Buoyed by the success of disinvestment [sale of government shares in public sector undertaking (PSU)] undertaken during 2017-18 and 2018-19 [when the centre garnered over Rs 100,000 crore and Rs 85,000 crore respectively], for the current year, Modi – government had set an ambitious target of getting Rs 105,000 crore. A major slice of these proceeds was to come from ‘strategic disinvestment’ – or transfer of a sizeable portion of ownership [this could go up to 51% implying privatization] and management control to a private entity.
The crucial ‘strategic disinvestment’ proposals included divestment of all of government’s shareholding in Bharat Petroleum Corporation Limited [BPCL] 53.29% ; Containers Corporation of India [ConCor] 30%; Shipping Corporation of India [SCI] 63.75%; North Eastern Electric Power Corporation [NEEPCO]: 100% and THDC India Limited: 75%. However, as we approach towards the year end, the results are disappointing.
As per the revised estimates [RE] given in the Union Budget for 2020-21 [presented to the Parliament by the Finance Minister, Nirmala Sitharaman on February 1, 2020], proceeds from disinvestment are only Rs 65,000 crore – Rs 40,000 crore short of the BE. However, till date, the government has garnered only Rs 18,000 crore. One wonders as to from where it will get the balance Rs 47,000 crore even as sale of BPCL, CONCOR and SCI [these three undertakings alone were projected to account for over 75% of the target] is unlikely to get consummated before March 31, 2020.
For 2020-21, Sitharaman has set an over-ambitious target of Rs 210,000 crore which is double the BE for 2019-20 and more than three times the RE for 2019-20. Apart from the strategic sale of the above mentioned three PSUs, the union government has also taken a major decision to list and sell shares of the Life Insurance Corporation of India [LIC] which is 100% owned by it and accounts for nearly 3/4th of the life insurance business. Besides, it has also resurrected its plan for sale of Air India which was abandoned during 2018-19 due to lack of interest among potential investors.
The government seems to be betting big on LIC and BPCL. Considering the likely valuation of about Rs 900,000 crore [@ 30% of its assets estimated at Rs 30,00,000 crore], sale of 10% shares in LIC could yield about Rs 90,000 crore. Further, divestment of 53.29% shareholding in BPCL is estimated to yield about Rs 60,000 crore [at current market capitalization of over Rs 110,000 crore]. These two add up to Rs 150,000 crore. For the balance, it could bank on sale of 100% Air India [plus Air India Express and 50% of Air India’s stake in ground-handling company AI Singapore Terminal Services Ltd [AISATS], CONCOR and SCI et al. The task is daunting.
Prima facie, the sale of a small percentage of shareholding in LIC may sound easy to push as the government can argue that majority ownership and control will continue to be with it even after divestment. But, this is easier said than done.
The proposed initial public offering [IPO] of the LIC will have to be preceded by amendments to the LIC Act three sections viz. Section 24: it deals with the way the corporation handles its corpus [‘own fund’ in which all of its receipts are credited thereto and all payments made there from”]; Section 28: it lays down the policy on dividend distribution [how the surplus is to be distributed] and Section 37: it provides government guarantee on all its policies.
The policy on dividend distribution could be a bone of contention. At present LIC pays 5% of the surplus to the shareholder [read: government at present], while the remaining 95% gets distributed among policyholders. In case of private insurance companies however, the shareholder gets 10% of the surplus even as the rest 90% goes to policyholders. The external investor could insist on bringing LIC on par with other insurance companies by modifying the dividend distribution norms. The former may insist on increasing the share of shareholder in surplus from existing 5%.
According to existing rules under Section 37 of the Act, “sums assured by all policies issued by the corporation including any bonuses declared in respect thereof…shall be guaranteed as to payment in cash by the central government”. One wonders whether post – dilution of government’s shareholding, the sovereign guarantee to the policy holders would be retained.
As per the LIC Act, “the paid-up equity capital of the corporation shall be one hundred crore of rupees provided by the central government after due appropriation made by Parliament by law for the purpose”. This needs to be increased appropriately in order to prepare it for the proposed IPO and sell even a 10% stake.
The preparations in this regard are bound to be time consuming and may stretch till the end of fiscal 2020-21. That apart, considering that most of the parties across the political spectrum have opposed stake sale in LIC, it is doubtful whether the government will be able to get the amendment bill passed more so when it is in minority in the upper house [the chances of this being taken up as ‘money bill’ in which case, it doesn’t have to go to RS are dim].
As regards, BPCL while divestment of majority stake in it won’t face any legal hurdle [necessary amendment to the relevant law was made in 2016], the potential buyer will look for exercising its due role even in undertakings where BPCL holds significant stake. For instance, it holds 12.5% stake in Petronet LNG India along with Oil and Natural Gas Corporation [ONGC], Indian Oil Corporation [IOCL] and Gas Authority of India [GAIL] holding 12.5% each. Though branded as a private company, its Chairman is Secretary, Ministry of Petroleum and Natural Gas [MPNG]. The acquirer of BPCL will insist on changing this arrangement.
Likewise, in city gas distribution firm, Indraprastha Gas [IGL], BPCL has 22.5% along with GAIL which also holds 22.5%. However, the chairmanship of IGL is decided by GAIL [which will continue to be majority owned by the union government even as BPCL is divested]. As in case of Petronet LNG India, the new owner of BPCL will insist on having a role in deciding the management of IGL.
If, the government is unwilling to bring about these changes, this will lower valuation or lead to dissipation of interest. Late last year, the political brass was contemplating to sell BPCL stake to IOCL on lines similar to the so called ‘strategic sale’ of Hindustan Petroleum Corporation Limited [HPCL] during 2017-18 [then, the union government sold 51.11% of its shareholding in HPCL to ONGC which is majority owned by itself]. But, the idea was dropped. It may be revived [in a desperate bid to achieve the target] if during 2020-21 also investors don’t evince interest.
As regards, Air India, the government has removed some major bottlenecks which led to the failed move in 2018-19. Now, it is offering 100% of its shareholding, hived off over 60% of total debt from its balance sheet and dispensed with other riders such as 3 years lock-in period on disposition of shares by the acquirer etc. However, there still remain many irritants the most serious being a condition relating to retention of employees.
Besides, the PSU specific factors, the government’s ability to achieve the target is constrained by ‘lack of appetite’ in an overall subdued economic environment characterized by plunging growth, demand compression, slow down in investment and above all not so buoyant perception about opportunities ahead. The appetite was lacking even during periods of high growth; for instance in 2017-18 when GDP growth was over 7% yet, the government was forced to sell all of its stake in HPCL to ONGC [this alone yielded Rs 37,000 crore out of a total of Rs 100,000 crore]. Now, with growth plummeting to less than 5% during 2019-20 and muted recovery projected for 2020-21, the appetite would be even lower.
Unless there is dramatic turnaround in the economy, bureaucratic machinery moves with alacrity to make the required preparations for conducting the sale and opposition parties extend cooperation in getting necessary laws/amendments passed, it is unlikely that government will reach anywhere near the Rs 210,000 crore target. The shortfall on this score alone could cause at least 0.5% slippage in fiscal deficit [target for 2020-21 is 3.5%] which anyway will be under threat due to unrealistic projections for tax collections during the year.