In her maiden budget presented on July 5, 2019, the union finance minister, Nirmala Sitharaman has set an ambitious target of Rs 105,000 crore as proceeds of disinvestment of government shares in public sector undertakings [PSUs] [this is even higher than about Rs 100,000 crore it had garnered during 2017-18]. She has also hinted at aggressive pursuit of ‘strategic’ disinvestment and even consider reducing governments’ shareholding in PSUs to below 51% on a case-by-case basis. A target of realizing 1/3rd of the proceeds from this route has been set.
Over Rs 35,000 crore, the government is contemplating to garner from the ‘strategic’ disinvestment includes proceeds from divestment of Air India which according to the secretary, department of investment and public asset management [DIPAM], Atanu Chakraborty is expected to be consummated within the current year [the centre is keen to sell 95% of its shareholding leaving 5% to be retained by the employees; an attempt to sell Air India last year came a cropper as then it was insisting on retaining 24% shareholding besides other riders such as 3 years lock-in period on disposition of shares by the acquirer].
The strategic disinvestment involves transfer of a sizeable portion of ownership and management control to an investor [call him ‘strategic’ investor] by selling commensurate shares. Apart from much needed capital, he/she can bring in technology, management skills, intellectual property and other resources that can help transform the way a PSU is run, make it grow faster and enhance its competitiveness in an increasingly challenging world.
As regards, the extent of divestment viz., 10%, 20%, 25% …. there cannot be ‘one-size-fits-for-all”. The level could vary depending on the area of operation, size, market capitalization, net-worth, profit, potential to grow etc of the undertaking under reference. However, in a transformative sense, the government could reduce its holding to below 51% so as to lead to relinquishment of its majority ownership and control, or privatization in plain words. This is precisely what the finance minister has alluded to.
But, mere declaration of intent is of no consequence unless it is matched by credible action. In this regard, Modi – government during its first term had very little to show.
In the budget for 2015-16 and 2016-17, it had targeted proceeds of Rs 28,500 crores and Rs 20,500 crores respectively from the strategic disinvestment. Against this, during 2015-16, there was not even a single case of divestment through this route whereas for 2016-17, the target itself was reduced to a meager Rs 5500 crores!
During 2017-18, the union government sold 51.11% of its shareholding in Hindustan Petroleum Corporation Limited [HPCL] to Oil and Natural Gas Corporation [ONGC] yielding about Rs 37,000 crores [this indeed was a major factor that helped the exchequer garner overall divestment proceeds of Rs 100,000 crore]. In the following year, it sold 52.63% of its shareholding in Rural Electrification Corporation [REC] to Power Finance Corporation [PFC] to yield Rs 13,000 crore.
The secretary, DIPAM has cited proceeds of over Rs 50,000 crore from the above sales in support of its success. However, the sale of shares in HPCL to ONGC [from one PSU to another] cannot be termed as strategic disinvestment as even after relinquishing 51% holding, the government continues to be in control of HPCL by virtue of being majority owner in ONGC. The same holds for sale of union’s share in REC to PFC which is majority owned by it.
The fact of the matter is that in early 2016, NITI Aayog had recommended strategic sale of government’s equity in over two dozen PSUs. But, that was not acted upon. An overarching reason for the disappointing results under Modi 1.0 is the utter lack of seriousness on the part of the government.
Whereas, for Air India, it made half-hearted move, in case of HPCL and REC, sale of shares to ONGC and PFC respectively was an orchestrated plan to garner resources to meet fiscal deficit target albeit at the cost of the acquirers viz. ONGC and PFC who were even forced to take recourse to borrowings for funding the purchase. There was nothing ‘strategic’ about it as ownership and control continues to vest with the union government – even post-disinvestment.
Now, with the budget proclaiming cut in government shareholding to below 51%, will things be different? A close look at the thought process of mandarins in the DIPAM and finance ministry would show that this is driven more by the need to enable these undertakings avoid coming under the scanner of the so called 4Cs viz. Central Bureau of Investigation [CBI], Central Vigilance Commission [CVC], Comptroller and Auditor General [CAG] and Courts.
The argument thus goes that with union’s shareholding down to below 51%, it will cease to be a PSU and hence, won’t be accountable to the mentioned statutory and judicial bodies. In a way, this is good as then the managements will be able to run the enterprises free from encumbrances and take business decisions on fast track.
But, we need to recognize that other entities such Life Insurance Corporation [LIC] which are 100% owned by the government, also hold shares in the PSUs. So, even if direct holding of the GOI goes below 51%, together with its indirect holding say through LIC, it will still have majority stake enabling it to exercise control. That could lead to a deadly scenario whereby the bureaucrats will continue to call the shots without at the same time being accountable. Surely, that is not the kind of disinvestment one is looking for.
The strategic disinvestment in true sense of the term would require transfer of the ownership and control of the undertaking to the strategic investor – lock, stock and barrel. So, while carrying out the exercise, the government should ensure that its shareholding – direct plus indirect – is reduced to a level below 51%. This will also help in unlocking full value and maximizing revenue.
It will requiring unshackling of our rulers’ mindset who for decades have got attuned to using PSUs as milch cow to serve ever expanding budgetary needs of the government without shedding control.