Management Perspectives

Disinvestment of shareholding and privatisation of public sector undertakings in India, spanning over the last two and half decades, is a mission that did not get accomplished. It was a frontline manifestation of the paradigm shift in the planning process towards national development that the government need not be in business and need only be a facilitator, the dictum still holds true with the present union government.

Public sector industries are a legacy of the Nehruvian model of state-controlled socialist model of overall national development. An immediate fallout of the liberalisation era is that governmental intervention is more needed to build public infrastructure rather than getting into the business through industrial activity and therefore shall eventually get out of it. Even after two and half decades of the onslaught on these enterprises, still, many of them are operating well and are profitable without any support - financial or policy level- from the owner, the government of India. During the financial year 2019-20, all CPSEs contributed Rs 3,76,425 crore to the central exchequer by way of excise duty, customs duty, GST, corporate tax, interest on Central Government loans, dividends, and other duties and taxes.

Contrary to the popular myth that the employees of the under-performing PSEs are fed on the poor man’s tax money and thus perpetuate inefficiency in these entities, the government’s budgetary support to PSEs for the last over two decades was meagre and that too intended only to build assets.

Though the disinvestment process was started by the Congress government in the 1990s at the start of the liberalisation initiative, it was during the times of the Vajpayee government that the disinvestment process gained momentum and was promoted by instituting a separate ministry in the central government under a cabinet ranking Minister. Since then, invariably, the Union Budget proposals earmarked a certain income on the revenues side arising out of the sale of public sector assets or disinvestment of its shares. But the proposed target is very often missed during most of the years.

Why are public sector industrial units put up for sale in India not attracting bidders? Though, the exact reason is unknown, one is fairly confident that it is not due to any market-related or operating issues or any other business-related aspects. Even those public enterprises operating in front-running or niche technology areas such as VSNL, IPCL, PPL, etc, were sold to the private sector at throwaway prices.

In our country, public sector industries, right from the inception of these units they are intertwined with certain social objectives such as balanced regional economic development, generation of employment, utilisation of domestic raw material, catering to the basic needs of the local community, upliftment of the historically underprivileged sections of the society through job reservation, etc. Of late, the necessity to support the social-economic development of the local communities in which these industries operate has become a mandatory requirement with the enactment and introduction of Section 135 in the Companies Act 2013. Corporate Social Responsibility (CSR) is a means through which a company incorporates environmental, social and human development concerns into its planning and actions to ensure that its operations are ethical and beneficial for society. Such sharing of social burden is not a mandatorily attributed responsibility of the corporates operating elsewhere and they are allowed to function as pure industrial and business entities.

Public sector units put on sale by the government of India are not attracting prospective bidders, also on account of the established social commitment thrust on the units. As the governments failed to attract prospective bidders for these units, it started relaxing the conditions of sale as well as disinvestment. Still, it barred government agencies to bid for them. An official memorandum of the government states that, as a general policy, PSEs (Central/ State/Joint)/State Government/Co-operative Societies controlled by the governments are not permitted to participate in the strategic disinvestment or privatisation of other PSUs as bidders unless otherwise specifically approved by the Central government.

The Modi government revised its public sector enterprises policy in 2021 in which it was proposed that the central PSEs shall maintain a minimal presence in four strategic sectors only—atomic energy, space and defence; transport and telecommunications; power, petroleum, coal and other minerals; and banking insurance and financial services. In all other sectors, central PSEs will be fully privatised, merged, or considered for closure.

The government also brought the Department of Public Enterprises (DPE) under the Ministry of Finance from the Ministry of Heavy Industries and Public Enterprises to expedite and facilitate a smooth transition of PSEs from state-run entities to private companies.

Following the above policy, Finance Minister Nirmala Sitharaman in the 2021 Union Budget has set an ambitious target of Rs 1.75 lakh crores to be raised through this route. An intensive campaign was initiated under the aegis of the ministry of disinvestment and the Niti Aayog to fast-track the sell-out of public sector units. Sensing the mood of the market which was not at all receptive, the target was later revised to Rs 78,000 crore only. According to the Department of Investment and Public Asset Management (DIPAM), the total receipts on account of disinvestment stood at Rs 13,561 crore on 31 March, 2022, which is Rs 1.61 lakh crore less than the original budgeted target.

Subsequently, in contrast with the tradition of setting ambitious divestment targets, the revenue generation budgeted in the 2022 budget was only Rs 65000 crore. The government has also not accounted for any receipts from the disinvestment of government stake in public sector banks and financial institutions during this year. The government, last year, expected to complete big-ticket privatisation proposals such as Air India, Bharat Petroleum Corporation (BPCL), Shipping Corporation of India (SCI), Bharat Earth Movers Ltd( BEML) , Projects & Developments India Ltd (PDIL), National Mineral Development Corporation (NMDC) and launch of the LIC IPO. But the second and the third wave of Covid-19 pandemic delayed the process.

Early this year, Air India, the much-acclaimed nation’s airline was taken over by Talace Private Ltd, a Tata Group subsidiary, through a bidding process for Rs 18000 crore. Management control of the airline was officially handed over to the Tata group by the Department of Investment and Public Asset Management (DIPAM).

Two other PSUs—Central Electronics Ltd and Pawan Hans Ltd—already privatised are not handed over to the successful bidders following cases pending before the National Company Law Tribunal (NCLT).

In March 2020, the government floated bids for selling its 54 per cent stake in BPCL for which three bidders expressed interest in acquiring its stake. Later with the withdrawal of two parties, a single bidder was left. Thereafter, the government has put on hold the disinvestment process till such time the ongoing expansion plans in its units are completed.

BPCL which owns the largest refining capacity in the public sector is an ever-profit-making company that also undertakes a number of social development initiatives through its CSR and other programs. For prospective bidders, this is a burden on the industry. Moreover, the future of the oil and gas industry, in the wake of advancing the decarbonisation agenda aiming at global carbon neutrality by several countries, is at stake and this thinking has also added an element of unattractiveness to the buyers.

Nobody would like to invest hard-earned money in a unit unless it is confident that the operation will generate sufficient revenue and profit at least for the next couple of decadesa proposition not guaranteed enough in the present circumstances.

All of the above clearly indicates that the government has not been successful in the past years to disinvest or sell out public sector units at fair prices through ministerial efforts. It is in this context that the government of India has recently decided to empower the board of directors of the PSE companies to recommend strategic divestment, minority stake sale or closure of their subsidiaries and joint ventures.

PSE boards hitherto had authority only to make equity investments, undertake mergers and acquisitions subject to certain ceilings of net worth and suggest minority stake sales for some PSEs, but no powers extended to them for disinvestment and closure of their subsidiaries.

The principles of competitive bidding have been suggested as the basis and the DIPAM is to set the guidelines for disinvestment and DPE to work out the closure guidelines.

The Union Cabinet has also empowered an alternative mechanism that comprises Finance Minister, Minister of Roads, Transport and Highways, and Minister of Administrative Ministry to grant ‘in principle’ approval for the process. This is in line with the COPU recommendations of 2018 which stated that PSEs’ boards must be sufficiently empowered to take strategic decisions such as the formation or dissolution of partnerships, JVs, mergers and acquisitions, the appointment of CEO and the creation of below-board level positions.

The procedural change above is indicative of the waning of the disinvestment process itself. Will the bureaucrats and professional directors of PSEs who are its custodians only for a certain period and who are mandated to optimally operate and manage them succeed in the disinvestment process where the administrative ministry that owns the unit did not fare well enough all these years, indeed, is doubtful. In fact, public sector enthusiasts have been demanding more autonomy to boards in order to professionally manage them and undertake expansion and diversification depending on national aspirations and market situation and not to dissolve through disinvestment, sell-off and closure. While it is more important who bids for the units rather than who recommends them, the above empowerment seems intended to distribute the responsibility of decision-making to the operator’s level.

Disinvestment protagonists argue that the government’s protectionist measures like Atmanirbhar Bharat, a copy of the Nehruvian model of self-reliance and the production liked incentive (PLI) schemes, which sets a minimum economic capacity beyond only which incentive is applicable, are remnants of the policy followed during the industrial licensing era and prevent the domestic industry to become globally competitive. Tariff protection given to domestic manufacturers denies access to cheap import of products to be used as either raw material or intermediates for the domestic consuming industry and thus renders their products uncompetitive in the global market. An even approach in this regard for our country would be to just remove all barriers to globalisation. If the above argument is adopted it will, no doubt, instantly pave way for deindustrialisation in several sectors.

Despite strenuous efforts by the central and state governments, still, our country has not become a sought-after investment destination. In line with the World Bank, India has also stopped classifying the investment friendliness of states in terms of ease of doing business (EoDB). It is replaced with Business Reforms Action Plan (BRAP) in 2020. Unlike the earlier evaluation of EoDB based on one uniform ranking, the BRAP assessment categorised States into top achievers, achievers, aspirer, and emerging business ecosystems. The evaluation is mostly on policy aspects and does not take into account site-specific advantages in terms of the availability of land, raw materials, utilities, trained manpower etc. We shall wait to see how situations change under the new scheme.

Rising energy costs, the Ukraine war and inordinate project delays have tremendously devastated the government finances. In the matter of fertilizer subsidy alone, the estimated additional burden during this fiscal would be R1.5 lakh crores. As things stand today, the disinvestment of CPSEs can’t be expected to bring a substantial contribution to the government’s kitty.

Nobody can deny the fact that during Covid-19, PSEs have steadily and effectively aligned with the government in several ways and built new models to mitigate its devastation and minimise the economic downturn. This gives new hope. If restructured professionally with a clear vision and strategy, the PSEs shall definitely contribute to balancing the fiscal situation and achieving a renewed growth of the national economy. The Independent Evaluation Group of the World Bank also has endorsed a similar viewpoint.

In the coming months, the situation will become clear and if the renewed strategy does not yield the desired result, the government will take cognizance of the overall global experience in disinvestment and privatisation, especially in the light of the Ukrainian war, the likely economic sanctions from the developed world while governments pursuing independent policies and as atma-nirbharatha demands, reverse its gears to drastically improve the efficiency of PSEs and enable them, by all means, to contribute to the national economy.