What is Disinvestment?
At the very basic level, disinvestment can be explained as follows:
“Investment refers to the conversion of money or cash into securities, debentures, bonds or any other claims on money. As follows, disinvestment involves the conversion of money claims or securities into money or cash.”
Disinvestment can also be defined as the action of an organisation (or government) selling or liquidating an asset or subsidiary. It is also referred to as ‘divestment’ or ‘divestiture.’ In most contexts, disinvestment typically refers to sale from the government, partly or fully, of a government-owned enterprise.
A company or a government organisation will typically disinvest an asset either as a strategic move for the company, or for raising resources to meet general/specific needs.
Objectives of Disinvestment
The new economic policy initiated in July 1991 clearly indicated that PSUs had shown a very negative rate of return on capital employed.
Inefficient PSUs had become and were continuing to be a drag on the Government’s resources turning to be more of liabilities to the Government than being assets.
Many undertakings traditionally established as pillars of growth had become a burden on the economy.
In relation to the capital employed, the levels of profits were too low. Of the various factors responsible for low profits in the PSUs, the following were identified as particularly important:
1)Price policy of public sector undertakings
2)Under-utilisation of capacity
3)Problems related to planning and construction of projects
4)Problems of labour, personnel and management
5)Lack of autonomy
Also lack of incentive to make profits, govt job so full security, so no pressure to be profitable.
Hence, the need for the Government to get rid of these units and to concentrate on core
activities was identified. The Government also took a view that it should move out of non-core businesses, especially the ones where the private sector had now entered in a significant way.
Finally, disinvestment was also seen by the Government to raise funds for meeting general/specific needs.
In this direction, the Government adopted the ‘Disinvestment Policy’. This was identified as an active tool to reduce the burden of financing the PSUs. The following main objectives of disinvestment were outlined:
- To reduce the financial burden on the Government ● To improve public finances
- To introduce, competition and market discipline ● To fund growth
- To encourage wider share of ownership
● To depoliticise non-essential services
Importance of Disinvestment
Presently, the Government has about Rs. 2 lakh crore locked up in PSUs. Disinvestment of the Government stake is, thus, far too significant. The importance of disinvestment lies in utilisation of funds for:
- Financing the increasing fiscal deficit
- Financing large-scale infrastructure development
- For investing in the economy to encourage spending
- For retiring Government debt- Almost 40-45% of the Centre’s revenue receipts go towards repaying public debt/interest
- For social programs like health and education
Disinvestment also assumes significance due to the prevalence of an increasingly competitive environment, which makes it difficult for many PSUs to operate profitably. This leads to a rapid erosion of value of the public assets making it critical to disinvest early to realize a high value.
DIFFERENT APPROACHES TO DISINVESTMENT
A minority disinvestment is one such that, at the end of it, the government retains a majority stake in the company, typically greater than 51%, thus ensuring management control.
Historically, minority stakes have been either auctioned off to institutions (financial) or offloaded to the public by way of an Offer for Sale.
A majority disinvestment is one in which the government, post disinvestment, retains a minority stake in the company i.e. it sells off a majority stake.
Historically, majority disinvestments have been typically made to strategic partners. These partners could be other CPSEs themselves, a few examples being BRPL to IOC, MRL to IOC, and KRL to BPCL. Alternatively, these can be private entities, like the sale of Modern Foods to Hindustan Lever, BALCO to Sterlite, CMC to TCS etc.
Complete privatisation is a form of majority disinvestment wherein 100% control of the company is passed on to a buyer.
Disinvestment and Privatisation are often loosely used interchangeably. There is, however, a vital difference between the two. Disinvestment may or may not result in Privatisation. When the Government retains 26% of the shares carrying voting powers while selling the remaining to a strategic buyer, it would have disinvested, but would not have ‘privatised’, because with 26%, it can still stall vital decisions for which generally a special resolution (three-fourths majority) is required.
For the first four decades after Independence, the country was pursuing a path of development in which the public sector was expected to be the engine of growth. However, the public sector overgrew itself and its shortcomings started manifesting in low capacity utilisation and low efficiency due to over manning, low work ethics, over
capitalisation due to substantial time and cost over runs, inability to innovate, take quick and timely decisions, large interference in decision making process etc. Hence, a decision was taken in 1991 to follow the path of Disinvestment.
Period from 1991-92 – 2000-01
The change process in India began in the year 1991-92, with 31 selected PSUs disinvested for Rs.3,038 crore. In August 1996, the Disinvestment Commission, chaired by G V Ramakrishna was set up to advice, supervise, monitor and publicize gradual disinvestment of Indian PSUs. It submitted 13 reports covering recommendations on privatisation of 57 PSUs.Dr R.H.Patil subsequently took up the chairmanship of this Commission in July 2001.However, the Disinvestment Commission ceased to exist in May 2004.
The Department of Disinvestment was set up as a separate department in December, 1999 and was later renamed as Ministry of Disinvestment from September, 2001. From May, 2004, the Department of Disinvestment became one of the Departments under the Ministry of Finance.
Against an aggregate target of Rs. 54,300 crore to be raised from PSU disinvestment from 1991-92 to 2000-01, the Government managed to raise just Rs. 20,078.62 crore (less than half). Interestingly, the government was able to meet its annual target in only 3 (out of 10) years. In 1993-94, the proceeds from PSU disinvestment were nil over a target amount of Rs. 3,500 crore.
The reasons for such low proceeds from disinvestment against the actual target set were:
- Unfavorable market conditions
- Offers made by the government were not attractive for private sector investors
- Lot of opposition on the valuation process
- No clear-cut policy on disinvestment
- Strong opposition from employee and trade unions
- Lack of transparency in the process
- Lack of political will
This was the period when disinvestment happened primarily by way of sale of minority stakes of the PSUs through domestic or international issue of shares in small tranches. The value realized through the sale of shares, even in blue chip companies like IOC, BPCL, HPCL, GAIL & VSNL, however, was low since the control still lay with the government.
Most of these offers of minority stakes during this period were picked up by the domestic financial institutions. Unit Trust of India was one such major institution.
Period from 2001-02 – 2003-04
This was the period when maximum number of disinvestments took place. These took the shape of either strategic
sales (involving an effective transfer of control and management to a private entity) or an offer for sale to the public,
with the government still retaining control of the management. Some of the companies which witnessed a strategic
- BHARAT ALUMINIUM CO.LTD.
- CMC LTD.
- HINDUSTAN ZINC LTD.
- HOTEL CORP.OF INDIA LTD. (3 PROPERTIES: CENTAUR HOTEL,JUHU BEACH, CENTAUR
HOTEL AIRPORT,MUMBAI & INDO HOKKE HOTELS LTD.,RAJGIR)
- HTL LTD.
- IBP CO.LTD.
- INDIA TOURISM DEVELOPMENT CORP.LTD.(18 HOTEL PROPERTIES)
- INDIAN PETROCHEMICALS CORP.LTD.
- JESSOP & CO.LTD.
- LAGAN JUTE MACHINERY CO.LTD.,THE
- MARUTI SUZUKI INDIA LTD.
- MODERN FOOD INDUSTRIES (INDIA) LTD.
- PARADEEP PHOSPHATES LTD.
- TATA COMMUNICATIONS LTD.
The valuations realized by this route were found to be substantially higher than those from minority stake sales.
During this period, against an aggregate target of Rs. 38,500 crore to be raised from PSU disinvestment, the Government managed to raise Rs. 21,163.68 crore.
Period from 2004-05 – 2008-09
The issue of PSU disinvestment remained a contentious issue through this period. As a result, the disinvestment agenda stagnated during this period. In the 5 years from 2003-04 to 2008-09, the total receipts from disinvestments were only Rs. 8515.93 crore.
A stable government and improved stock market conditions initially led to a renewed thrust on disinvestments. The Government started the process by selling minority stakes in listed and unlisted (profit-making) PSUs. This period saw disinvestments in companies such as NHPC Ltd., Oil India Ltd., NTPC Ltd., REC, NMDC, SJVN, EIL, CIL, MOIL, etc. through public offers.
However, from 2011 onwards, disinvestment activity slowed down considerably. As against a target of Rs.40,000 crore for 2011-12, the Government was able to raise only Rs.14,000 crore. However, the subsequent years saw some improvement and the Government was able to raise Rs. 23,857 crore against a target of Rs. 30,000 crore
(Revised Target : Rs. 24,000 crore) in 2012-13 and Rs. 21,321 crore against a target of Rs. 54,000 (Revised Target : Rs. 19,027 crore) in 2013-14. The achieved target dropped to Rs. 24,338 crore against a target of Rs. 58,425 crore in
2014-15. In 2015-16 the Government was able to raise Rs. 32,210 crore against a target of Rs. 69,500 crore
(Revised Target : Rs. 25,312 crore) and Rs. 46,378 crore against a target of Rs. 56,500 (Revised Target : Rs. 45,500
crore) in 2016-17. In 2017-18, some steep improvement was seen and the Government was able to raise Rs.
1,00,642 crore against a target of Rs. 72,500 crore (Revised Target : Rs. 1,00,000 crore) and Rs. 85,063 crore
against a target of Rs. 80,000 in 2018-19.
Further, the achieved target dropped to Rs. 49,828 crore against a target of Rs. 90,000 crore (Revised Target : Rs. 1,05,000 crore, further the Target Revised downward to Rs.65,000 crore) in 2019-20.
The NDA Government has set an ambitious disinvestment target of Rs. 2,10,000 crore(revised to 1.75 lakh crore) …. As such, 2020-21 is likely to see some big ticket disinvestments taking place.
Arguments against Disinvestment
1) A nationwide survey conducted by the NCAER in 2007-08 revealed that only 0.5% of Indian households invest in equities. A recent article in The Economist (21st May 2009) estimates this section to be 0.7% of Indian households. Thus, in case the public offer route is followed, it would imply transferring the common ownership of the PSUs by all Indians into the private ownership of 0.5-0.7% of Indians. Thus essentially implying that the real beneficiaries would not be the ordinary retail investor but institutional investors.
2) Using funds made available from disinvestment to bridge the fiscal deficit is an unhealthy and a short term practice. It is said that it is equivalent of selling ‘family silver’ to meet short term monetary requirements. Borrowing which is the currently used practice for bridging fiscal deficit, should continue to be used since while borrowing, the government has to make interest payments in the future against a one-time borrowing from the market, in the case of disinvestment, future streams of income from dividends are forgone against a one-time receipt from the sale of stakes.
3) Profit making PSUs should not be disinvested as they are performing well in any which way
4) Complete Privatisation may result in public monopolies becoming private monopolies, which would then exploit their position to increase costs of various services and earn higher profits
CURRENT SCENARIO(DISINVESTMENT IN BUDGET 2021-22)
The govt on Monday budgeted Rs 1.75 lakh cr from stake sale in public sector companies and financial institutions, including 2 PSU banks and one general insurance company, in the next fiscal year beginning April 1.
The amount is lower than the record Rs 2.10 lakh cr which was budgeted to be raised from CPSE disinvestment in the current fiscal year.
CPSE-Corporate Public Sector Undertaking
In her 2021-22 Budget speech, FM said strategic disinvestment of BPCL, Air India, Shipping Corporation of India, Container Corporation of India, IDBI Bank, BEML, Pawan Hans, Neelachal Ispat Nigam Ltd, among others would be completed in 2021-22.
“Other than IDBI Bank, we propose to take up the privatization of two Public Sector Banks and one General Insurance company in the year 2021-22. This would require legislative amendments and I propose to introduce the amendments in this session “
Also the legislative amendments required for launching IPO of LIC would be brought in the ongoing session of Parliament.
To fast-track the disinvestment policy, NITI Aayog would work out on the next list of central public sector companies that would be taken up for strategic disinvestment.
Also to similarly incentivise states to start disinvestment of their public sector companies, the government will work out an incentive package of central funds for states.
Besides, to ensure timely completion of closure of sick or loss making CPSEs, a revised mechanism would be brought in, she said.
“Idle assets will not contribute to Aatmanirbhar Bharat. The non-core assets largely consist of surplus land with government Ministries/Departments and Public Sector Enterprises.
“Monetizing of land can either be by way of direct sale or concession or by similar means. This requires special abilities and for this purpose, I propose to use a Special Purpose Vehicle in the form of a company that would carry out this activity,” Sitharaman added.
Unveiling the disinvestment/strategic disinvestment policy, she said the policy aims at minimising the presence of central public sector enterprises, including financial institutions and creating new investment space for private sector.
“Post disinvestment, economic growth of Central Public Sector Enterprises (CPSEs)/ financial institutions will be through infusion of private capital, technology and best management practices. Will contribute to economic growth and new jobs,” the Budget said.
As they say, never waste a crisis. The fiscal deficit this year is budgeted to be
9.5 percent of GDP and disinvestment and monetisation of assets will be key revenue earners for the government. So important decision, good decision, MODI ROXX(no lmao :p). Previous govts have shied away from doing this because of fear of unions, and no complete majority(the left was an important part of the UPA 1). This govt, having brute majority doesn’t really need to convince anyone, so easy for them.