Rethinking disinvestment or temporarily stalled?

There isn’t a White Paper yet on disinvestment but there is a discernible change in the Centre’s approach. This year’s budget speech and receipt budget skipped it altogether. So is the case with the FinMin’s “White Paper on the Indian Economy” released on February 8, 2024. The FinMin’s “The Indian Economy: A Review” (not the Economic Survey of 2023-24), released on the eve of the interim budget, on January 29, 2024, mentioned the word twice – both in the context of “reform” to give “space and opportunity” to private sector “to grow” as “co-partner in development” – but didn’t go into the outcomes or impact on public and private sectors.

The interim budget (2024) marks a departure in the way disinvestment is being disclosed. Until 2023, budget documents listed disinvestment targets and receipts under “miscellaneous capital receipts” (non-debt), along with “others”. In 2024, only a consolidated amount is mentioned under “miscellaneous capital receipts” – without explaining the change or listing the elements.

Clarity came a few days later, at the post-interim budget interactions by DIMPAM secretary Tuhin Kanta Pandey. He revealed that it consists of two items – disinvestment and asset monetisation (NMP) but without specific targets for either (“The fact is that we don't have a fixed number.”). He acknowledged that the omission of disinvestment was due to inability to achieve targets. Only twice, in FY18 and FY19, the targets have been achieved.

His statement would mean (i) disinvestment process would continue without targets and (ii) receipts from the NMP, the second channel of ‘strategic’ disinvestment, is likely to make its debut in budget documents soon. The combined target for FY25 (BE) is ₹50,000 crore. Sale of enemy property, another disinvestment channel (not classified as ‘strategic’) launched in 2018, hasn’t made its debut in budget documents either.

In another interview, Pandey said there was rethink in the government: (iii) to move away from disinvestment as “a way to manage your fiscal deficit on a sustained basis” and (iv) look at it “in terms of how you manage enterprises” (or public wealth management).

Whither ‘strategic disinvestment’?

Firstly, the Centre didn’t set up the National Investment Fund (NIF), as spelt out first in 2005 and continues to be part of the revised Disinvestment Policy of 2016. It mandates seven specific capex for which the proceeds are to be used – maintain public ownership of CPSUs, recapitalise PSBs, fresh investments in RRBs/NABARD/Exim Bank and other public enterprises, capex in the Railways etc. Instead, the proceeds went into the Consolidated Fund of India (CFI). Although this was suggested by the 14^th Finance Commission, the Centre never explained its position.

Secondly, the two core objectives (“vision”) of the Disinvestment Policy of 2016 – which are (a) “promote people’s ownership” of CPSUs and (b) “efficient management of public investment” in CPSUs – have been violated.

While no official assessment (FinMin, DPAM or NITI Aayog) is in public domain, the CAG has repeated flagged various issues in its reports of 2019, 2020 and 2021 (post-2014). The key findings of these reports are:

(i)CPSUs picked up the tab of ‘strategic disinvestment’ in eight CPSUs during 2014-2020 (HPCL, HSCC, DCIL, REC, Kamraj Port, NEPC, THDC India and NPCCL) – which became subsidiaries of the buyer CPSUs resulting in “transfer of resources” from one government department to another without “any change in the stake”. Many CPSUs had to do so “by borrowing from market”.

(ii) 25% public float in CPSUs was not met in a large number of cases of listed ones. Of 133 CPSUs eligible to be listed in stock exchanges, only two were brought to market for listing by FY20, showing “slow progress in listing”.

(iii) Strategic holdings in the SUUTI (government holding of blue-chip private companies) were given up as “sweetener” against the advice of the Department of Economic Affairs (DEA).

(iv) “Enemy shares” (part of “enemy property” brought into the ambit of disinvestment in 2018) were sold off to generate ₹1,881 crore in FY20 (“realised”). But the CAG report was severe for the method deployed. It said: “However, the share certificates of enemy shares in 45 listed companies and 145 unlisted companies were not available with the Custodian and duplicate share certificates were yet to be issued. Further, the unlisted shares in physical form were yet to be dematerialised for their disposal.”

CPSU-to-CPSU sale was prohibited in 2002; it was waived off only to be reinstated on April 19, 2022 on the plea that this would “continue the inherent inefficiencies” and “defeat the very purpose” – but without explaining why it had been waived off.

The reinstatement of prohibition on CPSU-to-CPSU sale came (a) after repeated criticism by the CAG and also (b) after disinvestment policy was tweaked in early 202 to let go of even profit-making CPSUs (banned in 2005 by the UPA government, allowing only minority stake sales) and wholesale disposal of CPSUs except a few in “strategic sectors”.

FinMin think tank NIPFP published a study of disinvestment during FY15-FY20. Its findings are in line with those of the CAG. On promoting public ownership, it said “minimum public float norms are yet to come into operation”. On efficient management of CPSUs, it said the CPSU-to-CPSU sale made no difference (continued as “government companies”). Besides, the new “capital restructuring norms” of compulsory declaration of dividend, issue of bonus shares and splitting of shares might be “considered as a deviation” from promoting greater corporate autonomy envisaged under the `Ratna' system”. Even the “expanded” ‘strategic disinvestment’ – sale of enemy shares, NMP and sale of strategic holdings in SUUTI (used as “sweetener” against the DEA advice) – attracted remarks such as these “may not reduce government's equity” in CPSUs, brought in “possibly to meet the fiscal deficit” but were “not in sync” with the government's intention to exit from the non-strategic businesses for efficient utilisation of public resources.

Post-2020 saw a series of setbacks to strategic disinvestment: (a) awards in the case of Central Electronics Limited (CEL) and Pawan Hans Limited (PHL) were terminated after the allegations of under-valuation and award to ineligible firms surfaced and the processes were put on hold (b) in the case of BPCL (cleared in 2016) and IDBI due to lack of due diligence and (c) in the case of Container Corporation of India (CONCOR) and NMDC after the Hindenburg report hit in January 2023 and the finances of two potential buyers, the Adani and Vedanta groups, came under intense scrutiny due to high debt.

The only successful case was that of the chronic loss making Air India in January 2022 – handed back to the original owner, the Tata group, nearly 70 years later (Air India was nationalised in 1953), after writing off ₹61,000 crore of legacy debts and other liabilities.

The cumulative impact is:

In FY22, the actual disinvest receipt was ₹13,627 crore – against the budget target (BE) of ₹1.75 lakh crore and revised target (RE) of ₹78,000 crore. In FY23, the actual receipt was ₹35,294 crore ((DPAM data, since the budget is silent) against the target of ₹65,000 crore (BE) and revised target (RE) of ₹50,000 crore). This means 7.8% and 54% of the budgeted targets were met in FY22 and FY23, respectively. In FY24, the disinvestment generated ₹12,504 crore until January 23, 2023 (DIPAM) – against the budgeted target of ₹51,000 crore.

Whither NMP and sale of ‘enemy shares’?

The second ‘strategic’ disinvestment channel, the NMP, is floundering too.

It was formally launched in 2021 “to unlock the value of investments in brownfield public sector assets” which the Union Cabinet called “strategic disinvestment” in 2019. In 2021, a target was set to generate ₹6 lakh crore in four fiscals of FY22-FY25. This is to be achieved by handing over existing public infrastructure, including those in social sector, to private businesses to run.

The NITI Aayog, which helms it (also acts as advisor on “strategic disinvestment” or privatisation), says in its 2022-23 annual report that in FY22, the NMP target of ₹88,000 crores was achieved but in FY23, only ₹26,000 crore of the targeted ₹1.6 lakh crore was “completed” (“in accruals and/or investments”). This means, in the first two years (half-way mark) only 19% of the target was achieved.

The disinvestment channel of sale of enemy property, was greenlighted in 2018 and made part of “disinvestment” in 2019. The CAG report of FY20 flagged how this was done (₹1,881 crore “realised” in FY20) even when share certificates were not available, duplicate certificates had not been issued and paper shares not dematerialised. The NIPFP study of 2022 said the sale of enemy shares may have been done to reduce fiscal deficit but it doesn’t really fit into the disinvestment goal of reducing government equity in CPSUs.

How much money has been generated through the sale of “enemy shares”? That is not clear (not disclosed in budget documents). As per a Lok Sabha answer of December 5, 2023, ₹2,709.16 crore had been generated through this. In January 2024, the Centre announced it will sell 291,000 “enemy shares” in 84 companies.

Why a review is imperative?

It is unlikely that public – to which the Centre is accountable – is even aware of all its components: (i) minority stake sales (including stake sales of the ‘strategic’ holdings in the SUUTI) (ii) strategic sales (CPSU-to-CPSU sale, sale and handover of management to private businesses and the NMP) and (iii) sale of enemy shares. They are also unlikely to be aware of all the instruments involved – like, IPOs/OFSs, sale to employees, compulsory buy backs, ETFs etc.

A comprehensive picture of the disinvestment proceeds is not in public since all of it goes to the Consolidated Fund of India (CFI). It’s utilisation is not known either. And if efficient management of CPSUs means their “revival”, then we’re far from there.

The DIPAM secretary’s indications that the Centre may pay more attention to manage CPSUs’ wealth better could be misleading given that the ascent continues on handing over public assets to private businesses (CPSUs, public infrastructure (NMP) and “enemy shares”).