Disinvestment in India
India’s Disinvestment Strategy amidst upcoming Elections
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Disinvestment
Mains level: Read the attached story
Central Idea
- India’s disinvestment process, primarily focusing on minority stake sales rather than full privatisation, is expected to fall short of its fiscal year 2024 target.
- The government’s cautious approach, influenced by the upcoming general elections, has led to a slowdown in the privatisation of major public sector undertakings (PSUs).
Disinvestment Performance and Targets
- Past Achievements: Over the past decade, disinvestment has generated over ₹4.20 lakh crore, but the current fiscal year’s target appears challenging.
- FY24 Target: The government set a disinvestment goal of ₹51,000 crore for FY24, a reduction from the previous year’s estimate.
- Major PSUs on Hold: Plans for the privatisation of Bharat Petroleum Corporation Ltd (BPCL), Shipping Corporation of India (SCI), and CONCOR have been deferred.
- Progress So Far: Approximately ₹10,049 crore, or 20% of the budgeted amount, has been raised through IPOs and OFS.
- Pipeline Projects: Strategic sales of CPSEs like SCI, NMDC Steel Ltd, BEML, HLL Lifecare, and IDBI Bank are planned but face delays due to various procedural hurdles.
Factors Influencing Disinvestment
- Political Considerations: Strategic disinvestment decisions are being influenced by the upcoming elections, leading to a cautious approach.
- Challenges in Strategic Sales: The sale process involves multiple stakeholders and complex procedures, making it a lengthy affair.
- Public and Political Resistance: Certain sectors, particularly defence and shipping, face opposition to privatisation, causing delays and policy reassessments.
- Economic Think Tank Views: Observers note a recent slowdown in PSU stake sales, attributed to regulatory processes, global economic volatility, and shifting government priorities.
Historical Context and Government Policy
- Post-2014 Strategy: Since 2014, the government has revived its disinvestment policy, focusing on stake sales and listing of PSEs on the stock market.
- Union Budget 2023-24: The disinvestment target for FY24 is the lowest in seven years, with the government yet to meet the target for 2022-23.
- Reasons for Disinvestment: The government undertakes disinvestment to reduce fiscal burdens, finance deficits, invest in development, and retire debt.
- Types of Disinvestment: The process includes minority disinvestment, majority divestment, and complete privatisation, managed by the Department of Investment and Public Asset Management (DIPAM).
Recent Disinvestment Performance
- Meeting Targets: The government has met its disinvestment targets only twice since 2014.
- Challenges in Execution: Strategic sales have been complicated by various factors, including market volatility and political opposition.
Future of Disinvestment in 2023-24
- No New Additions: The government plans to continue with the already announced privatisation of state-owned companies without adding new ones.
- Challenges and Vision: Observers suggest that disinvestment should align with the government’s long-term vision for privatisation and sectoral presence, rather than being driven solely by revenue needs.
Conclusion
- Strategic Policy Shifts: The government’s disinvestment strategy is evolving, balancing between raising revenues and managing political and public sentiments.
- Impact of Upcoming Elections: With general elections approaching, the focus on disinvestment might shift, impacting the progress and priorities of stake sales.
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Disinvestment in India
Nehru’s luminous legacy
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Public sector enterprise
Mains level: Challenges of public sector undertakings
Context
- Seventy-five years ago, India’s first Prime Minister Pandit Jawaharlal Nehru made these remarks in his stirring speech on India attaining freedom at midnight: “The achievement we celebrate today is but a step, an opening of opportunity, to the greater triumphs and achievements that await us. Are we brave enough and wise enough to grasp this opportunity and accept the challenge of the future?”
Nehru’s vision for India
- Nehru’s vision of India was anchored in a set of ideas such as democracy, secularism, inclusive economic growth, free press and non-alignment in international affairs and also in institutions that would lay the foundation for India’s future growth.
Leadership of Nehru after independence
- In 1947, Nehru, as Prime Minister, inherited an India that was politically shattered, socially divided and emotionally devastated. Yet, with restraint and self-confidence, he steered the country through those turbulent times and laid out the vision of a modern, progressive nation that quietly earned the respect of the global community.
Temple of modern India
- The Bhakra-Nangal Dam: The Bhakra-Nangal Dam project is a series of multi-purpose dams that were among the earliest river valley developments schemes undertaken by the government of India after independence. The project, though, had been conceived long before independence.
- Bhilai Steel Plant: Bhilai, located in Chhattisgarh, was home to massive iron-ore deposits at Dalli Rajhara. Taking this into consideration, the government of India and the USSR entered into an agreement which was signed on March 2nd 1955, at New Delhi.
- Bhabha Atomic Research Centre: The Atomic Energy Establishment, Trombay (AEET), was started by the government of India on January 3rd 1954 with the intention of consolidating all research and development activities for nuclear reactors and technology under the Atomic Energy Commission.
- Indian Council of Agricultural Research (ICAR): to support indigenous scientists like Boshi Sen, who is credited with producing hybrid maize and irradiated wheat mutant.
Relevance of these institutions
- Economic Development:Economic development mainly depends upon industrial development. Heavy & basic industries like iron & steel, shipping, mining, etc. are required for supplying raw materials to small industries.
- Regional Development:Private sector usually neglect backward area. But public sector organizations set up their units in economically backward areas. By this public sector removes regional imbalance & brings regional development.
- Employment:Various public sectors operating in India needs lot of manpower & this provide employment to unlimited individuals according to their education, experience & abilities.
- Service Motive: Public sector organizations are working with the only motive of providing public utility services to society at large irrespective of profit.
- Sound Infrastructure:Rapid industrial growth in a country needs sound infrastructure. Infrastructural industries require huge capital for construction of Roads, Railways, Electricity & many such industries. Private sector is unable to have such huge capital & that also without any high return but public sector can easily afford to provide all infrastructural facilities.
Some challenges they face today
- Inefficient Management: It has been found that these enterprises are managed by public savants. They are not professionally qualified nor experts in the management of industrial enterprises.
- Lack of Efficiency: They are not run on commercial principles. Their main motto is social welfare, not profit earning.
- Lack of Innovations: Innovations are essential for economic development. Public enterprise lacks it due to monopoly or lack of competition. The private sector is always busy with innovating new techniques, new production methods, etc. For the purpose of cost reduction and profit maximization.
Some suggestions to address the challenges
- Sound business principles: The enterprise should be run on sound business principles. There should be focus on improving efficiency in all functional areas. Policies, systems and procedures should be modified with the aim of making the enterprise flexible, efficient and profitable.
- Autonomy: Public enterprises should have considerable autonomy in their functioning. Authority should be delegated and they should have the freedom to take decisions. Autonomy would ensure that decisions are taken at the right time and growth opportunities utilized in the best possible manner.
- Freedom from political interference: Many public enterprises are considered to be the kingdoms of politicians. They are run to suit the needs and requirements of the ruling party.
Conclusion
- Today, opinions are divided about the iconic leader. While Nehru always had his critiques even back in the day, a significant section of the masses despise the dynasty politics of the Congress that ensued after his passing in 1964.
- However, his contributions to India’s freedom, and as a Prime Minister to his country are acknowledged by people both within and outside India. His shortcomings do not take away from the legacy he cemented as a propagator for freedom, and as the free nation’s first Prime Minister.
Mains question
Assess the Nehruvian legacy of public sector. Do you think they are still relevant today? While discussing challenges they face what suggestion will you give to improve their performance.
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Disinvestment in India
LIC
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Opening of insurance sector in India
Mains level: Paper 3- LIC and insurance sector in India
Context
LIC is now at a transformational moment. Its listing on the bourses should lift LIC to be a part of the elite corporate community in India.
Insurance sector in India
- Opening of the insurance sector: A milestone in the history of India’s insurance industry was the opening of the sector for private participation in the year 2000 and this caused widespread concern that LIC will find the competition tough and could very well be marginalised.
- Today, there are 24 private players in the life insurance space and many of them have foreign collaborations.
- LIC has steadily grown in the past six decades and today with over 290 million policyholders and an asset value of ₹38 lakh crore ($520 billion), it ranks as one of the largest insurance companies in the world.
- Yet, LIC remains a colossus capturing 75% of the life insurance business in the country.
- Its claim settlement at 99.87% is far above the industry average of 84%.
Role of LIC in skilling and women’s employment
- LIC created large scale employment for women right from its inception in 1956.
- Thousands of women became LIC agents in the 1950s and 60s, when job opportunities were scarce.
- There was no entry barrier in terms of age or fixed time for work.
- Education requirement was a mere high school pass.
- Many of these women were housewives who could earn an extra income by selling LIC policies.
- This was a period before the arrival of digital technologies and mobile phones.
- Skill development program: LIC’s training programme with its mix of online education and real-life case studies offer the best model for India’s skill development programmes.
- LIC’s relevance comes from its track record of creating vast number of employment opportunities for ordinary Indians, male and female, urban and rural.
Policies focused on savings
- In a country of vast poverty and low income, LIC recognised from the beginning that it cannot sell insurance as a risk cover on premature death.
- It, therefore, devised policies focussing on savings and the need for children’s education and daughter’s marriage which are fundamentals to family values in India.
- These policies also ensured that a part of the premium paid was returned at regular intervals before the maturity period, providing liquidity for emergencies.
- They simultaneously covered risk caused by death.
- People-centric approach: While the private players concentrated on technology-driven marketing, LIC’s approach was significantly people-centric.
- When Pradhan Mantri Jan Dhan Yojana was launched for financial inclusion of over 300 million of the rural population on August 15, 2014, LIC was already there with its policies covering a rural population of 200 million.
Conclusion
The nation must not forget the fact that LIC was built on sweat and tears, pain and sacrifice of ordinary Indians. It is these democratic credentials that remain LIC’s most valuable asset.
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Disinvestment in India
National Land Monetisation Corporation (NLMC)
Note4Students
From UPSC perspective, the following things are important :
Prelims level: National Land Monetisation Corporation (NLMC)
Mains level: Asset Monetization
The Union Cabinet has approved the creation of the National Land Monetisation Corporation (NLMC), the Special Purpose Vehicle (SPV) announced in the Union Budget 2021-22 to carry out monetisation of government and surplus land holdings of public sector undertakings (PSU).
What is the NLMC?
- The NLMC will be a firm, fully owned by the government, to carry out the monetisation of government and public sector assets in the form of surplus, unused or underused land assets.
- It will fall under the administrative jurisdiction of the Ministry of Finance and will be set up with an initial authorised share capital of ₹5,000 crore and a paid-up capital of ₹150 crore.
- Apart from monetising underutilised or unused land parcels of Central Public Sector Enterprises (CPSEs), the Corporation will also facilitate the monetisation of assets belonging to PSUs that have ceased operations or are in line for a strategic disinvestment.
- The surplus land and building assets of such enterprises are expected to be transferred to the NLMC, which will then hold, manage and monetise them.
What will it do?
- The setting of the NLMC will speed up the closure process of the CPSEs and smoothen the strategic disinvestment process.
- It will also enable productive utilisation of these under-utilised assets by setting in motion private sector investments.
- It will boost new economic activities such as industrialisation, boosting the local economy by generating employment and generating financial resources for potential economic and social infrastructure.
- Besides managing and monetising, the NLMC will act as an advisory body and support other government entities and CPSEs in identifying their surplus non-core assets.
- It will help monetising them in an efficient and professional manner, maximising the scope of value realisation.
What does monetization mean?
- When the government monetises its assets, it essentially means that it is transferring the revenue rights of the asset (could be idle land, infrastructure, PSU) to a private player for a specified period of time.
- In such a transaction, the government gets in return an upfront payment from the private entity, regular share of the revenue generated from the asset, a promise of steady investment into the asset, and the title rights to the monetised asset.
- There are multiple ways to monetise government assets; in the case of land monetisation of certain spaces like offices, it can be done through a Real Estate Investment Trust (REIT).
What are REITs?
Ans: REITs a company that owns and operates a land asset and sometimes, funds income-producing real estate. Assets of the government can also be monetised through the Public Private Partnerships (PPP) model.
Why need monetization?
- There are different reasons why the government monetises its assets.
- One of them is to create new sources of revenue.
- The economy has already been hit due to the coronavirus pandemic and revenues are essential to fulfil the Modi government’s target of achieving a $5 trillion economy.
- Monetisation is also done to unlock the potential of unused or underused assets by involving institutional investors or private players.
- Thirdly, it is also done to generate resources or capital for future asset creation, such as using the money generated from monetisation to create new infrastructure projects.
How will the NLMC function?
- The firm will hire professionals from the private sector with a merit based approach, similar to other specialised government companies like the National investment and infrastructure Fund (NIIF) and Invest India.
- This is because asset monetisation of real estate requires expertise in valuation of property, market research, investment banking, land management, legal diligence and other related skill sets.
- The NLMC will undertake monetisation as an agency function and is expected to act as a directory of best practices in land monetisation.
How much land is currently available for monetisation?
- According to the Economic Survey 2021-2022, as of now, CPSEs have put nearly 3,400 acres of land on the table for potential monetisation.
- They have referred this land to the Department of Investment and Public Asset Management (DIPAM).
- As per the survey, monetisation of non-core assets of PSUs such as MTNL, BSNL, BPCL, B&R, BEML, HMT Ltd, Instrumentation Ltd etc are at different stages.
What are the possible challenges for NLMC?
(a) Volatile market situation
- The performance and productivity of the NLMC will also depend on the government’s performance on its disinvestment targets.
- In FY 2021-22, the government has hardly been able to raise expected amounts through various forms of disinvestment.
- For example, the Life Insurance Corporation IPO, which was supposed to raise ₹60,000 crore is now shrouded in uncertainty owing to the Russia-Ukraine crisis making stock markets volatile.
- If the IPO does not hit the markets by the end of March, the government would be missing its disinvestment targets by a wide margin.
(b) Issues with transfer of rights
- The process of asset monetisation does not end when the government transfers revenue rights to private players.
- Identifying profitable revenue streams for the monetised land assets, ensuring adequate investment by the private player and setting up a dispute-resolution mechanism are also important tasks.
(c) Unattractiveness of PPP Model
- Posing as another potential challenge would be the use of Public Private Partnerships (PPPs) as a monetisation model.
- For instance, the results of the Centre’s PPP initiative launched in 2020 for the Railways were not encouraging.
- It had invited private parties to run 150 trains of the Indian Railways but when bids were thrown open, nine clusters of trains saw no bidders.
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Disinvestment in India
[pib] National Land Monetisation Corporation (NLMC)
Note4Students
From UPSC perspective, the following things are important :
Prelims level: National Land Monetisation Corporation (NLMC)
Mains level: Asset Monetization
The Union Cabinet has approved the setting up of a new government-owned firm National Land Monetisation Corporation (NLMC) for pooling and monetizing sovereign and public sector land assets.
What is NLMC?
- The National Land Monetisation Corporation (NLMC) is being formed with an initial authorised share capital of ₹5,000 crore and paid-up capital of ₹150 crore.
- The government will appoint a chairman to head the NLMC through a “merit-based selection process” and hire private sector professionals with expertise.
- The NLMC will undertake monetization of surplus land and building assets of Central public sector enterprises (CPSEs) as well as government agencies.
How will it function?
- NLMC will own, hold, manage and monetise surplus land and building assets of CPSEs under closure and surplus non-core land assets of Government-owned CPSEs under strategic disinvestment.
- This will speed up the closure process of CPSEs and smoothen the strategic disinvestment process of Government-owned CPSEs, the statement said.
- NLMC will undertake surplus land asset monetisation as an agency function, and assist and provide technical advice to the Centre in this regard.
- The NLMC board will comprise senior Government officers and eminent experts, while its chairman and non-Government directors will be appointed through a merit-based selection process, the statement said.
- The Corporation will have minimal full-time staff, hired directly from the market on a contract basis.
Stipulated tasks
- CPSEs have referred around 3,400 acres of land and other non-core assets to the Department of Investment and Public Asset Management (DIPAM) for monetisation.
- Monetisation of non-core assets of MTNL, BSNL, BPCL, BEML, HMT, is currently at various stages of the transaction, as per latest data in the Economic Survey 2021-22.
Significance of NLMC
- The government would be able to generate substantial revenues by monetizing unused and under-used assets.
- The new corporation will also help carry out monetization of assets belonging to public sector firms that have closed or are lined up for a strategic sale.
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Disinvestment in India
Privatisation and Related issues
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much
Mains level: Paper 3- Issues with privatisation and way forward
Context
There is a consensus that privatization is the panacea. Policymakers often cite the private sector’s ability to grow faster. This may not always be true.
Meaning of Privatisation
It means the transfer of ownership, management, and control of the public sector enterprises to the private sector. India adopted a mixed economy model, where the Public Sector Enterprises (PSEs) were established on a socialistic pattern of development. However, due to the poor performance of several PSEs and the consequent huge fiscal deficits, privatization was pursued.
Privatization can suggest several things-
- Migration of something from the public sector to the private sector.
- It is also used as a metonym for deregulation when a massively regulated private firm or industry becomes less organized.
- Government services and operations may also be (denationalised) privatised. In these circumstances, private entities are tasked with the application of government plans or the execution of government assistance that had earlier been the vision of state-run companies. Some instances involve law enforcement, revenue collection, and prison management.
- Privatization of the public sector companies by selling off parts of the equity of PSEs to the public is known as disinvestment.
Objectives of Privatisation
1. Providing strong momentum for the inflow of FDI
2. Improving the efficiency of public sector undertakings (PSUs)
- The efficiency of PSUs is improved by giving them the autonomy to make decisions.
- Some companies were given special categories of Navratna and Miniratna.
3. Reduce the fiscal burden on the government in maintaining PSEs.
Ways of Privatisation
Government companies are transformed into private companies in two ways.
Transfer of ownership
Government companies can be converted into private companies in the following two ways:
- By the withdrawal of the government from the ownership and management of public sector companies
- By the outright sale of public sector companies.
Disinvestment
- Disinvestment, or divestment, refers to the act of a business or government selling or liquidating an asset or subsidiary or the process of dilution of a government’s stake in a PSU.
- The rationale for disinvestment is that the government has no business to be in a business. Thus, the government continues to disinvest in sectors where private companies are already the dominant player.
However, there are six methods of privatization.
- Public sale of shares
- Public auction
- Public tender
- Direct negotiations
- Transfer of control of enterprises that were controlled by the state or by municipalities
- Lease with a right to purchase
Benefit of Disinvestment
- Improves corporate governance: It would result in the introduction of corporate governance in the privatized companies by freeing the PSEs from Government control and giving more scope to innovation. Enhanced corporate and with the introduction of independent Directors.
- Develops and deepens the capital market through the spread of equity culture: The disinvestment would benefit the small investors and employees as it would lead to a wider distribution of wealth in the form of public offerings of privatized companies.
- Disinvestment funds can be utilized for long-term goals such as:
- Financing large-scale infrastructure development.
- Investing in the economy to encourage spending
- Expansion and Diversification of the firm
- Repayment of Government Debts: Almost 40-45% of the Centre’s revenue receipts go towards repaying public debt/interest
- Investing in social programs like health and education
- Fiscal space for the relocation of resources locked with CPSEs: Disinvestment also assumes significance due to the prevalence of an increasingly competitive environment, which makes it difficult for many PSUs to operate profitably. This leads to a rapid erosion of the value of the public assets making it critical to disinvest early to realize a high value.
- Resources locked in sectors developed enough to raise money from the market are channelized into areas of the economy that are less likely to access resources for the market because of their stage of economic development. Letting go of these assets is best in the long-term interest of the taxpayers as the current yield on these investments is abysmally low.
- Unlocking of shareholder value: It is done with the help of issuing IPO. IPO means Initial Public Offering. It is a process by which a privately held company becomes a publicly-traded company by offering its shares to the public for the first time. Offering an IPO is a money-making exercise. Every company needs money for expansion, to improve their business, to better the infrastructure, to repay loans, etc.
- Employees: Employees of a firm are benefitted by disinvestment through:
- Pay rises, which has been done in past disinvestments.
- Greater opportunities and avenues for career growth and further employment generation through capacity expansion.
Is privatization a solution?
- No significant difference in performance: Studies indicate that the gap in growth (and service) between public sector undertakings (PSUs) with autonomy and private firms is not significant.
- Experience of the privatization in the UK: One study highlighted that the famed British privatization initiative of British Airways, British Gas, and the Railways led to no systemic difference in performance.
- Evidence on performance after privatization is even more mixed in developing countries.
- Multiple factors: Growth post-privatization is often due to multiple factors, for example, better funding under a private promoter versus a starved government budget, a better business cycle.
Failure of Privatisation
- Privatization as a revenue source: As a state, we have sought to hock our generational wealth in PSUs for the past two decades, with limited success.
- Failure to raise funds: Actual receipts from disinvestment have always fallen significantly short of targets.
- In total, between FY11 and FY21, about ₹5 lakh crore was raised (that is, about 33% of just FY22’s projected fiscal deficit (PRS India, 2021) – some of this, notably through stake sale to other PSUs.
- Considering social and institutional constraints, it is a slow process. For instance, BPCL’s long-awaited journey.
Challenges
- Challenge of valuation: For instance, about 65% of about 300 national highway projects have been recording significant toll collection growth; any valuations of such assets will need to ensure they capture potential growth in toll revenue, as NHAI’s highway expansion bears fruit and the economy recovers.
- Social consequences: There were about 348 CPSUs in existence in 2018, with a total investment of ₹16.4 trillion and about 10.3 lakh employees in Central Public Sector Enterprises (in 2019). Push for massive privatization resulting in mass layoffs in a period of low job creation.
- Concentration of wealth: A greater concentration of public assets in select private hands is also a medium-term concern. About 70% of all profits generated in the corporate sector in FY20 were with just 20 firms.
- Across sectors, a whiff of oligopoly is emerging – cigarettes continue to be dominated by a single player, paints have one entity with ~40% in FY21, airports now have a new operator with about six airports plus a 74% stake in Mumbai’s international airport, while telecom has just three players left.
- Such concentration, mixed with the privatization of public assets, is likely to lead to higher usage fees (already being seen in telecom) and inflation, coupled with a loss of strategic control.
Way forward
- Outright privatization is not a solution: Selective PSU Reform must be considered.
- The Maruti model is instructive – the government had a joint venture with the Suzuki Corporation, but ceded control, despite Suzuki having only 26% shareholding, in return for a push by Suzuki for greater exports from India and manufacture of global models in India
- Stake sale route: Empirical evidence highlights that stake sales are considered a preferred route (about 67% of all PSUs sales in about 108 countries between 1977 and 2000 were conducted via this route), as it gives time to ensure price discovery, allowing improved performance to raise valuations over time.
- Global Experience: In China, for the past few decades, growth has been led by corporatized PSUs, all of them held under a holding company (SASAC), which promotes better governance, appoints leadership, and executes mergers and acquisitions.
- In Singapore, the Ministry of Finance focuses on policymaking, while the holding firm is focused on corporatizing and expanding its PSUs on a global scale.
- PSUs with greater autonomy, with the government retaining control via a holding firm, can also be subject to the right incentives.
Conclusion
The time has come to take a relook at privatization. Simply pursuing this path, while utilizing such proceeds for loan write-offs or populist giveaways in the election cycle will not do.
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Disinvestment in India
The NMP is hardly the panacea for growth in India
Note4Students
From UPSC perspective, the following things are important :
Prelims level: National Monetisation Pipeline
Mains level: Paper 3- Significance of PSUs
Context
As the government seeks to monetise core assets through National Monetisation Pipeline (NMP), it needs to investigate the key reasons and processes which led to once profit-making public sector assets becoming inefficient and sick businesses.
Background of the MNP
- The National Monetisation Pipeline (NMP) envisages an aggregate monetisation potential of ₹6-lakh crore through the leasing of core assets of the Central government.
- These assets are in sectors such as roads, railways, power, oil and gas pipelines, telecom, civil aviation, shipping ports and waterways, mining, food and public distribution, coal, housing and urban affairs etc. over a four-year period (FY2022 to FY2025).
- Strategic objective of NMP: According to NITI Aayog, the strategic objective of the asset monetisation programme is to unlock the value of investments in public sector assets by tapping private sector capital and efficiencies.
- Unlocking idle capital: The NMP policy advocates unlocking idle capital from non-strategic/underperforming government owned assets
- Contribution of core sectors: Eight core industrial sectors that support infrastructures such as coal, crude oil, natural gas, refinery products, fertilizers, steel, cement, and electricity have a total weight of nearly 40% in the Index of Industrial Production (IIP).
Reasons for the decline of PSU and why the government should introspect the decline
- Cost overruns, inter alia, is one of the major reasons.
- Exceeding project completion time: In some cases, project completion time is exceeded, leading to elevated project cost so much so that either the project itself becomes unviable at the time of its launching or delays its break even point.
- Lack of optimum input-output ratio: Optimum input-output ratio is seldom observed in a majority of government infrastructural projects leading to their overcapitalisation.
- A reluctance to implement labour reforms, a lack of inter-ministerial/departmental coordination, poor decision-making, ineffective governance and excessive government control are other reasons for the failure of public infrastructural assets.
- Need for introspection: It is quite likely that the nation may find itself in a vicious cycle of creating new assets and then monetising the same when they become liabilities for the Government at a later stage.
Importance of public sector enterprises
- Going by the annual report (2020-2021) of the Department of Public Enterprises there are 256 operationally-run central public sector undertakings (CPSUs), employing about one million people.
- They posted a net profit of ₹93,294 crore (FY 2019-20).
- Ratna Status: Out of these, 96 have been conferred the Ratna status (72, 14, and 10 are Miniratnas, Navaratnas, and Maharatna companies, respectively).
- As India needs to invest about $1.5 trillion on infrastructure development in order to aspire to become $5 trillion economy by the year 2024-25, according to the Economic Survey 2019-20, public enterprises should be in focus.
Steps to strengthen public sector businesses
- Gati Shakti National Master Plan: Recently, the “Pradhan Mantri Gati Shakti National Master Plan” for multi-modal connectivity was launched.
- It is essentially a digital platform for information sharing among different Ministries and departments at the Union and State levels.
- Seamless planning and coordinated execution: The plan aims ‘to synchronise the operations of different departments of 16 Ministries including railways and roadways.
- Revamping corporate governance structure of PSUs: As enunciated in the Economic Survey 2020-21, an important step for the Government to take to strengthen public sector businesses would be to completely revamp their corporate governance structure in order to enhance operational autonomy augmented with strong governance practices including listing on stock exchange for greater transparency and accountability.
- Initiative to boost domestic production of steel: The Economic Survey also highlights the Government’s initiatives as part of the Atmanirbhar Abhiyaan in order to boost domestic production in the steel sector.
- Under it, four different types of steel are included for incentives under the production linked incentive (PLI) scheme; selling steel to Micro, Small and Medium Enterprises (MSMEs), affiliated to Engineering Export Promotion Council of India at export parity price under the duty drawback scheme of the Directorate General of Foreign Trade (DGFT);
- It also include measures to provide preference to domestically produced iron and steel in government procurement, where aggregate estimate of iron and steel products exceeds ₹25 crore;
- Protection of domestic industry from unfair trade practices: Protecting industry from unfair trade through appropriate remedial measures including imposition of anti-dumping duty and countervailing duty on the products on which unfair trade practices were adopted by the other countries.
Conclusion
More such out-of-the-box policy initiatives are needed to rule out public asset monetisation schemes such as the NMP in future.
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Disinvestment in India
Air India Disinvestment Deal
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Air India
Mains level: Air India disinvestment
After 68 years, Air India is all set to return to the Tata fold.
What is the deal?
- The Tatas will own 100% stake in Air India, as also 100% in its international low-cost arm Air India Express and 50% in the ground handling joint venture, Air India SATS.
- Apart from 141 planes and access to a network of 173 destinations including 55 international ones, Tatas will also have the ownership of iconic brands like Air India, Indian Airlines and the Maharajah.
History of Air India
- Prominent industrialist JRD Tata founded the airline in 1932 and named it Tata Airlines.
- As India gained Independence, the government bought 49% stake in AI.
- In 1946, the aviation division of Tata Sons was listed as Air India, and in 1948, the Air India International was launched with flights to Europe.
- In 1953, Air India was nationalised and for the next over four decades it remained the prized possession for India controlling the majority of the domestic airspace.
Why was Air India sold?
- End of Monopoly: With economic liberalisation and the growing presence of private players, this dominance came under serious threat.
- Govt running an airline: Ideologically too, the government running an airline did not quite gel with the mantra of liberalisation.
- Continuous losses: By 2007, AI (which flew international flights) was merged with the domestic carrier, Indian Airlines, to reduce losses.
- Wastage of taxpayers money: But it is the mark of how poorly the airline was run that it has never made a profit since 2007.
Why wasn’t it sold earlier?
Ans. Fear over Operational Freedom
- The first attempt to reduce the government’s stake — disinvestment — was made in 2001 under the then NDA government.
- But that attempt — to sell 40% stake — failed.
- In 2018, the government made another attempt to sell the government stake — this time, 76%. But it did not elicit even a single response.
- In the latest attempt started in January 2020, the government has been able to finally conclude the sale.
So how was it managed this time?
- Govt gives up stakes: The mere fact that the government retained a partial stake. In other words, as long as the government kept a certain shareholding of AI, private players did not seem interested.
- Operational freedom: That’s because the mere idea of government ownership, even if it was as little as 24%, made private firms wonder if they would have the operational freedom needed.
- Debt sharing: In the past, the government expected the bidders to pick up a certain amount of the debt. This time, the government let the bidders decide the amount of debt they wanted to pick up.
Significance of the deal
[A] From the government’s perspective: A success
- Disinvestment: It underscores govt commitment to reducing the its role in the economy.
- Easing burden on taxpayers: This claims to have saved taxpayers from paying for daily losses of AI.
- Economic reforms: Given the historical difficulties in AI’s disinvestment, or any disinvestment at all this is a significant achievement.
[B] Business perspective: Still a failure
- Missing the target: Purely in terms of money, the deal does not result in as big a step towards achieving the government’s disinvestment target of the current year.
- Unresolved bankruptcy: The assets left with the government, such as buildings, etc., will likely generate Rs 14,718 crore. But that will still leave the government with a debt of Rs 28,844 crore to pay back.
[C] Value perspective: Success for Tatas
- Business success: From the Tatas’ perspective, apart from the emotional aspect of regaining control of an airline that they started, AI’s acquisition is a long-term bet.
- Investment boost: The Tatas are expected to invest far more than what they have paid the government if this bet is to work for them.
Conclusion
- Complete liberalization: The privatisation of Air India is a message from the Government to the markets and global investors that it has the political will to bite the reform bullet.
- Roadmap for economic reforms: The govt had to shed the “over-conservatism” that is typical of bureaucracy.
- Future disinvestments: A transaction as “tough and complex” as Air India’s in an open, transparent and competitive bidding process, will boost future privatisation.
Way forward
- Other loss-making PSUs continue to drain taxpayers’ hard-earned money and get abused and fleeced in the name of social welfare.
- The govt should imbibe this experience gained in future disinvestment biddings.
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Disinvestment in India
National monetisation pipeline has narrow outlook
Note4Students
From UPSC perspective, the following things are important :
Prelims level: NMP
Mains level: Paper 3- Issues with National Monetisation Policy
Context
Recently, FM announced the National Monetisation Pipeline (NMP) to lease a slew of “brownfield” (already developed) but underutilised public sector assets to the private sector with the objective of raising Rs 6 lakh crore.
About the NMP
- The assets identified for lease include roads, railways, ports, power, mining, aviation, oil and gas pipelines, warehouses, hotels and even two sports stadia.
- The idea is to create “structured public-private partnerships” to unlock value from public sector assets and to recycle the revenues so raised into new infrastructure.
- But the move raises several concerns.
3 concerns with NMP
1) Government is preferring financial value of assets over public welfare
- The design of the NMP is out of sync with existential challenges — global warming, pandemics, geopolitical chaos and fundamentalism.
- The assets are valued on the basis of conventional financial metrics (enterprise value, book value, net present value, the costs of comparable assets).
- The model seemingly absolves the government from the responsibility to unlock the intrinsic “social” (to include “smart” and “clean” ) value of these assets.
2) It will lead to concentration of capital
- NMP is designed to attract deep-pocketed financial institutions (PE firms) and industrial conglomerates.
- This is because the valuations are so high that few other entities will have the resources or the risk carrying capacity to respond.
- The result will be a deepening of the concentration of capital and existing inequalities.
- There will be economic and social implications.
3) Addressing the system problem
- The government should have asked itself a fundamental question before placing a substantial share of public assets on the block:
- Why have these assets been so poorly managed?
- Was it because of bad leadership, inadequate talent within the PSEs, and/or systemic and structural shortcomings?
- If the reason for low productivity was poor leadership or lack of talent, the transfer of these assets to a different, private sector-led organisational and investment structure would make sense.
- Structural issues: But if the reason had to do with structural impediments, then such a change may not be warranted, at least not in the first instance.
- The example, gas pipelines GAIL are hugely underutilized, but this is not because of the “inefficiency” of GAIL, the PSE operator.
- It is because of structural factors such as the shortage of domestic gas supplies; the regressive taxation system; the relatively uncompetitive price of gas and the perennial tussle between the Centre and state governments over land access.
- A similar point can be made about most of the other assets identified for monetisation.
- Their low productivity is because their PSE operators have faced a combination of systemic hurdles related to weak dispute resolution mechanisms; regulatory miasma; lack of transparency in governance; pricing distortions and intrusive bureaucratic intervention.
- Way forward: So, until and unless these systemic problems are addressed, the private sector will find it difficult to harness the full value of these assets and the transfer of operatorship to them will offer at best a partial palliative.
Conclusion
Private-public investment structures make sense, but they must be modeled to also generate social value. In today’s world, there are no shortcuts to sustainable development.
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Disinvestment in India
Asset monetisation — execution is the key
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Cost of capital
Mains level: Paper 3- Asset monetisation and challenges in it
Context
The government has announced an ambitious programme of asset monetisation. It hopes to earn ₹6 trillion in revenues over a four-year period.
About Asset monetisation
- Unlike in privatisation, no sale of government assets is involved.
- The government parts with its assets — such as roads, coal mines — for a specified period of time in exchange for a lump sum payment.
- Asset monetisation will happen mainly in three sectors: roads, railways and power.
- Other assets to be monetised include: airports, ports, telecom, stadiums and power transmission.
- Two important statements have been made about the asset monetisation programme.
- The focus will be on under-utilised assets.
- Monetisation will happen through public-private partnerships (PPP) and Investment Trusts.
Challenges
1) Investors would prefer property utilised assets over underutilised assets
- Suppose an asset is not being used adequately because it has not been properly developed or marketed well enough.
- A private party may judge that it can put the assets to better use.
- It will pay the government a price equal to the present value of cash flows at the current level of utilisation.
- This is a win-win situation for the government and the private player.
- The government gets a ‘fair’ value for its assets.
- The private player gets its return on investment.
- Increase in efficiency: The economy benefits from an increase in efficiency.
- Monetising under-utilised assets thus has much to commend it.
- However, in case of an asset that is being properly utilised, the private player has little incentive to invest and improve efficiency.
- It simply needs to operate the assets as they are.
- The private player may value the cash flows assuming a normal rate of growth.
- The cost of capital for a private player is higher than for a public authority.
- The higher cost of capital for the private player could offset the benefit of any reduction in operating costs.
- The government earns badly needed revenues but these could be less than what it might earn if it continued to operate the assets itself.
- There is no improvement in efficiency.
- The benefits to the economy are likely to be greater where under-utilised assets are monetised.
- However, private players will prefer well-utilised assets to assets that are under-utilised.
- That is because, in the former, cash flows and returns are more certain.
2) Valuation challenges
- It is very difficult to get the valuation right over a long-term horizon, say, 30 years.
- For a road or highway, growth in traffic would also depend on factors other than the growth of the economy.
- . If the rate of growth of traffic turns out to be higher than assessed by the government in valuing the asset, the private operator will reap windfall gains.
- Alternatively, if the winning bidder pays what turns out to be a steep price for the asset, it will raise the toll price steeply.
- The consumer ends up bearing the cost.
- It could be argued that a competitive auction process will address these issues and fetch the government the right price while yielding efficiency gains.
- But that assumes, among other things, that there will be a large number of bidders for the many assets that will be monetised.
3) Life of the returned asset may not be long
- There is no incentive for the private player to invest in the asset towards the end of the tenure of monetisation.
- The life of the asset, when it is returned to the government, may not be long.
- In that event, asset monetisation virtually amounts to sale.
- Monetisation through the PPP route is thus fraught with problems.
Way forward: InvIT route
- Infrastructure Investment Trusts (InvIT) are mutual fund-like vehicles in which investors can subscribe to units that give dividends.
- Monetisable assets will be transferred to InvITs.
- The sponsor of the Trust is required to hold a minimum prescribed proportion of the total units issued.
- InvITs offer a portfolio of assets, so investors get the benefit of diversification.
- In the InvIT route to monetisation, the public authority continues to own the rights to a significant portion of the cash flows and to operate the assets.
- So, the issues that arise with transfer of assets to a private party — such as incorrect valuation or an increase in price to the consumer — are less of a problem.
Key takeaways
- Low cost of capital for public authority: In general, due to the low cost of capital for public authority, the economy is best served when public authorities develop infrastructure and monetise these.
- InvIT route: Monetisation through InvITs is likely to prove less of a problem than the PPP route.
- Monetise under utilised assets: We are better off monetising under-utilised assets than assets that are well utilised.
- Monitoring authority should be set up: To ensure proper execution, there is a case for independent monitoring of the process.
- The government may set up an Asset Monetisation Monitoring Authority staffed by competent professionals.
Consider the question “How asset monetisation is different from privatisation? What are the challenges in asset monetisation? Suggest the ways forward.”
Conclusion
Government must pay attention to the challenges in asset monetisation and use it in the proper way to increase the efficiency in the economy.
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Disinvestment in India
General Insurance Business (Nationalization) Amendment Bill, 2021
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much
Mains level: Privatization of insurance sector
The General Insurance Business (Nationalization) Amendment Bill, 2021, was recently passed by both houses of parliament.
What is the amendment?
- The Bill seeks to amend the General Insurance Business (nationalization) Act, 1972.
What is the GIB Act?
- The 1972 Act set up the General Insurance Corporation of India (GIC).
- The businesses of the companies nationalized under the Act were restructured in four subsidiary companies of GIC: (i) National Insurance, (ii) New India Assurance, (iii) Oriental Insurance, and (iv) United India Insurance.
- The Act was subsequently amended in 2002 to transfer the control of these four subsidiary companies from GIC to the central government, thereby making them independent companies.
- Since 2000, GIC exclusively undertakes the reinsurance business.
Answer this PYQ:
Microfinance is the provision of financial services to people of low-income groups. This includes both the consumers and the self-employed. The service/ services rendered under micro-finance is/are: (CSP 2011)
- Credit facilities
- Savings facilities
- Insurance facilities
- Fund Transfer facilities
Select the correct answer using the codes given below the lists:
(a) 1 only
(b) 1 and 4 only
(c) 2 and 3 only
(d) 1, 2, 3 and 4
Post your answers here:
Key highlights of the Amendment Bill
- Government shareholding threshold: The Act requires that shareholding of the central government in the specified insurers (the above five companies) must be at least 51%. The Bill removes this provision.
- Change in definition of general insurance business: The Act defines general insurance business as fire, marine or miscellaneous insurance business.
- Transfer of control from the government: The Bill provides that the Act will not apply to the specified insurers from the date on which the central government relinquishes control of the insurer.
- Notifying terms and conditions: The Bill provides that schemes formulated by the central government in this regard will be deemed to have been adopted by the insurer.
- Liabilities of directors: The Bill specifies that a director of a specified insurer, who is not a whole-time director, will be held liable only for certain acts.
Significance of the bill
- De-regulation: The move is part of the government’s strategy to open up more sectors to private participation and improve efficiency.
- Capital infusion: Privatization will bring in more private capital in the general insurance business and improve its reach to make more products available to customers.
- Insurance coverage: This will enhance insurance penetration and social protection to better secure the interests of policyholders and contribute to faster growth of the economy
Concerns of the opposition
- The Opposition is of the view that privatization will be detrimental to the interests of the public.
- They wanted a proper discussion on the pros and cons of the Bill rather than passing it in a hurry.
- They wanted an expert committee of the Cabinet to study the impact before passing the legislation.
- They are worried about large-scale employee layoffs and short-term investors entering and exiting these entities once the Act comes into force.
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Disinvestment in India
Privatisation of public sector enterprises in India
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much
Mains level: Paper 3- Privatisation of PSUs
The article suggests the privatisation of public sector enterprises by analysing their performance and devising strategy for privatisation accordingingly.
Three categories of public sector enterprises
1) Sick for long time and beyond redemption
- There is the category of enterprises which have been sick for a long time.
- Their technology, plants and machinery are obsolete.
- They should be closed, and assets sold.
- The labour in these enterprises have had a political constituency which has prevented closure.
What should be done with these enterprises?
- The Government should close these in a time-bound manner with a generous handshake for labour.
- After selling machinery as scrap, there would be valuable land left.
- Prudent disposal of these plots of lands in small amounts would yield large incomes in the coming years.
- All this would need the creation of dedicated efficient capacity as the task is huge and challenging.
- These enterprises may be taken away from their parent line Ministries and brought under one holding company.
- This holding company should have the sole mandate of speedy liquidation and asset sale.
2) Financially troubled but can be turned around
- Private management through privatisation or induction of a strategic partner is the best way to restore value of these enterprises.
- Air India and the India Tourism Development Corporation (ITDC) hotels are good examples.
What should be done with these enterprises?
- Air India should ideally be made debt free and a new management should have freedom permitted under the law in personnel management to get investor interest.
- As valuation rises, the Government could reduce its stake further and get more money.
- If well handled, significant revenues would flow to the Government.
3) Profitable enterprises
- Pragmatism instead of ideology should guide thinking about them.
- The Chinese chose to nurture their good state-owned enterprises as well as their private ones to succeed in the domestic and global markets by increasing their competitiveness in cost, quality, and technology.
- The Chinese chose to promote both their public as well as their private sector enterprises to rise.
- Both have made China the economic superpower that it is today.
What should be done with profitable enterprises?
- The Government can continue to reduce its shareholding by offloading shares and even reducing its stake to less than 51% while remaining the promoter and being in control.
- Calibrated divestment to get maximum value should be the goal instead of being target driven to get a lower fiscal deficit number to please rating agencies.
- In parallel, managements may be given longer and stabler tenures, greater flexibility to achieve outcomes, and more confidence to take well-considered commercial risks.
Challenges
- First, the number of Indian private firms which can buy out public sector firms are very few.
- Their limited financial and managerial resources would be better utilised in taking over the large number of private firms up for sale through the bankruptcy process.
- Then, these successful large corporates need to be encouraged to invest and grow both in brownfield and greenfield modes in the domestic as well as international markets.
- Sale at fair or lower than fair valuations to foreign entities, firms as well as funds, has adverse implications from the perspective of being ‘Atma Nirbhar’.
- Again, greenfield foreign investment is what India needs and not takeovers.
- Public sector enterprises provide for reservations in recruitment.
- With privatisation, this would end and unnecessarily generate social unrest.
Conclusion
Would it be in India’s interest to lose the strategic capacity that its ownership of public enterprises including financial ones provide it? It would be better to think carefully now.
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Disinvestment in India
Why privatising public assets is poor economics
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much
Mains level: Paper 3- How fiscal deficit financed government spending leads to wealth inequality
The article highlights the issues with government expenditure driven by the selling of public sector assets.
How public asset selling could affects private investment decisions
- Public sector assets are not bought by reducing consumption or investment.
- Current investment expenditure depends on decisions taken in the past and is more or less pre-determined.
- Investment decisions that are taken today for fructification tomorrow that may be scaled down by such a purchase.
- However, if investment decisions taken today are scaled-down, then it results in crowding out and such a strategy should be avoided anyway.
- This implies that selling public sector assets therefore does not release any resources from private use for government spending.
How selling public asset has same macroeconomic effect as fiscal deficit
- In case of fiscal deficit, the government puts its bonds in private hands; in sale of a public asset, the government puts its equity held in public sector assets in private hands.
- The macroeconomic consequences of a fiscal deficit on the economy are no different from those of selling public assets.
- However, finance capital, and institutions like the IMF treat the sale of public assets on a different footing from a fiscal deficit, for ideological — not economic — reasons, because they ideologically favour a dismantling of the public sector.
How fiscal deficit leads to wealth inequality
- In a situation of demand-constraints, where unutilised capacity and unemployed workers exist aplenty, if an appropriate monetary policy is pursued, it can have no adverse effects whatsoever, except one: It increases wealth inequality.
- The government expenditure financed by the fiscal deficit creates additional aggregate demand that increases output and incomes until the additional savings generated out of such incomes exactly match the fiscal deficit.
- These additional savings accrue to the savers without their having to reduce their consumption, compared to the initial situation (that is, prior to government expenditure increase).
- Since savings represent additions to wealth, this amounts to putting extra wealth into the hands of the rich.
- Selling public assets puts into private hands public assets, and that too at prices well below the capitalised value of earnings.
- This increases wealth inequality for two reasons:
- First, it does so exactly as a fiscal deficit does.
- Second, the public asset it puts in private hands is under-priced.
Why tax financed government spending should be preferred
- If the same government expenditure is financed by taxation, no matter who was taxed, then there would be no addition to private wealth and hence no increase in wealth inequality.
- Which is why tax-financed government expenditure should always be preferred to fiscal-deficit-financed government expenditure.
What alternative government have
- The obvious one is wealth taxation.
- Taxing away the private wealth created by a fiscal deficit leaves private wealth inequality unchanged at its initial level; it does not exacerbate it.
- If the government is unwilling to impose higher wealth or profit taxes, it can raise GST rates on several luxury goods.
Consider the question “How fiscal deficit financed government spending differs in its impact on weath inequality from the tax-financed government spending?”
Conclusion
Thus, selling public assets to finance government spending is both undesirable and unnecessary.
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Disinvestment in India
Initial Public Offer (IPO) of LIC
Note4Students
From UPSC perspective, the following things are important :
Prelims level: IPO
Mains level: LIC disinviestment
The government has started the process to launch the initial public offer (IPO) of Life Insurance Corporation (LIC) within this year.
Read the complete thread here at:
Try this question from CSP 2019:
Q.In India, which of the following review the independent regulators in sectors like telecommunications, insurance, electricity, etc.?
- Ad Hoc Committees set up by the Parliament
- Parliamentary Department Related Standing Committees
- Finance Commission
- Financial Sector Legislative Reforms Commission
- NITI Aayog
Select the correct answer using the code given below:
(a) 1 and 2
(b) 1, 3 and 4
(c) 3, 4 and 5
(d) 2 and 5
About LIC
- LIC is an state-owned insurance group and investment corporation owned by the Government of India.
- It was founded in 1956 when the Parliament of India passed the Life Insurance of India Act that nationalized the insurance industry in India.
- Over 245 insurance companies and provident societies were merged to create the state-owned LIC.
Why LIC IPO?
- LIC is the largest investor in government securities and stock markets every year.
- On an average, LIC invests Rs 55,000 crore to Rs 65,000 crore in stock markets every year and emerges as the largest investor in Indian stocks.
- LIC also has huge investments in debentures and bonds besides providing funding for many infrastructure projects according to its Annual Report for 2017-18.
Biggest IPO in Indian markets
- The finance ministry has invited bids from transaction advisors, including consulting firms, investment bankers, and financial institutions, for assisting the government in the preparatory processes leading to the IPO.
- The IPO is expected to be the biggest in the Indian capital markets given the size and scale of LIC, the country’s oldest and largest life insurer.
What is the size and position of LIC in the insurance market?
- Even if the government decides to sell 5-10 per cent of its equity in LIC through an IPO, the share sale of LIC, which was set up in 1956, is expected to be the largest.
- The insurer’s total assets had touched an all-time high of Rs 31.11 lakh crore in 2018-19, an increase of 9.4 per cent.
- The Corporation realized a profit of Rs 23,621 crore from its equity investment during 2018-19, down 7.89 per cent from Rs 25,646 crore in the previous year.
- LIC would have at least one transaction of IPO of a size of at least Rs 5,000 crore, or a capital market transaction of at least Rs 15,000 crore.
How does LIC fit into the overall disinvestment roadmap?
- In the Budget 2020-21, the finance ministry had announced plans for IPO of LIC and a proposal to sell the government’s equity in the stressed IDBI Bank.
- The government expects to raise Rs 90,000 crore through stake sale in LIC and IDBI Bank, and another Rs 1.2 lakh crore through other disinvestments.
- LIC is also a majority shareholder in IDBI Bank.
- The government had earlier listed the shares of General Insurance Corporation and New India Assurance through IPOs three years ago.
What benefits can be expected through the IPO?
- An IPO will certainly bring in transparency into affairs of LIC since it will be required to inform financial numbers and other market-related developments on time to the stock exchanges.
- Investors can benefit from picking up equity in the insurer, which has been making underwriting profit as well as profits on its investments.
- LIC’s investment in various equity and bond instruments will come under greater scrutiny after its lists on the exchanges.
Back2Basics: IPO
- IPO means Initial Public Offering. It is a process by which a privately held company becomes a publicly-traded company by offering its shares to the public for the first time.
- Offering an IPO is a money-making exercise. Every company needs money, it may be to expand, to improve their business, to better the infrastructure, to repay loans, etc.
- A private company, that has a handful of shareholders, shares the ownership by going public by trading its shares.
- Through the IPO, the company gets its name listed on the stock exchange.
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Disinvestment in India
[op-ed of the day] Strategic disinvestment does not deserve the criticism it gets
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3- Pros and cons of strategic disinvestment.
Context
Air India is on the block.
Why disinvestment is not such a bad idea?
- Wisdom lies in the use of resources to meet the emergent needs: True wisdom lies in the use of resources, including the so-called “family silver”.
- To meet emergent needs.
- As also for better returns.
- Even individuals and private sector organizations committed to meeting their obligations or optimizing wealth creation take such initiatives routinely.
- The weakening of Indian economy
- This fiscal year’s second quarter growth in the gross domestic product (GDP) slipped to 4.5% and the portents of a slowdown have been quite apparent.
- Private sector investment is sagging. Gross capital formation has dipped.
- Aggregate demand has contracted.
- Public sector expenditure is the single engine that’s driving economic growth.
- Clamour for the government to open its purse and limited fiscal room.
- Shrunk revenue growth: There is a clamour for the government to open its purse and help out. However, its revenue growth has shrunk.
- Low direct tax collection: Direct tax collections registered a growth of only a little more than 6%.
- The cautious approach by the RBI: The Reserve Bank of India has taken a rate cut pause, inter alia, to watch the government’s approach to the fisc.
- Commitment to low inflation: The political executive seems determined to honour its commitment to low inflation and macroeconomic stability.
- India facing Hobson’s Choice: India is thus faced with a Hobson’s choice—either to significantly revise its fiscal deficit target or monetize state assets.
- The liberalized markets and optimizing wealth.
- Perception in the capital market: Capital markets operate on perceptions. Valuations of public sector enterprises tend to be much lower than those of private sector companies even if their profit numbers are the same.
- Why should India suffer suboptimal wealth creation?: The liberalized market philosophy that the country has pursued aims at optimizing wealth creation. In case a change in ownership structure can deliver higher wealth, why should Indian society retain the current ownership frame and suffer suboptimal wealth creation?
- Need to make policies aimed at value creation: Given the limits on India’s resources, it is all the more important to see that policies are geared to ensure that value is created.
- Stake sales can achieve value creation: For validation of this surmise, look at the rapid rise in the enterprise value of Bharat Petroleum, as indicated by its share price, since the announcement of its strategic disinvestment.
- Not all private sector companies perform well: In those cases, the losses are not funded by innocent taxpayers.
Twin angles to welcome strategic disinvestment
- One: The need for India to invest in fresh asset creation.
- The fresh asset can be created by way of roads, ports and airports that would result in a cascade effect for the economy’s growth.
- Two: The optimization of wealth generation from the country’s assets.
- This, incidentally, will benefit individual shareholders, including employees with shares, who have invested in the equity of listed public-sector companies such as Bharat Petroleum.
- Energy security of the country not harmed: As there are other state-owned petroleum companies undertaking exactly the same activities, such as refining and marketing crude oil, the sale of one company does not tamper with the energy security of the country.
Way forward
- Caution against undervaluation: The government, however, must ensure that it is not taken for a ride. It must make a good judgment of the value of the company it decides to disinvest from and if the market conditions are not favourable for the move it must wait for the opportune moment.
- Asset creation from the proceeds: Instead of using the proceeds from the disinvestment to fund revenue deficit the proceeds must be utilized strictly for new asset creation.
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