Navigating the Challenges of Disinvestment
Monday, Mar 20, 2023
Introduction
Divestment in India refers to the process of selling government-owned assets, such as shares in public sector companies, to private investors. The government of India has been implementing a policy of disinvestment since the 1990s as a means to raise funds, reduce its fiscal deficit, and promote efficiency in the public sector.
The disinvestment process in India has been gradual, with the government selling small stakes in state-owned companies through the stock market. This approach has been successful in raising significant funds for the government, with disinvestment proceeds reaching a peak of INR 1.05 trillion (approximately $14 billion) in the financial year 2016-2017.
One of the major advantages of disinvestment is that it can lead to increased efficiency in the public sector. Private investors are often more focused on maximizing profits and are better equipped to manage and grow businesses. This can lead to improved financial performance and better returns for shareholders. Overall, disinvestment has been an important tool for the Indian government in raising funds and promoting efficiency in the public sector. However, it is important for the government to carefully consider the potential drawbacks and to ensure that the process is transparent and fair.
Divestment in FY24
Experts at Kotak Institutional Equities predict that the Indian government will aim to raise a more conservative amount of funds through the sale of state-owned enterprises in the next fiscal year, due to falling short of their target this year. Analysts estimate that the government will aim to generate INR 350 billion ($4.30 billion) in 2022-2023 and INR 500 billion in 2023-2024 by selling shares in public sector companies. The government’s target for the current fiscal year was INR 650 billion.
The government has raised a total of 31,106.4 crore rupees in the fiscal year 23 through divestment, with 20,516.12 crore rupees generated from selling their stake in the Life Insurance Corporation of India via an initial public offering. Additionally, 3,058.78 crore rupees were raised through the sale of shares in ONGC and 3,839 crore rupees were raised through the sale of shares in Axis Bank held by SUUTI. The government also received 36,637.78 crore rupees through dividends from public sector companies.
Similarly, the government is expected to raise money by selling more shares in Life Insurance Corporation, Shipping Corporation of India and by leaving holdings of Specified Undertaking of UTI, an investment vehicle that holds shares of listed and unlisted entities previously held by the failed Unit Trust of India. However, it will be difficult to privatize these companies before the general elections. Nomura also predicts a more conservative target of INR 500 billion for disinvestment receipts next year. Morgan Stanley expects the government to budget for only INR 350 billion in receipts from share sales in public enterprises this year. The government has only met or exceeded its disinvestment target in eight of the 32 instances in the past, according to economists at the Bank of Baroda.
Privatisation
Economists predict that the privatisation of government-run companies may not be a top priority after the completion of the IDBI Bank sale in FY24, as privatisation typically takes longer and requires consideration of factors such as employee base and inter-company synergies. While privatisation will remain an active agenda, disinvestment will likely be a more viable approach in the short term.
After the sale of Air India, the government’s privatisation process has been slow, with proposals to privatize two public sector banks and one general insurance company in 2021-22, but little progress made so far.
Conclusion
Hence whilst the strategic stake sales in PSUs such as BPCL, BEML, Container Corporation of India, and Shipping Corporation of India may increase the current target for FY23, the union government so far has only divested Rs 31,106.4 crore in FY 23 according to Department of Investment and Public Asset Management (DIPAM) which is half of the current year’s target of Rs 65,000 crore.
Since the government’s projected plan for FY23 was not achieved by a big margin and the following year is an election year, it is fair to expect that the government will set a more conservative divestment target, which may range between Rs 30,000 to 40,000 crore. Undercutting the target by a significantly as compared to FY23 gives them a more realistic chance at achieving the same especially considering the uncertainty around favourable market conditions and some major bottlenecks to the divestment process in FY24 such as elections, weak performance of PSU shares on the stock markets etc.
Author Bio– Shreesh Singh is a financial market expert and analyst with case study skills and knowledge. His work clearly shows his passion and enthusiasm and we can feel it through his articles
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