In recent years, disinvestment has been a leading indicator for the Centre. Last year, its budget was in some sense also hinged on expected disinvestment revenue, the government wanted to earn Rs 1.75 lakh crore from monetization of PSUs (Public Sector Undertakings) like Air India, BPCL (Bharat Petroleum Corporation Limited) and SCI. Was. Shipping Corporation of India). However, as of December 2021, the government was able to meet only about five per cent of that target, or Rs 9,240 crore. In her budget this year, Union Finance Minister Nirmala Sitharaman indirectly acknowledged a major lapse by reducing the FY22 disinvestment revenue estimate from Rs 1.75 lakh crore to Rs 78,000 crore and setting the 2022-23 target at just Rs 65,000 crore. did.
Over the years, the Center has faced several troubles in fulfilling its privatization promises, be it a pushback from employee unions worried about its future or trouble generating investor interest. Many of the block’s PSUs also have complex, damaged balance sheets, which makes them difficult to evaluate properly. Tuhin Kanta Pandey, secretary, DIPAM (Department of Investment and Public Asset Management), says the government is mindful of the challenges and has shifted focus from reducing PSU holdings to full privatization. The sale of Air India to the Tata group has been encouraging, though it brought in only Rs 2,700 crore in cash to the government. Pandey hopes to repeat this success.
Other PSUs in the block include IDBI Bank (which was not mentioned in this year’s budget speech) and helicopter operator Pawan Hans. Despite continued privatization push, the budget of the Center this year is more conservative in expectation and purpose. For one, it does not set any target for disinvestment of public sector banks (public sector banks) and financial institutions – a politically contentious sector – and revised last year’s target for it from Rs 1 lakh crore. does. The upcoming LIC IPO (Life Insurance Corporation Initial Public Offering) is expected to be a success, which is expected to launch on March 11. Fund managers say the IPO could raise between Rs 50,000 crore and Rs 1 lakh crore, but with the war erupting in Ukraine, the government may choose to delay the launch, with consequences for its disinvestment agenda. Meanwhile, Tata Steel has also acquired a 93.2 per cent stake in the government’s Nilachal Ispat Nigam, a steel maker, for Rs 12,100 crore.
missed target
The list of missed disinvestment targets includes firms that have now spent years on the block. For example, Pawan Hans has been on sale for 10 years. The firm’s revenue has reportedly been falling since 2016, with losses in 2019 and 2020. Last year, the Center made another attempt to sell it, easing its earlier conditions to attract more buyers. In December, it announced that it had received bids, but little has been said on the matter since then.
Another example is the sale of BPCL. The government has so far had to extend the deadline for filing preliminary expression of interest four times. Part of the crisis lies with the sector—with the extreme volatility in crude oil prices in recent years, it has been difficult to generate investor interest in energy companies. The government’s entire 52.98 per cent stake in BPCL is in the block, for which it says it has received three expressions of interest. Rating agency Fitch rated the firm BBB- with a negative outlook, saying, “Uncertainty over the bidding consortium and process complexity, including valuation, could lead to potential delays in the privatization of India’s second-largest fuel retailer.” Similarly, the sale of SCI is in limbo as the bidders find it difficult to complete their due diligence of the firm’s assets.
A major impediment to privatization in all sectors has been the pushback from the unions. On the morning of January 27, the day when DIPAM was to officially hand over Air India to the Tata Group, officials attended a virtual hearing of the Madras High Court. The court had considered a petition by an employees’ union against the sale of Air India, citing concerns about the future welfare of existing employees. Concerned that employee activism and litigation might disrupt sales, the government agreed to almost all of the union’s demands in this particular case, including continuation of medical benefits for retired and retired Air India employees, encashment of holidays, etc. Are included.
Employees unions are almost never in favor of disinvestment. Major reasons include job security and pay level. “PSU employees want to stay” [in the public sector] Because they get three times the salary of their counterparts in the private sector,” says Nilesh Shah, MD, Kotak Mahindra Asset Management. “The average BPCL salary is Rs 20 lakh per annum – the average private sector employee makes up a third of this.”
Another systemic problem is the complexity of PSU balance sheets, which makes it difficult to evaluate such firms. Apart from the often huge debts, many government undertakings also come with unwanted assets. Air India is again a good example—the airline’s non-core assets (including immovable assets like Centaur hotels) were up for sale and about Rs 51,000 crore of its debt was required to be divested into SPVs (special purpose vehicles). After several rounds of discussions, it was also decided to sell the airline at its enterprise value (market cap plus net debt) instead of its equity value. An official associated with the project says that it was only after these decisions that the Center could find the bidders. “We faced many hurdles in selling Air India,” admits Pandey. “The bidders were scared.” When it comes to the sale of BPCL, the government may once again take the asset-segregation route, as one of the major constraints is the firm’s huge real estate assets.
According to DIPAM, in 2021-22, the government had received around Rs 44,450 crore from various subsidiaries till January 3. Of this, only Rs 9,329.9 crore was from disinvestment, the remaining Rs 35,116.72 crore was in the form of dividend receipts.
next
In a sense, the government’s disinvestment challenge gets tougher with each success, as what remains on the block are firms that have already been passed by investors. “Except for new listings – for example LIC’s IPO, which is a huge opportunity as we are bringing something new to the market – the scope for the government to raise funds through disinvestment is very limited,” says Pandey. reducing our stake in [reduce our stake] Below 51 percent, we’re talking about privatization and handing over management control.
The to-do list so far includes IDBI, SCI, BPCL and Pawan Hans, which have proved difficult to sell due to various reasons. A senior official associated with the disinvestment effort says, “Pawan Hans has been in the block for 10 years, and it will be difficult for IDBI to find a buyer due to poor competition from the bank. Most companies are also troubled by tarnished assets.
One challenge the government will have to deal with is how to maintain the interest of investors through this process. Often, the bidders have gone cold through their appraisal/due diligence reviews, perhaps realizing how difficult the PSU’s management would be to handle. Apart from depreciated assets, huge debt and complex asset holdings, there is also the challenge of bringing many different stakeholders—employee associations, existing PSU management, bidders, regulators and policy makers—all on the same page. While the political leadership is determined to see it through, the disinvestment targets in the Budget for 2022-’23 indicate an acceptance of the enormity of this challenge.
The difficulty is also compounded by continuity issues in DIPAM. The tenure of secretaries is relatively short – three years – but creating, maintaining and channeling the investor interest required to sell a PSU is a huge effort. This involved not only a marketing blitz, but also careful financial analysis and a strategic regulatory and political campaign to take the deal to a successful conclusion.
There is no easy answer to privatization. Experts say clear plans and quick decision making can help. Speeding up sales is also important to prevent asset erosion – Air India’s debt doubled in the period between its first announcement of privatization and its final handover to the Tata group. The reopening of old cases by the judiciary – such as those related to a disinvestment deal done under the watch of former IAS officer Pradeep Baijal, or even one related to the disinvestment of Hindustan Zinc years after the deal ended – has a calming effect on the bureaucracy. up to speed.
Shah says the Center may be able to adopt the Singapore model. In that country, one firm, Temasek Holdings, manages the investments and assets formerly held by the government, while the other—GIC (formerly the Government of Singapore Investment Corporation) manages the government’s financial assets. It frees up the ministries to do policy work by delegating the privatization process to professionals. Another option is to tap equity markets to reduce PSU stake and allow a private board to manage these firms. Meanwhile, amendments to the General Insurance Business (Nationalisation) Act were approved during the monsoon session of Parliament. The Banking Laws (Amendment) Bill 2021 related to the privatization of two PSBs was also listed for introduction in the winter session of 2021, but protests by bank unions and state elections have delayed its introduction.
The fact that billionaire investor Rakesh Jhunjhunwala opted to start his own airline instead of bidding for Air India is a lesson for the Centre. There are many reasons why India’s ailing PSUs are stuck on the block – from their poor competition and heavy debt to constant asset erosion and tussle with employee unions. If the Center is committed to achieving its disinvestment goals, it is important to address these problems quickly and comprehensively.