Understanding Disinvestment Policy – Objectives, Purpose, And Recent Developments

What is Disinvestment?

Disinvesting is a strategy by which an investor offloads or disposes of an asset or a partial stake in the asset. Disinvesting is an exit strategy that means taking out an existing investment. Disinvestment policies are commonly followed by governments to allocate resources more efficiently. For example, the Indian government announced that they will carry out disinvestment in BPCL, a government oil and gas subsidiary.

Disinvestment by the government means the market activity through which the Government conducts the sale or liquidation of Government-owned assets. Such assets usually refer to the Government’s ownership stake in Central Public Sector Enterprises (CPSEs) and state public sector enterprises (SPSEs), but are not limited to that. Government assets also include project undertakings and other fixed assets.

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Disinvestment in India

Why Disinvestment is done?

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Types of Disinvestment

From a general point of view, the disinvestment in India can be categorized in the following manner:

1. Organizing the market segment: A company may disinvest in one of its underperforming divisions, as other divisions continue to deliver higher profitability while demanding similar resources and expenditures. Such a disinvestment strategy is to shift the focus of the company on the divisions performing well and to scale them up.
2. Offloading unnecessary assets: A company is cornered into adopting this strategy when the acquisition of an asset does not fit its long-term strategy. Companies post-merger are stuck with assets they do not intend to use. A company may choose to disinvest in acquired assets and instead focus on its competitive abilities.
3. Social and legal considerations: A company may have to disinvest if they cross a certain threshold limit in the market holding to enable fair competition. Another example is an endowment fund pulling out of investments in energy companies given environmental concerns.

From a government point of view, the disinvestment strategy can be of the following types:

• Minority Disinvestment: The Government wishes to retain managerial control over the company by maintaining the majority stake (equal to or more than 51 percent). Because public sector enterprises cater to the citizens, the Government needs to be able to influence company policies to further the interests of the general public. The Government generally auctions the minority stake to potential institutional investors or announces an offer for sale (OFS) inviting participation by the public.
• Majority Disinvestment: The Government gives up the majority stake in a government-held company. After the disinvestment, the government is left holding a minority stake in the company. Such a decision is based on strategic grounds and policies of the Government. Typically, the majority of disinvestments are done in the favor of other public sector enterprises. For example, Chennai Petroleum Corporation Limited, formerly known as Madras Refineries Limited is a group company of Indian Oil Corporation after disinvestment by the Government. The idea is the consolidation of resources in a company which ultimately leads to operational efficiency.
• Strategic Disinvestment: The government sells off a PSU to usually a non-government, private entity. The intention is to transfer the ownership of a non-performing organization to more efficient private players in the market and reduce the financial burden on the government balance sheet.
• Complete Disinvestment/Privatization: 100 percent sale of a Government stake in a PSU leads to the privatization of the company, wherein complete ownership and control are passed onto the buyer.

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Means of Disinvestment

Disinvestment of a minority stake in a Government-owned entity is done in one of the following ways:

1. Institutional Placement – Government stake is auctioned off to select financial institutions
2. Exchange-Traded Funds (ETFs) – Monetize shareholding simultaneously across multiple sectors and companies that form a constituent of the ETF. For example, Bharat-22 is an ETF comprising 22 companies (19 PSUs) with a Government stake in them.
3. Cross-holding – Listed PSUs are allowed to buy a Government stake in another PSU

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Disinvestment v/s Divestment

Divestment and disinvestment are terms used interchangeably. However, there is a slight point of difference between the two.

Disinvestment in an asset, division, or stake is typically carried out without the intent of reinvesting capital back into the same entity. Divestment, on the other hand, is generally done temporarily to deal with say, tight finances, or social/political pressures that may arise as a result of certain business activities. While disinvestment might also mean selling off the entity in its entirety, divestment only means the reduction of investment.

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Disinvestment v/s Privatization

Privatization is the partial or complete sale of Government-owned assets to a privately held firm or a group of individuals where the Government gives up majority control to the buyer of assets. Privatization can be done by:

• Stake sale of Government-owned equity in PSUs
• Lifting regulations restricting private participation in Government-regulated industries
• Offering public services contracts to private corporations
• Offering subsidies on various business activities

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Disinvestment policy of the Government?

Department of Disinvestment used to be an independent ministry in the cabinet. However, the Ministry 2004 was merged into the Ministry of Finance but remained an independent department. Later in 2016, under the BJP-led Government, the Department of Disinvestment was renamed as Department of Investments and Public Asset Management (DIPAM).

DIPAM is primarily concerned with the management of Central Government equity stake in public sector undertakings (PSUs) and conducting disinvestment activities as per the yearly targets set by the Finance Ministry.

Every year, the government sets a disinvestment target in the budget for the coming fiscal year, and disinvestment is carried out according to the planned amount. FY24 disinvestment target is set to Rs. 51,000 crores, which is less than the disinvestment target of Rs. 65,000 crores set in FY23.

The features of the disinvestment policy in India as per DIPAM are as follows:

• Promote public ownership of CPSEs to ensure and further accountability to the public of India by pursuing minority disinvestment or strategic disinvestment
• Meet the minimum public shareholding threshold of 25 percent for every listed CPSE through an OFS or FPO or a combination of both
• CPSEs that have no accumulated losses and have returned a net profit for the preceding three consecutive years have to be listed
• Disinvestment is to be discussed for CPSEs on a case-by-case basis where identifications of CPSEs for divestiture will be done following consultation with respective ministries administering such CPSEs
• OFS of Government equity proposals will be assessed by the Government
• Niti Aayog, the Government think tank, is to be considered an important party overseeing discussions of strategic disinvestment proposals and means
• Niti Aayog will recommend CPSEs requiring strategic disinvestment, mode of sale, percentage of stake to be disposed of, and valuation of such CPSEs

National Investment Fund (NIF), originally formed in 2005, received all the proceeds from the disinvestment of CPSEs. NIF was set up as a permanent fund and professionally managed to meet the two-fold objective of – promoting social welfare schemes (75 percent of the fund corpus) and meeting capital requirements of productive PSUs (25 percent of the fund corpus). However, after having exhausted the fund following the financial crisis of 2008 social welfare, the fund was re-aligned in 2013 to the disinvestment policy of the Government. NIF presently exists as a ‘Public Account’ under the Government Accounts and is withdrawn/invested only for pre-approved purposes of:

• Participate in rights issues of listed CPSE to maintain majority control
• Subscription to CPSE allotment of preferred equity to maintain Government shareholding of 51 percent
• Recapitalization of PSBs and public sector financial institutions as and when the need arises for capital infusion
• Capital infusion in metro projects
• Investment in development institutions such as NABARD, Exim Bank, RRBs, etc.
• Meet the CAPEX requirements of Indian Railways

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Disinvestment Examples

Big-ticket disinvestments

Air India Disinvestment: The Government offered to sell a 76 percent stake in the state-owned airliner in 2018. However, it could not receive a successful bid then. The Government reopened its process in January 2022, this time with the intention of disinvesting completely.

The disinvestment involved a 100 percent sale of the Government’s shareholding in the company, including Air India Express Limited and Air India SATS Airport Services.

The Government transferred 50 percent of the company’s liabilities and debt to another special purpose entity. The total transfer of liabilities and debt currently stood at Rs 30,000 crore, leaving only about Rs 23,000 crore of debt on the balance sheet.

In addition, the bidder could decide how much debt they are willing to take on; it could be zero as well. 

With the pandemic in the picture, Air India has suffered huge operational losses worsening financial health. Keeping this in mind, the government had already, by the end of the second quarter, provided Rs 1000 crore to the troubled airline, having incurred a loss of Rs 2750 crore in the quarter that ended June 2020.

Tata Group, the largest conglomerate in India, emerged as the successful bidder for Air India in October, beating a consortium led by Ajay Singh, the chairman and managing director of SpiceJet Ltd. Tata Sons Pvt. Ltd, the holding company of Tata Group, submitted a winning bid of ₹18,000 crores as the enterprise value of Air India, surpassing the reserve price of ₹12,906 crores, through its wholly-owned unit Talace Pvt. Ltd.

Life Insurance Corporation of India: The Government announced the disinvestment in the largest insurer in the country in 2021. LIC holds approximately 69 percent of the market share. LIC disinvestment was a unique case as disinvestment in the state-owned insurer demanded amendments to the LIC Act. LIC Act governs several operations of the company, such as the transfer of surpluses, government guarantee on policies, etc.

The Government conducted LIC IPO between 4th May 2022 and 9th May 2022. The government sold 3.5% of the LIC through the IPO and is planning to further reduce its stake going forward. 

BPCL Disinvestment: According to a memorandum put out by DIPAM, Ministry of Finance, BPCL is the second-largest oil marketing company in India cornering a market share of around 25 percent in FY22.

The company also has the third-largest refining capacity in the country. The central government intends to sell its entire stake of 52.98 percent in BPCL. However, this excludes BPCL’s 61.65 percent stake in Numaligarh Refinery Limited.

The BPCL disinvestment however is currently on hold till 2024.

Shipping Corporation of India (SCI) – The government on 22^nd December 2020 invited bids to sell its 63.75 percent stake in SCI, along with the transfer of the management control. 

The Indian government’s plan to sell its majority stake in the Shipping Corporation of India (SCI) has faced delays due to regulatory hurdles. However, SCI was required to spin off its non-core assets before the stake sale could proceed, and disagreements over the transfer of funds to the demerged entity have created obstacles in the process. These regulatory delays have impacted the timeline of the privatization plan for SCI.

The Core Group of Secretaries on Disinvestment (CGD) will meet on April 4, 2023, to discuss the disinvestment of the state-run company.

Disinvestment activity of PSUs

Source: DIPAM, Government of India, Tavaga Research

The table above features some of the high-profile disinvestment activities of the Government of India in the three financial years. The Government announced multiple issues of CPSE ETFs and Bharat-22 ETFs. The Government also announced several buybacks and employee OFS over the period.

The Indian government has realized an impressive amount of Rs. 3.62 lakh crore from disinvestment proceeds through 135 transactions during the period of 2014-15 to 2020-21. This is a significant increase compared to the previous 10-year period of 2004-14, where a total of Rs. 1,07,883 crore was raised. The efficiency of performance is evident in the higher number of transactions, with an average of 20 per year in the last 7 years, compared to just 4 per year in the previous 10 years. This reflects the government’s successful efforts in raising funds through disinvestment using various modes and instruments, showcasing a positive trend in the performance of disinvestment activities in India.

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Conclusion

Disinvestment has multiple advantages as it can promote competition in different sectors and enhance efficiencies. Additionally, it generates revenue for the Government, which can be utilized for welfare measures. However, the Government must be cautious and maintain its presence in strategic sectors such as banking and energy to safeguard social obligations and strategic interests associated with these sectors.