Disinvestment of major holdings of IDBI Bank is also in the pipeline and is likely to be completed by mid-FY24. , Photo credit: The Hindu
the story So Far: In the Union Budget for 2023-24, the government has set a disinvestment target of ₹51,000 crore, which is about 21% lower than the current year’s budget estimate and just ₹1,000 crore more than the revised estimate. This is also the lowest target in seven years. In addition, the Center has so far missed the disinvestment target for 2022-23, realizing ₹31,106 crore so far, of which ₹20,516 crore or close to a third of the budgeted estimate came from an IPO of 3.5% of its shares. came from In Life Insurance Corporation (LIC).
Why does the government do disinvestment?
Disinvestment or disinvestment, in this context, is when the government sells its assets or a subsidiary, such as a central or state public sector enterprise. Minority disinvestment, majority disinvestment and full privatization are the three main methods of disinvestment. Upon the outcome of a minority disinvestment, the government holds a majority stake in the company, usually over 51%, thus ensuring management control. In case of majority disinvestment, the government hands over control to the acquiring entity but retains some stake, whereas in full privatization, 100% control of the company is given to the buyer. The Union Ministry of Finance has a separate department for disinvestment related processes called the Department of Investment and Public Asset Management (DIPAM). The government can do disinvestment to reduce the financial burden or to meet the revenue shortfall for that year. It also uses the disinvestment proceeds to finance the fiscal deficit, invest in programs for the economy and development or social sector, and repay government debt. Disinvestment also encourages private ownership of assets and trading on the open market. Being successful also means that the government no longer has to compensate the loss of any loss-making unit. Following the privatization drive of the Atal Bihari Vajpayee-led NDA government, the stock market saw the listing of shares of a slew of public sector firms. A bold push for public sector disinvestment was expected shortly after Prime Minister Narendra Modi took office in May 2014, declaring that the government “has no business staying in business”.
How has disinvestment fared in recent years
To begin with, different central governments have been able to meet the annual disinvestment targets only six times in the last three decades. Since coming to power in 2014, the BJP-led NDA government has met (and achieved) its disinvestment targets twice. In 2017-18, the government earned disinvestment proceeds of a little over Rs 1 lakh crore against a target of Rs 72,500 crore, and in 2018-19, when the target was set at Rs 80,000 crore, it brought in Rs 94,700 crore . Notably, PRS Legislative Research points out that in recent years, in cases of disinvestment where the government sold more than 51% of its stake in Central Public Sector Enterprises (CPSEs), along with transfer of management control, its stake The other was sold. Public Sector Enterprise. Case in point, when the Center exceeded its target in 2017-18, it earned ₹36,915 crore by selling Hindustan Petroleum Corporation Limited (HPCL) to state-owned Oil and Natural Gas Corporation (ONGC). Similarly, in 2018-19, REC Limited was sold to state-owned Power Finance Corporation Limited, through which the government raised ₹14,500 crore.
In 2021-22, when Air India was added to the Tata group, the Center missed its higher disinvestment target of ₹1.75 lakh crore by a significant margin, mobilizing just ₹13,534 crore in disinvestment proceeds. In the current year, a third of its budget estimates came from the delayed LIC IPO, which would have happened in the previous year if not for market volatility. The sale of 52.8% stake in Bharat Petroleum (BPCL) had to be called off in mid-2022 as almost all the bidders had withdrawn. The strategic sale of Central Electronics was also stalled due to flaws in the bidding process and the sale of Pawan Hans stake did not even begin. While Neelachal Ispat Nigam Limited (NINL) was sold to a steel unit of the Tata group, no sale proceeds accrued to the Center’s exchequer as it had no equity in the company. With ₹31,106 crore in the exchequer so far in disinvestment, and less than two months left in the current financial year, the government is likely to miss its target.
Which CPSEs are likely to be disinvested in 2023-24?
The Center is not going to add new companies to the list of CPSEs to be disinvested in 2023-24 and two public sector banks and a general insurance firm will not be part of the ambitious disinvestment announced in the Budget two years ago. Disinvestment plan either. According to DIPAM, the government has decided to stick to the already announced and planned privatization of state-owned companies. These include IDBI Bank, Shipping Corporation of India (SCI), Container Corporation of India Limited (CONCOR), NMDC Steel Limited, BEML, HLL Lifecare etc. Incidentally, the disinvestment of Bharat Petroleum Corporation Limited, SCI and ConCor was approved by the government in 2019 but is yet to happen. The divestments of both SCI and ConCor were stuck because some of the physical assets of these companies were property of the states where they are located and had to be divested. Disinvestment of major holdings of IDBI Bank is also in the pipeline and is likely to be completed by mid-FY24.
What have been the challenges of disinvestment?
Observers point out that disinvestment should ideally be driven by the long-term view of the government, the extent to which it wants to privatize the economy and the sectors where it needs to maintain a presence – and not by the need to raise revenue. However, the government’s dependence on disinvestment proceeds is increasing to bridge the budget gap. It had introduced a new strategic disinvestment policy in 2021 to maintain ‘bare minimum’ presence in strategic sectors like nuclear power, defense etc. and exit from non-strategic sector enterprises. Further, the disinvestment plan demands a coherent and long-term rationale. Profitable oil refining and marketing company BPCL, which was put up for disinvestment, was paying handsome dividends and investing in upstream energy resources.