Definition of Disinvestment

At the very basic level, disinvestment can be explained as follows:

“Investment refers to the conversion of money or cash into securities, debentures, bonds or any other claims on money.

As follows, disinvestment involves the conversion of money claims or securities into money or cash.” 

Disinvestment can also be defined as the action of an organisation (or government) selling or liquidating an asset or subsidiary. It is also referred to as ‘divestment’ or ‘divestiture.’

In most contexts, disinvestment typically refers to sale from the government, partly or fully, of a government-owned enterprise.

A company or a government organisation will typically disinvest an asset either as a strategic move for the company, or for raising resources to meet general/specific needs.

Objectives of Disinvestment

The new economic policy initiated in July 1991 clearly indicated that PSUs had shown a very negative rate of return on capital employed. Inefficient PSUs had become and were continuing to be a drag on the Government’s resources turning to be more of liabilities to the Government than being assets. Many undertakings traditionally established as pillars of growth had become a burden on the economy. The national gross domestic product and gross national savings were also getting adversely affected by low returns from PSUs. About 10 to 15 % of the total gross domestic savings were getting reduced on account of low savings from PSUs. In relation to the capital employed, the levels of profits were too low. Of the various factors responsible for low profits in the PSUs, the following were identified as particularly important: 

• Price policy of public sector undertakings
• Under–utilisation of capacity
• Problems related to planning and construction of projects
• Problems of labour, personnel and management
• Lack of autonomy 

Hence, the need for the Government to get rid of these units and to concentrate on core activities was identified. The Government also took a view that it should move out of non-core businesses, especially the ones where the private sector had now entered in a significant way. Finally, disinvestment was also seen by the Government to raise funds for meeting general/specific needs.

In this direction, the Government adopted the 'Disinvestment Policy'. This was identified as an active tool to reduce the burden of financing the PSUs.

The following main objectives of disinvestment were outlined: 

• To reduce the financial burden on the Government
• To improve public finances
• To introduce, competition and market discipline
• To fund growth
• To encourage wider share of ownership
• To depoliticize non-essential services

Importance of Disinvestment

Presently, the Government has about Rs. 2 lakh crore locked up in PSUs. Disinvestment of the Government stake is, thus, far too significant. The importance of disinvestment lies in utilisation of funds for:

• Financing the increasing fiscal deficit
• Financing large-scale infrastructure development
• For investing in the economy to encourage spending
• For retiring Government debt- Almost 40-45% of the Centre’s revenue receipts go towards repaying public
  debt/interest 
• For social programs like health and education

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 value of the public assets making it critical to disinvest early to realize a high value.

Types of Disinvestment

Disinvestment can be classified into the following types :

1. Minority disinvestment
2. Majority disinvestment

Minority disinvestment

• It is a type of disinvestment where the government retains a majority stake in the company, mostly greater than 51%, and ensures that the management control stays with the government.
• Minority disinvestment of institutions started in the early and mid-90s. Some of them were Andrew Yule & co. Ltd., CMC Ltd, etc.
• Examples of minority disinvestment by the offer for sale include recent issues of Power Grid Corporation Of India Limited, Rural Electrification Corporation Limited, NTPC Limited, NHPC Limited etc.
• The government also came up with the policy that for the financial year (FY) 2018-19 all the disinvestments would only be through minority disinvestments through public offerings.

Types of Minority Disinvestment

Disinvestment of a minority stake in a PSU can be carried out in the following ways:

Initial Public Offering (IPO)

• It is an offer of shares by an unlisted PSU to the public for the first time.
• It refers to offering shares of a private entity to the public in a new stock issuance and allows a corporation to raise capital from public investors.

Follow-on Public Offering (FPO)

• It is also known as Further Public Offering as it is an offer of shares by a listed PSU. A follow-on public offering (FPO) is the issuance of shares to investors by a company that is listed on a stock exchange.
• It is the issuance of additional shares offered by a company after an initial public offering (IPO). They are also called secondary offerings.

Offer for sale (OFS)

• It is when the shares of a PSU are auctioned on the platform provided by the stock exchange.
• This mode of minority disinvestment has been used extensively by the government since 2012.

Institutional Placement Programme (IPP)

• It includes only the selected financial institutions that are allowed to participate and the stake involved of the government is offered only to such institutions.
• For instance, mutual funds, insurance, and pension funds such as LIC are included in the Institutional Placement Programme.

Cross-holdings

• In this method of disinvestment, one listed PSU takes up the government stake in another listed PSU.
• It can result in double-counting, where the equity of each company is counted twice when determining value, which can result in estimating the wrong value of the two companies.

CPSE Exchange Traded Fund (ETF)

• Through this mode of disinvestment, the government can divest its stake in various PSUs across diverse sectors through a single offering.
• It enables the government to monetize its shareholding in those PSUs which form part of the exchange-traded fund ETF basket.

Majority disinvestment

• It is a type of disinvestment where the government, post disinvestment, retains a minority stake in the company, and completely it sells off its majority stake.
• Generally, majority disinvestments have always included strategic partners. These partners could be other CPSEs themselves, such as BRPL to IOC, and KRL to BPCL.
• Strategic partners in majority disinvestment could also be private entities such as the sale of Modern Foods to Hindustan Lever Limited, CMC to Tata Consultancy Services Limited (TCS).
• In the case of majority disinvestment instances, the stakes can also be offloaded through an offer for sale, separately or in conjunction with a sale to a strategic partner.

Types of Majority Disinvestment

Disinvestment of a majority stake in PSUs can be done in the following ways:

Strategic sale

It involves the sale of a major portion of government shareholding which can be 50 percent or higher in a PSU along with the transfer of management control.

Privatization

It is a type of strategic sale in which the government divests its entire shareholding, along with the transfer of management control to a private entity.

Means of Disinvestment

Disinvestment of a minority stake in a Government-owned entity is done in one of the following ways:

1. Initial Public Offering (IPO)
2. Follow On Public Offer (FPO)
3. Offer For Sale (OFS)
4. Institutional Placement – Government stake is auctioned off to select financial institutions
5. Exchange-Traded Funds (ETFs) – Monetize shareholding simultaneously across multiple sectors and companies that form a constituent of the ETF. For example, Bharat-22 is an ETF comprising of 22 companies (19 PSUs) with a Government stake in them.
6. Cross-holding – Listed PSUs are allowed to buy a Government stake in another PSU

Disinvestment v/s Divestment

Divestment and disinvestment are terms used interchangeably. However, there is a slight point of difference between the two.

Disinvestment in an asset, or division, or stake is typically carried out without the intent of reinvesting capital back into the same entity. Divestment, on the other hand, is generally done temporarily to deal with say, tight finances, or social/political pressures that may arise as a result of certain business activities. While disinvestment might also mean selling off the entity in its entirety, divestment only means the reduction of investment.

Disinvestment v/s Privatization

Privatization is the partial or complete sale of Government-owned assets to a privately held firm or a group of individuals where the Government gives up majority control to the buyer of assets. Privatization can be done by:

• Stake sale of Government-owned equity in PSUs
• Lifting regulations restricting private participation in Government-regulated industries
• Offering public services contracts to private corporations
• Offering subsidies on various business activities

Disinvestment policy of the Government

Department of Disinvestment used to be an independent ministry in the cabinet. However, the ministry in 2004 was merged into the Ministry of Finance but remained an independent department. Later in 2016, under the BJP-led Government, the Department of Disinvestment was renamed as Department of Investments and Public Asset Management (DIPAM).

DIPAM is primarily concerned with the management of Central Government equity stake in public sector undertakings (PSUs) and conducting disinvestment activities as per the yearly targets set by the Finance ministry.

Every year, the government sets a disinvestment target in the budget for the coming fiscal year, and disinvestment is carried out according to the planned amount. FY22 disinvestment target is set to Rs. 1.75 lakh crore, which is less than the disinvestment target of Rs. 2.1 lakh crore set in FY21.

The features of the disinvestment policy in India as per DIPAM are as follows:

• Promote public ownership of CPSEs to ensure and further accountability to the public of India by pursuing minority disinvestment or strategic disinvestment
• Meet the minimum public shareholding threshold of 25 percent for every listed CPSE through an OFS or FPO or a combination of both
• CPSEs which have no accumulated losses and have returned a net profit for the preceding three consecutive years have to be listed
• Disinvestment to be discussed for CPSEs on a case by case basis where identifications of CPSEs for divestiture will be done following consultation with respective ministries administering such CPSEs
• OFS of Government equity proposals will be assessed by the Government
• Niti Aayog, the Government think tank, is to be considered an important party overseeing discussions of strategic disinvestment proposals and means
• Niti Aayog will recommend CPSEs requiring strategic disinvestment, mode of sale, percentage of stake to be disposed of, and valuation of such CPSEs

National Investment Fund (NIF), originally formed in 2005, received all the proceeds of disinvestment of CPSEs. NIF was set up as a permanent fund and professionally managed to meet the two-fold objective of – promoting social welfare schemes (75 percent of the fund corpus) and meet capital requirements of productive PSUs (25 percent of the fund corpus). However, after having exhausted the fund following the financial crisis of 2008 toward social welfare, the fund was re-aligned in 2013 to the disinvestment policy of the Government. NIF presently exists as a ‘Public Account’ under the Government Accounts and is withdrawn/invested only for pre-approved purposes of:

• Participate in rights issues of listed CPSE to maintain majority control
• Subscription to CPSE allotment of preferred equity to maintain Government shareholding of 51 percent
• Recapitalization of PSBs and public sector financial institutions as and when the need arises for capital infusion
• Capital infusion in metro projects
• Investment in development institutions such as NABARD, Exim Bank, RRBs, etc.
• Meet the CAPEX requirements of Indian Railways

Disinvestment Examples

Big-ticket disinvestments in the pipeline

Air India Disinvestment: The Government offered to sell a 76 percent stake in the state-owned airliner in 2018. However, it could not receive a successful bid then. The Government reopened their process this year in January, this time with intention of disinvesting completely.

The disinvestment will involve a 100 percent sale of the Government’s shareholding in the company, including Air India Express Limited and Air India SATS Airport Services. The issue at hand is that the company is neck-deep in debt.

The Government has already transferred 50 percent of the company’s liabilities and debt to another special purpose entity and plans to reduce further debt to attract bids for the company. The total transfer of liabilities and debt currently stands at Rs 30,000 crore, leaving only about Rs 23,000 crore of debt on the balance sheet.

In addition, the bidder can now decide how much debt they are willing to take on; it could be zero as well. The debt level that was pre-fixed earlier has now been unfettered and therefore, EV (enterprise value) bidding can now take place.

With pandemic in the picture, Air India has suffered huge operational losses worsening financial health. Keeping this in mind, the government has already, by the end of the second quarter, provided Rs 1000 crore to the troubled airline, having incurred a loss of Rs 2750 crore in the quarter ended June 2020.

The response, after these tweaks, has been enthusiastic, with the government receiving several expressions of interest (EoI) for the troubled airline. The foremost bidder has been the Tata Group, which has a sentimental value attached to the airline since Air India emerged out of Tata Airlines in 1946.

The other bidder is a consortium of Air India employees and Interups Inc. The bid propounds to provide a 51 percent stake to the employee association that include 219 staffers and the remaining, 49 percent stake, goes to Interups Inc.

Life Insurance Corporation of India: The Government announced the disinvestment in the largest insurer of the country this year. LIC holds approximately 69 percent of the market share. LIC disinvestment is a unique case as disinvestment in the state-owned insurer will demand amendments to the LIC Act. LIC Act governs several operations of the company, such as the transfer of surpluses, government guarantee on policies, etc.

Sources close to the matter say that the Government may be looking to sell a 25 percent stake in the company. However, the 25 percent sale will be achieved in stages with the first stage only offering a 5 percent sale. The expectation from the 5 percent sale is to raise over Rs 50,000 crores. The Government has appointed Deloitte and SBI Capital markets as their transaction advisors, which is the first step of the disinvestment process.

BPCL Disinvestment – In November 2019, the government of India announced the disinvestment of 5 public sector units (PSUs), which included cutting the majority stake in Bharat Petroleum Corporation of India (BPCL) and Shipping Corporation of India (SCI). Along with these two PSUs, the government also announced its 31% stake sale plans in Container Corporation of India (CONCOR).

According to a memorandum put out by DIPAM, Ministry of Finance, BPCL is the second-largest oil marketing company in India cornering a market share of around 21 percent in FY19.

The company also has the third-largest refining capacity in the country. The central government intends to sell its entire stake of 52.98 percent in BPCL. However, this excludes BPCL’s 61.65 percent stake in Numaligarh Refinery Limited.

The government has received three EoIs including one from Anil Aggarwal’s Vedanta and one each from two international funds (Apollo Global Management and Think Gas promoted by I Squared Capital). The expression of interest would be used to pre-qualify the interested parties. Those who qualify would then be allowed to participate in the next stage.

Shipping Corporation of India (SCI) – The government on 22^nd December 2020 invited bids to sell its 63.75 percent stake in SCI, along with transfer of the management control. The deadline to submit the initial bid had been set for 13^th February 2021. The stock has zoomed around 75 percent over November 2020, on reports that several domestic and global players are in the fray to participate in the privatization process.

At the current market price, the stake of the government in SCI is valued at more than Rs 3000 crore. The divestment process in SCI is being implemented through a competitive bidding route. The PIM (preliminary information memorandum) for the invitation can be download from the DIPAM website.

The Cabinet Committee on Economic Affairs (CCEA) also cleared the sale of the entire stake in Tehri Hydro Development Corp of India (THDC) and North Eastern Electric Power Corporation (NEEPCO) to NTPC. With this, the government set an ambitious target of raising Rs 1.05 lakh crore in FY20. But due to the Covid-19 pandemic, the government had to extend the deadlines to submit the Expression of Interest (EoI), thus failing to raise the targeted 1.05 lakh crores.