Disinvestment strategy: Centre's love; CAG's hate!

While the Centre marches ahead with en masse sale of public assets, little attention is paid to two critical aspects: Is the Centre following the objectives of its disinvestment policy and what really happens to the disinvestment proceeds?

These questions arise from the manner in which the profit-making Central Electronics Limited (CEL) was sold off in November 2021. As Fortune India detailed earlier, CEL is a frontline scientific organisation engaged in developing critical technologies for defence and space. It was sold to a financial entity Nandal Finance and Leasing Pvt Ltd (NFLPL), owned by Premier Furnitures and Interiors (99.6% holding), entirely unconnected to CEL’s activities.

But this is not an isolated or extreme case as it may seem to many. The government’s top auditor Comptroller and Auditor General of India (CAG) has been pointing out several failures of the Centre’s disinvestment drive, at least since 2019, but its voice has not resonated inside or outside the Parliament and thereby hangs another tale.

Why CAG is not happy with disinvestment and privatisation?

Let us start with the latest CAG report tabled on December 21, 2021. It examined disinvestments in FY20 and flagged four key concerns.

One, entire 66.7% government stake in PSU Kamarajar Port Limited (KPL) was sold to another PSU Chennai Port Trust (ChPT) for Rs 2,383 crore. Since the ChPT was not financially sound, it borrowed Rs 1,775 crore at 8% interest from the market (an annual interest outgo of Rs 142 crore). The CAG said: “Thus, the proceeds realised by GoI from disinvestment of KPL was substantially borrowed from the market by ChPT, which defeated the spirit of disinvestment.”

Second, the valuation of KPL saw a 20% discount (“company specific discount/additional risk premium”) under different valuation methods. In the case of another PSU, THDC India Limited, its land in and around Dehradun was “discounted at 40% over market price”. The CAG commented: “Audit is of the view that given the significant impact such assumptions have on the reserve price, justification and underlying reasoning should have been clearly documented”.

Third, the government realised Rs 1,881 crore from sale of “enemy shares” held with Custodian of Enemy Property for India. However, the share certificates of enemy shares in 45 listed companies and 145 unlisted companies were not available “and duplicate share certificates were yet to be issued”. Further, the unlisted shares in the physical form were yet to be dematerialised for their disposal.

Fourth, out of 133 CPSEs eligible to be listed in stock exchanges, only two CPSEs were brought to market for listing, showing “slow progress in listing”.

The CAG report of 2020, for FY19, flagged the first flaw that the CAG report of 2021 mentioned: stake sales of PSUs being picked up by other PSUs, thereby draining the financial resources of the latter, just to contribute to Centre’s coffer.

It said the Centre collected Rs 15,914 crore from strategic sales of four PSUs in FY19, namely, REC Limited, Dredging Corporation of India, HSCC (India) Limited and National Projects Construction Corporation. The tabs for these were picked up by another set of PSUs, namely, PFC Limited, consortium of Port Trusts, NBCC and WAPCOS. The CAG said: “Such disinvestments only resulted in transfer of resources already with the public sector to the Government and did not lead to any change in the stake of the Public Sector/Government in the disinvested PSUs.” PFC’s annual report of the same year (FY19) showed it had an accumulated a debt of Rs 1.27 lakh crore.

The CAG report of 2019, for FY18 when a record disinvestment of Rs 100,056.9 crore was made, flagged off a series of flaws in the disinvestment drive and said none of the objectives of the ‘disinvestment policy’ was achieved. One of these, which is now routine, was forcing oil PSU ONGC to pick up the entire Centre's stakes (51.1%) of HPCL for Rs 36,915 crore – for which the once debt-free and cash-rich ‘maharatna’ company borrowed Rs 24,881 crore from market. This, as it had already exhausted its cash reserves by acquiring stakes in the bankrupt and sick Gujarat PSU, Gujarat State Petroleum Corporation (GSPC) in 2017 for Rs 7,738 crore. The entire money, Rs 36,915 crore, went to the central government’s kitty. ONGC is now one of the most indebted companies with an outstanding of Rs 1.33 lakh crore in FY21.

The other flaws included failure to achieve the mandatory 25% of public ownership (Minimum Public Shareholding in CPSUs) even in one of the 17 CPSUs attempted and giving sweeteners of Rs 170 crore in the form of “very liquid, good pedigree stocks” which could “comfortably attract high net-worth investors (HNIs) to fetch better price and higher rate” and against the expressed advise of the Department of Economic Affairs (DEA) to increase attractiveness of some CPSUs.

What are the objectives of disinvestment?

It would be prudent to look at what the official disinvestment policy is.

Actually, the ‘disinvestment policy’ doesn’t talk of goals, it lists three “salient features’: “1. Public Sector Undertakings are the wealth of the Nation and to ensure this wealth rests in the hands of the people, promote public ownership of CPSEs. 2. While pursuing disinvestment through minority stake sale in listed CPSEs, the Government will retain majority shareholding, i.e., at least 51% of the shareholding and management control of the Public Sector Undertakings. 3. Strategic disinvestment by way of sale of substantial portion of Government shareholding in identified CPSEs up to 50% or more, along with transfer of management control.”

As is clear from the three CAG reports and CEL’s disinvestment mentioned earlier, the first two ‘features’ have been given a go bye. As for the third, ‘strategic disinvestment’, the policy was tweaked in early 2021 with the Centre declaring to sell most PSUs, irrespective of whether they are profit making or not, except those declared as ‘strategic sector’ units. As CEL’s disinvestment has demonstrated, even this classification is not without flaws.

What happens to the disinvestment proceeds?

Between FY15 and FY21, the government collected Rs 4.04 lakh crore from disinvestment, which includes proceeds from the privatisation of eight PSUs (HPCC, HSCC, DCIL, PFC, NPCC, THDC, NEEPCO and KPL). The disinvestment proceeds include both minority stake sales and strategic disinvestment/privatisation.

What happens to the proceeds?

The nodal agency, Department of Investment and Public Asset Management (DIPAM) declares that “the proceeds of disinvestment are credited into National Investment Fund (NIF) constituted in November, 2005 and are used for the approved purpose, as decided from time to time.”

But that is completely misleading. There is no account of NIF. The DIPAM doesn’t provide any detail other than the above declaration, nor does any other central government agency or budget documents. Even the three CAG reports mentioned earlier are silent about it.

The Centre had indicated in 2015 that it would consider winding up the NIF in line with the 14th Finance Commission’s suggestion. The commission was in favour of putting the proceeds in the Consolidated Fund of India (CFI) and utilising it for capital investment.

In February 2020, Finance Minister Nirmala Sitharaman assured: “…it's not being raised to fill certain hole in the Consolidated Fund of India. The money being raised from disinvestment will go towards infrastructure.”

How does one know that the disinvestment proceeds are not actually filling the hole in the CFI?

Apart from the information vacuum about fund movement and NIF’s activities, both fiscal and revenue deficits have remained high for several years. The latest budget document shows the revenue deficit to be 3.3% of the GDP in FY20, 7.5% in FY21(RE) and 5.1% in FY22 (BE). The fiscal deficits stand at 4.6%, 9.5% and 6.8% during the corresponding period, respectively.