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The Narendra Modi government is all set for India's biggest ever divestment programme. The finance ministry has identified over a dozen public-sector units, or PSUs, which can hit the market in the eight months that remain in 2014-15. The target is to raise Rs 58,425 crore - 269 per cent higher than Rs 15,819 crore mopped up last year. The money is crucial if Finance Minister Arun Jaitley has to meet his fiscal deficit target of 4.1 per cent of the gross domestic product. If there is a shortfall, Jaitley will be left with no option but to cut expenditure - a move that could prove politically suicidal because the National Democratic Alliance has come to power on the promise of higher growth and more jobs.
However, India's disinvestment record has been dismal over the past decade or so. It has constantly missed the target for several years now. Yet some bureaucrats and experts are gung-ho about not just meeting the target but also surpassing it. On the face of it, their arguments look strong. At current stock market valuations, the companies lined up for disinvestment can fetch the government much more than the target. Back-of-the-envelope calculations show that from divestment in PSUs, stake sale in SUUTI (Specified Undertaking of Unit Trust of India through which the government holds stake in private entities, including Axis Bank, ITC and Larsen &Toubro ) and complete exit from Hindustan Zinc and Balco (majority-owned by the Vedanta group), the government can get around Rs 80,000 crore. The crucial question, therefore, is whether the market will stay buoyant or lose steam in the next few months? While the bull run continues, it has been reported that some foreign investors may have used up a large part of their budgets for emerging economies, which means there might be a limited upside left in the market.
Some finance ministry officials say it would not be possible to surpass the target even if the market remains at the current level because to attract investors, the issues would be priced at a lower rate. In other words, it is important for the market to make further gains if the disinvestment programme has to succeed. There are other risks too. If there is a downturn in the market, not only will the target become more out-of-reach but even the PSUs will be reluctant to sell their shares cheap. "If markets remain buoyant and ministries and PSUs don't show any resistance, only then the target can be achieved," says a finance ministry official, adding the disinvestment target was set keeping in mind the current market conditions, and also it was believed that a "firm government" would be able to bring on board the PSUs opposing the stake sale.
Both Coal India and ONGC - the two biggest companies on the disinvestment list - have serious concerns. In the case of Coal India, unions have been opposing the disinvestment, but officials say that problem has been sorted out and the issue could sail smoothly now. ONGC has said disinvestment by the government at this stage may not realise the true value of its shares. At current prices, Coal India's 10 per cent stake can get over Rs 24,000 crore, while a 5 per cent stake sale in ONGC can potentially add over Rs 17,000 crore to the government's coffers. The department of disinvestment expects the proceeds from these two companies could be around Rs 35,000 crore. If there is a problem in any of these two issues, the disinvestment target will be difficult to achieve. Some experts say the price concerns are overblown. "As most of the issues would be for listed companies, Securities & Exchange Board of India's, or Sebi's, guidelines for pricing would apply. So pricing should not be a concern," says Deloitte Senior Director Arindam Guha.
Apart from ONGC and Coal India, about a dozen companies have been identified for disinvestment this year, starting with a 5 per cent stake sale in SAIL by October. However, these will barely fetch Rs 10,000 crore to the exchequer. Moreover, since the disinvestment programme is not likely to kick-off before September or October, the government would have a window of only six months to take all its issues to the market. It would not be feasible for the government to hit the market every month with so many issues. If the first disinvestment of 2014-15 happens in October, the government would have to raise an average of over Rs 9,737 crore from the market every month which is a tough target. It is, therefore, likely that some of the smaller issues may be rolled over to the next year.
Still, the number of issues this year would be much higher than previous years because of Sebi stipulating a minimum 25 per cent public shareholding in all listed companies. There are more than 30 companies where the government is required to bring its stake down to 75 per cent. "We have a three-year time-frame to do that and many of the PSUs with high government holding will have to bring down the stake this year itself. We will try to space out the issues as much as possible," the finance ministry official says. Power Finance Corporation, Rural Electrification Corporation, Tehri Hydro Development Corporation and Satluj Jal Vidyut Nigam may be among the first few to go for disinvestment. Other issues likely to tap the market this year are NHPC, Concor, MMTC, Neyveli Lignite Corporation and MOIL (formerly Manganese Ore India Limited). Most of the divestment will happen through an offer for sale. Besides Tehri Hydro Development Corporation, there will be two more IPOs: Hindustan Aeronautics and Rashtriya Ispat Nigam. Buybacks and cross-holdings are the other routes available with the government that could be employed to raise funds.
The Cabinet Committee on Economic Affairs has already given the go-ahead to sell stake in Hindustan Aeronautics, Rashtriya Ispat Nigam, SAIL, Hindustan Zinc and Balco. A note has been floated for inter-ministerial discussion with regard to a stake sale in Coal India, ONGC, NHPC, Power Finance Corporation, Rural Electrification Corporation and Concor. Road shows are being planned from next month in Singapore, Hong Kong and some other cities for SAIL, NHPC and other companies. The finance ministry is also discussing the possibility of divesting a stake in some unlisted companies of the Railways such as Indian Railways Construction Company, Indian Railway Finance Corporation and Indian Railways Catering and Tourism Corporation. It remains to be seen whether foreign investors appetite for PSUs is really that strong. Otherwise, the Life Insurance Corporation might have to step in-just as it has in the past.
