Divesting PSUs

Is it Viable to Disinvest Profit Making PSUs?

Disinvestment of PSUs
Disinvestment of PSUs

Disinvestment or divestiture refers mainly to parts or whole sale of government-owned enterprise by the government. Recently, the Cabinet Committee on Economic Affairs (CCEA) approved disinvestment of 5 PSUs- Bharat Petroleum Corporation Limited (BPCL), Container Corporation of India (CCI), North Eastern Electric Power Corporation (NEEPCO), Shipping Corporation of India (SCI) and Tehri Hydro-Power Development Corporation (THDC), thereby giving a green signal to government’s plan to sell off its shares in these units in order to meet its disinvestment target of 1.05 lakh crore rupees for the current financial year. As per the Department of Investment and Public Asset Management, till November 2019 around 16% of the target had been achieved. Another disinvestment unit doing the rounds in the current year is that of Air India. Government has been striving hard to sell off 100% share of this current loss-making sector, but till now no result has been achieved. Apart from THDCIL and NEEPCO, (which will be transferred to NTPC therefore being only exchange control between different arms of government) in the case of other three that is, BPCL (53.29%), CCI (30.8%), SCI(63.75%) government will be selling off majority shares and more importantly the management and control power to private entities. The disinvestment which has attracted maximum attention and criticism is that of BPCL because it is a profitable refiner and oil marketing company which has consistently paid off impressive dividend and the government’s decision to fully scale its shares will deprive it of all it of all upside potential benefits of BPCL.

History of Disinvestment in India  

Disinvestment in India started after liberalization, privatization and globalization (LPG) reforms of 1990’s. Even during 1991, when P.V. Narashima Rao was Prime Minister, liberalization was not fully exercised. Government was concentrated on selective disinvestments of PSUs only to finance fiscal deficits. Later in 1997, Government was concentrated on selective disinvestments of PSUs only to finance fiscal deficits. Later in 1997, Government setup Disinvestment Commission which was subsequently formed into a Department of Privatization. During NDA’s rule, strategic disinvestment started like in the case of privatization of Maruti, Bharat Aluminum Company, Hindustan Zinc, etc.

Strategic disinvestment is when government cedes management control to private players along with majority shares. This type of disinvestment was clear indication of government’s ideology that ‘government has no business being in business’. During 2001-02, NDA government ceded ownership of some PSUs to private buyers based on the same ideology. However, this move of the government was criticized due to the pricing and choice of buyers in disinvestment. From this experience, the subsequent governments have been treading carefully in area of disinvestment. It can be said that no major disinvestment with transfer of management control from government to private entity took place since 2001-02, until the current government’s approach of strategic disinvestment in BPCL, SCI, CCI. As mentioned earlier, during the period from 2003-2016, government’s disinvestment plans were mere dribbling of minority stakes in PSUs into the market whereas actual management control remained with the government. The current disinvestment steps will basically ensure that government moves out from non-strategic sectors by ceding control to private owners.

Reasons for Disinvestment 

There are 2 broad reasons for which government opts for disinvestment. First, some arguments consider that government needs to maintain distance from business and should only play a role in developing a healthy business environment so that private entities compete in sustainable manner and economy is benefited, simultaneously it also reduces burden of controlling non-strategic sectors on government. Second, it is generally accepted fact that government always needs to spend more than what it earns by means of taxes and other methods. In such a case the proceeds from stake sale becomes important in order to meet fiscal demands of the government. In case of India, which is a developing nation striving to improve its infrastructure, health, education, etc. thereby boosting economic growth, strategic disinvestments play a crucial role in providing additional income needed. Another reason for disinvestment is when private entities hold equity in public firms it brings in a better degree of discipline, monitoring, functioning in the PSUs.

Government’s current disinvestment approach is aimed to meet the present financial year’s disinvestment target. The major draw will be from stake sale in BPCL which is expected to fetch more than half of the disinvestment target of 1.05 lakh crore rupees. However, BPCL is a profit -making unit and yet government aims for stake sale. There are some basic reasons behind disinvesting a profit-making PSU. First, private buyers would not be interested to pay a premium for a loss-making unit hence government will not be truly benefitted by disinvestment. This has already been seen in case of Air India sale where government has been unsuccessful in selling off the unit for some time now because it is debt-laden and loss making PSU like BPCL is expected to fetch more returns which will be needed to squeeze India’s expanding fiscal deficit. Lastly, even if government sells BPCL, then also there will be public sector dominance in oil sector because of HPCL and ONGC, IOC. This will essentially mean that government will gain a huge profit without even undermining its control in the Oil Sector.

India is currently going through a phase of economic slowdown. The collection from indirect tax is well below par and combined with this government has reduced corporate taxes so as to motivate companies to increase investments so as to motivate companies to increase investments thereby creating jobs. Further, due to these reasons government will fall short of cash to invest in development of infrastructure and social sector. Also if fiscal deficit blows out of proportion, India’s global ratings will fall and this will result in costlier loans for India in future and will also adversely affect large Indian Conglomerates. These all are expected to be tackled efficiently by disinvestment and therefore government has opted for strategic sales.

Drawbacks of Disinvestment

Disinvestment has its share of disadvantages mainly in the case of India. First, strategic sales of 100% or majority shares as in case of Air India, has chances of getting lower return prices because in case of part wise sale of shares if one part is given off at a lower price than in future parts after price discovery over time and improvement in performance of the sector a better evaluated price can be gained. A majority of sales over the world occur by means of disinvesting partial shares as opposed to strategic sales. Second selling off majority shares only to overcome fiscal deficit is commonly comparable to selling family silver i which at some point of time there would not be anything left to sell and cushion fiscal deficit and subsequently economy will suffer. Third the returns from disinvestments need to be used for development of infrastructure, restructuring of other PSUs, etc. and if it is used only to meet government’s revenue expenditure then it will not be much of use and government will keep on depleting its source of income without any actual developmental benefits in return. Fourth, there exists a risk of cronyism due to lack of well-planned, long term plans of disinvestment and lack of efficient management. Cronyism may be having a role to play in current BPCL sale where government has planned to exclude 62% holding of BPCL in Assam ‘s Numaligarh refinery which would surely fetch adequate return price. This step hints towards political agenda being the driver without due importance to economic interest which should be the major goal in any disinvestment case. Lastly in the absence of a transparent bidding process, there are chances that some private players may opt to not engage in the sale thereby adversely affecting a healthy competition which will be needed to fetch a better return.

Conclusion

Government’s view of ‘government has no business being in business’ is a much-needed approach. Government’s presence is a necessary evil in strategic sector’s like defence, oil exploration, banking, etc. However, in case of non-strategic sector like container freight operations, fuel retailing outlets, etc. government presence distorts the conducive competition environment and demoralizes private players to buy shares of PSUs. The inefficient PSUs finally burden the consumers and taxpayers. Therefore, government should aim for better laid out, transparent, medium term disinvestment plan instead of merely aiming to overcome fiscal deficit. Furthermore, government should divert proceeds from disinvestments only for creation of new assets, developing infrastructure mainly in rural areas, improving healthcare and education, etc. and should not use the returns as a source to meet its revenue expenditure. Government should also keep in view that ceding its majority shares in a profit making entity would cause significant loss of future earnings and dividend payouts and its burden will be reflected in the economic condition and therefore it is essential that returns from strategic sales are reinvested in long-term assets which would boost the economy. Disinvestment followed by privatization is needed for economic development, but it has to be accurately and efficiently planned for gaining long term economic benefits.

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