Disinvestment: Changing tracks after multiple speed-bumps
With a new policy in place, the govt has embraced a comprehensive approach
When the NDA came to power in 2014 led by Narendra Modi, expectations ran high on privatisation or stake dilution by the government in Central Public Sector Enterprises (CPSEs). It was expected that the legacy of former Prime Minister Atal Bihari Vajpayee in divesting stake in CPSEs will be carried forward. Major achievements of the Bajpayee government were strategic sale of Videsh Sanchar Nigam Ltd, Hindustan Zinc, Balco, IPCL, several ITDC hotels and Modern Food Industries between 1999 and 2004.
However, continuing challenges in divesting stakes or privatising PSEs has led to disinvestment increasingly losing its relevance. The new PSE policy has shifted focus to value creation and improving the profitability of CPSEs rather than obsess over disinvestment or PSU dividend receipts.
PRESENT STATUS
The Interim Budget for 202425 had many surprises and one was removing the word ‘disinvestment’ from the list of capital receipts in the Budget document. This was the fourth major change since the formal process of disinvestment initiated way back in the late 90s and second major change during the 10 years of Modi Government.
The first major change was converting the Department into a Ministry in 2001. Second was converting the Ministry back into a department under the Finance Ministry in 2004. Third change was renaming the Department of Disinvestment as Department of Investment and Public Asset Management (DIPAM) in 2016.
Throughout these years, the Union Budget, whether full or interim, had one permanent head under capital receipt and that was ‘Disinvestment Receipts’. However, now, there is new head ‘Miscellaneous Capital Receipts’ which includes the erstwhile categories of disinvestment and other capital receipts. “There is no specific estimate for disinvestment in 202324 RE,” the Finance Ministry said in Parliament.
During 202223, the Government realised ₹35,293.52 crore as disinvestment proceeds against the Revised Estimate (RE) of ₹50,000 crore. In 202324, ₹51,000 crore was estimated for disinvestment and ₹10,000 crore for other capital receipts.
WHY THIS CHANGE
“Focus is more on value creation rather than just divesting or getting higher dividends,” explained DIPAM Secretary Tuhin Kanta
Pandey. According to DIPAM, since the introduction of the New PSE policy in January 2021, the NSE CPSE and BSE CPSE indices have surpassed benchmarks, showcasing returns of 160.49 per cent and 128.66 per cent respectively, until November 2023.
The new PSE policy, announced first as part of Atmanirbhar Bharat in 2020, aims to minimise presence of CPSEs including financial institutions and creating new investment space for private sector.
Post disinvestment, economic growth of CPSEs/ financial institutions will be through infusion of private capital, technology and best management practices. This was expected to lead to economic growth and jobs. Further, disinvestment proceeds would be used to finance various social sector and developmental programmes of the government.
The contours of the new policy shows that there will be more focus on strategic disinvestment, rather than selling shares in small tranches.
At the same time, in order to enhance the value before selling, effort is also to monetise noncore assets. For example, in Air India, while the core business of airline services was sold to the Tata group, noncore assets such as the iconic building at Nariman Point in Mumbai was transferred to an SPV (Special Purpose Vehicle) which later sold some such assets and helped the government earn more.
Also, an important aspect in managing investment in CPSE is continuous dividend. It is said that disinvestment gives the government onetime earning, but if focus is on value creation, there is the possibility of earning more and more through dividend. However, the emphasis now is not on maximum dividend.
“We have not insisted that the government should receive the maximum dividend. We are only saying that there should be a consistent dividend policy and there will be use of resources and wherever we have the capex needs, the equity needs of the capex should be fully met with a reasonable debt, which is consistent with the principles of efficiency and effectiveness,” Pandey said.
The big question is what will be the policy stance on investment management when the new government is formed post general election 2024?
WHAT LIES AHEAD
As of now indication is that the Budget might not give much importance to the word ‘disinvestment’ per se, but the process of more and more strategic selloff may gather momentum keeping in mind the new CPSE policy. At the same time, effort would also be made to get more and more CPSEs listed (at present just 61 out of 200 plus are listed). Simultaneously, monetisation of noncore assets will gather pace.
All these will help in determining the value in a much more effective way and that, in turn, will help strategic disinvestment. However, strategic selloff or privatisation has not been easy. Besides, there have been instances of one public sector undertaking buying another. Now, the government has decided to stop this trend and this has also impacted strategic selloff.
(This is the fifth article in the series)
Anil Kumar Sood, Professor, Institute for Advanced Studies in Complex Choices, talks about the NDA’s strike rate on the disinvestment front.
How do you rate the disinvestment process?
Rating is very subjective, but I would give it a 3.
The aggregate capital receipts from disinvestment or strategic divestment have constituted about 2.0 per cent of the Central Government’s nondebt revenue and capital receipts during the last 25 years. For example, the disinvestment receipts during this period have been a little over ₹5 lakh crore, that is about ₹20,000 crore per year.
Sometimes, these are not even true disinvestments that involve the sale of a PSU to a private sector firm. For example, ONGC bought HPCL shares worth ₹36,000 crore from GOI during 2018. In a case like this, the divestment allows the fiscal deficit to be lower, as the debt shifts to a public sector firm. It does nothing more than that.
Has disinvestment lost steam?
We do not have much to divest at this stage, as some of the PSUs have not been doing well, e.g., BHEL, BSNL, etc. The valuations of some of the large PSUs are stretched. The question, therefore, is which of our business families have the ability to raise equity to finance these large corporations or the ability to raise large amount of debt?
What is the road ahead?
I do not expect much progress on genuine disinvestment. Global firms are unlikely to be interested in investing in areas where the political influence continues to be high — energy, banking, telecom, etc.
I also expect that the government will hesitate to create private sector monopolies by handing over PSUs at poor valuations to Indian business families.
Finally, it makes limited economic sense to privatise at a stage when we need additional private sector capex to accelerate economic growth. A mere exchange of money from the private sector to public sector for balancing government books or show that we are privatising to bring efficiency is of limited value to the country.