1/27/2021 Report on Disinvestments in India

Reads (reads) . Deep Dives (deep-dives)

Report on Disinvestment of Public

Sector Enterprises in India

Sudhanva Shetty
Editor, TRANSFIN.
Jul 12, 2020 11:34 AM | 5 min read | 1.0K views

Deep Dives

With the COVID-19 pandemic in India wreaking considerable strain on tax revenues, calls for more disinvestments are
louder than ever. In fact, the Government’s disinvestment target for FY2021 is its highest ever since 1991.

But meeting this would be easier said than done.

The pandemic has adversely a ected economic activity which has no doubt deteriorated disinvestment prospects. The
nationwide lockdown forced the Government to extend the deadline for several Expressions of Interest (EoI) including
for Air India. Record low oil prices meant bad news for Bharat Petroleum's (BPCL’s) envisaged disinvestment.

The only silver linings in these uncertain times are the buybacks and dividends by Public Sector Undertakings (PSUs) to
the Government (which have their own demerits) and a stake sale from the state-owned Numaligarh Re nery. However
that is not a pure play disinvestment as the buyer would be another state-owned rm.

In light of these challenges, even Government o cials admit that the previously stated FY21 target is now
“irrelevant” (https://bit.ly/3fmKYiS) .

Let us look at a brief history of disinvestments to bring much needed context to the disappointing state of progression in
this matter, both for disinvestments currently being undertaken or planned.

Table of Contents
1. Why Disinvest?

2. From PSU Reform to Fiscal Diversi cation

3. A Brief History of Disinvestment in India

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4. How to Disinvest?

5. Challenges and Obstacles of Disinvestment

Why Disinvest?
Disinvestment is the act of selling or liquidating an asset or subsidiary by an organisation, in most cases this being the
Government. If you think about it, it’s the opposite of investment. Whereas “investment” involves infusing capital in a
company in exchange for ownership, “disinvestment” involves relinquishing ownership in a company in exchange for
releasing capital.

The capital released through this transaction (i.e. The disinvestment proceeds) are a form of revenue for the
Government.

Since Independence, Government-owned enterprises, also known PSUs, have remained important pillars of the
economy. The public sector employs close to 30m people, contributing 3.5trn ($46.5bn) to the public exchequer. But
their dominance has dimmed since the 1990s, as evidenced by the dwindling share of their market cap to total market
cap (from 31.6% in 2004 to 11% in 2019).

10 Largest Indian PSUs by Gross Pro t

Name of PSU Gross Pro t in 2019

1 Oil & Natural Gas Corporation 62,296cr

2 Indian Oil 42,113cr

3 NTPC 19,989cr
4 Power Grid Corporation 19,624cr

5 Bharat Petroleum 17,058cr

6 Coal India 13,792cr

7 Hindustan Petroleum 12,944cr

8 GAIL (India) 8,454cr

9 Power Finance Corporation 8,429cr

10 Rural Electri cation Corporation 7,010cr

Source: Fortune India • Get the data • Created with Datawrapper

From PSU Reform to Fiscal Diversi cation

PSUs’ low e ciency and proclivity for loss-making is not new information. An analysis of the Return on Capital Employed
(ROCE) shows that PSU returns dropped by almost 50% (https://www.businesstoday.in/current/corporate/in-depth-
government-companies-almost-lost-half-of-their-e ciency-in-last-10-years/story/378508.html) through 2009-2018.

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According to the Public Enterprises Survey 2018-19, there are 249 operating Central PSUs (excluding insurance
companies), of which 178 are pro t-making and 70 are loss-making. But among pro t-making public companies, just ten
(mostly from oil, gas and power corporations) account for two-thirds of all PSU earnings.

Meanwhile, loss-making PSUs have continued to pile on debt and continue to be a massive drain on the exchequer. It is
estimated that 10-15% of the total gross domestic savings are being a ected on account of low savings from PSUs.

So it’s fairly obvious that some degree of reform is necessary to stop the continued wastage of taxpayer money and
better utilise resources. One way out is for the Government to divest its stake in these companies via disinvestment and
use the capital raised in the process for other purposes.

After all, enough has already been said on how PSU disinvestment can improve public nances by reducing dependency
on tax revenues, encourage better management and more innovation, deleverage the Government, enhance
competition, and depoliticise (i.e. Remote control from Finance Ministry) functioning of enterprises at-large.

A Brief History of Disinvestment in India

As a policy objective, disinvestments were embraced by the Government during the economic liberalisation of the early
1990s. The rst disinvestment was announced by then Finance Minister Manmohan Singh during his Interim Budget
speech on July 24th 1991. In that year, minority shares were sold by auction method in bundles of "very good", "good"
and "average" companies.

Disinvestment Target vs Actual Receipts Since

FY11
All gures in cr.
Budgeted Target Actual Receipts

100,000

90,000

80,000

70,000

60,000

50,000

40,000

30,000

20,000

10,000

0
FY11 FY12 FY13 FY14 FY15 FY16 FY1

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In the two decades that followed, disinvestments continued to take place but at a relatively weak pace. There was a brief
increase in targets and proceeds in the early 2000s but there were also many years when no targets were set and no
disinvestment proceeds achieved.

It was only in the 2010s that activity picked up. Since FY2011, the Government’s disinvestment targets and proceeds have
remained high (although the former has been higher than the total receipts in all but two years in this 10-year period).

Difference between Budgeted Disinvestment

Target and Actual Receipts at end of the FY
All gures in cr.
FY11 −17,856

FY12 −26,106

FY13 −6,043

FY14 −24,181

FY15 −19,076

FY16 −45,503

FY17 −10,253

FY18 27,557

FY19 4,972

FY20 −54,701
−50,000 −40,000 −30,000 −20,000 −10,000 0 10,000 20,000

Source: DIPAM • Get the data • Created with Datawrapper

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Interestingly - but perhaps unsurprisingly - the drive to disinvest is driven by ideology i.e. It depends on which political
party is in power at the Centre. The BJP-led NDA, which is perceived as economically more right-wing, accounts for more
than 58% (https://bit.ly/3hymyos) of all disinvestment since 1991.

How to Disinvest?
Now that we understand what disinvestment actually is, let’s delve into the di erent methods of disinvestment. As per
current policy, disinvestments can be of two types:

1. Minority stake sale: Here, the Government post sale continues to retain majority shareholding i.e. Greater or
equal to 51%.
2. Strategic disinvestment: This involves the Government selling a substantial portion of its stake - 50% or more -
and relinquishing management control of the PSU.

Some other ways to disinvestment can be:

1. Initial Public O ering (IPO): First time o er of shares by an unlisted PSU to the public for subscription.
2. Secondary O ering: O er of shares by a listed PSU to the public for subscription.
3. Institutional Placement Programme (IPP): Only quali ed institutions can participate in an IPP placement.
4. Exchange Traded Fund (ETF): Disinvestment through ETF route allows simultaneous sale of Government's stake
across diverse sectors through single o ering.
5. Share Buybacks: A PSU can o er buyback of shares from the Government at a premium (You can read more on
PSU Share Buybacks and Dividends here (https://trans n.in/why-the-government-wants-more-psu-share-
buybacks-and-dividends) ).

Challenges and Obstacles of Disinvestment

Just as there are numerous advantages to disinvestments, there are also numerous challenges:

1. It’s not universally popular. Selling “family jewels” or “nation’s treasures” is viewed unfavourably by
disinvestment’s many critics, who include labour unions and politicians.
2. PSUs are Government companies and thus the pro t-making ones are a source of regular income. Their
privatisation would mean a loss of this income channel.
3. Strategic, national security and public interest concerns. Some PSUs are signi cant in a strategic sense. Bharat
Petroleum, for example, is one of the world’s biggest corporations and holds considerable sway over the
country’s oil and gas wealth. Its privatisation would imply an ill-conceived notion that private companies can lay
claim on ownership of natural resources and not the public.
4. Labour concerns. Private companies can streamline the operations of a PSU to make it more pro table. This
could lead to job losses and labour unrest, which are politically charged issues.
5. Unsurety of incentive for the private sector. Many PSUs are loss-making and in bad shape. The Government may
be eager to divest its stakes in these enterprises, but they might not garner much enthusiasm from investors.

FIN.
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