The What, How and Why of Government disinvestment in PSU's
Finance minister Nirmala Sitharaman announced in the interim Budget for FY 2019-20, the disinvestment of Central Public Sector Enterprises (CPSEs) and increased the disinvestment target to Rs.105000 Cr.
What is Strategic Disinvestment?
It involves sale of substantial volume of shares (more than 50%) by the government in a manner that the control of the company and management passes to the private shareholders. The strategic disinvestment fetches better price to the government for the loss making and debt ridden CPSEs.
How it works?
In the wake of plethora of steps taken by Government of India to revive the slow economy, Department of Investment and Public Asset Management (DIPAM) under Ministry of Finance nominated as nodal department for the strategic disinvestment. DIPM in association with NITI Aayog, DIPM will identify PSUs for strategic disinvestment.
Bidding process involves two stages
- Preliminary intent showing bid and
- Final financial bid.
Why Strategic Disinvestment is required?
1) Helps in gradually reducing the stress of fiscal deficit over the economy and meeting the fiscal deficit target of 3.3% in FY 2019-20 as compared to 3.4% in FY 2018-19
2) Resolving the liquidity crunch in the consumption and investment market.
In carrying out the disinvestment program, Government is using ETFs (Exchange Traded Funds) wherein government will offer an investment option in ETFs on the line of ELSS (Equity linked savings scheme), which would also encourage long-term investment in CPSEs.
Recently, September 30, group of secretaries gave approval to sell government’s entire stake of 53.29% in BPCL (Bharat Petroleum Corp Ltd) worth Rs.57500 Cr. Additionally, government has also approved sale of its 30% stake in CONCOR (Container Corporation of India), 63.75 % stake in SCI (Shipping Corp of India), 100% in NEEPCO (North Eastern Electric Power Corporation) and 75% in THDC (Tehri Hydro Development Corporation Ltd).Finance Minister has also announced the strategic disinvestment of Air India and Bharat Petroleum by March 2020. This is also like selling good cash flows that these business generate and keeping the one that is the most problematic (Air India stake sale was a complete failure due to high debt, BSNL another loss making company)
Considering the reduction in tax revenues, Disinvestment program is an appreciated step taken by government to get good funds for the infrastructure activities which is much needed in the current sentiments of slowdown and also not take a hit on the fiscal deficit.
However, in the current arena of rising NPAs, bank frauds, slow GDP growth, staggering investments, disinvestment strategy seems like a quick fix solution for issues calling radical policy making and implementations. Government has come half way in introducing policy decisions, hoping for stronger implementation mechanisms to revive the developing economy of India.