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[RSTV SUMMARY] THE BIG PICTURE- PSU’S: STRATEGIC SALE

 

RSTV: THE BIG PICTURE- PSU’S: STRATEGIC SALE

RSTV, RSTV FRANK, FRANK INSIGHTS

Introduction:

            The government kicked off a blockbuster disinvestment plan, lining up the sale of five public sector units (PSUs), including majority stakes in bluechip oil company Bharat Petroleum Corp Ltd (BPCL) and Shipping Corporation of India. Also on sale will be a 31% stake in Container Corporation of India (Concor) along with management control. Based on current market prices, the sale of stakes in these three firms will fetch the Modi government about Rs 78,400 crore, taking it close to the disinvestment target for the fiscal year. The cabinet committee on economic affairs (CCEA), which met under the chairmanship of Prime Minister Narendra Modi, also cleared the sale of its entire stake in Tehri Hydro Development Corp of India and North Eastern Electric Power Corporation (Neepco) to NTPC. The CCEA also gave in-principle clearance to the reduction of the government’s stake in select public sector units to 51%, “while retaining management control on case-to-case basis, taking into account the government shareholding, and the shareholding of government-controlled institution.

 

What is Disinvestment?

Disinvestment, or divestment, refers to the act of a business or government selling or liquidating an asset or subsidiary or the process of dilution of a government’s stake in a PSU (Public Sector Undertaking).

 

Disinvestment policy in India- salient features of the Policy:

  • Public Sector Undertakings are the wealth of the Nation and to ensure this wealth rests in the hands of the people, promote public ownership of CPSEs
  • While pursuing disinvestment through minority stake sale in listed CPSEs, the Government will retain majority shareholding, i.e. at least 51 per cent of the shareholding and management control of the Public Sector Undertakings
  • Strategic disinvestment by way of sale of substantial portion of Government shareholding in identified CPSEs upto 50 per cent or more, along with transfer of management control.

 

Need for Strategic Disinvestment:

  • The improvement of the performance of many companies was needed since long.
  • Government presence distorts competitive dynamics for private players.
  • Economic potential of such entities may be better discovered in the hands of the strategic investors due to various factors, e.g. infusion of capital, technology up-gradation and efficient management practices
  • It also results in consumers and taxpayers bearing the brunt of inefficient PSU operations.
  • Success stories like Hindustan Zinc’s, which has seen a hundred-fold increase in its profits, since its takeover by Vedanta in 2002.

 

Disinvestment got a much-needed boost during the Atal Bihari Vajpayee regime, when Arun Shourie was appointed the minister for disinvestments. Some of the key disinvestments under the Vajpayee administration include the strategic sale of Videsh Sanchar Nigam Limited, Hindustan Zinc, Balco, IPCL, several Indian Tourism Development Corporation hotels and Modern Food Industries. The strategic sales during that period fetched government Rs 6,344 crore. Additionally, the government began disinvesting its stake in Maruti Udyog Ltd in 2002. The government exited the company completely by 2006.

However, disinvestment slowed under the Manmohan Singh government. It seems to have picked pace under the current dispensation. In March, the Modi government claimed that it exceeded its disinvestment target for FY19

 

Development through Disinvestment :

  • Firms like BSNL, Maruti Suzuki which went for disinvestment in 2000’s are now doing very well, the value of those firms are now 17 to 18 times than they were
  • Improving the structure of incentives and accountability of PSUs in India.
  • Companies do well in terms of production, giving resources to the country.
  • Reducing the financial burden on the government
  • Improving public finances
  • Introducing competition and market discipline
  • Funding growth
  • Encouraging wider share of ownership
  • Financing the increasing fiscal deficit.
  • Financing large-scale infrastructure development, defense, education, healthcare etc.
  • Bring relief to consumers by way of more choices and better quality of products and services, e.g. Telecom sector.
  • Disinvestment allows the transferring of the Indian government’s enormous public debt of its PSU’s to the Indian private sector. By transferring the debt the Indian government’s overall debt becomes greatly reduced.
  • Disinvestment allows government assets allocated for profit-making ventures to instead be reallocated for use in non profit activities or social causes thus helping to strengthen both the non profit activities and social causes.

 

Challenges:

  • Loss making units don’t attract investment so easily.
  • Government has mostly used disinvestment for fiscal reasons rather than growth objectives.
  • Most firms are not clear with their legal land rights.
  • Process of disinvestment is not favoured socially as it is against the interests of socially disadvantaged people.
  • Over the years the policy of divestment has increasingly become a tool to raise resources to cover the fiscal deficit with little focus on market discipline or strategic objective.
  • Sometimes with the emergence of private monopolies consumer welfare will be reduced.
  • Mere change of ownership from public to private does not ensure higher efficiency and productivity.
  • It may lead to retrenchment of workers who will be deprived of the means of their livelihood.
  • Private sector governed as they are by profit motive has a tendency to use capital intensive techniques which will worsen unemployment problem in India.

 

Way Forward:

  • We must have long term strategy.
  • Monetization of PSU assets instead of disinvestment which yield more.
  • Define the priority sectors for the government based on its strategic interests.
  • Investment in PSUs has to be in terms of generation of adequate social and strategic returns.
  • It should be time bound programme.
  • The government ownership is required for sectors with strategic relevance such as defence, natural resources, etc. The government should, exit non-strategic sectors such as hotels, soaps, airlines, travel agencies and the manufacture and sale of alcohol.
  • The government should look into strengthening the regulatory framework that ensures efficient market conditions.
  • Instead of creating PSUs, the government should create regulations that would ease the entry of new players. The regulations should also ensure that the basic necessities of the consumers are met.
  • Allowing both domestic and foreign buyers to bid freely for stakes.