Reportedly, the Department of Investment and Public Asset Management (DIPAM) which deals with all matters relating to management of Union Government investments in equity including disinvestment of its shareholding in Central Public Sector Undertakings (CPSUs) is in a war of words with the Ministry of Finance (MoF) over the target of proceeds of disinvestment during the current financial year (FY) i.e. 2020-21.
In the Union Budget for 2020-21 presented on February 1, 2020, the Finance Minister, Nirmala Sitharaman had set the target at Rs 210,000 crore – a steep increase over the revised estimate (RE) for FY 2019-20 at Rs 65,000 crore (the actual for that year was even lower at about Rs 50,000 crore). The point raised by DIPAM is that out of Rs 210,000 crore, a big slice of Rs 90,000 crore was thrust on it by MoF being the projected proceeds from sale of Union Government’s 10% shares in the Life Insurance Corporation (LIC) and its residual stake in IDBI bank (during 2018-19, LIC acquired 51% stake in IDBI Bank even as the balance 49% remained with GOI).
Leave aside Rs 90,000 crore, even the balance Rs 120,000 crore which DIPAM was chasing appears to be nowhere within reach as with 3/4th of the year already over, the proceeds so far are a meager about Rs 12,000 crore or 10%. During the last 7 years since Modi – Government took charge, barring 2 years viz. 2017-18 and 2018-19 when the actual proceeds from disinvestment exceeded the target, in the remaining 5 years the achievement was far short.
Even during those 2 exceptional years, the good performance was made possible primarily due to two big ticket sales of Union Government shares in one CPSU to another viz. (i) sale of its 51.11% shareholding in Hindustan Petroleum Corporation Limited (HPCL) to the Oil and Natural Gas Corporation (ONGC) during 2017-18 yielding Rs 37,000 crore; (ii) sale of its 52.63% stake in Rural Electrification Corporation (REC) to the Power Finance Corporation (PFC) 2018-19 to yield Rs 13,000 crore. But, for these, even during 2017-18/2018-19, actual proceeds would have fallen short of the target.
These trends clearly point towards bad handling of the disinvestment process. At the root of this is the faulty approach of successive governments to treat CPSUs as an appendage to the administrative ministry under which the concerned PSU falls and by extension, treating proceeds from divestment of its shareholding as source of revenue (albeit non-tax) while preparing its budget. In recent years, this has been catapulted to a point whereby the amount sought from share sale has escalated to lakhs of crore.
Unlike tax revenue which has a high degree of predictability (given the tax rate as per the law enacted by the Parliament and the level of economic activity, the government gets to know broadly how much collection it will make – barring certain unanticipated and extraordinary events as during the current year), the same can’t be said about the proceeds from disinvestment. Here, a lot depends on the market scenario and in particular, perception of the investors about the PSU in which share sale is contemplated.
It is even more relevant in cases where strategic disinvestment is contemplated. Under such sale, the shareholding of the Union Government is brought down to below 50% or even zero; for instance, sale of its entire shareholding of 51.11% in HPCL undertaken in 2017-18 or sale of its entire 53.29% shareholding in Bharat Petroleum Corporation Limited (BPCL) initiated in 2019-20 and has not yet happened. In such cases, if you don’t get a buyer, the sale won’t materialize.
The proof of pudding is in eating. Originally, the 51.11% shares of Union Government in HPCL were to be sold to a private investor (resulting in transfer of ownership and management control to the latter; that indeed was strategic disinvestment in the true sense). But, things did not pan out as planned even as the Government had to ask ONGC to pick up the entire stake as it desperately needed money to plug the budgetary deficit. The sale of its shareholding in REC to PFC was also driven by the same consideration.
A major consideration in determining whether the disinvestment will succeed is the pace at which the plan is executed. In this regard, almost everything starting from conception, appointment of transaction advisor, invitation of expression of interest (EoI), financial bids, selection of the bidder and so on is done within the Government. That is an inherently lengthy process involving approval at various stages. Add to this, the reluctance of bureaucrats to take timely decisions apprehending that they might be questioned later after retirement.
This leads to delay in processes and by the time, the plan is ready, the market scenario undergoes a drastic change. For instance, the sale of BPCL was planned during 2019-20. Then, the projected the realization from sale was over Rs 60,000 crore. But, officials were not ready. Even as this is now planned for the current year, preparations have thus far been hamstrung by Corona. Meanwhile, the estimate of likely proceeds has already slipped to Rs 45,000 crore.
Another major constraint is the obsession of the government with policy formulation on disinvestment per se – a process that goes on ad infinitum. To get an idea, look at this. In early 2016, the NITI Aayog had recommended to the Government strategic sale of over two dozen CPSUs. Early this year, Sitharaman announced the broad contours of Government’s plans on privatization delineating different approaches to the so called ‘strategic’ and ‘non-strategic’ sectors. Now, a meeting of the Cabinet Committee on Economic affairs (CCEA) will be held shortly to approve the policy.
Allowing for some time for NITI Aayog to come up with its recommendations, it has been more than 5 years and the policy on strategic disinvestment is not finalized yet. Till that happens, the concerned ministries/departments won’t gain the necessary momentum to push the sale process.
However, the most dominant bottleneck has to do with Government’s inherent desire to remain in the driver’s seat for all time – even after strategic divestment. To get an idea, look at what the Finance Minister said in her Budget speech for 2019-20. She had stated that the intent was to change the extant policy of the Government “directly” holding 51% or above in a CPSU to one whereby its total holding, “direct” plus “indirect”, is maintained at 51%.
Such a stingy approach and unwillingness of the political establishment not to relinquish control even after divestment of majority ownership and control is far from conducive to eliciting interest from potential suitors. This gets exacerbated by continuous flip flop even after the privatization plan for a given PSU is finalized. For instance, in case of Air India, in its initial sale plan (2018-19) that failed, the Government insisted on retaining 26% stake, three years’ lock-in period on disposition of shares by the acquirer, leaving a big slice of debt on the balance sheet, retention of employees and so on.
Since, then several changes have been made with the package on offer now includes inter alia divestment of all of Government’s shareholding, requiring the suitor to bid for the ‘enterprise value’ (which in plain words, means that he will be free from any debt burden), relaxation in other riders such as lock-in period, retention of employees etc. These flip flops result in avoidable delay in execution of the divestment plan and erosion in realization from the sale.
The present approach to divestment of Government’s shareholding in CPSUs won’t take us anywhere not even for garnering the required revenue to bridge fiscal deficit. The approach is flawed. Team Modi should pursue strategic disinvestment or privatization as an objective by itself instead of linking it to revenue mobilization and in turn, achievement of fiscal deficit target.
For undertaking privatization, the Government should abandon the current top-down approach that involves thrusting on the management a plan for given PSU prepared by the concerned administrative ministry (and approved by higher echelons in the political establishment). Instead, the plan should come from the management which is best equipped to do the job. However, for coordination at the macro level and providing guidance, the Government may constitute a panel of eminent professionals.
In the present scenario, wherein the Government is encouraging private companies to invest even in sensitive areas such as defense, space etc, there is no point in getting bogged down with drawing a line between strategic and non-strategic sectors. Any decision to privatize a PSU should be taken on the merit of each individual case. This will give the much-needed flexibility to the management to decide the contours and timing of the divestment, taking into account market conditions. This will help in maximizing proceeds from sales and improve Centre’s budgetary position too.