The Disinvestment Program in India

Disinvestment of the Shares/Equity of Public Sector Enterprises

• The government of India has decided to withdraw from the Industrial sector, and in accordance with this decision, it decided to privatize the Public sector enterprises in a gradual and phased manner.
• The approach adopted by the government in this regard is to bring down its equity shares in all non-strategic Public sector enterprises to 26 percent or lower.
• For the purpose of privatization, the government has adopted route of disinvestment which involves the sale of the public sector equity to the private sector.
• In the first round of dis‑investment it was decided to (a) offer a randomly structured portfolio of shares each with notional reserve price based on a complex valuation procedure and (b) to off‑load the shares to institutional investors as a buffer between the Government and the stock market.
• Financial institutions and mutual funds were offered the opportunity to bid for the bundles. Later, the bidding process was opened up to foreign institutional investors and to the public at large with the stipulation of a certain minimum bid. Almost all the bidding so far has been done by financial institutions or mutual funds.
• There have been the inevitable controversies about the prices at which some of the initial shares were sold, even though all the disinvestment has been done through an auction process.
• The Government has decided to permit up to 49% disinvestment of equity so that the government would continue to hold 51%. A firm is legally regarded as a public sector firm in India if the Government holds more than 50% of equity. A company so classified is then subject to all the rules, regulations, procedures etc. connected with government ownership. Thus, a firm in which government ownership goes below 50% can be effectively regarded as being in the private sector even if the government has a dominant share holding.
• One criticism of this disinvestment process has been that it has essentially been seen as resource raising exercise by the government.
• A second and, perhaps, more valid criticism is that the valuation of shares is affected by the decision not to reduce government holdings to less than 51 per cent. With the continuing majority ownership of the government the disinvested public enterprises would continue to operate within the constraints of the public sector. Thus, there is a lack of clarity on future corporate plans and prospects of these enterprises. Consequently, it is expected that share bids would be lower than they would otherwise be if there was a clear announcement of eventual disinvestment of greater than 51 per cent.

Types of Disinvestment Methods in India

The method is followed in India from time to time. The method involves the sale of the Public sector equity to the private sector and the public at large.

Methods of Disinvestment

There are primarily three different approaches to disinvestments (from the sellers’ i.e. Government’s perspective)

Minority Disinvestment

A minority disinvestment is one such that, at the end of it, the government retains a majority stake in the company, typically greater than 51%, thus ensuring management control.

Historically, minority stakes have been either auctioned off to institutions (financial) or offloaded to the public by way of an Offer for Sale. The present government has made a policy statement that all disinvestments would only be minority disinvestments via Public Offers.

Examples of minority sales via auctioning to institutions go back into the early and mid 90s. Some of them were Andrew Yule & Co. Ltd., CMC Ltd. etc. Examples of minority sales via Offer for Sale include recent issues of Power Grid Corp. of India Ltd., Rural Electrification Corp. Ltd., NTPC Ltd., NHPC Ltd. etc.

Majority Disinvestment

A majority disinvestment is one in which the government, post disinvestment, retains a minority stake in the company i.e. it sells off a majority stake. It is also called Strategic Disinvestment.

Historically, majority disinvestments have been typically made to strategic partners. These partners could be other CPSEs themselves, a few examples being BRPL to IOC, MRL to IOC, and KRL to BPCL. Alternatively, these can be private entities, like the sale of Modern Foods to Hindustan Lever, BALCO to Sterlite, CMC to TCS etc.

Again, like in the case of minority disinvestment, the stake can also be offloaded by way of an Offer for Sale, separately or in conjunction with a sale to a strategic partner.

Complete Privatisation

Complete privatisation is a form of majority disinvestment wherein 100% control of the company is passed on to a buyer. Examples of this include 18 hotel properties of ITDC and 3 hotel properties of HCI.

Disinvestment and Privatisation are often loosely used interchangeably. There is, however, a vital difference between the two. Disinvestment may or may not result in Privatisation. When the Government retains 26% of the shares carrying voting powers while selling the remaining to a strategic buyer, it would have disinvested, but would not have ‘privatised’, because with 26%, it can still stall vital decisions for which generally a special resolution (three-fourths majority) is required.

The Way Ahead: What should be the Objectives of Public Sector Enterprises Disinvestment and Restructuring?

The means of achieving these objectives involve considerations such as the injection of greater competition into the industrial economy in order to foster a healthier market structure.