Disinvestment of Public Sector Enterprises

When India became independent in 1947, the economy was primarily agrarian with low industrial activity. It became vital for the government of the day to create employment opportunities and attain self-sufficiency through import substitution so as to save foreign exchange. Given the social and economic challenges at the time, public sector enterprise led growth was considered a pragmatic choice. The thinking was investments in public sector enterprises was necessary in strategic sectors of the economy such as railways, communications, and defense to be self-reliant. During the initial decades of the country the public sector units were considered to be the engines of economic growth in the country. The Industrial Policy of 1956 gave an impetus for massive investments in public sector undertakings. As a result PSUs flourished and expanded into a number of areas including non-core businesses such as soaps, watches and personal vehicles.

The year 1991 marked the liberalization, privatization and globalization of Indian economy. The Government announced on 24th July 1991 the ‘Statement on Industrial Policy’ which included Statement on Public Sector Policy. The statement contained the following decisions: 

“Portfolio of public sector investments will be reviewed with a view to focus the public sector on strategic, high-tech and essential infrastructure. Whereas some reservation for the public sector is being retained, there would be no bar for area of exclusivity to be opened up to the private sector selectively. Similarly, the public sector will also be allowed entry in areas not reserved for it.

Public enterprises which are chronically sick and which are unlikely to be turned around will, for the formulation of revival/rehabilitation schemes, be referred to the Board for Industrial and Financial Reconstruction (BIFR), or other similar high level institutions created for the purpose. Social security mechanism will be created to protect the interests of workers likely to be affected by such rehabilitation packages.
In order to raise resources and encourage wider public participation, a part of the government’s shareholding in the public sector would be offered to mutual funds, financial institutions, general public and workers.

Boards of public sector companies would be made more professional and given greater powers.

There will be a greater thrust on performance improvement through the Memorandum of Understanding (MOU) System through which managements would be granted greater autonomy and will be held accountable. Technical expertise on the part of the Government would be upgraded to make the MOU negotiations and implementation more effective.

To facilitate a fuller discussion on performance, the MOU signed between Government and the public enterprises would be placed in Parliament. While focusing on major management issues, this would also help place matters on day-to-day operations of public enterprises in their correct perspective”. ^[1]

It’s been 25 years since the process of disinvestment was set in motion and it continues till this day.

On February 1, 2017 the Finance minister set out the most ambitious disinvestment target in recent memory. The government plans to raise Rs. 72,500 crores in financial year 2017-18. ^[2]In the past 16 years, the government has met its disinvestment target only thrice. ^[3] This hasn’t stopped the government in raising the bar. In the last union budget (read FY17 budget), the government has revised its disinvestment target to Rs 56,500 crores as it was more realistic given the unfavorable market conditions. As of today, the government has realized Rs.45,500 crores through minority stake sales and strategic sale. ^[4] However, for the next fiscal the government is more optimistic and I believe there are two good reasons for it.

1) The government plans to meet its target through the listing of Insurance and Rail PSUs and minority stake sale through ETF.Listing of PSUs will user in transparency because of various regulatory disclosures and will help garner resources as the government has to dilute its stake to meet the public shareholding norms of SEBI.Whenever the government felt that the stake sale wasn’t received well by the market, LIC of India, government’s cash cow, would come to the rescue. This is true even today. Recently when the government sold 2% of SUUTI’s stake in ITC it was bought by LIC at near 52 week high price ^[5] and raised about Rs.6700 crores. Employee Provident Fund Organization (EPFO) which was primarily a debt investor is now diversifying its corpus into equity. ^[6] So far it has invested in CPSE ETF and has earned decent returns. Apart from retail and institutional investors we now have 2 government agencies (LIC and EPFO) who have the ability to bail the government out in case the sale gets poor response.

2) All strategic disinvestment or outright sale is now going to be done through a two stage auction process which involves the submission of technical and financial bids. ^[7] The disinvestment policy is being implemented by the Department of Disinvestment in consultation with the NITI Aayog. The NITI Aayog has already submitted list of PSUs for disinvestment.^[8] Of this some PSUs are to be sold outright, some to merge with healthier PSUs and remaining to be divested strategically (government holding at or below 49%). The last strategic disinvestment occurred in 2003-04, during which government bought its stakes in Hindustan Zinc and Jessop&Co below 51%. ^[9] In January 2017, the government gave in principle approval for the strategic sale of Bharath Earth Movers Limited (BEML). ^[10]

I believe that disinvestment through auctions and minority stake sale through ETF will help the government mobilize higher resources and help it in meeting its target for FY 18. What do you think?

References

[1] Policy on Public Sector Disinvestment. Read here: http://www.bsepsu.com/policy-disinvestment.asp

[2] Budget 2017: Disinvestment target at Rs72, 500 crore Read here: http://www.livemint.com/Politics/XsyCQEmXcfOuQqmNcM9KuN/Budget-2017-Disinvestment-target-at-Rs72500-crore.html

[3] Govt sets record disinvestment target of Rs. 72,500 crores for FY18. Read here: http://www.livemint.com/Politics/5hXs3estyx4fwDdcTlhZRP/Modi-govt-sets-Rs72500-crore-as-disinvestment-target-for-20.html

[4] Arun Jaitley shows the way for PSU reforms in Budget 2017.Read here: http://www.livemint.com/Politics/NsmcHSdG2YEz7S2huXvaaN/Arun-Jaitley-shows-the-way-for-PSU-reforms-in-Budget-2017.html

[5] SUUTI: Govt offloads 2% stake in ITC to LIC via block deals, raises Rs 6,700 crore. Read here: http://www.firstpost.com/business/suuti-govt-offloads-2-stake-in-itc-to-lic-via-block-deals-raises-rs-6700-crore-3270502.html

[6] EPFO to invest in equities from Thursday. Read here: http://www.livemint.com/Money/HuGaWaGi3hy0oX8QuOMEmK/EPFO-to-invest-in-equities-from-Thursday.html

[7] Decks cleared for strategic sale! Government okays plan to exit sick PSUs, subsidiaries. Read more at:

http://economictimes.indiatimes.com/articleshow/55103084.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

[8] Niti Aayog’s proposal for PSU strategic stake sale gets in-principle nod. Read Here: http://indianexpress.com/article/business/business-others/niti-aayogs-proposal-for-psu-strategic-stake-sale-3371668/

[9] Disinvestment dept working on Niti Aayog’s stake sale proposal. Read here: http://indianexpress.com/article/business/business-others/disinvestment-dept-working-on-niti-aayogs-stake-sale-proposal-3731470/

[10] Government approves 26% strategic sale in BEML Read more at:
http://economictimes.indiatimes.com/articleshow/56376522.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst