As per Margaret Thatcher – “Free enterprise has enabled the creative and the acquisitive urges of man to be given expression in a way which benefits all members of society. Let free enterprise fight back now, not for itself, but for all those who believe in freedom.”
In November 2019, India launched its biggest privatization drive in more than a decade. An “in-principle” approval was accorded to reduce the government of India’s paid-up share capital below 51% in select Central Public Sector Enterprises (CPSEs).
Among the selected CPSEs, strategic disinvestment of the Government’s share holding of 53.29% in Bharat Petroleum Corporation Ltd (BPCL) was approved. This recent approval of strategic disinvestment in Bharat Petroleum Corporation Limited (BPCL) led to an increase in value of shareholders’ equity of BPCL by INR 33,000 crore when compared to its peer Hindustan Petroleum Corporation Limited (HPCL) and this reflects an increase in the overall value from anticipated gains from consequent improvements in the efficiency of BPCL when compared to HPCL which will continue to be under Government control.
This chapter, therefore, examines the realized efficiency gains from privatization in the Indian context.
Evolution of Disinvestment Policy in India
The liberalization reforms undertaken in 1991 ushered in an increased demand for privatization/ disinvestment of PSUs.
- In the initial phase, this was done through the sale of a minority stake in bundles through auction. This was followed by a separate sale for each company in the following years, a method popularly adopted till 1999-2000.
- India adopted strategic sale as a policy measure in 1999-2000 with the sale of a substantial portion of government shareholding in identified Central PSEs (CPSEs) up to 50% or more, along with transfer of management control. This was started with the sale of 74 % of the Government’s equity in Modern Food Industries Limited (MFIL).
- Thereafter, 12 PSUs (including four subsidiaries of PSUs), and 17 hotels of Indian Tourism Development Corporation (ITDC) were sold to private investors along with transfer of management control by the Government.
- Another major shift in disinvestment policy was made in 2004-05 when it was decided that the government may “dilute its equity and raise resources to meet the social needs of the people”, a distinct departure from strategic sales.
- Department of Investment and Public Asset Management (DIPAM) has laid down comprehensive guidelines on “Capital Restructuring of CPSEs” in May 2016 by addressing various aspects, such as payment of dividends, buyback of shares, issues of bonus shares and splitting of shares.
The Government has been following an active policy on disinvestment in CPSEs through the various modes:
- Disinvestment through minority stake sale in listed CPSEs to achieve minimum public share holding norms of 25%. While pursuing disinvestment of CPSEs, the Government will retain majority share holding, i.e., at least 51% and management control of the Public Sector Undertakings.
- Listing of CPSEs to facilitate people’s ownership and improve the efficiency of companies through accountability to their stakeholders.
- Strategic Disinvestment.
- Buy-back of shares by large PSUs having a huge surplus.
- Merger and acquisitions among PSUs in the same sector.
- Launch of exchange-traded funds (ETFs) – an equity instrument that tracks a particular index.
- The CPSE ETF is made up of equity investments in India’s major public sector companies like ONGC, REC, Coal India, Container Corp, Oil India, Power Finance, GAIL, BEL, EIL, Indian Oil and NTPC.
- Monetization of selected assets of CPSEs to improve their balance sheet/reduce their debts and to meet part of their capital expenditure requirements.
NITI Aayog has been mandated to identify PSUs for strategic disinvestment. For this purpose, NITI Aayog has classified PSUs into “high priority” and “low priority”, based on:
- National Security
- Sovereign functions at arm’s length, and
- Market Imperfections, and
- Public Purpose.
The PSUs falling under “low priority” are covered for strategic disinvestment. To facilitate quick decision making, powers to decide the following have been delegated to an Alternative Mechanism in all the cases of Strategic Disinvestment of CPSEs where Cabinet Committee on Economic Affairs (CCEA) has given ‘in principle’ approval for strategic disinvestment:
- The quantum of shares to be transacted, mode of sale and final pricing of the transaction or lay down the principles/ guidelines for such pricing; and the selection of strategic partner/ buyer; terms and conditions of sale; and
- To decide on the proposals of Core Group of Disinvestment (CGD) with regard to the timing, price, terms & conditions of sale, and any other related issue to the transaction.
In November 2019, the government announced that full management control will be ceded to buyers of Bharat Petroleum Corporation Ltd. (BPCL), Shipping Corporation of India (SCI) and Container Corporation of India Ltd (CONCOR). In Jan 2020, strategic disinvestment was approved for Minerals & Metals Trading Corporation Limited (MMTC), National Mineral Development Corporation (NMDC), MECON and Bharat Heavy Electricals Ltd. (BHEL)
IMPACT OF PRIVATIZATION: A FIRM LEVEL ANALYSIS
- To assess the impact of strategic disinvestment/privatization on performance of select CPSEs before and after privatization, 11 CPSEs are studied, that had undergone strategic disinvestment from 1999-2000 to 2003-04 for which data is available both before and after privatization.
- difference-in-difference methodology Enable careful comparison between Peers in the same group of industries
- The Survey has aggressively pitched for divestment in PSUs by proposing a separate corporate entity wherein the government’s stake can be transferred and divested over a period of time.
- The performance of privatized firms, after controlling for other confounding factors using the difference in the performance of peer firms over the same period, improves significantly the following privatization.
- Further, the survey has said privatized entities have performed better than their peers in terms of net worth, profit, return on equity and sales, among others.
i. Net Worth: The net worth of a company is what it owes its equity shareholders. This consists of equity capital put in by shareholders, profits generated and retained as reserves by the company.
- The net worth of privatized firms increased from INR 700 crores before privatization to INR 2992 crore after privatization.
- Significant improvement in financial health and increased wealth creation for the shareholders.
- Difference-in-difference (DiD) analysis attributes an increase of INR 1040.38 crores in net worth due to privatization.
ii. Net Profit: Increase in net profit indicates greater realizations from the company after incurring all the operational expenses.
- The net profit of privatized firms increased from INR 100 crores before privatization to INR 555 after privatization compared to the peer firms.
- DiD analysis attributes an increase of INR 300.27 crore in net profit due to privatization.
iii. Gross Revenue: The gross revenue of privatized firms increased from INR 1560 crore to before privatization to INR 4653 crores after privatization, signalling an increase in income from sales of goods and other nonfinancial activities.
- DiD analysis attributes an increase of INR 827.65 crore in gross revenue due to privatization.
iv. Return on Assets: ROA captures the ratio of profits after taxes (PAT) to the total average assets of the company, expressed in percentage terms.
- ROA for the privatized firms has turned around from (-) 1.04% to 2.27% surpassing the peer firms which indicate that privatized firms have been able to use their resources more productively.
- DiD analysis attributes an increase of 5.04% in ROA due to privatization.
v. Return on Equity: Return on equity (ROE) is profit after tax (PAT) as a percentage of average net worth.
- The ROE of privatized firms increased from 9.6% before privatization to 18.3% after privatization, reflecting an increase in a firm’s efficiency at generating profits from every unit of shareholders’ equity.
- DiD analysis attributes an increase of 0.89 per cent in ROE due to privatization.
vi. Net Profit Margin: A Net profit margin of a company is PAT as a percentage of total income.
- The net profit margin of privatized firms increased from (-)3.24% before privatization to 0.65% after privatization, reflecting that out of a rupee that is generated as income, the share of after-tax profit in the income increases.
- DiD analysis attributes an increase of 15.26% in net profit margin due to privatization.
Way Forward
- Aggressive disinvestment, preferably through the route of strategic sale, should be utilized to bring in higher profitability, promote efficiency, and increase competitiveness and to promote professionalism in management in CPSEs.
- The focus of the strategic disinvestment needs to be to exit from the non-strategic business and directed towards optimizing the economic potential of these CPSEs.
- This would, in turn, unlock capital for use elsewhere, especially in public infrastructures, like roads, power transmission lines, sewage systems, irrigation systems, railways and urban infrastructure.
- Provisions of DIPAM and disinvestment in various CPSEs need to be taken up aggressively to facilitate the creation of fiscal space and improve the efficient allocation of public resources.
- The Government can transfer its stake in the listed CPSEs to a separate corporate entity and this entity should be managed by an independent board that would mandate to divest the Government stakes in these CPSEs over a period of time.
- This will lend professionalism and autonomy to the disinvestment programme which, in turn, would improve the economic performance of the CPSEs.
Conclusion
The aim of any privatization or disinvestment programme should, therefore, be the maximisation of the Government’s equity stake value. Hence, the analysis clearly affirms that disinvestment (through the strategic sale) of CPSEs unlocks their potential of these enterprises to create wealth evinced by the improved performance after privatization.
MCQs
- Which of the following are the modes of disinvestment in Central public sector enterprises (CPSEs)?
1. Listing of CPSEs on stock exchange
2. Buy-back of shares by large PSUs
3. Merger and acquisitions among PSUs
Select the correct answer using the code given below.
(a) 1 and 2 only
(b) 2 and 3 only
(c) 3 only
(d) 1, 2 and 3
Solution: D Disinvestment means the sale or liquidation of assets by the government, usually Central and state public sector enterprises, projects, or other fixed assets.
The government undertakes disinvestment to reduce the fiscal burden on the exchequer, or to raise money for meeting specific needs, such as to bridge the revenue shortfall from other regular sources. In some cases, disinvestment may be done to privatize assets. However, not all disinvestment is privatization.
The Government has been following an active policy on disinvestment in CPSEs through the various modes:
1.Disinvestment through minority stake sale in listed CPSEs to achieve minimum public shareholding norms of 25 percent. While pursuing disinvestment of CPSEs, the Government will retain majority shareholding, i.e., at least 51 percent and management control of the Public Sector Undertakings;
2.Listing of CPSEs on exchange to facilitate people‘s ownership and improve the efficiency of companies through accountability to its stake holders – As many as 57 PSUs are now listed with total market capitalization of over ` 13 lakh crore.
3.Strategic Disinvestment;
4.Buy-back of shares by large PSUs having huge surplus; 5.Merger and acquisitions among PSUs in the same sector; 6.Launch of exchange traded funds (ETFs) – an equity instrument that tracks a particular index. The CPSE ETF is made up of equity investments in India‘s major public sector companies like ONGC, REC, Coal India, and Monetization of select assets of CPSEs to improve their balance sheet/reduce their debts and to meet part of their capital expenditure requirements.
