Will 2016-'17 be a record year for Indian selling stakes in public sector units?

The media is abuzz with reports of the government gearing up to divest stakes in central public sector enterprises to generate revenue from the sales. Finance Minister Arun Jaitley, in an interview last month, said that in the financial year 2016-'17, the government will “probably achieve a much higher disinvestment figure than ever in history”.

On Thursday and Friday, the government sold a 15% stake in the National Buildings Construction Corporation. In all, it has targeted an earning of Rs 56,500 crore through disinvestment in the ongoing financial year.

Is this optimism justified? The government’s past track record does not suggest that.

The government sells a part of its stakes in central public sector enterprises to the private sector or in the open market as a way to raise funds, which can then be used to for various purposes, such reducing deficits or increasing public finances.

Proceeds from disinvestment – the sale of government stakes in central public sector enterprises – are accounted as capital receipts in Union Budget. The government sets targets every year for disinvestment. However, unlike revenue receipts (like taxes), capital receipts are not predictable and hence a lot depends on political will.

Through the years, despite various approaches and efforts, the process of disinvestment has been largely unsuccessful in raising big-ticket funds for the government.

How it began

Disinvestment was introduced during the economic reforms of 1991. “It has been decided that government would disinvest up to 20% of its equity in selected public sector undertakings, in favour of mutual funds and financial or investment institutions in the public sector,” Manmohan Singh, then the finance minister, had said.”The disinvestment, which would broad base equity, improve management and enhance the availability of resources for these enterprises, is also expected to yield Rs 2,500 crores to the exchequer in 1991-'92.”

Disinvestment, thus, was proposed as a measure to help the central public sector as well as the government.

According to the Department of Investment and Public Asset Management under the Ministry of Finance, disinvestment can be done in two ways:

1. Through minority stake sale, where the government retains management control of the public sector but sells a minority stake to the public through a public offering of shares (for example, the sale of the Government’s 10% stake in Coal India in October, 2010).
2. Through strategic disinvestment, where the government sells a substantial portion of its shareholding, including management control, through a process of valuation and sells it to the highest bidder (for example, the sale of Bharat Aluminum to Sterlite Industries in 2001).

So far, the most the government has earned through disinvestment in a single central public sector enterprise is Rs 22,558 crores – this it got in 2014-'15 by selling its shares in Coal India to the public, as a follow-up an earlier sale in 2010.

However, for all its potential, disinvestment has largely been a failure. For 16 of the past 25 years, the Indian government has missed the disinvestment target, including 2016.

What's different this time?

So then why is the government so optimistic about meeting its target in this financial year? Perhaps because this time, it has taken a different approach.

Prior to the Union Budget 2016, the Department of Disinvestment was in charge of disinvestments and the Disinvestment Commission would recommend sale of stakes in central public sector enterprises to the government. In this year’s budget, the Department of Disinvestment was renamed as the Department of Investment and Public Asset Management and the NITI Aayog, the government’s policy think-tank, was roped into the process of disinvestment.

“NITI Aayog would perform the role of erstwhile Disinvestment Commission,” said a government press release. “In fact, the role of NITI Aayog is larger as it would also identify CPSEs [central public sector enterprise] for strategic disinvestment and suggest methods for valuation of the CPSE apart from advising the Government on mode and percentage of shares to be sold in a CPSE.”

Picking up pace

Since the NITI Aayog took charge of the disinvestment process, there has been a flurry of activity. Reports last month said that the commission had sent a list of companies for disinvestment to the government and was working on a follow-up to this.

Last month, the government approved the strategic sale of its stake in Bharat Pumps and Compressors Limited and sold 7% stake in Hindustan Copper. The ongoing NBCC sale is the third such initiative.

Media reports have also spoken of a visible increase in pace on the disinvestment front, with many central public sector enterprises lined up for minority stake sales and initial public offerings. Then, there is the government-run Specified Undertaking of the Unit Trust of India, which holds minority stakes in large companies such as Axis Bank, ITC, and Larsen & Toubro. The government could realise a large sum by selling these stakes, but has so far resisted this.

Easy victory

For its target of Rs 56,500 crores through disinvestments in this financial year, the government aims to generate Rs 36,000 crores through minority stake sales (such as Hindustan Copper and NBCC) and Rs 20,500 crores through strategic disinvestment (such as the planned disinvestment in Bharat Pumps).

The government has so far raked in about Rs 21,000 crores. With less than six months left for this financial year, the finance minister’s claim that 2017 will be a record year of disinvestment might just prove right.

The previous record was last year, when the government raised Rs 32,149 crores. To exceed this, the government needs to raise just Rs 12,000 crores till March 31, 2017. However, the budgetary target of Rs 56,500 crores is still a slight way off, and will require many large disinvestments.

Anupam Gupta is a chartered accountant and has worked in equity research since 1999, first as an analyst and now as a consultant. His Twitter handle is @b50.