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By Uttam Gupta
Against the `210,000 crore target set for disinvestment proceeds from Central Public Sector Undertakings (CPSUs) in FY21, the actual realisation was just about `32,000 crore. Even as the Centre may explain it away as ‘corona pandemic effect’, the prospects in FY22, when the economy is expected to register high growth, don’t seem much better. For this year, the target for speaks for itself.
Finance minister Nirmala Sitharaman has fixed the target for FY22 at `175,000 crore, substantially lower than year before. This is despite adding two public sector banks (PSBs) and one general insurance company to the list. The lukewarm response to the disinvestment efforts last year is because of four major bottlenecks.
First, the Government treats CPSUs as an appendage of itself, and, by extrapolation, considers proceeds from disinvestment of its shareholding in them as a source of revenue. However, unlike tax revenue, which can be projected with a degree of certainty, the same can’t be said about proceeds from disinvestment. In this case, a lot depends on the market scenario and, in particular, the perception of investors about the PSU in which share-sale is contemplated.
For instance, during FY18, the government had planned sale of its 51.11% shareholding in Hindustan Petroleum Corporation Limited (HPCL) to a private investor. But, it did not get a buyer, and towards the fag-end of that year, i.e., January 2018, it had to ask ONGC—another CPSU in the upstream oil and gas sector—to pick up all of the shares.
Second, even after completing strategic sale, it wants to remain in the driver’s seat. In her Budget speech for 2019-20, Sitharaman had stated that the intent was to change the existing 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%. This mindset may not enthuse potential suitors.
Third, the government spends too much time on policy formulation. In early 2016, NITI Aayog had recommended strategic sale of over 24 CPSUs. This was not acted upon. Even now, the Budget for FY22 has only come out with broad contours of the policy for sale of PSUs in the so-called ‘strategic’ and ‘non-strategic’ sectors. Even after a decision is taken, it remains in a flip-flop mode.
In the case of Air India (AI), initially (FY19), the government had insisted on retaining 26% shareholding, three years’ lock-in period, leaving a big slice of debt on the balance sheet and retention of the employees. Since then, several changes have been made. The offer plan currently under execution includes sale of all of its shareholding, requiring the suitor to bid for the “enterprise value”, besides relaxation in other riders. Had this offer been made in the first round itself, AI would have been sold three years back, fetching a much better price than what is likely now.
Fourth, the process is hamstrung by bureaucratic red tape. The NITI Aayog identifies companies for divestment which are then considered by the Core Group of Secretaries on Divestment (CGD), a long drawn process by itself, which takes it to the Alternative Mechanism (AM)—a group of ministers including finance, road transport & highways, administrative reforms etc—for approval. After AM’s approval, Dipam moves proposal for in-principle approval of the Cabinet Committee on Economic Affairs (CCEA). All put together, strategic divestment involves around 12 steps.
This leads to delay, and by the time, all approvals are in place, the market scenario has undergone a drastic change. For instance, sale of BPCL (53.29% shareholding) was initially planned for FY20. Then, the government expected to realise over `60,000 crore. But, it was not ready then. During FY21, Covid – 19 spoilt the party. Meanwhile, there has been significant value erosion; as per current valuation, the proceeds may not exceed `45,000 crore.
The process of disinvestment needs to be unshackled. In fact, Modi will do well to ‘debureaucratise’ the process of running CPSUs. This should be done even before privatisation is taken up.
The government may set up a holding company (HC)—on the lines of a bank investment company (BIC) recommended by RBI committee under P Nayak for PSBs—where all its shares in CPSUs will be vested. The HC should be authorised to take all decisions, including share sale to private investors, in consultation with the management. To be manned by eminent professionals drawn from respective fields, the company should to be empowered and given full autonomy in its working.
The arrangement will put the sale process on fast track, give the much-needed flexibility to decide the contours and timing, taking into account market conditions and thus maximise the proceeds. Running PSUs on profitable lines—as long as these remain in the government’s fold—will be an added bonus.
The author is a Delhi-based policy analyst