Decoding disinvestments

Public sector undertakings (PSUs) are often called the government’s cash cows and investors’ darlings for the high dividends they give. So, when it comes to PSU disinvestment, markets pay attention to the finance minister’s take on the subject.

Come July 5, when Nirmala Sitharaman presents her maiden Union Budget as finance minister, markets will be all ears to know the Narendra Modi-led government’s take on PSU disinvestment in its second term at the Centre. Before wondering whether the FY20 disinvestment target of ₹90,000 crore (as announced in the interim Budget) will be tweaked, or how the government will go about achieving it, there is merit in going over the government’s report card on divestment in the past year.

Modi 1.0, which came to power in 2014, has a clear edge over the second United Progressive Alliance government (UPA 2.0) if one were to see the average of disinvestment proceeds as a percentage of GDP of the country. Against UPA 2.0’s average of 0.24%, Modi 1.0 garnered an average of 0.36% of GDP as disinvestment proceeds. During the five years of UPA 2.0, the actual mop-up of disinvestment target hovered between 34.7% and 79.9%, while during Modi 1.0 it was between 56.1% and 106.2%.

According to a report by Mumbai-based KRChoksey Shares and Securities, of the ₹3.8 lakh crore disinvestment proceeds garnered over the 10-year period (FY10 to FY19), ₹2.8 lakh crore, accounting for 74% of the total amount, was raised during Modi 1.0. The past two fiscals saw the government raising 100.1% and 106.2% each in terms of the budgeted disinvestment proceeds. That helped it to score an average of 80.5% against UPA 2.0’s average of 52.4% when it came to actuals as a percentage of budgeted estimates.

While the earlier years saw the government diluting sizeable stake in PSUs through initial public offerings (IPOs), the recent ones have seen increasing use of market vehicles like exchange-traded funds (ETFs). In FY19, the government raised ₹45,080 crore through ETFs, which helped it achieve 53% of the targeted disinvestment that year, according to KRChoksey Shares and Securities.

While the government has mopped up close to ₹70,000 crore through CPSE (Central Public Sector Enterprises) ETFs and Bharat 22 ETF, these market vehicles have inherent problems, too. Holdings now in some companies is nearing the 52% mark, highlights a July 1 research note from Mumbai-based Edelweiss Securities. “The government had set up an internal limit to not let the holding drop below the 52% mark, which also opens up the possibility of rebalancing in the current ETF,” the note adds.

Yogesh Radke, Sriram Velayudhan, and Abhilash Pagaria, analysts with Edelweiss Securities, expect the launch of PSB (public sector bank) ETFs in the coming quarter for routing the disinvestment programme. The PSB ETFs, in the trio’s opinion, is expected to comprise prominent banks like State Bank of India, Bank of India, Bank of Baroda, Canara Bank, Union Bank of India, Allahabad Bank, and others, through an Index. “Though most of these PSB stocks are not yet out of the woods in terms of NPAs [bad loans], some sweeteners like recapitalisation laced with positive guidance can generate investment interest,” the trio added. “Moreover most of the PSBs have started seeing subtle signs of recovery in price lately. The government could spell out some guidance on the same in the impending Budget.”

Buybacks and inter-PSU mergers have become another avenue for the government to mop up disinvestment proceeds lately. In FY18, the Oil and Natural Gas Corporation-Hindustan Petroleum Corporation deal, worth ₹36,915 crore, raked in close to 37% of that fiscal’s ₹1,00,057 crore disinvestment proceeds. In FY19, ₹14,500 crore—over 17% of the total disinvestment of ₹84,972 crore—came from the Power Finance Corporation of India-Rural Electrification Corporation of India deal.

Given the mix of methods at the government’s disposal, and the varying proportions of stakes it holds across PSUs, it would be interesting to see what Sitharaman has to say on disinvestments in the Union Budget on July 5.