In 1991 when the government first decided to divest its equity stake in public sector enterprises (PSUs), Yashwant Sinha,  then finance minister, said that disinvestment would “broad-base the equity, improve management and enhance the availability of resources for these enterprises”. Twenty-five years later, India’s disinvestment story is in a sorry state. This fiscal will be the sixth consecutive year the government will miss its budgetary target of raising money through divestment, as per the department of disinvestment.

The finance ministry had set the target of raising Rs 69,500 crore through disinvestment process in the current fiscal (2015-16). Of this, Rs 41,000 crore was to be raised through sale of minority stakes in central public sector enterprises (CPSEs) and the rest, Rs 28,500 crore, through strategic sale of equity in loss-making CPSEs. While the target was huge, there was a general expectation that it could be achieved. But the government so far has managed to raise only about Rs13,344 crore.

The process though was started on a positive note with Rural Electrification Corporation Limited (REC) being divested in the beginning of the financial year. The government had the best half-yearly collection in the last many years, raising Rs 12,700 crore between April and September. But the volatile market seems to have worked against the initial positive tide.

So, where is our disinvestment strategy heading to?

Experts argue that disinvestment must be carried out for greater economic efficiency rather than just meeting the expenditure needs of the government.

Pranav Haldea, managing director, Prime Database, which compiles data on capital markets and related matters, says disinvestment targets should be the result of a clearly thought-out action plan, irrespective of the fate of the market. “The return might be little less than expected but it will be better than year-on-year shortfall of targets,” he adds.

“Valuation and pricing cannot be the only factors as far as disinvestment is concerned. There is a need for a larger strategic plan,” says Haldea. The smaller disinvestments and the government asking CPSEs to pay higher dividends are only short-term measures. The government should have well planned objectives for a three-to-five-year horizon and it should stick by it, irrespective of the market movements, suggests Haldea.

“Markets are becoming more and more volatile and interlinked globally. There are a huge number of factors which decide the fate of the Indian markets. The divestment process cannot just be linked to market movements. It has to have more of a strategic objective,” adds Haldea.

Navneet Munot, chief investment officer of SBI Funds Management, says market conditions and some of the factors in which PSUs operate have been challenging throughout the year. There have also been challenges related to sectors like oil and gas, fertilizers and infrastructure. “Market conditions have not been favourable to pursue an aggressive divestment plan. But there were a few opportunities which could have been used. In some of the oil companies stocks were favourable.”

However, Reena Ramachandran, former chairman and managing director at Hindustan Organic Chemicals, says the decline in global oil prices provided an alternative to the government. It helped it to fill the fiscal deficit gap and thus the government was not under pressure to sell family silver at relatively lower prices.

“Disinvestment should logically be done for improving the health of the public sector,” she adds.

Strategic sale, an alternative

So far the centre has been able to garner around Rs 13,344 crore after selling stake in REC (Rs 1,608 crore), Power Finance Corporation Limited (Rs 1,671 crore), Dredging Corporation of India Ltd (Rs 53.33 crore), Indian Oil Corporation Limited (Rs 9,369 crore), and Engineers India Limited (Rs 643 crore). And now with just a month and a half left for the fiscal to end, not much is expected from the disinvestment calendar.
Finance minister Arun Jaitley had announced in January that his ministry was working on an alternative strategy to push disinvestment in volatile markets.

Industry experts see strategic sale (that is, sale of stake to private companies or complete privatisation) as a good alternative. Munot believes that strategic sale could have sent a very strong signal in the market.

Calling it the best alternative available, Haldea says it will also fulfill the prime minister’s vision of ‘minimum government and maximum governance’. “The government has no business of staying in most of the businesses. The decision of aggressive strategic sale will send out positive signals. It is independent of the market and will get them much higher premium over the current stock price, fulfilling the government’s objectives from monetary terms.”

While industry experts also expect the government to be more realistic in setting its disinvestment target for the next fiscal, it is working on its plans to ensure targets are met in 2016-17. According to various media reports, it will revamp the disinvestment process by taking all stakeholders on board.

The department of economic affairs and the department of public enterprises will be involved in the decision-making process related to divestment of the government stake in CPSEs, which means the new disinvestment policy will not be in isolation.

jasleen@governancenow.com

(The article appears in the February 16-29, 2016)