Macro

Can disinvestment raise Rs 1 lakh crore?

Every year, to mark the beginning of the printing process of budget documents, Finance Ministry officials indulge in some halwa, a traditional confectionery that marks many auspicious events in India. This year, there was another reason for the halwa - 2017-18 will be the first time that India will exceed its disinvestment target.

Now the deal which will help the government rake in Rs 37,000 crore, is not exactly a traditional disinvestment or a strategic sale. It is a merger of two public sector oil companies where the larger Oil and Natural Gas Corporation Limited (ONGC) will acquire 51.1% stake in Hindustan Petroleum Corporation Limited (HPCL) from the Government of India for Rs 36,915 crore. When the transaction closes by January 31, the government will have raised by Rs 92,475 crore from disinvestment as against the 2017-18 budget estimates of Rs 72,500 crore.

“We are calling it an innovative in vertical integration. Let’s not get into jargons as to whether this is a strategic sale or disinvestment,” Dharmendra Pradhan, Minister of Petroleum and Natural Gas had said in a media briefing days after the announcement of the merger.

The deal was not expected to materialise in 2017-18 as a merger of such scale would need several regulatory approvals. But the government granted several exemptions, including doing away with the mandatory 20% open offer, which allows the transactions to be closed by January 31, 2018, according to Bombay Stock Exchange filings from ONGC.

However, the government’s push for completing the ONGC-HPCL merger in this fiscal is a sign of its aggressiveness towards unlocking resources in public sector companies to bolster the treasury. In this fiscal alone, share sales were done in 24 central public sector enterprises through buyback offers, initial public offerings and offer for sales. These combined have fetched the government Rs 34,049 crore. The listing of insurance companies like General Insurance Corporation and National Insurance Company fetched another Rs 17,357 crore, while the sale of strategic holdings in SUUTI (Specified Undertaking of the Unit Trust of India) raised Rs 4,153 crore.

Now, it only seems obvious that the government will keep an even higher disinvestment target - Rs1 lakh crore or more - for FY19. But the question is - Is that an achievable target? Theoretically, it's possible. The government has options to raise larger amounts from divestments in both public and private companies. Even the government’s think-tank Niti Aayog has recommended the strategic sale in over 40 public sector units and the outright closure of 26 sick public sector units.

A back-of-the-envelope calculation shows that there are as many as 46 public sector companies ranging from the profit-making ONGC to loss-making Scooters India, and 29 state-sponsored banks and financial institutions that can be potential targets for disinvestment. The government has more than 51% stake in all these companies. Infact, the government holds as much as 90% stake or more in companies like Metals and Minerals Trading Corporation, Fertilizers and Chemicals Travancore, and Haryana Financial Corporation.

A recent report by Kotak Institutional Equities titled “India Strategy/Economy” states that the government can raise over Rs 3 lakh crore, just by bringing its stake down to 51% in companies, banks and financial institutions where it has a high shareholding. The report estimates that if the government decides to sell the entire stake in these companies, it will be richer by Rs 14 lakh crores. Selling its minority stakes in SUUTI companies, like its 10.4% stake in Axis Bank, 29.5% in Hindustan Zinc, 9.1% in ITC it can garner nearly Rs 90,000 crore.

Taking a cue from its success in the current financial year, the government may go in for a second round of fund-raising exercise with the Bharat 22 Exchange Traded Fund. In 2017, it raised around Rs 14,500 crore through the fund, the highest-ever new fund offer collection in the history of mutual funds in India.

What’s more, the ONGC-HPCL merger has shown that it may not even need to privatise the public sector companies but rather nudge its larger and more cash-rich public sector companies for mergers with smaller companies. For example, the public sector companies under the Petroleum and Natural Gas Ministry could see some more mergers.

“There maybe a scope for more such mergers. We think that there are more possibilities of the kind of vertical integration that the ONGC-HPCL merger offers,” the Petroleum and Natural Gas Minister said recently. Talks are already on to merge Indian Oil and Bharat Petroleum or even GAIL and Oil India.

When Manmohan Singh started the disinvestment process in 1991-92, it was also the first time that an Indian Finance Minister had budgeted more than Rs 1 lakh crore of total receipts. Today it will be no surprise if Jaitley announces that Rs 1 lakh crore of receipts would come from disinvestment alone. And if 2017-18 is anything to go by, it wouldn’t be too much to expect disinvestment proceeds to cross the magic figure of Rs 1 lakh crore next year.

Of course, any target Jaitley gives for funds raised from disinvestment will be viewed with a certain amount of skepticism. For years, India’s disinvestment targets have been little more than cosmetic. Slippages from the disinvestment target have been the norm rather than an exception. In fact, it is believed that that disinvestment targets are deliberately kept high to keep non-tax revenue targets high and fiscal deficits low.

Besides, the practical implementation of a large scale share sale programme is no mean feat. Not only is it a long-drawn out process but there are other challenges as well. While it is easy to sell stakes in profit-making companies, finding buyers for the loss-makers is very hard. Lastly, the timing of such sales is tricky since valuations are contentious. But with the benchmark set in 2017-18, Jaitley and his team will face more pressure than ever to deliver on any promises made on February 1.