Rethinking Public Sector Disinvestment Strategy

 

RETHINKING CPSEs DISINVESTMENT POLICY

 

Creating a Sovereign Wealth Fund for

Better Asset Management and Privatisation

 

 

SUBHASH CHANDRA GARG

 

Economic, Financial and Fiscal Policy Strategist and Former Finance and Economic Affairs Secretary, Government of India

 

 

Universe of CPSEs Assets

There are two set of Central Public Sector Enterprises or CPSEs portfolio of assets- non-financial or real sector CPSUs and financial sector CPSUs. The Department of Public Enterprises publishes an annual survey of CPSEs. The Survey for 2018-19 was placed in the Parliament in February 2020. There were 348 CPSEs at end 2018-19 comprising 249 operating, 86 ‘under construction’ and 13 under closure/liquidation. 

Total capital employed in all the CPSEs as on 31^st March 2019 was Rs. 26.34 lakh crore. The CPSEs had total ‘financial investment’ of Rs. 16.41 lakh crore, including total paid capital of Rs. 2.76 lakh crore. The accumulated Reserves and Surpluses of CPSEs at Rs. 9.93 lakh crore made up the difference between the total capital employed and the total financial investment. The total net worth amounted to a little more than Rs. 12 lakh crores. 56 CPSEs were listed as on 31^st March 2019. Their total market capitalisation was Rs. 13.71 lakh crore which made up 9.08% of total BSE market capitalisation on that day.  

The 249 operating CPSEs earned gross revenues of Rs. 25.43 lakh crores. 178 CPSEs made profits aggregating net profits of Rs. 1.75 lakh crores. 70 CPSEs reported losses of Rs. .32 lakh crores. On the whole, CPSEs returned net profit of Rs. 1.43 lakh crores. 121 operating CPSEs declared and paid dividend of Rs. .72 lakh crores.

The total gross value added (GVA) of the CPSEs in 2018-19 amounted to Rs. 5.60 lakh crores as reported in the Survey. Adding back the indirect taxes paid of Rs. 1.84 lakh crore, the GVA was Rs. 7.14 lakh crores. In terms of the GVA, the CPSEs contribute only about 4% of the total GVA.

The workers earned salary and wages of Rs. 1.53 lakh crores, the Government got the taxes of Rs. 3.25 lakh crore and the rest of Rs. 2.36 belonged to the capital contributors (dividend, interest and retained earnings).

 

CPSEs On Terminal Decline

The CPSEs are commercial enterprises owned by Government. Most CPSEs have been entrusted to non-civil servant managers in the country, though some are run as departmental undertakings directly by the civil servants.

British organised first government enterprises of railways and post-offices which are still run as departmental undertakings. India did have only five undertakings which could be called central government enterprises at the time of independence.

The CPSEs grew massively to assume ‘commanding heights’ of the economy in pursuance of the policy of socialist pattern of society adopted by India after independence which muzzled the private sector and envisaged the public sector to grow in most important and capital-intensive segments of the economy.

The CPSEs grew organically and inorganically (by nationalisation) from 1950s to 1980s. The 2018-19 Survey classifies the CPSEs in 4 major sectors of a. agriculture, b. mining and exploration, c. manufacturing, processing and generation and d. services and 20 industry/services groups. More than half of the plus 25 lakh crores of gross turnover is contributed by Petroleum (refinery and marketing) (Rs. 13.84 lakh crores). Almost all of the operating CPSEs were set up before 1990.

The 1991 marked the watershed year for CPSEs. With every sector of economy being opened again for the private sector, the Government did not establish new CPSEs, except in financial and some other services. The CPSEs are losing share of value added every year.

There are a few sectors where CPSEs still have more than 50%. Coal mining, crude oil exploration and extraction, petroleum products marketing, railways and banking to cite the bigger ones. Even in these sectors, the share of CPSEs is contracting fast. In banking, CPSEs are losing market share at the rate of about 3% a year. In oil exploration, almost all new finds are in private sector and if the plans to privatise BPCL goes through, the presence of CPSEs in oil marketing would fast deplete.

The CPSEs are on a terminal decline.

From Investment to Disinvestment

In 1990s, after the era of economic liberalisation started, the public sector enterprises policy got reset from investment to disinvestment. In 1991-92 itself, minority stakes in 31 public sector undertakings were disinvested for a amount of Rs. 3038 crores. The policy of minority stake sale continued throughout 1990s with some amount being raised in 8 out of 9 years until 1999-2000.

The first Disinvestment Commission was set up in 1996 to place the process of disinvestment on more serious footing, including considering the cases for ‘strategic sale’ (another name for real privatisation, with the Government selling majority stake in the CPSE and the CPSE becoming a private entity thereafter). A separate Department of Disinvestment was set up in 1999.

The first strategic sale/ privatisation transaction took place in 1999-2000 when the Government realised first consideration of Rs. 105.45 crore. The strategic sale was the policy of the Government during first NDA Government when, the bulk of the privatisation transaction which have taken place till today, were concluded. Major CPSEs like Bharat Aluminium (BALCO), CMC Ltd., Hindustan Zinc, IPCL, Maruti Suzuki and VSNL were privatised.

The policy of strategic sale/ privatisation was stalled when the UPA Government came to power in 2004 with the Government reverting to minority stake sale. No privatisation transaction took place in the ten years of UPA Government (2004-2014).

The NDA Government adopted the policy of strategic sale in 2015. It has attempted to carry out a few transactions. However, there has not been a single success in last 6 years. All the strategic sales were the sale of Government stake in a CPSE to another or a group of CPSEs. In 2018-19, HPCL was sold to ONGC. In 2019-20, REC was sold to PFC. In 2019-20, there were three ‘strategic sale’ transactions (Tehri Hydro, North East Power and Kamarjar Port Ltd.). All three companies ended up being bought by other CPSEs. These transactions did not lead to any privatisation and therefore were not ‘strategic sale’, the Government did not even transfer management control to the buying CPSEs. In a way for the buying CPSE, it was only a financial investment with the real management control still remaining with Government.

The Government signalled real intent for real strategic sale in November 2019 when the Government announced strategic sale of three CPSEs- BPCL, CONCOR and Shipping Corporation. The Government, however, could not complete these transactions in the financial year 2019-20.

CPSE Index Not Recovered from Stock Market Rout of March 2020  

Equity prices fell like ninepins all over the world when the Covid-19 was declared pandemic and started spreading in many countries. India could not remain unaffected either. Indian stock markets lost over 35% of their market capitalisation in March 2020. COVID-19 shook the confidence of investors in equity. Many investors saw it as the end of the world. They wanted to simply sell at whatever price equities could be sold. Foreign investors sold over Rs. 61 thousand Crore of stocks in March 2020, which contributed to the free fall in share prices.

The Indian economy suffered its worst quarterly performance in Q1 of 2020-21 contracting by about 24%. However, the equity markets recovered decently and by September 2020, the equity markets are at pre-Covid levels.

The shares of listed public sector enterprises have, however, not recovered. S&P BSE CPSE index was at about 1000 in September 2020 whereas the index was around 1300 in February 2020. The CPSE index is about 1/3d lower than the levels it had about 5 years back and 40% lower than its five- yearly peak in 1017-18.

Many CPSE strong companies are quoting at their all-time lows or at levels which are 50% or less than their peaks.

March Sell-Off Disrupted Disinvestment Programme

Lynchpin of Government privatisation strategy has been to sell minor stakes in CPSEs by way of offer for sale (OFS) or creation of exchange traded index funds or making the CPSEs buy-back the shares. The success of strategy hinges around the prevailing market prices. If the market prices do not reflect true worth of a CPSE, the Government ends up selling the shares at undervalued prices.  

This March market turmoil post Covid-19 outbreak put the Government’s disinvestment programme in a complete disarray. The Government was forced to defer the disinvestment of shares planned for March 2020.  It seemed quite apparent in March that there was no likelihood of the disinvestment programme resuming for at least six months. Strategic sale of BPCL and two other companies- CONCOR and SCI- was derailed for some time at least.

The Government resumed minority stake sale with 15% stake sale in Hindustan Aeronautics Ltd. in August and Bharat Dynamics Ltd. in September. These issues could garner about Rs. 5700 crores. The Government could not sell planned 15% stake in Bharat Dynamics and could off-load only 12.82%. These are the only two transactions which could be done in first six months of FY 2020-21.

Four strategic sales were announced in FY 2019-20- BPCL, Air India, CONCOR and Shipping Corporation. Air India is in fact only for stopping the operating sclerosis. The Government would be writing off much of equity and almost all of the debt. The Expression of Interest for BPCL were first time invited on 7^th of March and have been postponed quite a few times. The last postponement is until September 30, 2020. The EOI for CONCOR has not been issued until now. The invitation for EOI for Shipping Corporation has been issued in August 2020. The Air India EOI date stands postponed till September end. None of the strategic sale has proceeded beyond issuing preliminary memorandum and there are no interests expressed as yet.   

The LIC stake sale, though only a minority stake sale, is another major item on the disinvestment agenda. The LIC stake sale would require quite a few amendments in the LIC Act. There are also major issues connected to the valuation of the LIC. The way matters are progressing, it is unlikely that LIC issue will take place in 2020-21.

2020-21 Might Prove to be a Washout Year for Disinvestment

The Government had decided upon the highest ever target of Rs. 2.1 lakh crores to be raised from the disinvestment proceeds in 2020-21. This was set at over four times of the actual receipts of only Rs. 50,304 crores in 2019-20. The 2020-21 targets are way above the best performances of Rs. 1,00,045 crores in 2017-18 and Rs. 94,727 crores in 2018-19.

With realisation of only Rs. 5695.63 crores thus far, strategic sale in the three target companies (BPCL, CONCOR and Shipping Corporation) not proceeding very well and LIC stake sale unlikely to materialise this financial, the target of 2.10 lakh crores seems to an impossible target. It seems that the Government would be at best able to sale BPCL this year and would be able to do some small minority stake sale. With BPCL, the Government might end up with about Rs. 70,000-80,000 crore of disinvestment revenue and without BPCL, the realisation might be only in the range of Rs. 20000-30000 crore. 2020-21 is likely to be a washout year for privatisation and disinvestment of public sector enterprises and banks.

Market Capitalisation of CPSEs

At the close on 16^th September 2020, the 58 non-financial CPSEs, listed on the stock exchanges, had a total market capitalisation was Rs. 9.46 lakh crores, which made up 6% of the total market capitalisation of 157.63 lakh crores on that day. None of these 58 CPSEs had market capitalisation in excess of Rs. 1 lakh crores and only 20 had market capitalisation exceeding Rs. 10000 crores. 10 CPSEs had market capitalisation of less than Rs. 1000 crore. Market capitalisation of the topmost private company in India- Reliance Ltd.- was close to Rs. 15 lakh crores. Market cap of Reliance exceeded market capitalisation of all the 58 non-financial CPSEs listed.

In the financial space, there are 12 public sector banks listed on the stock exchange in the middle of September. In addition, there were two non-bank finance companies- PFC and REC- and two insurance sector companies- GIC and New India Assurance. The market capitalisation of banks was Rs. 3.32 lakh crores in the middle of September and the two non-banks and two insurance companies had market capitalisation of a total of Rs. 45800 crore and Rs. 41397 crores. All the 16 financial sector companies put together had market capitalisation of 4.19 lakh crores. The market capitalisation of the largest private sector bank- HDFC Bank- alone exceeded Rs. 5.92 lakh crores.

Market capitalisation of SBI is respectable Rs. 1.74 lakh crores. Excluding SBI, the market capitalisation of remaining 11 public sector banks is only Rs. 1.58 lakh crores. The PSB with next highest market capitalisation is scam-ridden Punjab National Bank with market capitalisation of Rs. 30,930 crores. The desperate state of PSBs can be gauged by the fact that the market capitalisation of now-technically private IDBI Bank, which has the highest ratio of non-performing loans, at Rs. 38564 crores exceeded the market capitalisation of PNB.

Taking all the CPSEs- financial and non-financial together, the market capitalisation of 74 companies was Rs. 13.65 lakh crores. The market capitalisation of Reliance Ltd exceeded market capitalisation of all the 74 listed public sector- financial and non-financial- enterprises together.  

Minority Stake Sale Strategy is a Spent Force

Assuming approximately 2/3^rd of the share capital of the 74 listed CPSEs is held by the Government of India, the value of the shares attributable to the Government of India is about Rs. 9 lakh crores. At 80% shares held by the Government of India, the value attributable goes up to a little less than Rs. 11 lakh crores.

The first major realisation which needs to be accepted while designing appropriate divestment strategy is that there is not too much of juice left to be extracted if the Government were to retain 50% shareholding. At 50%, the value of Government’s shareholding comes to Rs. 6.82 lakh crores. If the total value of Government shares is about Rs. 9 lakh crores, there is only about Rs. 2 lakh crores which can be realised at best even if all Government stake beyond 50% in the 74 companies is sold off.

The actual situation is much worse. The Government shareholding in the ONGC, the company with the largest market capitalisation of about Rs. 92000 crores, is only 60.41%. In the second CPSE with largest market capitalisation, the Powergrid Corporation, with market capitalisation of Rs. 90,000 crores, the Government shareholding is only 51.34%. In NTPC also it is only about 51%. In the State Bank of India, with market capitalisation of Rs. 1.74 lakh crores, the Government stake is only 57.64%. It is the dud stocks with very low market capitalisation where the Government share is large, in many cases exceeding 90%.

These shareholding patterns bring out the stark fact that the GOI is not left with much shareholding above 50% in the most capitalised CPSEs. The four companies cited above have more than 35% of the total market capitalisation. In these companies, the Government is left with only about 5% of total market capitalisation or about Rs. 25000 crores.

The policy of minority stake sales will not lead anywhere in times to come.

Selling Stakes Below 50% Retaining Management Control has not Worked Either

The Government announced in the Budget 2019-20 that the Government would be open to “to below 51% to an appropriate level on case to case basis” retaining management control where felt necessary. The went further to say that “Government has also decided to modify present policy of retaining 51% Government stake to retaining 51% stake inclusive of the stake of Government controlled institutions.”

The major policy departure signalled in the Budget 2019-20 announcement was threefold deviation from the earlier policy of selling only the minority stake. First, the Government was open to make strategic sale or privatise by going below 51% stake, which included selling complete stake as well. Second, wherever the Government felt it necessary to retain management control, it could go below 51% but retain management control. Third, the Government was also agreeable in policy to apply 51% threshold taking the composite stake of Government and the Government controlled institutions in consideration.

The Government, by announcing total stake in BPCL, after taking out the Numaligarh Refinery, stake sale of 30.8% out of total stake of 54% in CONCOR and entire stake of 63.75% in Shipping Corporation, rolled out the first part of the policy i.e. stake sale with management control by divesting total or retaining less than 26% stake. The Government has been separately attempting to sale all its stake in Air India for quite some time.

The other two components of the policy i.e. considering stakes of Government and Government controlled institutions together for the purpose of 51% stake and going below 51% but retaining management control seem to have been abandoned. Instead, the policy seems to be shifting to total stake sale, without retaining management control.

Rehashing the Debate About Privatisation of Non-Strategic PSUs

Finance Minister spoke about a new PSU Privatisation policy, as part of her announcements under the so-called Aatmnirbhar Stimulus Package of 21 lakh crores in May 2020. She stated that the Government would privatise public sector enterprises in “non-strategic sectors”. She further announced that a list of strategic sectors would be announced soon. She stated that in strategic sectors only one to four public sector enterprises would remain.

The Government has not announced strategic sector until now. There was speculation in media in August 2020 that the Government had identified 18 sectors as strategic. The whole debate about “strategic” and “non-strategic” sector is phoney and would only result in diversion and waste of time.

In the socialistic pattern of society era of 1950s to 1980s, the industrial policy resolutions enforced by the Industrial Development and Regulation Act (IDRA) and licencing policies, had identified several sectors as “strategic” in which only public sector was permitted to establish new enterprises. Those were the strategic sectors for the economy. It led to a massive de-privatisation of Indian industry and economy with adverse impact for country’s growth and development. These policies and laws have been gradually done away with. From the list of several sectors identified as strategic, there are only two sectors which remain classified as strategic under industrial policies and laws of the country.

What can be the new class of strategic sectors for CPSEs and why?

The CPSEs Survey classifies the CPSEs in 4 sectors and 20 cognate groups. The 20 groups are agro-based industries in the agriculture sector, coal, crude oil and ‘other minerals and metals’ in mining and exploration sector, steel, petroleum (refinery and marketing), fertilisers, chemicals and pharmaceuticals, heavy and medium engineering, transportation vehicle and equipment, industrial and consumer goods, textiles and power generation in the manufacturing, processing and generation sector and power transmission, trading and marketing, transport and logistics, contract and construction and technical advisory services, hotel and tourist services, financial services and telecommunication and information technology in the services sectors.

The first question which needs to be discussed about strategic sector is whether the Government is looking for a sector from the strategic perspective for the economy or for the CPSEs? The economy wide approach for identifying the strategic sectors has been abandoned in last thirty years and with good results. In each of the 20 groups recorded in CPSE survey, private sector has come very strongly as noted above and the public sector is fast losing the market share. Therefore, the presence of CPSEs cannot serve any exclusive national objective in the any of these economic sectors.

What can be a strategic purpose from the CPSE perspective? No CPSE wants to be privatised. If you ask the management of CPSE and the administrative ministries which control them, every sector is strategic. Power Ministry would argue that power generation, power transmission and even power distribution is strategic. Public Sector Banks which are not doing the function of lending and are increasingly getting drowned in the non-performing loans would without any doubt be argued as strategic by the Department of Financial Services. When the Government has permitted private sector refiners and is offering BPCL, which has considerable refinery and distribution capacity, to be privatised, how can oil refining and marketing can be strategic? When the power sector generation is primarily taking place in the renewable sector and in the private sector, how can the power generation be strategic? Is telecom strategic to retain MTNL and BSNL in the public sector when the proportion of subscribers they serve is less than 10%.

There is no sector in which CPSEs are operating which is strategic? There is no CPSE which is strategic? There is no objective criterion which can be evolved to define any sector or CPSE as strategic? It will lead nowhere. Of course, if you don’t want to privatise any particular CPSE, you can always call it strategic subjectively? There is no need for such an excuse, it is the sovereign power of the Government to decide not to privatise any particular CPSE- for justifiable or unjustifiable reasons.

The intent to keep from one to four CPSEs in a sector identified as strategic is more bizarre. In the first stage, no sector is really “strategic”. Second, even if one can find the “strategic” sector, what on earth can justify up to four enterprises? Is there a need for competition amongst the CPSEs when they are run almost under similar policies?

It will be in the national interest to stop doing these kinds of exercises and get on the task of privatising the CPSEs.  

Creating a Sovereign Wealth Fund to Manage Public Sector Assets Better

There is need for a completely new approach for asset management and divestment of public sector undertakings.

There are several reasons to rethink the public sector asset management and disinvestment strategy. First, the stock markets do not perceive good value in CPSEs and the market sees such oversupply coming from the Government as a big drag. The Government has to make better offerings to the stock markets. Second, the biggest drag on the CPSEs performance is their administrative control by the administrative Ministries and passing on all kinds of directions and instructions of non-commercial nature to the CPSEs. The way PSBs have been micro-managed and directed to do things is the big reason for their non-professional and non-commercial functioning. Same applies to power and many other PSEs. Third, there is no professional management overseeing and directing the functioning of PSEs and PSBs.

All these big shortcomings can be changed if the Government of India were to create an Indian Sovereign Wealth Fund (ISWF). This Fund can be created by transferring the Government of India stakes in all the listed companies and also commercially valuable unlisted companies. There are more than 80 real sector public sector entities like IOC, GAIL, NTPC etc. and financial sector entities like public sector banks and insurance companies with market capitalisation of over 13.5 lakh crores. The stake of the Government in these companies is around Rs. 9 lakh crores. The market capitalisation of unlisted entities, including companies like LIC should also be about Rs. 10-12 lakh crores. With combined potential Government capital valuation of about Rs. 20 lakh crores, or about $275 billion, the sovereign wealth fund (SWF) would have an enormous heft.

Such a powerful and well capitalised SWF will be able to borrow from the market large amounts, in excess of Rs. 10 lakh crores easily in case there are good investment opportunities. This war-chest can be used to buy equities and assets of long-term interest to the country domestically and abroad. Such a vehicle can also be used to support the market during big crises like the one witnessed in March 2020 on account of Covid-19. Such investments can be expected to generate excellent returns for the SWF when the tide turns and the assets come to fruition.

Creation of SWF would continue to serve the two financial objectives which the CPSEs serve for the Government presently- paying dividends and realisation of capital proceeds upon disinvestments. The Government gets about Rs. 50000 crores as dividends and has averaged about Rs. 80000 crores in last three years as disinvestment capital receipts.

With better management, the SWF would be expected to earn more dividends for the Government, which will get only routed through SWF instead of coming from the CPSEs. The objective of generating disinvestment revenues can be served by selling a part of its stake in the SWF. Assuming that SWF will have valuation of at least equal to the value of equities transferred to the SWF, the valuation of SWF would be at least about Rs. 20 lakh crores. By selling a 5% stake in the SWF, the Government can generate more than Rs. 1 lakh crore every year as disinvestment resources.

The SWF can become the vehicle for a very professionally run public sector asset management and divestment programme in India. For this to be a reality, the SWF will have to be entrusted to real investment professionals for management, something on the lines of assets managed by professionally run SWFs like TAMASEC or Private Equity firms like Blackstone.  

There will need to be some administrative re-alignment in the Government of India to make this happen. The administrative control of the Ministries and Departments over the public sector entities, including the Department of Financial Services, would need to be ended. The Department of Public Asset Management (DIPAM) would also not be required. All the listed companies and even the unlisted ones like LIC today are not monopolies in their space. These CPSEs compete with the private sector. There is no social or public purpose being serviced by these companies when managed by the concerned administrative Ministries. These companies need to be managed as efficient business entities. The SWF would ensure that the management of these companies is truly professional. As and when the SWF determines that investment value in a particular company is optimum for it to be sold, the company concerned could be fully divested.

Conclusion

The management control of CPSEs in the administrative ministries and divestment strategy followed so far have in fact contributed in evaporating the market capitalisation of the CPSEs. With very little of the Government stake left above 50% in most of the profitable and large market cap CPSEs, the policy of minority stake sale cannot yield anything meaningful going forward. Exploration of the policy option of retaining one to four CPSEs in strategic sectors is also not going to lead to anywhere. The real effective solution for public sector asset management and privatisation at appropriate time is to create a Sovereign Wealth Fund by transferring all the Government stake in the listed CPSEs and also valuable unlisted entities. The Sovereign Wealth Fund would not only deliver dividends higher than what the Government has been getting in last few years, but would also provide a consistent capital receipts by selling a minority stake in the SWF. The arrangement would also yield the best value when the companies, after creating value by better professional management, are privatised at appropriate times.

 

SUBHASH CHANDRA GARG

NEW DELHI 18/09/2020