Strategic Disinvestment: Way Forward for the Great Indian Growth Story

Strategic Disinvestment: Way Forward for the Great Indian Growth Story

 Disinvestment and Privatization Leading to Value Unlocking and Price Discovery - The Foundation for the Indian Growth Story.’

 The Government has no business to be in business. Strategic Disinvestment and Sale of non-core assets by the Government will result in value unlocking and price discovery for PSEs, recourses of which would be used for more inclusive growth and developing world class infrastructure resulting in overall development and prosperity.’

 The Indian economy has been through one of the most turbulent times in the last twelve months. Due to the pandemic, India had to undergo one of the most stringent lockdowns in the world owing to its high population density, extremely crowded metropolis cities with a very weak and ineffective health care system. If the intense lockdown was not undertaken today the siltation would have been extremely bad. However due such a lockdown the Indian economy has taken a very bad beating in terms of overall GDP numbers due to the fact that millions of SME companies were shutdown and lakhs of people lost their jobs.

 The key to revive the economy is to have short term as well as long term objective in place so that the economy rebounds and continues to grow.

For India to transition from a developing to a developed nation, the key is to have world class infrastructure. In order to build this infrastructure in terms of roads, ports, urban infrastructure, healthcare infrastructure the Government needs to play the key role and fund its growth. One of the best ways to do so is by strategic disinvestment and privatization.

 The business of the Government is not to run business but to create infrastructure and polices that lead to an overall development of the country and increase per capita GDP and overall socio economic development. Every rupee from tax payers should be utilized in the most appropriate and effective manner to enhance overall development rather than funding loss making Public Sector Enterprises (PSE).

 Accumulated losses of 55 non-strategic PSE both listed as well as non-listed from 2016-2017 to 2019 was an alarming INR 46,000 crores. This was mainly due to the fact that these PSEs have not been managed to the best possible industry standards and efficiency and thereby resulting in huge losses year after year. By strategic disinvestment of core PSEs and privatization of non-core PSEs it would lead to better management and imbibing the industry best practices resulting in better ROA (return on Assets), ROE (Return on Equity) and overall profitability. In the present scenario there is no value for the shareholders of most PSEs resulting in overall lower valuations for the company and accumulated losses wherein the Government is hit the most being the biggest or the only shareholder.

 Keeping this in mind the Central Government has put in place an asset monetisation plan for public infrastructure which will help the Government raise revenue. The Government’s targets is to get INR 1.75 lakh crores from disinvestment in FY 2022 which will help bring its fiscal deficit to below 4.5% of GDP by 2025-26; pegging India's fiscal deficit at 9.5% in 2020-2021 and 6.8% in 2021-2022.

 At present 31 PSEs have got an in principal approval for privatization. In these the intention of the Government is to bring down ownership below 51% or disinvest totally. Some of the larger names that are present in this list of 31 PSEs are BPCL, Air India, Shipping Corporation of India, IDBI Bank, BEML, Pawan Hans, Neelachal Ispat Nigam Limited and the biggest and most awaited disinvestment candidate LIC.

Along with this the InvITs will be used to monetise operational assets worth INR 5,000 crores with the NHAI and INR 7,000 crores with Power Grid.

 The route to use strategic disinvestment and privatization results in better overall price discovering and valuation. Since the budget when the finance minister had announced that two banks will be privatised, there has been an increase in market cap to an extent of over 50% for most Public Sector Banks with an anticipation that they will be privatised thereby signalling that investors do understand that once the banks will be privatised they will be managed better and thereby are ready to pay a higher price in valuation terms for the same company almost immediately without any significant change on the ground.

 It is anticipated that a reduction in shareholding to around 51% across all the state-owned entities could bring in INR 2.9 lakh crores approximately at current prices thereby the Government holdings in listed state-owned companies at INR 8.8 lakh crores. Even a 10% stake sale in the ten large public state undertakings that are likely disinvestment candidates can help raise INR 81,000 crores approximately.

 The disinvestment exercise in LIC is to an extent of only 10% which would result in value creation for the Government being the only shareholder at present. With a market share in the insurance industry of over 75% and having subsidies like IDBI Bank, the IPO would result in making LIC one of the most valuable companies in India in terms of market cap and thereby helping in overall value creation for the Government.

 Some of the biggest advantages of disinvestment and privatization that the Government would enjoy are as follows:

 ·        Better efficiency and productivity by implementation of industry best practices being implemented resulting in better ROA, ROE and better profitability.

·        Appropriate price realization in case the company is listed, leading to a better value and overall take away for the Government.

·        Helps mobilize resources which are much needed for better utilization by the Government.

·        Lack of political interference leading to better result oriented efficiency and better shareholder value.

·        Better market efficiency and increase competition within the sector, as most PSE have a huge network and reach and once run effectively and efficiently would lead to better performance and competition to private players within the sector.  

The large disinvestment and privatization exercised by the Government would result in more foreign capital coming into India, thereby adding depth to the overall capital markets and help India shine on a world stage.

 In these turbulent times, for India to emerge as a clear winner, more steps and bold reform is required. Large number of people did criticise the opening of the economy in 1991, but rest is history now. Privatization is not selling family silver but realizes the value of the asset and utilization of the money in areas that are most required. India being the biggest and most vibrant democracy in the world, the stage is set for double digit GDP growth rate for many years to come and by privatization huge amounts of tax payers’ money will be saved from losses that PSEs make year on year. Instead of most PSEs dying a slow death and yielding nothing, disinvestment and privatization will result in putting them on the right path and lead to better profitability for all concerned.

 There is no one formula which fits all PSEs for privatization, but a case to case approach will have to be adopted for best results and realization. Investors should look at long term investment in PSEs which are trading at reasonable valuation as a valuation re-rating is on the cards for most PSEs in the next 12 to 36 months.

 _Farzan Ghadially.