Disinvestment target within reach: Centre
15, Mar 2019
The government expects to meet its disinvestment target of ₹80,000 crore even though it has achieved only ₹56,473.42 crore so far with only 15 days left for the end of the financial year.
The government hopes that the Power Finance Corporation’s (PFC) acquisition of the Rural Electrification Corporation (REC), expected to be completed soon, would push disinvestment proceeds above the target.
Disinvestment policy in India:
Divestment in India is a by-product of the economic reforms initiated in 1991. Although the objective of redefining the role of the government versus the market started in 1991 and there was considerable discussion on the role of PSUs, the process of divestment was formalized only after the Divestment Commission was set up in 1996 to examine and suggest withdrawal from non-strategic sectors.
- The department of divestment was formed in December 1999, which later was made the ministry of disinvestment in September 2001. In May 2004, it was shifted to the ministry of finance as one of the departments under it.
- Now, the department has been renamed as Department of Investment and Public Asset Management (DIPAM)
What was objective of divestment then?
- The main objective of disinvestment is to put national resources and assets to optimal use.
- Through divestment the role of the government versus the market was sought to be redefined and market discipline was sought to be injected in PSUs’ decision-making
- Through divestment loss-making public enterprises were also sought to be revived and additional resource needs for containing the fiscal deficit and capital expenditure generated
Current setup for Disinvestment:
- Department of Disinvestment: Setup in 1999. Responsible to deal with all matters relating to disinvestment of Central Government equity in Central Public Sector Undertakings. This department now works under the Ministry of Finance.
- National Investment Fund: In 2005, the government formed a National Investment Fund or NIF, to which the proceeds of disinvestment were channelled. The mandate of the Fund, managed by professional investment managers, was to utilise 75% of annual funds in social sector schemes to promote education, health and employment. But with the economic slowdown of 2008-09, and later a drought, this was waived for three years — and later, in 2013, restructured to provide flexibility in using the Fund.
It was decided that the NIF would be utilized for the following purposes:
- Subscribing to the shares being issued by the CPSE including PSBs and Public Sector Insurance Companies, on rights basis so as to ensure 51% ownership of the Government in those CPSEs/PSBs/Insurance Companies, is not diluted.
- Preferential allotment of shares of the CPSE to promoters as per SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 so that Government shareholding does not go down below 51% in all cases where the CPSE is going to raise fresh equity to meet its Capex programme.
- Recapitalization of public sector banks and public sector insurance companies.
- Investment by Government in RRBs/IIFCL/NABARD/Exim Bank.
- Equity infusion in various Metro projects.
- Investment in Bhartiya Nabhikiya Vidyut Nigam Limited and Uranium Corporation of India Ltd.
- Investment in Indian Railways towards capital expenditure.
The current Government policy on disinvestment envisages people’s ownership of CPSEs while ensuring that the Government equity does not fall below 51% and Government retains management control. Keeping this objective in view of disinvestment policy, the Government has adopted the following approach to disinvestment:
- Already listed profitable CPSEs (not meeting mandatory shareholding of 10%) are to be made compliant by ‘Offer for Sale’ (OFS) by Government or by the CPSEs through issue of fresh shares or a combination of both.
- Unlisted CPSEs with no accumulated losses and having earned net profit in three preceding consecutive years are to be listed.
- Follow-on public offers (FPO) would be considered in respect of profitable CPSEs having 10% or higher public ownership, taking into consideration the needs for capital investment of CPSE, on a case by case basis and Government could simultaneously or independently offer a portion of its equity shareholding in conjunction.
- Since each CPSE has different equity structure; financial strength; fund requirement; sector of operation etc., factors that do not permit a uniform pattern of disinvestment, disinvestment will be considered on merits and on a case-by-case basis.
- CPSEs are permitted to use their surplus cash to buy-back their shares; one CPSE may buy the shares of other CPSEs from the Government
Why a relook at divestment policy is necessary now?
Over the years, the policy of divestment has increasingly become a tool to raise resources to cover the fiscal deficit with little focus on market discipline or strategic objective.
Why divestment is good?
- Reduces financial burden on the Government.
- Improves public finances.
- Introduces competition and market discipline.
- Funds growth.
- Encourages wider share of ownership.
- Depoliticizes non-essential services.
What is the NEW approach of current government?
Government’s roadmap – 3 pronged approach:
- First, a plan for winding up loss-making units, including rules for the disposal of their assets and land. Passage of the new bankruptcy code will aid these sales.
- Second, profitable PSUs will be listed on stock exchanges through public sales of shares. The government’s shareholding in enterprises already listed will be pared down through public offers to the minimum level depending on the sector and “in line with government policy.”
- The third category will be that of strategic sales of high-value and big-size companies such as BHEL, and the oil and defence sector PSUs.
But we need changes at policy level so that more broader changes can be made.
What policy changes are necessary now?
- Define the priority sectors for the government based on its strategic interests.
- Investment in PSUs have to serve social/strategic purposes and not only financial purpose.
- Government ownership is required for sectors with strategic relevance such as defence, natural resources etc. The government should, therefore, exit non-strategic sectors such as hotels, soaps, airlines, travel agencies and the manufacture and sale of alcohol.
- The outlook towards strategic divestment should move from the current policy of emphasizing on public ownership and retaining majority shareholding to looking at the strategic interest. As per the current divestment policy, government has to retain majority shareholding, i.e., at least 51% and management control of the PSUs. The policy thereby limits the scope to create divestments that would allow easy exit for the government from non-strategic sectors. Allowing ownership of less than 51% will be the first step in the right direction. Eventually, the objective of divestment should be to limit the government ownership to strategic sectors.
- It is important to realize that ownership is not a substitute for regulation. Therefore, instead of creating PSUs in non-priority sectors, the government should look into strengthening the regulatory framework that ensures efficient market conditions. The regulations should also ensure that the basic necessities of the consumers are met
Land Bank of loss making PSUs
The government is looking at creating a bank from the land available at loss-making state-run enterprises as part of its efforts to sell these entities and push the overall disinvestment programme. The idea is to create a special purpose vehicle (SPV) which will hold all the land resources from loss-making public sector enterprises. The SPV then can give the land for other projects which may come up.
- The government has accelerated efforts to wind up several loss-making state-run firms and the NITI Aayog is drawing up a strategy on the issue. Land available with state-run firms is seen as an asset and several defunct PSUs have huge tracts of land available with them. Latest data shows there are 77 CPSEs which incurred a loss of Rs 27,360 crore in 2014-15.
- Vijay Kelkar panel in 2012 had also suggested this.
NITI Aayog’s recommendations:
The NITI Aayog has submitted two sets of recommendations to the Centre for strategic disinvestment of State-owned companies.
- NITI Aayog has submitted a list of recommendations on each of the sick and loss-making government-owned companies. Of 74 such companies, it has recommended closure of 25 companies in which revival plans were attempted but had failed. After the closure their assets, especially land holdings, could be disposed off and employees be offered voluntary retirement.
- In the remaining cases, either mergers with other public sector units or strategic disinvestment is recommended. In some companies, the Aayog preferred to let revival plans run their course, before taking a call on their future.
- In another set of suggestions, it has recommended strategic disinvestment on priority in 15 PSUs. This list has been submitted to the Department of Investment and Public Asset management in the Finance Ministry.