Union Finance Minister Nirmala Sitharaman has set an ambitious target of Rs 1.05 lakh crore as proceeds of disinvestment of government shares in public sector undertakings (PSUs). She has also proposed aggressive pursuit of ‘strategic’ disinvestment by reducing government’s shareholding in PSUs to below 51% on a case-by-case basis.
The route to garnering one-third of this target, or Rs 35,000 crore, has been set. This includes proceeds from divestment of Air India, which could not go through last year, courtesy the government’s decision then to retain 24% shareholding with itself (besides other riders such as a three-year lock-in period on disposition of shares by the acquirer) which discouraged prospective bidders.
Strategic disinvestment involves transfer of a sizeable portion of ownership and management control to an investor (call him ‘strategic’ investor) by selling commensurate shares. Apart from much-needed capital, he/she can bring in technology, management skills, intellectual property and other resources that can help transform the way a PSU is run, make it grow faster and enhance its competitiveness in an increasingly challenging world.
As regards the extent of divestment — 10%, 20%, 25%…51% — there cannot be a ‘one-size-fits-all’ approach. The level could vary depending on the area of operation, size, market capitalisation, net-worth, profit, potential to grow, etc., of the PSU in question. However, in a transformative sense, the government could reduce its holding to below 51% so as to lead to relinquishment of its majority ownership and control, or privatisation in plain words. This is precisely what the finance minister has alluded to. But mere declaration of intent is of no consequence. It should be matched by credible action. In this regard, the Modi government has very little to show from its first term.
In the budget for 2015-16 and 2016-17, it had targeted proceeds of Rs 28,500 crore and Rs 20,500 crore respectively from strategic disinvestment. Against this, during 2015-16, there was not even a single case of divestment through this route. In 2016-17, the target itself was reduced to a meagre Rs 5,500 crore.
During 2017-18, the Union government sold 51.11% of its shareholding in Hindustan Petroleum Corporation Limited (HPCL) to Oil and Natural Gas Corporation (ONGC), yielding about Rs 37,000 crore. This helped the exchequer hit Rs 1 lakh crore mark in overall divestment proceeds. In 2018-19, it sold 52.63% of its shareholding in Rural Electrification Corporation (REC) to Power Finance Corporation (PFC) to yield Rs 13,000 crore.
The secretary of the Department of Investment and Public Asset Management (DIPAM), Atanu Chakraborty, has cited the above sales to show that their efforts are gathering pace. However, the sale of shares in HPCL to ONGC or of shares in REC to PFC — that is, from one PSU to another — cannot be called ‘strategic disinvestment’ as even after relinquishing 51% shareholding, the government continues to exercise full control, through another PSU, over the divested entity (HPCL/REC) by virtue of it being majority owner in the acquirer (ONGC/PFC).
The reality is that in early 2016, Niti Aayog had recommended strategic sale of government’s equity in over two dozen PSUs. That was not acted upon. Not getting a good price is a standard argument often given for explaining away the failure to divest. But, under Modi 1.0, the real reason was the utter lack of seriousness on the part of the ruling dispensation in taking forward this structural reform.
Whereas over Air India it made a half-hearted move, in the case of HPCL and REC, sale of shares to ONGC and PFC respectively was an orchestrated plan to garner resources for the government to meet the fiscal deficit target — at the cost of ONGC and PFC, who were even forced to borrow to fund the purchase.
Avoiding the 3Cs
Now, with the Budget proclaiming a cut in government shareholding to below 51%, will things be different? A close look at the thought process of mandarins in the DIPAM and the finance ministry would show that this is driven more by the desire to enable PSUs to avoid coming under the scanner of the so-called 3Cs — Central Bureau of Investigation (CBI), Central Vigilance Commission (CVC), and the Comptroller and Auditor General (CAG) — the statutory watchdogs who maintain strict vigil over PSUs.
The argument goes that with the shareholding of the Union government dipping below 51%, the undertaking will cease to be a PSU, and hence won’t be accountable to the watchdogs. In a way, this is good as then the managements will be able to run the enterprises free from encumbrances and take business decisions on the fast track.
But we need to recognise that other entities, such as the Life Insurance Corporation (LIC), which are 100%-owned by the government, also hold shares in the PSUs. So, even if direct holding of the Government of India goes below 51%, together with its indirect holding, say through LIC, it will still have a majority stake, enabling it to exercise control. That could lead to a deadly scenario whereby the political brass and bureaucrats will continue to call the shots without at the same time being accountable. Surely, this is not the kind of disinvestment the nation needs or was promised.
Strategic disinvestment, in the true sense of the term, would require transfer of the ownership and control of the undertaking to the strategic investor – lock, stock and barrel. So, while carrying out the exercise, the government should ensure that its shareholding – direct plus indirect – is reduced to a level below 51%. This will also help in unlocking the PSU’s full value as well as maximising revenue for the government.
It will require unshackling the mindset of our rulers, who have got attuned to using PSUs as milch cows to serve the budgetary needs of the government. Will Modi 2.0 take a call on this and be different?
(The writer is a New Delhi-based policy analyst)