Statsguru: Value erosion in PSUs can limit govt's disinvestment target

All sectors will be opened up for private firms and PSUs will be privatised in non-strategic sectors.

While announcing the economic package to deal with the impact of Covid-19, Finance Minister Nirmala Sitharaman had said that the government would formulate a new policy for public sector undertakings (PSUs).

All sectors will be opened up for private firms and PSUs will be privatised in non-strategic sectors. This will not only help improve efficiency in the system but also raise resources for the government. The government has budgeted to raise over Rs 2 trillion through disinvestment in the current fiscal year (chart 1). Notably, PSUs have improved their dividend payment in the past few years.

However, the data shows that recent developments in PSUs can limit the value that the government can expect to raise. In FY20, the biggest chunk of disinvestment inflow came by selling stakes in PSUs through exchange-traded funds (ETFs), as shown in chart 2. Also, the performance of PSUs has been weak in the market.

The BSE PSU index has fallen more sharply as compared to the BSE Sensex in the last two years (chart 3). The fall in stock prices has eroded significant value in some of the largest PSUs, which will limit receipts for the government (chart 4). One clear reason for this could be the poor financial performance of PSUs: Their sales and profits have come down significantly in recent quarters (chart 5).

There are some sectors in which sales performance of PSUs has been better than private companies, such as the power sector (chart 6). But the case is different in the refinery sector.

Covid-19 impact: Missing disinvestment targets will have consequences

Any slippage in disinvestment numbers combined with other revenue shortfall would mean the govt would have to borrow more in the market.

The economic travails this year will be challenging, and from the economist’s perspective, economic growth and fiscal deficit are the two main challenges. The government had embarked on a very ambitious disinvestment programme for the year of Rs 2.1 trillion. It sounded optimistic as we have never delivered such an amount before. The highest was Rs 1 trillion in FY18. The present programme includes the sale of Air India, Life Insurance Corporation of India (LIC) and Bharat Petroleum Corporation Limited (BPCL), which made this very aggressive target look possible.

For disinvestment to take place, there need to be a good number of buyers as well as valuation. Else, like in the past, divestment becomes an exercise of one public sector undertaking (PSU) buying into another. The challenge today is that the conditions do not look congenial and the market is just too volatile. The stock market has touched a new low post the announcement of a shutdown. There seems to be no sign of the shutdown ending or even a plan as to what should be done once this ends. Realistically speaking, FY21 will be a washout. The market is unlikely to reach the January levels anytime soon and unless it is moving in the upward direction continuously for three months, can one be assured that the valuation will be fair?

The other factor is the kind of disinvestment we are looking at. BPCL no longer looks as attractive with the price of oil below $30/barrel and the future of the sector being uncertain. A global recession is for sure, which means that oil prices will be depressed and the sale of such an enterprise will remain unattractive. Next, Air India has been on the block for some time now, and there is no clear plan about how to go about it given the overhang of debt which is around Rs 60,000 crore. To top it all, the future of the aviation industry is in jeopardy following the breakout of the pandemic as movement across countries will remain barred for at least six months after normalcy returns.

CCEA may consider govt's stake cut in some PSUs to below 51% next week

This move is different from privatisation as the Centre will continue to hold a majority stake in these companies and they will still be classified as public sector enterprises.

Business Standard : The Cabinet Committee on Economic Affairs (CCEA) is next week expected to take up a proposal to reduce the government’s stake in a number of state-owned companies below 51 per cent. This move is different from privatisation as the Centre will continue to hold a majority stake in these companies and they will still be classified as public sector enterprises.

These companies are those in which the Centre already has a stake below 60 per cent, and could include Indian Oil (current government stake of 51.5 per cent), NTPC Ltd (54.50 per cent), Bharat Electronics (58.83 per cent), BEML (54.03 per cent), Engineers India (52 per cent), GAIL India (52.66 per cent), and National Aluminum Co (52 per cent).

The stake in these companies will be pared through offers for sale (OFS) on the exchanges.

Ahead of the proposal being taken to the CCEA, a group of secretaries is expected to meet on Friday to finalise the Cabinet note.

“The government is considering, in case where the undertaking is still to be retained in government control, to go below 51 per cent to an appropriate level on case to case basis. The government has also decided to modify the present policy of retaining 51 per cent

government stake to retaining 51 per cent stake inclusive of the stake of government-controlled institutions,” Finance Minister Nirmala Sitharaman had said in her 2019-20 Budget speech on July 5.

For example, ONGC holds a 14 per cent stake, Oil India holds a 5.16 per cent stake, and LIC holds a 6.5 per cent stake in Indian Oil. Even if the Centre reduces its stake in Indian Oil to 30 per cent, the combined stake of the government and these PSUs in Indian Oil will still be above 55 per cent.

The Finance Ministry’s Department of Investment and Public Asset Management (DIPAM) is faced with its steepest yearly divestment target yet, tasked with accruing ~1.05 trillion for 2019-20, and these stake sales are expected to go some way in meeting that target.

However, the bulk of the proceeds will come from the planned privatisation of Bharat Petroleum, Air India, Container Corp, Shipping Corp, NEEPCO and THDC India, monetisation of land and other assets of PSUs, and follow-on offerings of the Centre’s two exchange-traded funds.