The Union Government must set up a holding company where all of its shares in the Central Public Sector Undertakings (CPSUs) are placed
In Budget for 2022-23, Finance Minister Nirmala Sitharaman had set a target of Rs 65,000 crore for proceeds of sale of Union government shareholding in central public sector undertakings (CPSUs). Against this, the revised estimate (RE) is placed at just about Rs 31,000 crore which works out to 47 per cent of the target. For 2023-24, Sitharaman has set a target of Rs 51,000 crore.
During the last eight years since 2015-16 when this government started disinvestment with particular focus on ‘strategic’ sale (a sophisticated nomenclature for share sale that reduces its holding in the CPSU to below 50 per cent), barring two years viz. 2017-18 and 2018-19 when the actual proceeds exceeded the target, in the remaining six years, the achievement was far short.
Even during those two exceptional years, the good performance was made possible primarily due to two big ticket sales of Union Government shares in one CPSU to another viz. (i) sale of its 51.11 per cent shareholding in Hindustan Petroleum Corporation Limited (HPCL) to the Oil and Natural Gas Corporation (ONGC) during 2017-18 yielding Rs 37,000 crore; (ii) sale of 52.63 per cent stake in Rural Electrification Corporation (REC) to the Power Finance Corporation (PFC) during 2018-19 yielding Rs 13,000 crore.
These sales can’t be termed as strategic as the purchaser being another CPSU namely ONGC/PFC, the Government continues to have effective ownership and control over the divested entity viz. HPCL/REC. An overarching reason as to why the actual proceeds from disinvestment have fallen short of the target has to do with the very premise of treating these as a source of revenue (albeit for plugging fiscal deficit) which is flawed.
In cases where strategic sale is mooted, the government faces a bigger challenge as it needs bidders with deep pockets. For instance, in case of Bharat Petroleum Corporation Limited or BPCL (sale of the entire 53.29 per cent of government’s share in this oil refining and marketing CPSU was originally planned for 2019-20), it needed a strategic investor who could pay around Rs 60,000 crore.
The lengthy and cumbersome process of approval and bureaucratic red-tape further undermines the chances of the Government kicking the ball rolling just around the time when the strategic investors are ready to put in their bets.
The Niti Aayog identifies companies for divestment which are then considered by the Core Group of Secretaries on Divestment (CGD), a long-drawn process by itself, which takes it to the Alternative Mechanism (AM) – a group of ministers, including finance, road transport & highways, administrative reforms, etc., – for approval. After AM’s approval, the Department of Investment and Public Asset Management (DIPAM) moved a proposal for in-principle approval of the Cabinet Committee on Economic Affairs (CCEA).
This leads to delay and by the time all approvals are in place, the market scenario becomes adverse. For instance, in case of BPCL, during 2019-20, the international price of crude oil (fortunes of oil companies move in tandem with it) was hovering around $70 per barrel. But the bureaucrats were not ready.
In 2020-21, Covid-19 spoiled the party as the average crude price plunged to a low of $20 per barrel in April 2020. During 2021-22, even as the price ruled above $70 per barrel most of the time, the officials were not ready yet again. During 2022-23, the market turned even more favorable with crude price zooming past $80 per barrel (courtesy, Ukraine War and resulting disruption in supplies) yet, the government has not pursued; in fact, it seems to have deferred it indefinitely.
Meanwhile, a number of other strategic sales such as Container Corporation or ConCor (30 per cent), Shipping Corporation of India or SCI (63.75 per cent), and IDBI Bank have been under consideration since FY 2019-20. They have been hamstrung due to bureaucratic red-tape and uncertainties of the investment environment. The government now intends to complete all these transactions during FY 2023-24.
In a post-Budget interaction, Sitharaman reiterated that all CPSUs in non-strategic sectors will be privatized (all loss-making enterprises will be closed), whereas in the strategic sector also, the undertakings will be privatized with the caveat that at least one (and a maximum of four) will be retained in the public sector. To buttress this strategy (as laid down in the Budget for 2021-22), she cited the example of Air India incurring a loss of Rs 20 crore per day when it was under the government’s ownership and control.
While this should clear the policy uncertainty, thereby imparting momentum to the process, contrary signals emerge from a statement in FM’s Budget speech for FY 2019-20. She had stated the intent was to change the existing policy from “directly” holding 51 per cent or above in a CPSU, to one whereby its total holding, “direct” plus “indirect”, is maintained at 51 per cent.
To illustrate this, let us take the case of Indian Oil Corporation Limited (IOCL). In addition to its direct stake of 51.5 per cent, the Union Government holds more than 51 per cent in other CPSUs, which in turn, hold shares in IOCL. Life Insurance Corporation (LIC), which is 95 per cent owned by the GOI, holds 6.5 per cent in IOCL. ONGC which is 63 per cent Government-owned, holds 14 per cent in IOCL. Oil India Limited (OIL), which is 60 per cent owned by the Union Government, holds five per cent shares in IOCL.
The “indirect” stake of the Union Government in IOCL via LIC/ONGC/OIL being 25.5 per cent, it can reduce its direct stake in IOCL to 25.5 per cent (thereby sending a message that it has been privatized) and yet, including the “indirect” control, it will still have majority stake of 51 per cent.
Privatization could also be stymied in case the government asks another PSU to buy the shares of the CPSU up for strategic disinvestment as happened with HPCL/REC. Although there is an order of the Ministry of Finance (MoF) that prohibits such purchase, a caveat in the order “…unless otherwise specifically approved by the Central Government in public interest” can always be relied upon to make it happen if the powers that be so wish.
To conclude, the very act of linking disinvestment with budgetary exercise is a flawed idea. Even while not guaranteeing the intended receipt from the share sale (as we have seen during the last eight years), it undermines the chances of conducting the exercise in an efficient manner and getting handsome proceeds. The process inefficiencies are aggravated by bureaucratic red-tape and a desire of the top brass to remain in the driver’s seat.
The government should delink disinvestment from the budget and pursue it as an objective by itself. It must de-bureaucratise the process by setting up a holding company (HC) where all government shares in CPSUs are placed. The HC to be manned by eminent professionals should be fully empowered and given freedom to take all decisions in regard to valuation, quantum of shares, timing of sale, etc., keeping in mind the market conditions.
Under this arrangement, the share sale process will be faster, more efficient and yield much more revenue.
(The author is a policy analyst)
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