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The Disinvestment Diary

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By Divya Kamboj

Meaning & Reasons

In finance and economicsdivestment or divestiture is the reduction of some kind of asset for financial, ethical, or political objectives or sale of an existing business by a firm. A divestment is the opposite of an investment

Generally found reasons of Disinvestment are:

  • First, a firm may divest (sell) businesses that are not part of its core operations so that it can focus on what it does best.
  • A second motive for divestitures is to obtain funds. Divestitures generate funds for the firm because it is selling one of its businesses in exchange for cash.
  • A third motive for divesting is that a firm’s “break-up” value is sometimes believed to be greater than the value of the firm as a whole. This encourages firms to sell off what would be worth more when liquidated than when retained.
  • A fourth motive to divest a part of a firm may be to create stability.

PSU’s turning into liability resulting in their Divestment

Government-owned corporations often operate in sectors where there is a natural monopoly, or where the government has strategic interest. In India, a government-owned corporation is termed as Public Sector Undertaking (PSU).

The economic policy initiated in July 1991 clearly indicated that PSUs had shown a very negative rate of return on capital employed. Inefficient PSUs had become a drag on the Government’s resources, and turned out to be liabilities instead of assets.

Hence, the Government decided to get rid of these units, concentrate on core activities, and move out of non-core businesses, especially the ones where the private sector had entered in a significant way. Finally, disinvestment was also seen by the Government as a means to raise funds for meeting general/specific needs.

                                                                                                                                                                                           

 

In this direction, the Government adopted the ‘Disinvestment Policy’. The following main objectives of disinvestment were outlined:                                 

  • To reduce the financial burden on the Government.
  • To improve public finances.
  • To introduce, competition and market discipline.
  • To fund growth.
  • To encourage wider share of ownership.
  • To retire Government debt- Almost 40-45% of the Centre’s revenue receipts go towards repaying public debt/interest.

Disinvestment target Fiscal 2013-14.

The government has framed the disinvestment target for fiscal year 2013-14 as Rs.40000 crore. The government needs all the revenue it can manage if it is to stay within the budgeted fiscal deficit of 4.8% of gross domestic product, a line finance minister P Chidambaram has repeatedly said will not be crossed.

Presently, the Government has about Rs.2 lakh crore locked up in PSUs so the stake sale is the top agenda of the government. Achieving the disinvestment target is critical to keep the government finances on track.

Divestment target for different PSU’s:

The government wants to sell 10% of its stake in Indian Oil Corp (IOC) in a bid to achieve its disinvestment target.

The government, which currently holds 29.5% stake in HZL and 49% stake in Balco, is looking at exiting from the two firms.

It had originally planned to divest 10% in Coal India Ltd (CIL), but on account of stiff opposition from unions, it lowered it to 5%.CIL stake sale could fetch over Rs.8600 crore. The government currently holds 90% stake in CIL.

Bharat Heavy Electricals Ltd(BHEL) disinvestment of 5% is also facing roadblocks of unfavorable market conditions as the company’s share price has taken a beating since its disinvestment was approved in 2011.

It expects to raise about Rs 2000 crore through disinvestment of state run hydro power producer National Hydro Power Ltd (NHPC). The board of the state-run company has approved buying back of 10% of total shares. The government holds 86.36% stake in NHPC.

It had managed to garner Rs.1600 crore by divestment of Power Grid Corporation of India in December 2013.

Divestment target High & Dry

The government’s disinvestment programme is stuck because of opposition from the parent ministries of some companies in which it wants to sell shares. In the case of Coal India, the company’s Labor unions are against the government reducing its holding and had threatened to hold a strike, if the government goes ahead with its plan.

So, the government is now considering innovative financial instruments and bumper dividends by its companies as its plan to raise revenue by selling stakes in state run firms is set to fall way short of target.

The government has got about Rs.3000 crore so far, with less than three months remaining in this fiscal year.

PM Manmohan Singh had convened a high level meeting to push forward the disinvestment programme and reviewed the progress with regards to Coal India, BHEL, Hindustan Zinc and Balco.

Besides Inter-ministerial differences, trade union protests, unfavourable market conditions have left the government’s PSU disinvestment programme high and dry. The ambitious disinvestment target for 2013-14 was left stranded after few initial PSU stake sales. Besides, works on setting up the Exchange Traded Fund (ETF) also kept the disinvestment target busy. The government so far managed to garner about Rs 3000 crore through stake sale in six companies to meet SEBI’s listing norms and another Rs.1600 crore through disinvestment of Power Grid Corporation in December.

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