Ramifications of Govt approval for strategic disinvestment of 28 PSUs

MoS Finance tells Lok Sabha profitability not criteria for selection
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Divestment is the name of the game

On November 18, Anurag Thakur, Minister of State for Finance and Corporate Affairs, informed the Lok Sabha via a written reply that the Cabinet Committee on Economic Affairs had granted ‘in principle’ approval to the strategic sale of 28 CPSEs.

The budget target for disinvestment during 2019-20 has been set at 1,05,000 crore and the government has so far raised 17,364.26 crore, Thakur told the Lower House of Parliament. About 14,370 crore out of this sum has come in by disinvesting through Exchange Traded Funds (ETFs).

As to the policy of strategic disinvestment followed by the Government, Thakur stated it is guided by the economic principle that Government should not continue business in sectors where competitive markets have come of age and where the economic potential of such entities may be better discovered in the hands of a strategic investor. Profitability of CPSEs is not the criteria for selection of CPSE for this purpose, he said.

Any restructuring/revival of CPSEs is managed by the respective ministries or departments under which the concerned enterprises operate, he noted.

Under the government’s disinvestment policy, strategic disinvestment is undertaken through a consultation process among different Ministries/Departments. NITI Aayog is required to identify CPSEs for strategic disinvestment and advice on the mode of sale, percentage of shares to be sold and method for valuation.

The list of CPSEs approved for Strategic Divestment includes Navratna companies like Hindustan Petroleum Corporation and Rural Electrification Corporation, along with companies such as Cement Corporation of India, Air India and Pawan Hans.

Financial minister Nirmala Sitharaman recently said that the government is engaged in the strategic divestments of two such companies, Air India and Bharat Petroleum Corporation Limited, both of which it aims to divest by March 2020.

In her maiden budget, Sitharaman had said that the government will be focusing on consolidation and strategic disinvestment with respect to CPSEs, setting the disinvestment target at an all-time high of 1.05 lakh crore (1.05 trillion). Although she had assured citizens that the government would not be diluting its control below 51 per cent in PSUs at the time, the Union Cabinet is likely to consider a proposal on bringing government stake down to below that percentage by roping in other state-owned entities to take over that chunk.

Prakash Javadekar, Minister of Heavy Industries & Public Enterprises, stated in a written reply at the Lok Sabha that the losses incurred by 71 Central Public Sector Enterprises (CPSEs) in 2017-18 rose to 31,261 crore from 27,480 crore made by 81 companies in the previous fiscal, as per the latest data released by the government.

What this means for CPSEs and its employees

Although Mr. Thakur has avoided addressing these in his reply, the main economic reasons behind this disinvestment policy are:

(1) that the Government needs resources to reduce its budget deficit which cannot be covered by the collected tax revenues, and/or

(2) that the concerned public enterprises are incurring huge losses which can be made up for more efficiently through private investment.

Not considering the profitability of the PSU sounds like a very absurd proposition with this context.

Additionally, when the Government engages in disinvestment or sale of its equity capital in such a way that more than 50 per cent so that the majority ownership and therefore control and management of the enterprise is transferred to private enterprise, it results in privatisation.

This means that those employed under these undertakings would effectively transition into being considered private sector employees, and are likely to see a change in at least their service and retirement benefits, if not salary renumeration.

This is why employees belonging to companies on the disinvestment chopping block such as Indian Oil CorporationNTPC Limited and Bharat Earth Movers Limited have taken to publicly dissent this contentious government policy.

Additionally, the dilution of equity in these companies by the government has failed to yield large funds as state-run companies have been consistently underperforming in domestic stock markets since the Budget was presented in July. The BSE PSU Index has shed 10.16% while the Sensex has risen 2.70%. This underperformance can gravely affect the valuation of PSU stocks.

It is worth noting that government equity in PSUs effectively is “capital” invested by India’s taxpayers, which is why it is incumbent upon the government to ensure maximum value for the investment made. A disinvestment programme—founded on something the need to meet a budgetary revenue target—does not consider equity to be the citizens’ capital, and therefore fails to meet this objective.

Mr. Thakur’s written reply on the disinvestment of PSUs may be read here:



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