New Delhi: An analysis of stock market data shows that the government by relaxing its disinvestment policy has helped create value for the public holding stocks of government companies, whereas the previous policy eroded that value.
According to Tuhin Kanta, Secretary, Department of Investment and Public Asset Management (DIPAM), the government has over the years reoriented its disinvestment policy to focus more on the fiscal imperative of revenue generation. Pandey explained to ThePrint.
The previous policy was single-mindedly focused on achieving high disinvestment targets, which actually led to a rise in the share prices of listed Central Public Sector Enterprises (CPSEs), also known as PSUs (Public Sector Undertakings)., The overall stock market is falling even as it is rising.
“If we have a big disinvestment target, the market will feel that the government is going to do many more disinvestments to meet that target, and hence the share prices of CPSEs will remain low as investors believe that soon The more they supply the stock,” Pandey told ThePrint in an interview.
“Not only that, but the existing holders of the stock will start selling them as the price will remain low, which will push the prices down further,” he added.
Pandey pointed out that this ‘price overhang’ effect was prevalent two to three years ago during a period when the government did significant disinvestment. An analysis of Bombay Stock Exchange data proves this to be true.
Read also: Why is the BSNL bailout in line with the undeclared policy of the Modi government?
different routes
Index of Listed CPSEs, prior to 2017 was moving in tandem with the momentum of the overall Sensex. That is, the stock prices of the listed CPSEs follow the same trajectory as the benchmark stock market index.
However, there was a change in the government’s disinvestment strategy in the financial year 2017-18. It started setting higher disinvestment targets and accordingly started selling more of its stock in CPSEs.
Hence, in 2017-18, it set a disinvestment target of Rs 72,500 crore and surpassed it by earning over Rs 1 lakh crore through disinvestment that year.
The next year it set a target of Rs 80,000 crore and surpassed it again by earning Rs 94,727 crore.
In 2019-20, the government has set a target of Rs 1.05 lakh crore. It earned only half that that year, but then set an even higher target of Rs 2.1 lakh crore for 2020-21.
The COVID-19 pandemic certainly hampered the government’s ability to earn through disinvestment in 2020, but it was also the period when the government itself realized that it had to change its disinvestment strategy.
Pandey explained what was happening during the years of high disinvestment, people were expecting the government to sell its stake in various companies, and were therefore expecting a consequential increase in the supply of shares of those companies. When supply increases, prices fall.
Bombay Stock Exchange figures show that this is exactly what happened.
During the high disinvestment phase of 2017-20, the index of CPSE companies started falling even as the Sensex rose. It was only after this phase, when the government eased disinvestment, that both the indices started moving together again.
“Now we have fixed it (price hike),” Pendex said. “We got a lot of feedback from the market that people were voting vociferously, that they were getting out of CPSE stocks.”
“We have bucked that trend, and the CPSE index is now rising again, and for the last two years it has risen more than Nifty and Sensex, but it is still holding up,” he added.
The key to this change, according to Pandey, was the government’s communication with the markets. While the earlier communication was that the government was keen to sell its stake in CPSEs, the later communication was that this would be done more cautiously, irrespective of the targets set.
“During this recovery period, we have effectively told the market that we will disinvest only when the time is right,” Pandey explained. “Just because we have a target, we will not disinvest, come what may.”
credibility of numbers returned
Another step taken by the government was to improve the credibility of its disinvestment process. A major criticism of many of its previous large divestments was that they were only possible because state-owned companies were buying the stock that the government was selling.
For example, in 2018, government-owned oil and natural gas corporation (ONGC) bought the government’s entire 51.11 per cent stake Hindustan Petroleum Corporation Limited ,HPCL). Similarly, there have been reports that the Life Insurance Corporation is taking steps to buy the government’s stake in various companies it has tried to disinvest over the years.
Critics have pointed out that this is not a true disinvestment as the stake is still held by the government-owned entity.
The government acknowledged in April 2022 that this was a problem and issued a memorandum prohibiting government-owned companies from buying stakes in other government companies.
In its memorandum to all ministries and departments of the central government, DIPAM said the government’s Public Sector Enterprise (PSE) policy aims to reduce the government’s presence in public sector companies across the economy.
“Therefore, the transfer of management control from the Government of India “Any other government organization/state government may continue with the inherent inefficiencies of PSEs and this will defeat the very purpose of the new PSE policy,” DIPAM said in its memorandum.
The memorandum states, “As a general policy, PSEs are not permitted to participate in strategic disinvestment/privatisation of other PSUs as bidders, unless specifically approved by the Central Government in public interest.” Gone.”
In this regard, a PSE is defined where 51 per cent or more is owned by the Central Government, State Governments or jointly by the Central and State Governments.
(Editing by Richa Mishra)
Read also: India’s economic indicators tell a story – of growth, reform, strength