necessary in strategic sectors such as defence or oil exploration, there is no need in areas like building ships or running container freight operations. Government presence in such non-strategic sectors distorts competitive dynamics for private players. It also results in consumers and taxpayers bearing the brunt of inefficient PSU operations.
  • Competition: Government control makes it difficult for many PSUs to operate profitably. This leads to a rapid erosion of the value of the public assets, making it critical to disinvest early to realise a high value.

Department of Investment and Public Asset Management (DIPAM) and NITI Aayog jointly identify PSUs for strategic disinvestment, with DIPAM as the nodal agency for disinvestment.

In 2021-22, the government made a new disinvestment policy. The government listed four strategic sectors: i) atomic energy, space and defence ii) transport and telecommunications, iii) power, petroleum, coal and other mineral; and iv) banking, insurance and financial services.

  • It will be done by bringing down government’s equity shares in all non-strategic Public sector enterprises to 26% or lower.
  • While pursuing disinvestment through minority stake sale in listed CPSEs, the Government will retain majority shareholding, i.e. at least 51% of the shareholding and management control of the Public Sector Undertakings.
  • Strategic disinvestment by way of sale of substantial portion of Government shareholding in identified CPSEs upto 50% or more, along with transfer of management control.

Performance of the Disinvestment policy

  • According to the Department of Investment and Public Asset Management (DIPAM), between 2004-05 to 2013-14, disinvestment raised Rs. 1.07 lakh crore, on an average yearly collection of Rs. 10,700 crores.
  • However, from 2014-15 to 2017-18, the collection went up to Rs. 2.12 lakh crore, i.e., a yearly collection of Rs. 53,000 crores.
  • The government exceeded the target of Rs. 1 lakh crore in 2017-18 and Rs. 80,000 crores in 2018-19.
  • The success of BHARAT-22 Exchange Traded Funds (ETF) took government closer to the disinvestment target. The ETF is a benchmark to an index named BHARAT22 consisting of 22 companies (19 PSEs and 3 private).
  • However, in 2020-21 due to the COVID-19 pandemic, the disinvestment process was hindered in between. It could only gather disinvestment revenues of Rs 31,000 crore against a target of Rs 2.1 lakh crore.

“WHY DIVESTMENT IS AN ELUSIVE TARGET” & “Let’s exorcise the ghost of stalled asset sell-offs” – Livemint – 6th Jan 22

  • There are regular protests from unions and requests for reconsideration from state governments.
  • Rising uncertainty in the global markets due to the pandemic, divestment plans seem to have fallen short of their fiscal targets in the past two years.
  • Litigation issues. For instance, as mentioned above, a court-monitored or CBI (Central Bureau of Investigation) inquiry in the Air India case is demanded.
  • Potential investors backing out at the last minute. For instance, the BPCL disinvestment program where the ISquared Capital opted out of the race.
  • The lack of political will to back divestment is the biggest issue. The problem is that due to politics, selling at a lower price can create a problem for the government.
  • The issue of bureaucratic risk aversion. No government official would want to be caught post-retirement, just in case, there is an investigation on selling at a lower price.
  • There are other internal factors, like certain preparatory activities at the level of the PSU such as addressing any special dispensation available to these entities, issues around the land title, identifying and carving out non-core assets.
  • One of the key issues stems from the value that the government aims to get from the stake sales. The value may be more than the actual value or real value of the asset on the block, more so in the case of loss-making units.
  • 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 our strategic goals. For example, disinvesting Bharat Petroleum Corporation Limited (BPCL).
  • Using funds from disinvestment to bridge the fiscal deficit is an unhealthy and short-term practice. It is said that it is the equivalent of selling ‘family silver’ to meet short term monetary requirements.
“Price we pay for privatisation delays” – Live Mint – 25th Jan 22While on one hand Centre is presenting the view that its disinvestment policy is “being guided by the basic economic principle that government should discontinue in sectors where competitive markets can utilize the economic potential of such entities through strategic investors”.

While at the same time, it is also forming new ventures. According to the Department of Public Enterprises, Government has a plan to bring 96 new PSUs. Government should try to sort out these dichotomies and should start execution of its other disinvestment Plans.

“WHY DIVESTMENT IS AN ELUSIVE TARGET” & “Let’s exorcise the ghost of stalled asset sell-offs” – Livemint – 6th Jan 22

First, the government should find ways of redeploying people, given that employment is a big issue today. It may help close down loss-making units.

Second, merging with other PSUs where possible if the product is the same (as has been done for banking) is another option.

Third, in order to address the concerns of the bureaucracy, more assurances need to be given through the disinvestment ministry, which takes ownership of the decision, also backed by the prime minister’s office. Bureaucratic reforms may also be the need of the hour.

Fourth, decisions ought to be taken quickly. Else, the value of the unit (like plant and equipment) depreciates to a large extent. Timely divestment can increase the sale value and stakeholder returns.

Fifth, not all PSEs should be disinvested. Many of them are high performers in core economic sectors. Good units should not be sold, like NTPC or oil companies, which have either monopoly power or have sector benefits, as this becomes useful for the government to garner resources.

Mains Marathon

  • Transparency: The strategic sale process needs to be transparent, with a minimum reserve price that does justice to the valuable assets being auctioned off. A third-party valuation of every PSU’s assets and a minimum number of bidders, should be necessary pre-conditions before going ahead with each sale.
  • Infrastructure creation: Spending the sums raised from such strategic sales in long-term infrastructure assets can yield returns to the economy. Government can redirect these disinvestment proceeds into Infrastructure projects.
  • Regulation: The government should look into strengthening the regulatory framework that ensures efficient market conditions.
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