 "Why this could be the best year for divestment")
The government's yearly disinvestment programme, irrespective of the party in power, has followed a predictable script for nearly a decade. The finance minister of the day sets an ambitious target; bureaucrats exude confidence in public about meeting the goal, while privately admitting that it would be a big ask; and, then, after a handful of stake sales, the actual figures fall way short of the budgeted expectation.
This year's combined disinvestment target, at Rs 56,500 crore, is no less ambitious than previous ones. However, because of a number of reasons, 2016-17 could be the closest that the government gets to achieving the budgeted estimates.
Simply put, this could be the best year ever for stake sales in state-owned companies. Out of the Rs 56,500-crore target, Rs 36,000 crore is expected to come from minority stake sale in central public sector enterprises, or CPSEs, through the stock exchanges, while Rs 20,500 crore is expected from strategic sales in loss-making or profit-making CPSEs or their assets like factories, warehouses, office buildings and so on.
The big contributor
First, let's take a look at minority stake sales. Ranging from 5-15 per cent of shares in CPSEs, these will be either through offer-for-sales (OFS) for listed CPSEs and initial public offering (IPO) for unlisted companies. And if the frenetic pace of activity is anything to go by, the Department of Investment and Public Asset Management (DIPAM), newly renamed and given added responsibilities, certainly is aiming high.
Already, DIPAM has issued request for proposals for merchant bankers for NBCC, State Trading Corp, MMTC, NMDC, Oil India, National Fertilizers and Rashtriya Chemicals and Fertilizers. Combined, the planned 5-15 per cent sales in these companies could fetch more than Rs 7,000 crore.
Plans are also afoot for IPOs in Hindustan Aeronautics (HAL), and Rashtriya Ispat Nigam (RINL). While IPOs in these two companies were first discussed in 2014-15, they have been delayed because of differences of opinion within ministries. The defence ministry, for example, was reluctant to sell stake in HAL, one of its marquee organisations and the only manufacturer of military aircraft in India.
As for RINL, the Vizag-based steelmaker suffered damages worth Rs 350 crore as Cyclone Hudhud hit the country's east coast in October 2014. It was then said the IPO plans would be revived once the company had recovered. HAL and RINL were discussed in FY16 but this year officials seem more confident than ever about their plans going the distance. Combined, the four IPOs could generate around Rs 8,000 crore for the exchequer
The SUUTI advantage
Then, there is the ace which DIPAM has up its sleeve. The centre holds substantial minority stake in Axis Bank, ITC and Larsen & Toubro through Specified Undertaking of the Unit Trust of India (SUUTI). SUUTI also has less than one per cent stake in a number of companies. For years, SUUTI was the responsibility of the finance ministry's economic affairs division. Every year there were discussions to sell part of the nearly Rs 60,000 crore SUUTI stakes to meet the looming shortfall in disinvestment. Apart from a Rs 3,000 crore sale in Axis Bank in 2013-14, the plans never saw fruition.
This year, SUUTI's responsibility has been taken over by DIPAM. After a request for proposal for merchant bankers, it is soon expected to complete the selection of a panel of six merchant bankers, from which three could be chosen to sell a particular stake. While not all of the SUUTI stake is expected to be offloaded this year, a substantial chunk could be sold, boosting the government's overall divestment targets.
There are also plans for a second CPSE Exchange Traded Fund (ETF). ICICI Bank's capital market division is already said to be appointed as the manager of the fund, which will draw on the success of the existing Rs 3,000-crore CPSE ETF. The quantum and constituent stocks of the second CPSE ETF have not yet been decided.
Making PSUs pay
All these measures (IPOs,OFS, SUUTI and ETFs) aside, DIPAM is planning something rather unorthodox. In June, DIPAM released a new set of guidelines on capital restructuring of state-owned companies, which will make them more accountable on matters of dividends, buybacks and bonuses. While bonuses and dividends are non-tax revenue, share buybacks will be considered disinvestment, as the centre, along with other shareholders, will be selling part of its stake back to the company in question.
The guidelines state that all CPSEs with a net worth of at least Rs 2,000 crore, and cash and bank balance of Rs 1,000 crore will have to exercise the option of buyback of shares. Even dividends and bonuses have been made mandatory, provided the public-sector units (PSUs) fulfil certain criteria. The idea behind such a move is to ensure PSUs do not sit on their cash piles. They either invest in capital spending or in the markets, or they pay the government.
The boards of five CPSEs - Coal India, NMDC, Nalco, MOIL, and Bharat Electronics - have already cleared proposals to buyback shares.
A problem area
There is a lot of confidence in DIPAM, and in the government, that these measures could lead to the minority stake sale target of Rs 36,000 crore being exceeded. However, strategic sales in an entirely different matter altogether.
In contrast to the clear actions being taken by DIPAM on stake sales, NITI Aayog, which is responsible for identifying CPSEs for strategic sales, seems to be fumbling, with a lot of contrasting information coming out of the department.
Every month, there is talk of a new list of probable candidates which the Aayog is said to have prepared for divestment. There are reports of the Prime Minister's Office being unhappy with the lists that the Aayog puts up. The latest is that the Aayog has submitted a list of seven companies that have been marked for closure . These PSUs are part of a larger list of 74-loss making state-owned units that the government is planning to either shut down or divest its stake in. Among them are likely to be Bird Jute and Exports, Hindustan Papers, Hindustan Photo Films and Tyre Corporation. While shutting down PSUs that are racking up losses saves money, it does not generate any revenue for the government.
Although the government is poised to surpass the Rs 32,620 crore garnered in 2014-15 from divestment (the highest so far), unless it gets the strategic part of the divestment process right, it may fall short of its overall target yet again.
This year's combined disinvestment target, at Rs 56,500 crore, is no less ambitious than previous ones. However, because of a number of reasons, 2016-17 could be the closest that the government gets to achieving the budgeted estimates.
Simply put, this could be the best year ever for stake sales in state-owned companies. Out of the Rs 56,500-crore target, Rs 36,000 crore is expected to come from minority stake sale in central public sector enterprises, or CPSEs, through the stock exchanges, while Rs 20,500 crore is expected from strategic sales in loss-making or profit-making CPSEs or their assets like factories, warehouses, office buildings and so on.
The big contributor
First, let's take a look at minority stake sales. Ranging from 5-15 per cent of shares in CPSEs, these will be either through offer-for-sales (OFS) for listed CPSEs and initial public offering (IPO) for unlisted companies. And if the frenetic pace of activity is anything to go by, the Department of Investment and Public Asset Management (DIPAM), newly renamed and given added responsibilities, certainly is aiming high.
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Already, DIPAM has issued request for proposals for merchant bankers for NBCC, State Trading Corp, MMTC, NMDC, Oil India, National Fertilizers and Rashtriya Chemicals and Fertilizers. Combined, the planned 5-15 per cent sales in these companies could fetch more than Rs 7,000 crore.
Plans are also afoot for IPOs in Hindustan Aeronautics (HAL), and Rashtriya Ispat Nigam (RINL). While IPOs in these two companies were first discussed in 2014-15, they have been delayed because of differences of opinion within ministries. The defence ministry, for example, was reluctant to sell stake in HAL, one of its marquee organisations and the only manufacturer of military aircraft in India.
As for RINL, the Vizag-based steelmaker suffered damages worth Rs 350 crore as Cyclone Hudhud hit the country's east coast in October 2014. It was then said the IPO plans would be revived once the company had recovered. HAL and RINL were discussed in FY16 but this year officials seem more confident than ever about their plans going the distance. Combined, the four IPOs could generate around Rs 8,000 crore for the exchequer
The SUUTI advantage
Then, there is the ace which DIPAM has up its sleeve. The centre holds substantial minority stake in Axis Bank, ITC and Larsen & Toubro through Specified Undertaking of the Unit Trust of India (SUUTI). SUUTI also has less than one per cent stake in a number of companies. For years, SUUTI was the responsibility of the finance ministry's economic affairs division. Every year there were discussions to sell part of the nearly Rs 60,000 crore SUUTI stakes to meet the looming shortfall in disinvestment. Apart from a Rs 3,000 crore sale in Axis Bank in 2013-14, the plans never saw fruition.
This year, SUUTI's responsibility has been taken over by DIPAM. After a request for proposal for merchant bankers, it is soon expected to complete the selection of a panel of six merchant bankers, from which three could be chosen to sell a particular stake. While not all of the SUUTI stake is expected to be offloaded this year, a substantial chunk could be sold, boosting the government's overall divestment targets.
There are also plans for a second CPSE Exchange Traded Fund (ETF). ICICI Bank's capital market division is already said to be appointed as the manager of the fund, which will draw on the success of the existing Rs 3,000-crore CPSE ETF. The quantum and constituent stocks of the second CPSE ETF have not yet been decided.
Making PSUs pay
All these measures (IPOs,OFS, SUUTI and ETFs) aside, DIPAM is planning something rather unorthodox. In June, DIPAM released a new set of guidelines on capital restructuring of state-owned companies, which will make them more accountable on matters of dividends, buybacks and bonuses. While bonuses and dividends are non-tax revenue, share buybacks will be considered disinvestment, as the centre, along with other shareholders, will be selling part of its stake back to the company in question.
The guidelines state that all CPSEs with a net worth of at least Rs 2,000 crore, and cash and bank balance of Rs 1,000 crore will have to exercise the option of buyback of shares. Even dividends and bonuses have been made mandatory, provided the public-sector units (PSUs) fulfil certain criteria. The idea behind such a move is to ensure PSUs do not sit on their cash piles. They either invest in capital spending or in the markets, or they pay the government.
The boards of five CPSEs - Coal India, NMDC, Nalco, MOIL, and Bharat Electronics - have already cleared proposals to buyback shares.
A problem area
There is a lot of confidence in DIPAM, and in the government, that these measures could lead to the minority stake sale target of Rs 36,000 crore being exceeded. However, strategic sales in an entirely different matter altogether.
In contrast to the clear actions being taken by DIPAM on stake sales, NITI Aayog, which is responsible for identifying CPSEs for strategic sales, seems to be fumbling, with a lot of contrasting information coming out of the department.
Every month, there is talk of a new list of probable candidates which the Aayog is said to have prepared for divestment. There are reports of the Prime Minister's Office being unhappy with the lists that the Aayog puts up. The latest is that the Aayog has submitted a list of seven companies that have been marked for closure . These PSUs are part of a larger list of 74-loss making state-owned units that the government is planning to either shut down or divest its stake in. Among them are likely to be Bird Jute and Exports, Hindustan Papers, Hindustan Photo Films and Tyre Corporation. While shutting down PSUs that are racking up losses saves money, it does not generate any revenue for the government.
Although the government is poised to surpass the Rs 32,620 crore garnered in 2014-15 from divestment (the highest so far), unless it gets the strategic part of the divestment process right, it may fall short of its overall target yet again.