Discussion on Disinvestment Policy
Disinvestment is a form of privatisation whereby the Government sells its stake in Public Sector Units (PSUs) to the private sector. Since the mid-1990s, the Government has been on a major disinvestment drive to cut its losses in PSUs and augment its finances. In disinvesting, there are two options for the Government. One is the strategic sales option whereby a substantial stake is sold through a bidding process to private companies working in the same sector as the PSU. The other option is to reduce the stake of the Government below 50 percent through the sale of equity in the international and domestic markets. Most PSUs like Modem Foods, ITDC (Indian Tourist Development Corporation) or Cement Corporation of India cannot be sold through a sale of equity in the markets simply because there would be no takers. In the case of most PSUs, therefore, the only option is to sell a substantial stake to private companies in the same sector.
Earlier in all the Union Budgets, the Government would take the credit for a certain amount to be collected during the course of the financial year by selling its equity holdings in PSUs. For instance, in the'99-2000 Budget, a collection of Rs.10,000 crore was indicated through the sale of the shares in PSUs such as GAIL, MTNL, IOC etc. But under the new dispensation, the Centre will not assume any receipt from disinvestment in the Budget statement.
The Disinvestment Policy began in 1996 as part of a massive privatisation drive. However, disinvestment as an annual exercise puts the government at a disadvantage in securing the best price for its share as the markets perceive that the Centre would divest its shares even at a lower price, if only to raise money to meet the Budgetary deficit. The Government has had to withdraw from the market after offering its shares in some companies as the price was too low. The other problem that the Government faces with having an annual disinvestment target is that there is pressure to divest even if the market in general is very bad. For instance, the Global Depository Receipts (GDR) market is virtually dead since 1998 after the East Asian Crisis. The Government failed to divest in the GDR market; a medium-term three- to four-year strategy in disinvestment is therefore preferable. Also, sometimes the process of calling open bids and the finalization of the deal itself takes another year. So it does not make sense to do it as an annual exercise.
The sale of PSU shares is done under the Department of Disinvestment (DoD) headed by Arun Shourie. Modem Foods has already been sold to the multinational Hindustan Lever. His brief is to similarly announce the strategic sale of almost all loss-making PSUs in non-strategic areas, where the Government will bring down its stake to 26 percent. Now the focus will be on selling at least a 20 to 30 percent stake either in the market or to the strategic investor on the basis of open bids. Also, for a start, the main idea is to bring down the Government's stake in PSU s below 51 percent. The Government believes that the perception of shareholder value in these PSUs will change dramatically once the Government reduces its stake to below 51 percent. Today most blue chip PSUs like IOC, BHEL, HPCL and others are quoting at extremely low price-earning ratios because the investor generally doesn't expect a majority-owned Government company to show future earnings potential. So reducing the Government holding below 51 percent is important.