In fact: The gradual evolution of India’s disinvestment policy
It was Yashwant Sinha who first mentioned the sale of assets of Public Sector Undertakings in his interim budget of March 4, 1991.
Written by Shaji Vikraman | Updated: April 5, 2017 6:08:44 pm
When the Chandra Shekhar government took over in early November 1990, India was battling a balance of payments crisis, and a real danger of default on sovereign repayments loomed. Yashwant Sinha, the new Finance Minister, needed to quickly mobilise additional revenue, and cut expenditure. By end November, foreign exchange reserves had dropped to Rs 3,142 crore, inadequate for even a month’s imports.
Raising resources by selling shares in state-owned companies was a proposal under discussion. Finance Ministry officials were in negotiations with the International Monetary Fund for the Compensatory and Contingency Financing Facility (CCFF), but the use of the proceeds of the sale of equity of state-owned companies was a sticking point. The government wanted to use the proceeds to reduce the budget deficit. But the Fund was not agreeable initially because the proceeds, classified in accounting terms as capital receipts, wouldn’t then be used to retire debt, or in other economically efficient ways.
Chief Economic Advisor Deepak Nayyar, however, managed to persuade the Fund that given India’s economic challenges, it would be better to allow fiscal managers to use it to lower the deficit at that juncture. Internally, Nayyar had always argued that money raised through assets sales should be used either to retire public debt or to restructure state-owned firms, rather than on consumption expenditure. India got the first tranche of the IMF loan and CCF aggregating $ 1.8 billion.
It was Yashwant Sinha who first mentioned the sale of assets of Public Sector Undertakings in his interim budget of March 4, 1991. He used the word disinvestment — suggested apparently by Nayyar because ‘privatisation’ was politically unpalatable. Sinha said the government would shed 20% of its equity in select PSUs in favour of mutual funds and financial or investment institutions to broadbase equity, improve management, and enhance the availability of resources. The target was a modest Rs 2,500 crore.
However, the Congress had just withdrawn support to the government, and the plans remained on paper. The first sale of shares of PSU firms in small bundles to mutual funds and institutional investors happened in 1991-92, under P V Narasimha Rao.
But Rao’s government, with Manmohan Singh as Finance Minister, too faced a difficult time. The World Bank, with which it was in talks for assistance, took the stance that funds raised through sale of equity of government companies should be used only to reduce the government’s debt. In negotiations in September 1991, Finance Ministry officials, again with Nayyar in the team, persuaded the Bank that given the fiscal challenges, this couldn’t be done in the short run.
After the I K Gujral government took over, Finance Minister P Chidambaram announced the formation of a Disinvestment Commission, which, under G V Ramakrishna, recommended the sale of shares or outright sale of several PSUs, including Air India. There was a promise in that Budget about utilising the revenue from these share sales for education, health, and to create a fund to strengthen Public Sector Enterprises. But for years, much of the money has been routed to what some officials and economists have described as a black hole, the Consolidated Fund of India, to lower the deficit (or gap between revenue and expenditure).
The policy on disinvestment next evolved under Atal Bihari Vajpayee’s NDA government. In the 1998-89 Budget, Yashwant Sinha, who had returned to North Block as Finance Minister, said that in general, the government would lower its shareholding in state-owned firms to 26%, while continuing to hold majority stake in public sector companies that were considered strategic. There was a promise to protect the interests of workers, and to create a restructuring fund to provide compensation to workers. It was during this period that the concept of strategic sales of state-owned companies came into vogue — some of which, including the sales of Modern Bakeries, Hindustan Zinc and Balco, fuelled major controversies.
The Vajpayee government’s determination to push the policy through was reflected in the creation of a new Department of Disinvestment in 1999, which, in 2001, became a full Ministry. Resistance from ministries to which some PSUs reported was overcome with Vajpayee backing Arun Shourie, who was in charge of disinvestment.
The UPA government under Manmohan Singh was clear on not taking the strategic sale route. The Congress manifesto in 2004 said it would approach privatisation selectively. Unlike what the NDA had done, there would be no disinvestment just to raise revenues to meet short-term targets. Disinvestment revenues would be used for designated social development programmes. The manifesto added that generally profitmaking companies would not be privatised, and that all privatisation would be considered on a transparent and consultative case-by-case basis.
In 2005, the government formed a National Investment Fund or NIF, to which the proceeds of disinvestment were channeled. The mandate of the Fund, managed by professional investment managers, was to utilise 75% of annual funds in social sector schemes to promote education, health and employment. But with the economic slowdown of 2008-09, and later a drought, this was waived for three years — and later, in 2013, restructured to provide flexibility in using the Fund.
The Narendra Modi government has enjoyed the best of market conditions, with equities soaring in its first year, but like many previous governments, is yet to carry out asset sales consistently over a fiscal year — pushing it till the end, with resultant impact on valuation and proceeds.
shaji.vikraman@expressindia.com
Coal India sell-off: Investing at the time of disinvestment
Written by Sandeep Singh | Published: November 20, 2015 1:33:55 am
In January this year, the government divested 10 per cent stake in Coal India Limited through the offer-for-sale (OFS) route at Rs 358 per share and brought its holding down to 79.65 per cent. Ten months later, on Wednesday, the Cabinet Committee on Economic Affairs approved an additional 10 per cent divestment of government’s stake in the company.
Experts say that while the share sale makes sense for large institutional investors, looking to pick a notable stake in a company (as the shares are being made available in bulk), retail investors who participated in the previous OFS of the company and are still holding on to those shares may not be enthused to participate.
According to market experts, following the Cabinet’s decision to divest 10 per cent in CIL, the share price may remain weak as has been the case with such issues in the past. Also, the prevailing market conditions may keep the stocks under pressure and therefore calls for a proper due diligence before one can invest. On Thursday, a day after the CCEA approval, while the benchmark Sensex at the Bombay Stock Exchange was up by 1.4 per cent, share price of Coal India was down 0.4 per cent. The only benefit that one might look to capitalise on is the discount in the offer price.
The government might offer a discount to retail investors on the offer price (to be decided a few days before the OFS) and some say that retail investors should look to benefit from the issue and if one is entering as a long-term investor then the basis should be the fundamental of the company and the sector.
The frequency of disinvestment
While the sell-off process does not lead to any changes in the capital with CIL or its ownership status, some say that frequent disinvestment in a company impacts the pricing of the firm. While the government has approved the fresh stake sale process in CIL within just 10 months of its earlier divestment move in January 2015, there have been other such examples too. In Hindustan Copper, the government had divested its holding twice in a matter of eight months between November 2012 and July 2013. Similarly, in Steel Authority of India Limited, the government divested its stake twice in a period of 20 months between March 2013 and December 2014.
“Long-term investors in CIL have expressed their concern over frequent disinvestment as it impacts the stock price of the company. Ideally, you should give time to the stock to recover,” a government official said.
Several experts have also raised concerns over the method of disinvestment adopted by the government. Even as the Centre looks to provide both institutional and retail investors with an opportunity to buy the stocks through OFS, experts say that the government should rather divest through a closed auction process.
“I am fundamentally against this method of sale. They can do a closed auction for interested institutional investors and sell the desired stake. When you opt for the OFS route, your offer price is competing against your own market price and you are always hoping that the market remains strong so that the market price of the stock is trading above the offer price. If for some reason the market falls just ahead of the issue date then either you will have to call-off the issue or it may not get subscribed and fail,” said Prithvi Haldea, founder and chairman of Prime Database.
If they do a closed auction then the market price of the stock is irrelevant and the government can be more assured of the success of the issue.
How retail investors should proceed
Experts say that retail investors should be very careful while planning to participate in a stock when the government is divesting its stake. In a bull market, a disinvestment may throw up the opportunity to subscribe to a good stock at a discount of around 5 per cent (generally offered to retail investors by the government) and therefore there are gains to be had after the issue.
“There would be a 5 per cent discount in pricing for retail investors and that is what they should look to pocket,” said SP Tulsian, an independent investment advisor.
However, if market conditions are weak then the issue may not get subscribed and the investor may suffer loss on the investment. While global stock markets are trading weak, the concerns surrounding a hike in interest rates by the US Federal Reserve in December may also pose threat to the markets and thus impact the success of the forthcoming disinvestments.
Market participants say that investors should look at disinvestments as trading in the secondary market because the company is already listed and the share price is driven by the existing fundamentals. Only if the fundamentals of the company are strong and the stock is available at a good price, investors should invest for long-term.
Investors should, however, be extra cautious while picking up shares in a company at a discount as it is always better to avoid firms operating in sectors that need major reforms or are facing environmental issues. It is wiser to wait till the time the issues are resolved.
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