How Strategic is Our "Strategic" Disinvestment?

In the union budget for 2023-2024, the government has set a disinvestment target of Rs 51,000 crore, down nearly 21% from the budget estimates for the current year and just Rs 1000 crore more than the revised estimates. It is also the lowest target in seven years. Moreover, the centre has not met the disinvestment target for 2022–2023 so far, having realised Rs 31,106 crore to date, of which Rs 20,516 crore, or close to a third of the budgeted estimate, came from the IPO of 3.5% of its shares in the Life Insurance Corporation. As a student of history, I always prefer to read about the past in order to gaze into the future. It doesn't work all the time, but it certainly gives you an edge over others. What is disinvestment? What has been India's disinvestment journey? Why is disinvestment required? What can the government learn from other countries that have undertaken disinvestment in the past? I'll try to answer all of these questions.

What is disinvestment? Disinvestment basically means when the government decreases its holdings (as a percentage) in an existing PSU. The government is not in the business of doing business, and hence disinvestment is the preferred option for divesting their stake. Throughout a financial year, the government has to undertake capital expenditures for the economic welfare of the country as well as for the betterment of its citizens. For this capital expenditure, the government needs funds, which they either raise through debt (issuing government bonds) or by depleting their revenue reserves (income through taxes, grants, etc.). Another golden option that the government has in its arsenal is disinvestment. Minority, majority, and complete privatisation are the three main approaches to disinvestment.

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

The government can undertake disinvestment in order to either bridge the revenue shortfall or meet the fiscal burden for that financial year. To begin with, different central governments over the last three decades have been able to meet annual disinvestment targets only six times. Since 2014, the NDA-led BJP government has met (and overachieved) its disinvestment targets twice. In 2017–18, the government earned disinvestment receipts of a little over Rs 1 lakh crore as against Rs 72,500 crore, and in 2018–19, it brought in Rs 94,700 crore when the target was set at Rs 80,000 crore. Privatising Air India was a big opportunity that the government missed as they raised only Rs 13,534 Cr as against the target of Rs 1.75 lakh Cr.

HISTORY OF DISINVESTMENT

Before disinvestment, these PSUs were asked to restructure. More than 100 PSUs were restructured as navratna and mini-ratna. Navratna companies were given autonomy over capital expenditure, raising resources, and entering technology contracts. These navratnas are BPCL, BHEL, HPCL, IPCL, NTPC, ONGC, SAIL, and VSNL. The government showed its willingness to hand over control through strategic sales to any private player acquiring 25% of the company. On November 3, 2005, the GOI constituted the national investment fund, into which the proceeds from the disinvestment of CPSE were to be channeled. The proceeds from the disinvestment of CPSEs will be channeled into the NIF, which is to be maintained outside the consolidated fund of India. 70% of the annual income will be used to finance selected social sector schemes that promote education, health, and employment. The NIF funds are managed by three PSU fund managers: UTI, SBI, and LIC Mutual Fund.

After widely missing the disinvestment targets on PSU, the government adopted an innovative route to meet the disinvestment targets. Cash-rich oil companies were asked to subscribe to each other’s shares. This swopping of shares took place just before 1998–99. This crossholding of IOC taking 10% stake in BPCL and 5% in GAIL and GAIL buying 2.5% stake in ONGC helped the government gather Rs 4867 Cr at the end of the year. The next option was a strategic sale. Under this, the government sold equity blocks to a single buyer, accompanied by a transfer of management to the private investor. The government also felt the need to privatise companies instead of just divesting its stakes. That’s when the strategic sale route came into play. The first strategic sale was of Modern Foods, where the government offloaded 74% of its equity to Hindustan Lever for Rs 105.45 crore.

 The government had no clear-cut objectives set for the disinvestment programme. In the initial days of disinvestment, the government talked of disinvestment without losing control, but when the programme flopped, it talked more in terms of privatization than disinvestment. The disinvestment method was used as a tool to tackle the fiscal deficit. It was more of a tool for raising resources to finance revenue expenditures. The government did not have a proper privatization policy. The government was never clear about what businesses it meant to remain in and from where it needed to move out. There was a lack of political will and a sense of urgency, which led to sales being repeatedly stopped and restarted.

Every sale undertaken by the government created some controversy. There were differences of opinion on the method of pricing, which slowed the process. Moreover, lack of a politically acceptable agenda hampered the progress of the disinvestment programme. Improvement in efficiency should be the first objective of privatisation. The objective can be achieved when inefficient PSUs are privatised. Instead, in the last decade, some of the best-performing units have been sold off. Most of the blue chips were sold at very low prices. The distress sale was the result of an inappropriate pricing strategy and a delay in pricing.

 The delay in resolving VSNL issues resulted in a massive loss to the nation. The same mistake was repeated when GAIL shares were sold off. To make the disinvestment a success, the government should come to terms with the fact that it is the markets that determine the price of a PSU stock. The UTI was one of the financial institutions that picked up a sizeable number of shares in the disinvestment programme of the early 1900s. The market price of these shares fell so sharply that UTI lost Rs 5056 Cr over an investment of Rs 6403 Cr. The government had to bailout UTI with taxpayer money. In the case of a strategic sale, the government did not put in sustainable efforts to restructure or market the PSU. Hence, most of the time, it ended up selling the company cheap. For example, the restructuring of Pradeep phosphate was incomplete, and hence it was sold at a lower price than Zuari macrophosphate.

Disinvestment was not a privatization programme in the real sense; it was one that led to the transfer of money from one PSU to another to bridge an immediate resource gap. Cash-rich oil companies were asked to cross-hold shares of other oil companies. Instead, the surplus cash of these OMCs (oil marketing companies) could have been used to strengthen their own finances. Moreover, there has been no real change in ownership or management. Most of the companies have had a disinvestment of less than 10% of government holdings. The proceeds should have been used to decrease loans and create sound infrastructure. 

FUN FACT

GOI had 45.8% in Maruti Udyog Ltd or MUL. The disinvestment was set off with the IPO from India's largest car manufacturer. Government divested 25% of it's 45.8% stake by selling 7.22 cr shares at floor price of Rs 115. The total size of issues was RS 830 Cr which got 10 times oversubscribed and hence the new share price was set at RS 125. MUL IPO Created history giving 26% listing day gains. The scrip touched an intraday high of RS 170.3. The government garnered RS 993 Cr through this sale. Post offer, government stake came down to 18.3% from 45.8%. 

In conclusion, a slow and strategic disinvestment in certain PSEs (public sector enterprises) and government companies is in principle a nice idea. Disinvestment would put much needed funds in the government's hand that would be used to support the economy, However, the g needs government to evaluate whether what they consider "strategic" is really optical and whether there is a better strategy to what is at the moment considered strategic. 

HAPPY INVESTING.