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Stop chasing a mirage

Stop chasing a mirage

The Govt needs to pursue disinvestment, including privatisation, as an objective by itself instead of linking it to revenue receipts and meeting the fiscal target

The Department of Investment and Public Asset Management (DIPAM) is in a war of words with the Ministry of Finance (MoF) over the proceeds of disinvestment of the Government’s shareholding in Central Public Sector Undertakings (CPSUs) during 2020-21. The point raised by the DIPAM is that out of the Rs 2,10,000 crore target fixed in the Union Budget, a big slice of Rs 90,000 crore, was thrust upon it by the MoF as being the projected proceeds from the sale of 10 per cent shares in the Life Insurance Corporation (LIC) and its residual stake in IDBI bank (during 2018-19, LIC acquired 51 per cent stake in IDBI Bank even as the balance 49 per cent remained with the Centre).

Leave aside Rs 90,000 crore, even the balance Rs 1,20,000 crore is nowhere within reach as the proceeds so far are a meagre Rs 14,000 crore. The Narendra Modi Government’s strategy of disinvestment pursued during the last seven years has not worked. This is because barring two years i.e. 2017-18 and 2018-19 — when the actual proceeds from divestment exceeded the goal — in the remaining five years the target fell short. Even during those two exceptional years, the good performance was made possible primarily due to two big ticket sales of the Union Government’s shares in one CPSU to another. This was the sale of its 51.11 per cent shareholding in Hindustan Petroleum Corporation Limited (HPCL) to the Oil and Natural Gas Corporation (ONGC) during 2017-18 yielding Rs 37,000 crore and the sale of its 52.63 per cent stake in the Rural Electrification Corporation (REC) to the Power Finance Corporation (PFC) 2018-19 that brought in Rs 13,000 crore. But, for these, even during 2017-18 and 2018-19, actual proceeds would have fallen short.

These trends point towards bad handling of the disinvestment process. At the root of this is the faulty approach of the Union Government to treat CPSUs as an appendage to the administrative Ministry under which the PSU concerned falls and by extension, treating proceeds from divestment of its shareholding in them as a source of revenue (albeit non-tax) while preparing its Budget.

Unlike tax revenue which can be projected with a degree of certainty (the crucial determinants being the prevailing tax rate as per the law of the land and the value of economic activity), the same can’t be said about the 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. It is even more relevant in cases where strategic disinvestment is mooted. Under such a sale, the shareholding of the Union Government is brought down to below 50 per cent or even zero. For instance, the sale of its entire shareholding of 51.11 per cent in HPCL or sale of its entire 53.29 per cent shareholding in Bharat Petroleum Corporation Limited (BPCL) that was initiated in 2019-20 and has not yet happened. In such cases, if you don’t get a buyer, the sale won’t materialise. The proof of the pudding is in the eating.

As per the original plan, the 51.11 per cent shares of the Union Government in HPCL were to be sold to a private investor. But things did not pan out as planned and towards the fag end of that year i.e. January 2018, the  Government had to ask ONGC to pick up the entire stake, as it desperately needed money to meet the fiscal deficit target (in the process, ONGC suffered a collateral damage as it had to borrow Rs 35,000 crore to fund the purchase).  The second flaw has to do with the Government’s reluctance to transfer rights proportionate to shares sold to private parties.

Even in cases where strategic disinvestment is proposed, it wants to remain in the driver’s seat. To get an idea, look at what Finance Minister Nirmala Sitharaman said in her Budget speech for 2019-20. She had stated that the intent was to change the extant policy of the Government "directly" holding 51 per cent  or above in a CPSU to one whereby its total holding, "direct" plus "indirect", is maintained at 51 per cent.

Such a stingy approach and the unwillingness of the political establishment to relinquish control even after divestment of majority ownership is far from conducive to eliciting interest from potential investors.

Third, the Government spends too much time on policy formulation — a process that goes on ad infinitum. In early 2016, the NITI Aayog had recommended a strategic sale of over two dozen CPSUs. But, the powers that be didn’t act on those recommendations.

Meanwhile, early this year, Sitharaman announced broad contours of the Government’s plans on privatisation, delineating different approaches to “strategic” (16 such sectors have been identified) and “non-strategic” sectors. Reportedly, a meeting of the Cabinet Committee on Economic Affairs (CCEA) will be held shortly to approve the policy.

Allowing for about a year for the NITI Aayog to come up with its recommendations, it has been more than five years and the policy on strategic disinvestment has not been finalised yet. Till that happens, the Ministries concerned  won’t gain the necessary momentum to push the sale process. Even after a divestment plan for a PSU is finalised, the Government remains in a flip-flop mode. For instance, in the case of Air India (AI), in its initial sale plan (2018-19), it had insisted on retaining 26 per cent stake, three years’ lock-in period on disposition of shares by the acquirer, leaving a big slice of debt on the balance sheet, retention of employees and so on. Since then several changes have been made. The offer plan currently under execution includes divestment of all of the Government’s shareholding, requiring the suitor to bid for the “enterprise value” (put simply, it means, he will be free from any debt burden), relaxation in other riders such as lock-in period, retention of employees and so on.

These flip-flops result in avoidable delays and erosion in the sale proceeds. If, only the Government had gone for sale of its 100 per cent stake in its 2018-19 offer and not insisted on the suitor to pick up a big slice of the debt on the AI’s books, further erosion in the realisable value from sales could have been avoided. Fourth, notwithstanding much trumpeting about governance reforms, bureaucratic red tape rules the roost. Almost all processes starting from conception, getting approvals, appointment of transaction advisor, inviting an Expression of Interest, financial bids, selection of bidder and so on, crucial to successful completion of disinvestment are hamstrung by it. Add to this, the reluctance of bureaucrats to take timely decisions fearing they might be questioned after retirement.

This leads to delay in processes and by the time, all approvals are in place, the market scenario has undergone a drastic change. For instance, the sale of BPCL was planned during 2019-20. Then, the projected realisation from sale was over Rs 60,000 crore. But, the officials were not ready. Even as they exuded confidence that the sale would go through during the current year, the pandemic has spoilt the party. The chances of the sale getting completed by March 31 this year are dim. Meanwhile, there has been significant value erosion, even as the proceeds on current valuation may not exceed Rs 45,000 crore.

To conclude, the present approach of the Government to link divestment of its shareholding in CPSUs to using receipts (non-tax) therefrom to meet the fiscal deficit target is flawed. It should be abandoned. Instead, the Government should pursue share sale including strategic disinvestment (or privatisation) as an objective by itself.

In this regard, formulation of an appropriate strategy and preparation of a PSU-specific plan should come from the management (it is best equipped to do the job) instead of being thrust on it by the concerned administrative Ministry under a typical top-down approach.

However, the Government may constitute a panel of eminent professionals (sans bureaucrats) for providing guidance on macro-economic issues that have a bearing on the disinvestment process and can be helpful in maximising realisation from the sale.

In the current scenario, wherein the Government is encouraging private companies to invest even in sensitive areas such as defence, space and so on, there is no point in getting bogged down in drawing a line between strategic and non-strategic sectors. Any decision to privatise a PSU should be taken on the merit of each case.

This will give the much-needed flexibility to the management to decide the contours and timing of the divestment, taking into account market conditions. This will help in maximising proceeds from sales and improve the Centre’s budgetary position, too.

(The writer is a New Delhi-based policy analyst. The views expressed are personal.)

Stop chasing a mirage

Stop chasing a mirage

The Govt needs to pursue disinvestment, including privatisation, as an objective by itself instead of linking it to revenue receipts and meeting the fiscal target

The Department of Investment and Public Asset Management (DIPAM) is in a war of words with the Ministry of Finance (MoF) over the proceeds of disinvestment of the Government’s shareholding in Central Public Sector Undertakings (CPSUs) during 2020-21. The point raised by the DIPAM is that out of the Rs 2,10,000 crore target fixed in the Union Budget, a big slice of Rs 90,000 crore, was thrust upon it by the MoF as being the projected proceeds from the sale of 10 per cent shares in the Life Insurance Corporation (LIC) and its residual stake in IDBI bank (during 2018-19, LIC acquired 51 per cent stake in IDBI Bank even as the balance 49 per cent remained with the Centre).

Leave aside Rs 90,000 crore, even the balance Rs 1,20,000 crore is nowhere within reach as the proceeds so far are a meagre Rs 14,000 crore. The Narendra Modi Government’s strategy of disinvestment pursued during the last seven years has not worked. This is because barring two years i.e. 2017-18 and 2018-19 — when the actual proceeds from divestment exceeded the goal — in the remaining five years the target fell short. Even during those two exceptional years, the good performance was made possible primarily due to two big ticket sales of the Union Government’s shares in one CPSU to another. This was the sale of its 51.11 per cent shareholding in Hindustan Petroleum Corporation Limited (HPCL) to the Oil and Natural Gas Corporation (ONGC) during 2017-18 yielding Rs 37,000 crore and the sale of its 52.63 per cent stake in the Rural Electrification Corporation (REC) to the Power Finance Corporation (PFC) 2018-19 that brought in Rs 13,000 crore. But, for these, even during 2017-18 and 2018-19, actual proceeds would have fallen short.

These trends point towards bad handling of the disinvestment process. At the root of this is the faulty approach of the Union Government to treat CPSUs as an appendage to the administrative Ministry under which the PSU concerned falls and by extension, treating proceeds from divestment of its shareholding in them as a source of revenue (albeit non-tax) while preparing its Budget.

Unlike tax revenue which can be projected with a degree of certainty (the crucial determinants being the prevailing tax rate as per the law of the land and the value of economic activity), the same can’t be said about the 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. It is even more relevant in cases where strategic disinvestment is mooted. Under such a sale, the shareholding of the Union Government is brought down to below 50 per cent or even zero. For instance, the sale of its entire shareholding of 51.11 per cent in HPCL or sale of its entire 53.29 per cent shareholding in Bharat Petroleum Corporation Limited (BPCL) that was initiated in 2019-20 and has not yet happened. In such cases, if you don’t get a buyer, the sale won’t materialise. The proof of the pudding is in the eating.

As per the original plan, the 51.11 per cent shares of the Union Government in HPCL were to be sold to a private investor. But things did not pan out as planned and towards the fag end of that year i.e. January 2018, the  Government had to ask ONGC to pick up the entire stake, as it desperately needed money to meet the fiscal deficit target (in the process, ONGC suffered a collateral damage as it had to borrow Rs 35,000 crore to fund the purchase).  The second flaw has to do with the Government’s reluctance to transfer rights proportionate to shares sold to private parties.

Even in cases where strategic disinvestment is proposed, it wants to remain in the driver’s seat. To get an idea, look at what Finance Minister Nirmala Sitharaman said in her Budget speech for 2019-20. She had stated that the intent was to change the extant policy of the Government "directly" holding 51 per cent  or above in a CPSU to one whereby its total holding, "direct" plus "indirect", is maintained at 51 per cent.

Such a stingy approach and the unwillingness of the political establishment to relinquish control even after divestment of majority ownership is far from conducive to eliciting interest from potential investors.

Third, the Government spends too much time on policy formulation — a process that goes on ad infinitum. In early 2016, the NITI Aayog had recommended a strategic sale of over two dozen CPSUs. But, the powers that be didn’t act on those recommendations.

Meanwhile, early this year, Sitharaman announced broad contours of the Government’s plans on privatisation, delineating different approaches to “strategic” (16 such sectors have been identified) and “non-strategic” sectors. Reportedly, a meeting of the Cabinet Committee on Economic Affairs (CCEA) will be held shortly to approve the policy.

Allowing for about a year for the NITI Aayog to come up with its recommendations, it has been more than five years and the policy on strategic disinvestment has not been finalised yet. Till that happens, the Ministries concerned  won’t gain the necessary momentum to push the sale process. Even after a divestment plan for a PSU is finalised, the Government remains in a flip-flop mode. For instance, in the case of Air India (AI), in its initial sale plan (2018-19), it had insisted on retaining 26 per cent stake, three years’ lock-in period on disposition of shares by the acquirer, leaving a big slice of debt on the balance sheet, retention of employees and so on. Since then several changes have been made. The offer plan currently under execution includes divestment of all of the Government’s shareholding, requiring the suitor to bid for the “enterprise value” (put simply, it means, he will be free from any debt burden), relaxation in other riders such as lock-in period, retention of employees and so on.

These flip-flops result in avoidable delays and erosion in the sale proceeds. If, only the Government had gone for sale of its 100 per cent stake in its 2018-19 offer and not insisted on the suitor to pick up a big slice of the debt on the AI’s books, further erosion in the realisable value from sales could have been avoided. Fourth, notwithstanding much trumpeting about governance reforms, bureaucratic red tape rules the roost. Almost all processes starting from conception, getting approvals, appointment of transaction advisor, inviting an Expression of Interest, financial bids, selection of bidder and so on, crucial to successful completion of disinvestment are hamstrung by it. Add to this, the reluctance of bureaucrats to take timely decisions fearing they might be questioned after retirement.

This leads to delay in processes and by the time, all approvals are in place, the market scenario has undergone a drastic change. For instance, the sale of BPCL was planned during 2019-20. Then, the projected realisation from sale was over Rs 60,000 crore. But, the officials were not ready. Even as they exuded confidence that the sale would go through during the current year, the pandemic has spoilt the party. The chances of the sale getting completed by March 31 this year are dim. Meanwhile, there has been significant value erosion, even as the proceeds on current valuation may not exceed Rs 45,000 crore.

To conclude, the present approach of the Government to link divestment of its shareholding in CPSUs to using receipts (non-tax) therefrom to meet the fiscal deficit target is flawed. It should be abandoned. Instead, the Government should pursue share sale including strategic disinvestment (or privatisation) as an objective by itself.

In this regard, formulation of an appropriate strategy and preparation of a PSU-specific plan should come from the management (it is best equipped to do the job) instead of being thrust on it by the concerned administrative Ministry under a typical top-down approach.

However, the Government may constitute a panel of eminent professionals (sans bureaucrats) for providing guidance on macro-economic issues that have a bearing on the disinvestment process and can be helpful in maximising realisation from the sale.

In the current scenario, wherein the Government is encouraging private companies to invest even in sensitive areas such as defence, space and so on, there is no point in getting bogged down in drawing a line between strategic and non-strategic sectors. Any decision to privatise a PSU should be taken on the merit of each case.

This will give the much-needed flexibility to the management to decide the contours and timing of the divestment, taking into account market conditions. This will help in maximising proceeds from sales and improve the Centre’s budgetary position, too.

(The writer is a New Delhi-based policy analyst. The views expressed are personal.)

Stop chasing a mirage

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