Disinvestment

Practice Questions –

The Union Cabinet has recently decided to approve strategic disinvestment of the government’s shareholding in few public sector enterprises. In light of the current economic scenario, discuss the challenges which such a disinvestment process would face. – 200 words.

What do you understand by the term ‘disinvestment’ and what are its advantages? What is the difference between a ‘disinvestment’ and a ‘strategic sale’? – 200 words

What is Disinvestment?

Disinvestment is the process by which the Union government either sells its stakes in a PSU–fully or partially–or lists it on the stock market. The concept of disinvestment follows the dictum: The government has no business to be in business. Thus, the government continues to disinvest in sectors where private companies are already the dominant players. The proceeds of the sale are channelised to the National Investment Fund, which was set up in 2005 as a corpus of permanent nature to help the government.

Relevance.

The Union Cabinet has recently decided to approve strategic disinvestment of the government’s shareholding in five public sector enterprises including Bharat Petroleum Corporation Limited, Shipping Corporation of India and the Container Corporation of India. The government announced that it would sell stakes in several public sector undertakings (PSUs) and even give up management control in some. The Central government will cede full management control to buyers in the case of oil marketing company Bharat Petroleum Corporation Ltd. (BPCL), Shipping Corporation of India (SCI) and Container Corporation of India Ltd (CONCOR). The government will transfer its 74.2% stake in THDC India Limited (formerly Tehri Hydro Development Corporation of India) and its 100% stake in North Eastern Electric Power Corporation Limited (NEEPCO) to another public sector unit and power distribution major, NTPC Ltd.

How disinvestment can be useful?

  • The primary objectives of disinvestment are as follows: Reducing the financial burden on the government, improving public finances, introducing competition and market discipline, funding growth, encouraging wider share of ownership, and depoliticising non-essential services.
  • Playing the role of a business promoter rather than being directly involved in business – “The government has no business being in business”. That is, the government’s role is to facilitate a healthy business environment but the core competence of a government does not lie in selling fuel or steel at a profit.
  • Narrowing the fiscal gap – As of September 30, net tax revenue had only reached 36.8% of the budget estimate of 16.5 lakh crore for the full year, while non-debt capital receipts were at 17.2% of the fiscal’s target of about Rs.1.2 lakh crore according to the Controller General of Accounts.
  • Exiting unprofitable, non-strategic businesses (e.g. Air India).
  • In some cases, disinvestment may be done to privatise assets.
  • It can be helpful in the long-term growth of the country; it allows the government and even the company to reduce debt. Disinvestment allows a larger share of PSU ownership in the open market, which in turn allows for the development of a strong capital market in India.

Challenges in the disinvestment process –

  • The scale of the exercise – the disinvestment of government companies is a massive exercise which requires considerable time, substantial human expertise and financial resources.
  • Addressing the concerns of all the stakeholders like lenders, employees, existing contractors etc.
  • Finding a strategic investors willing to pay the right price.
  • Appointment of advisers, to deciding on the pricing mechanism and initiating a transparent bidding process.
  • Ensuring that politics does not take precedence over economic interest.
  • Assessing the right time for disinvestment depending upon the market temperament.

Way ahead:

The government is lagging behind in its investment target by a substantial margin. With just Rs. 17,364 crore of the Rs. 1.05 lakh crore disinvestment target realised till the end of September 2019, the Centre has little choice but to expedite these strategic sale proposals in double-quick time.

Additional Information –

Why did the government retain the stake in Container Corporation of India? – The reason for retaining the stake in Concor, explained the finance minister, was because the company was integrally linked to the Indian Railways. “We don’t really have a very competitive market as yet in this area, so therefore, it is important that the government retain stake that is less than 26%.

What is a strategic sale? – A strategic sale by a government is one where the management control is ceded to the buyer. A divestment could be stake sale to a buyer, via an initial public offering or a direct deal, but in which the government still retains majority and management control. A strategic sale is also different from cases where the government transfers majority stake but only to another PSU over which it has control, as happened recently with HPCL (bought by Oil and Natural Gas Corporation) and with Tehri Hydro and NEEPCO in the latest round.

Sources –

https://www.thehindu.com/business/Economy/will-the-governments-stand-on-privatisation-of-public-sector-units-help-the-economy/article30063710.ece

https://www.thehindu.com/opinion/editorial/expedient-exit/article30041503.ece

https://www.fortuneindia.com/opinion/the-road-to-105-trillion-disinvestment-target/103809

https://www.news18.com/news/business/budget-2019-disinvestment-meaning-and-definition-what-is-disinvestment-and-how-it-affects-economy-2213045.html

https://www.financialexpress.com/what-is/disinvestment-meaning/1762574/