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Soumik Dey
Soumik Dey


Tough sell


Government needs to rethink its disinvestment strategy to meet the target

When Arun Jaitley set in his last budget a steep target of earning Rs.69,500 crore by selling stake in public sector companies in 2015-16, many people thought the finance minister had a plan in place to achieve it. Of this, Rs.41,000 crore was expected to come from stake sale in public sector undertakings through the offer-for-sale route and the rest from strategic sale of loss-making PSUs and unviable government assets. In January, when Jaitley was asked about meeting the target, he seemed less optimistic. “We have to find an alternative method for this,” he said. “Wait for two to four weeks and the government will come up with an alternative strategy for this.”

A while before that, the department of disinvestment had sent an internal report to Jaitley requesting that the targets for disinvestments for the current fiscal be scaled down to Rs.30,000 crore. “The department is of the view that the disinvestment target could be spread over two years instead of one,” said a finance ministry spokesperson. This effectively means that the department now plans to garner the remaining Rs.39,500 crore in the next fiscal. The argument seems to have convinced the finance minister. “There is no hurry,” Jaitley said recently. “We will disinvest only when the government gets the right price.”

To give a push to the disinvestment process, the government decided to replace disinvestment secretary Aradhana Johri with Uttar Pradesh-cadre IAS officer Neeraj Kumar Gupta. As special secretary of the department of public sector enterprises, Gupta had earlier helped Johri prepare a list of loss-making PSUs and recommended strategic sale of government stake in many of them.

Johri, who had been in the disinvestment department since October 2014, facilitated the 10 per cent stake sale in Coal India for Rs.22,600 crore in January 2015. From April to September, Johri divested stake in four companies—Power Finance Corporation, Rural Electrification Corporation, Dredging Corporation of India and Indian Oil Corporation—for around Rs.12,600 crore. This is the highest ever for the first half of any fiscal. However, not much has happened after that.

Jaitley and Johri had earlier claimed that what they achieved in the past one and a half years was more than what the previous government had done in seven years. However, their claims were marred by allegations that the government favoured institutional investors rather than retail investors. Also, Life Insurance Corporation of India had to rescue the disinvestment in IOC and REC. LIC was the prime buyer in most of government disinvestment processes this year. In fact, its participation was crucial in meeting the disinvestment target last year, and often the insurer seemed to be functioning under government directives. For instance, LIC was reducing its stake progressively in IOC, but picked up around 11 per cent stake from government sale.

“On an aggregate basis, LIC may be a winner,” said Abizer Diwanji, partner (financial services), KPMG. “But this is not the best route for disinvestment. Sale of shares can be done to LIC through private deals as well. So, why does the government have to do a public offer?” He added that the disinvestment policy should be reviewed to have a wider shareholding and reach to retail investors.

The government, however, dismissed the charges. “LIC is a very important player and it has never picked up more than 50 per cent stake that came up through offer to sale,” said Jayant Sinha, minister of state for finance, on the sidelines of an event organised by Confederation of Indian Industry in New Delhi. “This, of course, cannot be termed as LIC bailing out the government.” He said the anticipated shortfall in disinvestment receipts was because of the adverse market conditions for a portfolio that largely comprised commodity stocks. “Most of the disinvestments we have lined up are of commodities-related companies. We have to wait for the commodity cycle to turn before proceeding with disinvestment in these companies,” he said.


The disinvestment plans suffered another setback when the Supreme Court directed the government to maintain status quo in the sale of its minority stake (29.5 per cent) in Hindustan Zinc Ltd. The government had initiated the process to get valuations done by an independent valuer and had consulted the attorney general twice on the issue. The earlier valuation exercises had raised several questions. The huge cash reserves of the company were not included in a valuation in 2012.

“The court felt that the company was the largest producer of zinc in India. The metal is the most important after iron, aluminium and copper. It was on these grounds that the court considered that the company was dealing in strategic minerals,” said a lawyer, who represented the National Confederation of Officers’ Associations of Central Public Sector Undertakings, on behalf of lawyer Prashant Bhushan. A bench headed by Chief Justice T.S. Thakur questioned the government’s haste. “What is the urgency?” the bench asked. “Why is the government in a hurry to divest stakes in HZL to Vedanta or any other company?”

A few days after the Supreme Court order, the mines ministry, in a note to the finance ministry, conceded that a stake sale in HZL might not be a “wise move”, as the government had been getting a healthy dividend from the company. “If industrial activity improves in the coming quarter, as is already anticipated, we can expect HZL’s profits to be much better,” said Balvinder Kumar, mines secretary.

With disinvestments failing to garner enough cash this year, some major PSUs have been asked to consider buyback of their shares by their ministries. “CPSEs [central public sector enterprises] not meeting state's capital expenditure plans have the choice of announcing higher dividends or going for buyback,” said Shaktikanta Das, secretary, department of economic affairs. The department had sought payment of dividends at 30 per cent of profit after tax or 30 per cent of government holding in these companies, whichever is higher. In Davos, addressing the World Economic Forum, Jaitley defended the government's plan to ask public sector companies to pay higher dividend or opt for a share buyback by pointing out that resources that belonged to the public and were lying in company reserves could be used to boost infrastructure and support capital expenditure.

Some experts suggest that the right way for the government to get back on track could be taking small steps. “There are many companies in the government kitty which are not bound by any commodity cycle,” said Professor Pinaki Chakraborty of National Institute of Public Finance and Policy. “Most of these are in manufacturing and service sectors. These are really the worst performers. A number of hotels and tourism services could also be easily divested by the government to shore up sentiments before announcing any big-ticket divestment offer.”

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