Not so strategic disinvestment

by February 11, 2020 0 comments

Unless there is an economic turnaround and the bureaucratic machinery moves with alacrity to make preparations for conducting PSU sales, the Govt will not reach the Rs 2,10,000 crore target

Buoyed by the success of disinvestment in  Public Sector Undertakings (PSU) during 2017-18 and 2018-19 (when the Centre garnered over Rs 100,000 crore and Rs 85,000 crore respectively), for the current year, the Modi Government had set an ambitious target of getting Rs 1,05,000 crore. A major slice of these proceeds was to come from “strategic disinvestment” or transfer of a sizeable portion of ownership (this could go up to 51 per cent, implying privatisation) and management control to a private entity.

The crucial “strategic disinvestment” proposals included divestment of all of the Government’s shareholding in Bharat Petroleum Corporation Limited (BPCL) 53.29 per cent; Containers Corporation of India (ConCor) 30 per cent; Shipping Corporation of India (SCI) 63.75 per cent; North Eastern Electric Power Corporation (NEEPCO) 100 per cent and THDC India Limited 75 per cent. However, the results are disappointing. As per the revised estimates (RE) given in the Union Budget for 2020-21 on February 1, proceeds from disinvestment are Rs 65,000 crore-Rs 40,000 crore short of the Budgetary Estimates (BE). However, till date, the Government has garnered only Rs 18,000 crore. One wonders where it will get the balance Rs 47,000 crore even as the sale of BPCL, CONCOR and SCI (these three undertakings alone were projected to account for over 75 per cent of the target) is unlikely to get consummated before March 31.

For 2020-21, Sitharaman has set an over-ambitious target of Rs 2,10,000 crore which is double the BE for 2019-20 and more than three times the RE for 2019-20. Apart from the strategic sale of the above-mentioned three PSUs, the Union Government has also taken a major decision to list and sell shares of the Life Insurance Corporation of India (LIC), which is 100 per cent owned by it and accounts for nearly three-fourths of the life insurance business. Besides, it has also resurrected its plan for sale of Air India which was abandoned during 2018-19 due to lack of interest among potential investors. The Government seems to be betting big on LIC and BPCL. Considering the likely valuation of about Rs 900,000 crore (at 30 per cent of its assets estimated at Rs 30,00,000 crore), the sale of 10 per cent shares in LIC could yield about Rs 90,000 crore. Further, divestment of 53.29 per cent shareholding in BPCL is estimated to yield about Rs 60,000 crore (at current market capitalisation of over Rs 110,000 crore). These two add up to Rs 150,000 crore. For the balance, it could bank on sale of 100 per cent Air India (plus Air India Express and 50 per cent of Air India’s stake in ground-handling company AI Singapore Terminal Services Limited (AISATS), CONCOR and SCI et al. The task is daunting.

Prima facie, the sale of a small percentage of shareholding in LIC may sound easy to push as the Government can argue that majority ownership and control will continue to be with it even after this divestment. But, this is easier said than done. The proposed Initial Public Offering (IPO) of the LIC will have to be preceded by amendments to the LIC Act, particularly three sections — Section 24: It deals with the way the corporation handles its corpus (own fund in which all of its receipts are credited thereto and all payments made therefrom); Section 28: It lays down the policy on dividend distribution (how the surplus is to be distributed) and Section 37: It provides Government guarantee on all its policies. The policy on dividend distribution could be a bone of contention.

At present the LIC pays five per cent of the surplus to the shareholder (Government), while the remaining 95 per cent gets distributed among policyholders. In case of private insurance companies however, the shareholder gets 10 per cent of the surplus even as the rest 90 per cent goes to policyholders. The external investor could insist on bringing LIC on par with other insurance companies by modifying the dividend distribution norms. The former may insist on increasing the share of shareholder in surplus from existing five per cent.

According to existing rules under Section 37 of the Act, “Sums assured by all policies issued by the corporation including any bonuses declared in respect thereof…shall be guaranteed as to payment in cash by the Central Government”. One wonders whether post-dilution of  the Government’s shareholding, the sovereign guarantee to the policyholders would be retained.

As per the LIC Act, “The paid-up equity capital of the corporation shall be Rs 100 crore provided by the Central Government after due appropriation made by Parliament by law for the purpose”. This needs to be increased appropriately in order to prepare it for the proposed IPO and sell even a 10 per cent stake. The preparations in this regard are bound to be time-consuming and may stretch till the end of fiscal 2020-21. That apart, considering that most of the parties across the political spectrum have opposed stake sale in the LIC, it is doubtful whether the Government will be able to get the amendment Bill passed, more so when it is in the minority in the Upper House (the chances of this being taken up as Money Bill in which case, it doesn’t have to go to the Rajya Sabha are dim). As regards BPCL, while divestment of majority stake in it won’t face any legal hurdle (necessary amendment to the relevant law was made in 2016), the potential buyer will look for exercising its due role even in undertakings where BPCL holds significant stake. For instance, it holds 12.5 per cent stake in Petronet LNG India along with Oil and Natural Gas Corporation (ONGC), Indian Oil Corporation (IOCL) and Gas Authority of India (GAIL) holding 12.5 per cent each. Though branded as a private company, its Chairman is Secretary, Ministry of Petroleum and Natural Gas (MPNG). The acquirer of BPCL will insist on changing this arrangement.

Likewise, in a city gas distribution firm, Indraprastha Gas (IGL), BPCL has 22.5 per cent along with GAIL which also holds 22.5 per cent. However, the chairmanship of IGL is decided by GAIL (which will continue to be majority-owned by the Union Government even as BPCL is divested). As in the case of Petronet LNG India, the new owner of BPCL will insist on having a role in deciding the management of IGL.

If, the Government is unwilling to bring about these changes, this will lower valuation or lead to dissipation of interest. Late last year, the political brass was contemplating to sell BPCL stake to IOCL on lines similar to the so-called strategic sale of Hindustan Petroleum Corporation Limited (HPCL) during 2017-18 (then, the Union Government sold 51.11 per cent of its shareholding in HPCL to ONGC which is majority owned by itself).

But, the idea was dropped. It may be revived (in a desperate bid to achieve the target) if during 2020-21 also investors don’t evince interest. As regards, Air India, the Government has removed some major bottlenecks which led to the failed move in 2018-19. Now, it is offering 100 per cent of its shareholding, hived off over 60 per cent of total debt from its balance sheet and dispensed with other riders such as three years’ lock-in period on disposition of shares by the acquirer and so on. However, there still remain many irritants, the most serious being a condition relating to retention of employees.

Besides, the PSU-specific factors, the Government’s ability to achieve the target is constrained by “lack of appetite” in an overall subdued economic environment characterised by plunging growth, demand compression, deceleration in investment and above all a not-so-buoyant perception about opportunities ahead.

The appetite was missing even during periods of high growth; for instance in 2017-18 when GDP growth was over seven per cent yet, the Government was forced to sell all of its stake in HPCL to ONGC (this alone yielded Rs 37,000 crore out of a total of Rs 100,000 crore). Now, with growth plummeting to less than five per cent during 2019-20 and muted recovery projected for 2020-21, the appetite would be even lower.

Unless there is dramatic turnaround in the economy, the bureaucratic machinery moves with alacrity to make the required preparations for conducting the sale and Opposition parties extend cooperation in getting necessary laws/amendments passed, it is unlikely that the Government will reach anywhere near the Rs 2,10,000 crore target. The shortfall on this score alone could cause at least 0.5 per cent slippage in fiscal deficit (target for 2020-21 is 3.5 per cent) which anyway will be under threat due to unrealistic projections for tax collections during the year.

(Writer: Uttam Gupta; Courtesy: The Pioneer)

 

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