By: Tavaga Research
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 recently 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 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.
Disinvestment in India
Why Disinvestment is done?
- Reducing the financial burden on the Government finances
- Opening up markets for private firms, which eventually leads to better capital markets and efficient allocation of resources
- Supporting the liquidity measures in the market by aiding to consumption and demand as the need arises
- Raise money to facilitate long-term Government goals of growth and development in the country
- Channelize resources to more productive avenues and projects by reducing the capital expenditures on existing non-performing assets or loss-making firms
- Improve the Return on Investment (ROI) of underperforming firms
Types of Disinvestment
From a general point of view, the disinvestment in India can be categorized in the following manner:
- 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 expenditure. Such a disinvestment strategy is to shift the focus of the company on the divisions performing well and to scale them up.
- 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 their competitive abilities.
- 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 of 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, majority 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 on the financial burden on the government balance sheet.
- Complete Disinvestment/Privatization: 100 percent sale of Government stake in a PSU leads to the privatization of the company, wherein complete ownership and control are passed onto the buyer.
Means of Disinvestment
Disinvestment of a minority stake in a Government-owned entity is done in one of the following ways:
- Initial Public Offering (IPO)
- Follow On Public Offer (FPO)
- Offer For Sale (OFS)
- Institutional Placement – Government stake is auctioned off to select financial institutions
- 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 of 22 companies (19 PSUs) with a Government stake in them.
- Cross-holding – Listed PSUs are allowed to buy a Government stake in another PSU
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, or 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.
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
|Point of Difference||Disinvestment||Privatization|
|Control||Dilution of ownership, Government retains control||Transfer of ownership, control changes hands|
|Shareholding threshold||More than 50 percent||Less than 50 percent|
|Purpose||To ease public finances and increase productivity of Government capital||Strategic in terms of achieving operational efficiency|
Source: Tavaga Research
Disinvestment policy of the Government?
Department of Disinvestment used to be an independent ministry in the cabinet. However, the ministry in 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. FY22 disinvestment target is set to Rs. 1.75 lakh crore, which is less than the disinvestment target of Rs. 2.1 lakh crore set in FY21.
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 which have no accumulated losses and have returned a net profit for the preceding three consecutive years have to be listed
- Disinvestment 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 of 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 meet capital requirements of productive PSUs (25 percent of the fund corpus). However, after having exhausted the fund following the financial crisis of 2008 toward 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
Big-ticket disinvestments in the pipeline
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 their process this year in January, this time with intention of disinvesting completely.
The disinvestment will involve a 100 percent sale of the Government’s shareholding in the company, including Air India Express Limited and Air India SATS Airport Services. The issue at hand is that the company is neck-deep in debt.
The Government has already transferred 50 percent of the company’s liabilities and debt to another special purpose entity and plans to reduce further debt to attract bids for the company. The total transfer of liabilities and debt currently stands at Rs 30,000 crore, leaving only about Rs 23,000 crore of debt on the balance sheet.
In addition, the bidder can now decide how much debt they are willing to take on; it could be zero as well. The debt level that was pre-fixed earlier has now been unfettered and therefore, EV (enterprise value) bidding can now take place.
With pandemic in the picture, Air India has suffered huge operational losses worsening financial health. Keeping this in mind, the government has 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 ended June 2020.
The response, after these tweaks, has been enthusiastic, with the government receiving several expressions of interest (EoI) for the troubled airline. The foremost bidder has been the Tata Group, which has a sentimental value attached to the airline since Air India emerged out of Tata Airlines in 1946.
The other bidder is a consortium of Air India employees and Interups Inc. The bid propounds to provide a 51 percent stake to the employee association that include 219 staffers and the remaining, 49 percent stake, goes to Interups Inc.
Life Insurance Corporation of India: The Government announced the disinvestment in the largest insurer of the country this year. LIC holds approximately 69 percent of the market share. LIC disinvestment is a unique case as disinvestment in the state-owned insurer will demand amendments to the LIC Act. LIC Act governs several operations of the company, such as the transfer of surpluses, government guarantee on policies, etc.
Sources close to the matter say that the Government may be looking to sell a 25 percent stake in the company. However, the 25 percent sale will be achieved in stages with the first stage only offering a 5 percent sale. The expectation from the 5 percent sale is to raise over Rs 50,000 crores. The Government has appointed Deloitte and SBI Capital markets as their transaction advisors, which is the first step of the disinvestment process.
BPCL Disinvestment – In November 2019, the government of India announced the disinvestment of 5 public sector units (PSUs), which included cutting the majority stake in Bharat Petroleum Corporation of India (BPCL) and Shipping Corporation of India (SCI). Along with these two PSUs, the government also announced its 31% stake sale plans in Container Corporation of India (CONCOR).
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 21 percent in FY19.
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 government has received three EoIs including one from Anil Aggarwal’s Vedanta and one each from two international funds (Apollo Global Management and Think Gas promoted by I Squared Capital). The expression of interest would be used to pre-qualify the interested parties. Those who qualify would then be allowed to participate in the next stage.
Shipping Corporation of India (SCI) – The government on 22nd December 2020 invited bids to sell its 63.75 percent stake in SCI, along with transfer of the management control. The deadline to submit the initial bid had been set for 13th February 2021. The stock has zoomed around 75 percent over November 2020, on reports that several domestic and global players are in the fray to participate in the privatization process.
At the current market price, the stake of the government in SCI is valued at more than Rs 3000 crore. The divestment process in SCI is being implemented through a competitive bidding route. The PIM (preliminary information memorandum) for the invitation can be download from the DIPAM website.
The Cabinet Committee on Economic Affairs (CCEA) also cleared the sale of the entire stake in Tehri Hydro Development Corp of India (THDC) and North Eastern Electric Power Corporation (NEEPCO) to NTPC. With this, the government set an ambitious target of raising Rs 1.05 lakh crore in FY20. But due to the Covid-19 pandemic, the government had to extend the deadlines to submit the Expression of Interest (EoI), thus failing to raise the targeted 1.05 lakh crores.
Past disinvestment activity of PSUs
The table above features some of the high-profile disinvestment activities of the Government of India in the past 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.
Recent disinvestment activity of PSUs
The disinvestment activity in FY21 has only been to the extent of the given two transactions. Citing the pandemic, the Government is unlikely to execute any planned disinvestments. The market value of assets has been adversely affected by the reduced economic activity due to multiple complete lockdowns imposed in the country. Any efforts by the Government to liquidate assets will not yield the potential market value, undermining the receipts from the disinvestment. This is precisely why the IBC proceedings had been suspended for most of the fiscal year 2021. The amount of disinvestment receipts this year sums up to Rs 21,303 crores (66%) as against the revised budgeted receipts of Rs 32,000 crores.
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