Divestment, a term fraught with challenges for successive administrations, has presented notable volatility even for the BJP-led NDA government over the past nine years.
Despite notable transactions such as the privatization of Air India and the public listing of the Life Insurance Corporation of India (LIC), divesting government equity in public sector enterprises (PSE) remains a complex endeavour.
In the latest, Finance Minister Nirmala Sitharaman expressed openness to the idea of divesting equity stakes in prominent Public Sector Undertakings (PSUs) like State Bank of India (SBI) and Oil and Natural Gas Corp (ONGC) during an interview on Friday.
During the interview, Sitharaman clarified the government’s stance, stating that it does not oppose maintaining a minority stake, which could be less than 50 per cent, in crucial strategic public sector enterprises.
When asked if she was comfortable with holding 49 percent or less in PSUs including SBI and ONGC, Sitharaman responded affirmatively, indicating the government’s openness to divesting further.
Presently, the government holds a controlling 57.49 percent stake in SBI and a 58.89 percent stake in ONGC.
The Steps
In recent years, the government has actively pursued divestment, shedding stakes in various publicly listed and privately held companies. However, the sale of a controlling stake has been rare, with Air India being the only notable instance in recent years, acquired by the Tata Group.
Sitharaman stressed the government’s dedication to initiatives aimed at enhancing the valuation of Public Sector Undertakings (PSUs). Historically, government-owned companies have traded at discounts compared to their private counterparts, but there has been a narrowing of this valuation gap in recent years.
Highlighting the private sector’s entry into “core strategic” sectors, Sitharaman stated the government’s objective of maintaining only a “minimum presence” in these areas.
The ONGC Story
In March 2022, the government divested a 1.5% stake in Oil and Natural Gas Corporation (ONGC) through an offer for sale (OFS), with expectations of increasing divestment receipts by over Rs 3,000 crore. Following the stake sale, the government’s shareholding in ONGC decrease from 74.14% to 69.14%.
ONGC, a central public sector undertaking under the ownership of the Ministry of Petroleum and Natural Gas, Government of India, contributed over 0.7 trillion Indian rupees to the exchequer in the financial year 2023.
Ambitious Divestment Targets
The government has set an ambitious divestment target of ₹50,000 crore for FY25, marking a significant increase of 67% compared to the revised target of ₹30,000 crore for the current fiscal year ending on 31 March.
Initially, in the budget for FY24, the government aimed to generate ₹51,000 crore through the sale of its stakes in various public sector companies; however, as of 1 February, only about ₹12,500 crore has been raised, casting doubts on the achievement of the revised divestment target for FY24.
Expert Perspectives on Divestment
Experts weigh in on the feasibility of the divestment target, noting its historical unattainability over the past five years. Some suggest that the target could be reached by liquidating minor shareholdings in sectors that are performing well.
With current valuations of PSU stocks presenting an opportune moment, there’s potential for the government to marginally dilute its shareholding in blue-chip companies without relinquishing control.
Sectors like the power sector, where stocks are trading at or near lifetime highs, offer attractive liquidity options for divestment.
Offsetting Revenue Shortfall
While the shortfall from disinvestments is a concern, higher non-tax revenues, including dividends from the Reserve Bank of India (RBI) and state-run banks, are expected to mitigate this.
Consequently, the government has revised the FY24 fiscal deficit target downwards to 5.8% of GDP from the earlier 5.9%.
Revenue Expectations and Dividends
The government anticipates dividends from state-owned firms to reach ₹50,000 crore in FY24, up from the initial estimates of ₹43,000 crore.
Dividend receipts from public sector enterprises have already reached ₹44,060 crore as of 1 February.
Moreover, it projects ₹1.02 trillion in dividends from RBI and state-owned banks in FY25, along with ₹48,000 crore from state-owned companies in the next fiscal year.
Outlook and Fiscal Implications
Given the substantial dividend projections, it’s suggested that the government may not heavily rely on disinvestment proceeds in the coming fiscal year.
While significant progress has been made, ongoing strategic divestments are yet to materialize fully, potentially extending into the next fiscal year
Several strategic disinvestments are currently underway across various stages. These include IDBI Bank Ltd, BEML Ltd, Shipping Corp. of India Ltd, HLL Lifecare Ltd, Projects & Development India Ltd, Indian Medicines Pharmaceutical Corp. Ltd, and Ferro Scrap Nigam Ltd.
Future Prospects and Candidates
Expressions of interest are yet to be sought for Container Corp. of India Ltd, while there are no immediate plans to resume the disinvestment process of Bharat Petroleum Corp. Ltd.
Additional potential candidates for divestment in FY25 include Rashtriya Ispat Nigam Ltd (RINL) and certain subsidiaries under AI Assets Holding Ltd.
Challenges and Delays
The government has encountered hurdles in executing strategic sales, particularly evident in the aborted attempts to privatize Bharat Petroleum Corporation Limited and delays in cases such as Shipping Corporation of India and Container Corporation, largely due to prevailing market conditions.
Some voices advocate for a reassessment of the government’s divestment strategy to ensure future targets are achieved.
Rajesh Sivaswamy, Senior Partner at law firm King Stubb & Kasiva, suggests exploring alternative divestment methods beyond large-scale privatization, including strategic sales and minority stake offerings.
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Evaluating India’s Disinvestment Agenda
Despite the government’s comprehensive approach, including listing, minority stake sales, strategic sales, asset monetization, and closures of non-viable firms like Scooters India, the actual transactions have been limited in number and scale.
Government data reveals 159 disinvestment transactions over the last nine years, with only a fraction of the proposed strategic sales materializing.
Since 2016, the Union Cabinet has given in-principle approval to 36 cases of PSEs, subsidiaries, and joint ventures for strategic disinvestment.
However, out of the 33 cases managed by the Department of Investment and Public Asset Management (Dipam), only 10 strategic disinvestment transactions have been completed, including the privatization of Air India.
In July last year, Minister of State of Finance Bhagwat Karad informed the Lok Sabha that approximately 14 transactions were at various stages.
However, expectations were notably high, with the government holding a significant mandate of over 300 seats in the Lok Sabha and publicly expressing its intent to pursue strategic sales and disinvestment.
Lower Than Expected Returns
However, the numbers spotlight a disparity.
Targets for receipts from disinvestment have often been revised, with the actual receipts from stake sales frequently falling short of expectations.
In seven out of the nine fiscal years since 2014-15, Revised Estimates have fallen below the Budget Estimates. Higher dividends from state-run firms have frequently compensated for revenue shortfalls, aiding in managing the fiscal deficit.
However, government officials and experts stress the importance of viewing disinvestment beyond a mere cash generation tool. They emphasize the significance of correct processes, due diligence, value maximization, and market timing over simply striving to meet specific financial targets.
Vivek Kumar, Economist at QuantEco Research, notes that while Budget targets for disinvestment may be aspirational, the actual realization depends heavily on market conditions.
Procedural delays and political opposition can also contribute to shortfalls in targets. Consequently, transactions, particularly those involving strategic sales, often face delays as they require extensive due diligence and the transfer of government equity and management control to the successful bidder.
For example, the privatization of IDBI Bank necessitates thorough due diligence, while strategic sales in Shipping Corporation of India and Bharat Earth Movers involve the demerger and listing of their non-core businesses, which include land assets.”
Challenges in Investor Interest and Pricing
Interest from investors has presented a significant hurdle, with securing the right price being a paramount consideration.
A notable example is the disinvestment of Air India, the debt-laden erstwhile national carrier, which required three attempts spanning two decades before its sale to the Tata group materialized.
Similarly, in the case of LIC, the IPO size was reduced from the planned 5% to 3.5% due to volatile capital market conditions.
Stagnant Initiatives and Delays
Certain initiatives have failed to gain traction; despite Union Cabinet approval and clearance of a land lease policy for Container Corporation of India, progress appears to be at a standstill.
Moreover, the strategic disinvestment plans for Pawan Hans have been scrapped, while those for Bharat Petroleum Corp. seem to be in limbo.
Progress on National Land Monetisation Corporation (NLMC)
Efforts towards operationalizing the National Land Monetisation Corporation (NLMC) are underway, albeit with potential delays.
The NLMC, sanctioned by the Union Cabinet in March 2022, aims to monetize land and non-core assets of central public sector enterprises (CPSEs) slated for strategic sale or closure.
The Department of Public Enterprises, overseeing this initiative, has engaged international property consultants such as SBI Capital Markets and CBRE South Asia for transaction advisory services.
Challenges and Progress in Asset Monetization
The National Monetisation Pipeline still has significant ground to cover.
While FY22-25 targeted asset monetization worth Rs 6 lakh crore, actual numbers fell short, with Rs 97,000 crore and about Rs 1.3 lakh crore realized in FY22 and FY23 respectively.
Efforts are underway to raise approximately Rs 1.8 lakh crore in FY24, with entities like the National Highways Authority of India targeting nearly Rs 45,000 crore through asset monetization.
Future Outlook and Fiscal Implications
With elections approaching, market anticipation suggests a potential slowdown in the disinvestment drive for FY24.
However, ongoing transactions such as the strategic sale in IDBI Bank and Shipping Corporation of India are reportedly on track. Nevertheless, significant stake sales might be deferred to 2025-26.
Current Disinvestment Landscape and Fiscal Targets
Despite a disinvestment target of Rs 51,000 crore set in the Union Budget 2023-24, receipts thus far have amounted to a modest sum, primarily comprising dividends from CPSEs and proceeds from OFS and other transactions.
Plans for minority stake sales in Indian Railway Finance Corp. and the IPO of Indian Renewable Energy Development Agency are underway, with Dipam also initiating work on the disinvestment of Indian Medicines Pharmaceutical Corp.
Anticipated Priorities and Challenges Ahead
Expedited stake sales in PSEs are expected to remain a central focus for the upcoming government.
Not only will this aid in bridging the fiscal deficit, but it will also enhance operational efficiency, corporate governance, and transparency within these entities.
A recent report by Bank of Baroda suggests substantial potential from disinvestment receipts, should the government opt to reduce its stake in all PSEs and financial institutions to 51%.
The Last Bit, Disinvestment, is poised to remain a significant focus in the foreseeable future, albeit with persistent challenges.
