Disinvestment scorecard: Govt likely to miss target 16th time in 25 years

Mumbai: For the sixth consecutive year and 16th time in the disinvestment’s quarter-century history, India is likely to miss its budgetary target of raising money by selling stake in public sector undertakings (PSUs).

Even after missing its targets for the past five years, the Centre set a record target of raising ₹ 69,500 crore through disinvestments for fiscal 2016, comprising ₹ 41,000 crore by way of minority stake sale and an additional ₹ 28,500 crore from strategic sale.

The Centre has been able to garner about ₹ 13,340 crore after trimming its stake in Rural Electrification Corp. Ltd or REC ( ₹ 1,608 crore), Power Finance Corp. Ltd or PFC ( ₹ 1,671 crore), Dredging Corp. of India Ltd or DCIL ( ₹ 53.33 crore), Indian Oil Corp. Ltd or IOC ( ₹ 9,369 crore), and Engineers India Ltd (estimated ₹ 640 crore), data from the Department of Disinvestment (DoD) website shows.

Given current market conditions, the chances of meeting the revised disinvestment target appear bleak, despite a downward revision to the original objective, a trend seen in recent years due to the government’s inability to conduct stake sale.

The finance ministry has trimmed its FY2015-16 disinvestment target by roughly 57% to ₹ 30,000 core, citing volatile market conditions.

Finance minister Arun Jaitley announced in January that the government will come out with an alternative strategy to push PSU disinvestment in volatile markets.

“This year, for the past few months, we have slowed down the pace because it does not make sense to sell PSU shares at low prices when markets are volatile. We will disinvest only when the government gets the right price. We have to find out an alternative method for this (disinvestment),” Jaitley told television channel CNBC Awaaz on 15 January.

Investment bankers acknowledged that the government faltered after a good start and called for a change in strategy. It began well by launching REC Ltd offer for sale (OFS) within the first 10 days on FY16 and bringing companies such as PFC, DCIL and IOC in a phased manner instead of clustering issues towards the end of the year or relying on one big company for disinvestment proceeds.

“Weak market conditions put the government on the back-foot for conducting share sale. However, you cannot blame the government for the decline in equity markets. In the long run, the government needs to be more prudent regarding disinvestment and its plan in selling stake both in non-banking as well as banking PSUs,” said an investment banker with a top domestic bank who did not wish to be named as he is involved with the government’s disinvestment process.

“We are advising the government on future stake sale and coming out with better strategy,” the banker added.

For FY16 stake sale, the government created a pool of roughly 15-20 companies in which it would sell stake ranging 3% to 15% depending on market conditions and surprising the market. In addition, it nudged the Securities and Exchange Board of India (Sebi) to tweak OFS rules by reducing the time gap between the announcement and actual sale to one day instead of two days earlier. The move was aimed at avoiding short selling of PSU shares.

The government raised ₹ 12,700 crore during April-September, the best half-yearly collection in seven years, DoD data showed. But fears of hard-landing of China’s economy, devaluation of the Yuan and an increase in interest rates by the US Federal Reserve had muddied market sentiment and dampened the prospects of share sales by public and private companies.

Since the start of this fiscal year, the benchmark BSE Sensex has fallen nearly 13%.

46 listed PSUs lost 15.53% or ₹ 2.05 trillion in market value from the start of April 2015, BSE data showed.

The sharp fall in global crude oil prices, along with the decline in global equities, however, provided an alternative to the government as it raised excise duty on petroleum products and mopped up indirect tax collections to negate the shortfall in disinvestment receipts and direct tax collections, industry observers said.

The process of disinvestment in India was started in FY1991-92 by then finance minister Manmohan Singh with a view to bring in economic reforms and adopting liberalisation, privatization and globalization of the Indian economy.

Disinvestment is a process where a company or government organization will divest an asset or subsidiary as a strategic move for the company, planning to put the proceeds from the divestiture to better use that garners a higher return on investment.

However, data by the Department of Public Enterprises show that PSUs’ return on capital employed declined over the years to near its all-time low of 12.9% at the end of March 2014. This data is published with a one-year lag and the statistics for FY15 will be presented during the Budget session before both houses of Parliament.

The UPA-1 government missed its disinvestment target in FY2004-05, following which it refrained from setting any stake sale target for the next five years starting FY2005-06. During that period, the central exchequer raised Rs.32,068.87 crore by way of an initial public offerings (IPOs) of REC, Coal India Ltd, hydropower generation company NHPC Ltd, and Power Grid Corp. of India Ltd as well as follow-on offers in companies such as NMDC Ltd, NTPC Ltd and Oil India Ltd.

Last year, the government relied heavily on Coal India ( ₹ 22,557 crore)—the biggest equity offering in Indian capital market history—to reach closer to its disinvestment target that was revised downward twice during the year, but not achieved.