By moderator July 9, 2019 11:41

The Big Picture – Disinvestment for Development

The government will reinitiate the process of divesting its stake in national carrier Air India, even as it increased its disinvestment target in the Union Budget 2019-20 presented by Finance Minister Nirmala Sitharaman. The target for disinvestment receipts has increased to Rs 1.05 trillion for FY20, from Rs 90,000 crore in the interim Budget presented in February. Significantly, the finance minister said that the government’s stake in non-financial public sector units can go below the majority stake of 51 percent. Instead of holding a direct stake of 51 percent in PSUs, “government-controlled institutions” can chip in the remaining sum which the government will look to divest. This move will enable the government to retain control over such firms. The Finance Minister reiterated that the government will make sure that its control is not diluted after lowering its stake in public sector undertakings (PSUs) to below 51 percent. The government will also continue with the strategic divestment of select Central Public Sector Enterprises (CPSEs).

What kinds of disinvestments are done?

  • The government follows different disinvestment strategies like strategic disinvestment, Exchange Traded Funds (ETF) and Offer for Sale (OFS).
  • Strategic disinvestment – It means divesting the majority share of a firm over 50% which implies transferring the ownership and control of the firm to the buyer. In other words, it can be called privatization.
  • Exchange Traded Funds –ETF is a bunch of certain percentage of shares of different firms put together in a certain proportion. It is then listed on the stock exchange and then made available for sale. The government is able to keep control of the PSUs in this method and also sell shares irrespective of the shares being that of a good or a bad PSU.
  • Offer For Sale (OFS) – It is used only when existing shares are put on the block. Only promoters or shareholders holding more than 10 percent of the share capital in a company can come up with such an issue.
  • In addition to the above existing methods, the Finance Minister has announced one more method of holding control indirectly rather than directly.

Why is it important that the government has a controlling stake?

  • The government needs to have a controlling stake in the financial institutions for management purpose as they have control over the economy.
  • Other institutions in which the government has a controlling stake include the institutions whose goods are largely consumed by the public like the railways or which have an impact on the sector like Air India on the aviation sector.
  • The controlling stake of the government, directly or indirectly, helps in easy implementation of policies desired by the government. It implies that they won’t be any backlash from other minority shareholders in deciding the policies.
  • It is also necessary that the government provides the required funds for the implementation of policies so that these companies can compete with their peers in the same field.
  • Once the companies become competitive and sustainable, the government may divest its controlling stake in the company.
  • Government’s stake is also required in fields where the private sector finds it difficult to enter. The government needs to keep the controlling stake in such fields for the economy to run and give time to the private sector to acquire stakes.
  • If the government does not hold 51% shareholding, CAG audit is not necessary and more flexibility is available to such companies. Such companies can be made to face competition from the private sector.
  • Also, the government can divest its majority stake in companies which are not efficient, productive and competitive with the private sector as such companies are a drain on government resources.
  • There are other methods through which the government can ensure that competition takes place and economic power is not concentrated in one place like the Competition Commission of India, sectoral regulators, etc.

What should the government do in the case of Air India?

  • Air India has an 18% market share in the aviation sector.
  • Year after year the airlines has been a drain on the resources of the government with the purchase of new airlines of which may have been grounded.
  • The airlines were purchased unnecessarily.
  • Airbuses purchased by the airlines were grounded after there was an accident in the 1990s.
  • There was not enough synergy between Air India and Indian Airlines when the merger was pushed.
  • The airlines are overstaffed and have a huge number of loans.
  • Subsidies were also given by the government to reduce the drag on the main company which also did not work out.
  • Experts say that the government should maintain a controlling stake in the airlines only if it can work efficiently like the Singapore airlines.
  • Otherwise, it is a drain of government resources when huge stakeholders are ready to buy the airlines share and ready to run it and also when the sector is substantially having competitive airline run by the private sector.

Way forward

  • The government should divest its majority share in those companies which do not deal with the public at large.
  • It may also divest its share in the sectors which have been taken over by the private sector.
  • The government may retain the core function of the company while disinvesting its other stakes.
  • Assets such as excess land with the PSUs should be given away so that the private sector can use it efficiently for other purposes.
  • State governments should also be taken on board to make use of the assets with the PSUs.
  • There should be a balanced market showing that the government has executive regulatory power over the sector.
  • While government should welcome FDI in every sector, it also needs to be cautious as it will have a major impact on society.
By moderator July 9, 2019 11:41