Disinvestment: The Runaway Bride
The issue is should the government own everything that it owns and must the government manage everything which it manages. Why not divest enterprises listed for privatisation from political management and place the holdings in a sovereign trust?
You could call it the eleventh hour fifty ninth minute phenomenon. Come January explanatory headlines sprout out of the woodworks of government about the imminent disinvestment of an entity, promising the meeting of the elusive disinvestment target.
The script of the annual spectacle is reminiscent of the 1999 Hollywood blockbuster Runaway Bride where the bride ditches grooms at the altar and escapes via windows and chutes. Disinvestment, in the dramatic sense, is the runaway bride of India’s most tracked, tagged and watched annual event.
In 2022–23 the government vowed to realise around Rs 65,000 crore through disinvestments. The promise of target fulfilment is embedded in the disinvestment of IDBI Bank. The landscape is buzzing with induction of exceptions to rules and regulations. The latest sweetener added is the compression of government’s voting rights to 15 per cent and reclassification of the government’s stake by SEBI as public holding.
It begs the question as to why the inductions of exceptions must await the eleventh hour. Consider the global environment. On the face of it IDBI Bank is valued at $ 7.5 billion. Effectively the bidder would have to fork out over $ 5 billion — not a small sum even for the Bloomberg Billionaires. In late 2021 global interest rates were hovering around zero or one per cent. Would it have not made more sense for a foreign bidder to consider a bid when the US Federal Funds Rate — which generally defines global cost of capital — was sub-one per cent than now when it is roaring towards 5 per cent?
The government, more than others, would know the potential for upsides from data — the extent of clean up undertaken accompanied by rising demand for credit. Over the past 18 months the big buzz in the stock market was the upside in bank stocks. Funds, analysts and every punter worth their rupee has been betting on public sector banks — forget the big guns such as SBI and Bank of Baroda, even smaller players have soared. In the past two years shares of public sector stocks have roared — the NSE Nifty PSU Bank Index shot up over 60 per cent in 2022. Yet the disinvestment of IDBI Bank must await last hour induction of exceptions.
Year after year despite brave assertions governments more often than not miss the disinvestment target. In the three decades since the entry of the phrase “disinvestment” into the Indian political lexicon successive governments have flattered in promise and faltered in performance. Since 1992 a sum of over Rs 11.6 lakh crore was targeted and less than half or Rs 5.6 lakh crore has been collected.
As per the government ‘Disinvestment/sale implies entire or substantial sale of Government shareholding of CPSEs, along with transfer of management control’. In 2016 the government listed 36 central public sector enterprises for ‘strategic disinvestment’. Barring Air India and Neelachal Ispat which were acquired by the Tatas, big tag ‘disinvestments’ have been essentially government stakes being bought by government owned enterprises.
HPCL was sold to ONGC, REC was bought by Power Finance Corporation, the Kamarajar Port stakes were divested to Chennai Port Trust, HSCC(India) Limited to NBCC and so on. Only twice in the past ten years has the government achieved the target for disinvestment. The pending list includes other big ones on the ambitious list to be completed in 2021–22 included BPCL, Shipping Corporation, BEML, Pawan Hans. Unsurprisingly there is an attempt to define dividends received from public enterprises as disinvestment!
Meanwhile the political management of business enterprises continues to bleed tax payer monies. During the winter session, government informed Parliament that of the 248 operating CPSEs 59 were reporting losses. In the past five years CPSEs have reported losses of over Rs 1.17 lakh crore which translates to over Rs 2.6 crore every hour of the day — the ones in profit are largely those where the government is a major player or a monopoly.
The gap in promise and performance symbolises the systemic inadequacies which haunt the disinvestment programme. To start with the architecture of the political economy disables the faculty to reconcile the opportunity of net present value with perceived valuations expected. This is illustrated by the delays in the divestment of entities such as IDBI Bank or BPCL which once attracted the attention of transnationals including Saudi petro giant Aramco.
The fundamental factor that successive governments have struggled to resolve is whether to be the umpire/regulator or one of the players. It is true that in a developing economy, such as India, the government plays a major role in investment and growth. The question is should the government own everything that it owns and must the government manage everything which it manages.
To start with the government should transfer the holdings of companies listed for privatisation into a sovereign trust accountable to Parliament. Second divest political management and reduce all government holdings via ETFs to 51 or 26 per cent as strategy dictates. The holdings can be leveraged to fund development. Disinvestment can happen as opportunity arises — at premium and in phases as it did with Maruti.
The saga of disinvestment targets merits attention and closure. Even the runaway bride eventually does get married.
Shankkar Aiyar, political economy analyst, is author of ‘Accidental India’, ‘Aadhaar: A Biometric History of India’s 12-Digit Revolution’ and ‘The Gated Republic –India’s Public Policy Failures and Private Solutions’. You can email him at email@example.com and follow him on Twitter @ShankkarAiyar. His previous columns can be found here. This column was first published here.