The ‘strategic disinvestment’ is an acronym used to denote transfer of a sizeable portion of ownership and management control of the state in a public sector undertaking [PSU] to an investor [call him ‘strategic’ investor] by selling commensurate shares. 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 privatization in plain words.
The governments, the world over, have used this as an instrument to vacate areas of economic activity where they believe the state ought not to be involved in the very first place or after having operated for a certain period, currently feel it is no longer necessary. It is also used to secure capital, technology, management skills, intellectual property and other resources needed to make the firm grow fast and enhance its competitiveness in an increasingly challenging world. The strategic investor will bring all these resources upon acquisition of majority ownership and control over the undertaking.
Under NDA – I [1999-2004] led by then Prime Minister, AB Vajpayee ‘strategic disinvestment’ was successfully executed involving privatization of prominent companies viz. Modern Food Industries (India) Limited [MFIL], Hindustan Zinc Limited [HZL] etc which have substantially improved their profitability and market capitalization under their new owners. Unfortunately, under the UPA – dispensation [2004-2014], this was given a go-bye. Whatever disinvestment happened [certainly not strategic], it was all with the intent of garnering revenue to plug government’s fiscal deficit.
On assumption of office in 2014, NDA – II led by Narendra Modi resurrected the idea. In the budget for 2015-16 and 2016-17, the government had targeted proceeds of Rs 28,500 crores and Rs 20,500 crores respectively from the strategic disinvestment. Against this, during 2015-16, there was not even a single case of strategic sale whereas for 2016-17, the target itself was reduced to a meager Rs 5500 crores realizing that there was hardly anything to show up.
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 crores. In 2018-19, it sold 52.63% of its shares in Rural Electrification Corporation [REC] to Power Finance Corporation [PFC] to yield Rs 13,000 crore. However, these sales cannot be termed as strategic as even after relinquishing 51% plus shareholding, the union continues to exercise full control over HPCL/REC by virtue of being majority owner in the acquirer namely, ONGC/PFC.
Last year, the government also tried to sell Air India. Though the offer was for 76% [more than 51% needed for majority control], it didn’t go through as bidders were not comfortable even with state’s residual holding. There were other riders such as 3 years lock-in period on disposition of shares by the acquirer, embargo on lay-off of employees for specified period etc which deterred them.
During the current year, the government has come up with its most ambitious program of strategic disinvestment. It has decided to divest all of its shareholding in three PSUs viz. Bharat Petroleum Corporation Limited [BPCL] 53.29% ; Containers Corporation of India [ConCor] 30% and Shipping Corporation of India [SCI] 63.75%. It also intends to sell its stake in North Eastern Electric Power Corporation [NEEPCO] 100% and THDC India Limited 75%.
As per reports, the stake in NEEPCO and THDC India will be picked up by National Thermal Power Corporation [NTPC] and NHPC Limited respectively which are majority owned by the union government. Like the earlier sale of HPCL and REC, these can’t be termed as strategic as their ownership and control will remain with the union [albeit indirectly]. However, in case of BPCL, ConCor and SCI, the government seems to be looking for a strategic investor. If, it happens, this will be transformative and a major reform in true sense of the term.
From the sale of its entire shareholding of 53.29% in BPCL alone, the government will garner Rs 57,000 crore [at current market capitalization of Rs 107,000 crore] or nearly 55% of the year’s target for disinvestment proceeds. But, that is smaller part. The real big gain will accrue by way of the undertaking being unshackled from bureaucratic controls and statutory watchdogs viz. Central Bureau of Investigation [CBI], Central Vigilance Commission [CVC], Comptroller and Auditor General [CAG] and ability to take decisions on fast track.
If, the strategic investor happens to be a global behemoth such as Aramco – Saudi Arabia’s government owned biggest oil giant and world’s biggest oil exporter – [the idea fits into the intent of the Kingdom to forge comprehensive partnership with India on long-term basis by investing a mammoth US$100 billion in latter’s value chain in the downstream sector], India will be assured of crude supplies on a long-term and sustained basis.
More such sales [for instance, ONGC/GOI may consider selling all of its stake in HPCL to Aramco or any other global major which owns and controls crude assets] will further boost assured availability of crude to meet a major slice of our needs thereby reducing our vulnerability to imports [currently, India imports over 80% of its oil requirements and a slight disruption in any of the major source of supply causes a major destabilizing effect on the economy].
The above is a very rosy picture. To get there, the political establishment should be prepared to shed some of the past practices which it had been taking recourse in the past leveraging the very fact of union government having majority ownership and control over the undertaking [after privatization, the very basis or the foundation for such unhealthy practices would have ceased to exist].
First, successive governments have been used to directing profit making PSUs to give high dividend, special dividend or insisting on share buy-back – irrespective of latter’s underlying financials and expenditure commitments – with the sole objective of using the proceeds for meeting budgetary target. Post-divestment, this option won’t be available any more. Likewise, the forced sale of union’s shareholding in one PSU to another [a tool often used to boost non-tax revenue] will not be possible as there won’t be any shares to sell.
Second, after de-regulation of petrol and diesel, despite giving oil PSUs freedom to fix prices in tandem with movement in their international price [as per prescribed formula], the government often directs them to refrain from affecting hike. Even as this was done to immunize consumers from escalation [especially election time], post-privatization this option won’t be available.
Third, the government rides piggy back on oil PSUs to give subsidy to consumers of LPG and kerosene. These PSUs sell kerosene at subsidized price and in case of LPG, deposit subsidy in the account of beneficiaries even while selling at the market/formula based price. The amount is reimbursed to them by the centre. After privatization, it will have to think through making direct payment to beneficiaries.
Fourth, our politicians and bureaucrats have for long used PSUs for seeking personal favors [that even includes appointment of favorites as directors or other crucial positions] though this practice has been cut drastically under Modi – dispensation. This will go automatically in the aftermath of privatization.
All these practices have done enough damage to the economy in the past. If, exit of government from PSUs can help in shunning these, it should be welcome.
Will Modi crack the whip?