Divestment has been an important keyword for the Center in recent years. Last year, in a sense, the budget was even anchored on projected divestment revenues, with the government looking to earn Rs 1.75 lakh crore monetizing PSUs (public sector enterprises) such as Air India, BPCL (Bharat Petroleum Corporation Limited) and SCI ( Shipping Company of India). However, by December 2021, the government had only achieved about five percent of that target, or Rs 9,240 crore. In this year’s budget, the Union’s finance minister, Nirmala Sitharaman, indirectly acknowledged the huge miss by cutting the projection of FY22 divestment revenues from Rs 1.75 lakh crore to Rs 78,000 crore and setting the target for 2022-23 at only Rs 65,000 crore.
For several years now, the Center has faced numerous difficulties in delivering on its privatization promises, be it a push from unions worried about their future or difficulties in arousing investor interest. . Many PSUs in the block also have complex, damaged balances, making it difficult to rate them accurately. Tuhin Kanta Pandey, secretary of DIPAM (Department of Investment and Public Asset Management), says the government is aware of the challenges and has shifted its focus from diluting PSU holdings to full privatization. Air India’s sale to the Tata Group was encouraging, although it brought in just Rs 2,700 crore to the government in cash. Pandey hopes to repeat this success.
Other PSUs on the block include IDBI Bank (which was not mentioned in this year’s budget speech) and helicopter operator Pawan Hans. Despite ongoing privatization pressures, the Center’s budget this year is much more conservative in expectation and objective. First, it sets no targets for the divestment of public sector banks (PSBs) and financial institutions – a politically contentious area – and is reviewing last year’s target of cutting it to zero from Rs 1 lakh crore. One hoped for success is the upcoming LIC IPO (Life Insurance Corporation initial public offering), which is expected to launch on March 11. Fund managers say the IPO could yield between Rs 50,000 crore and Rs 1 lakh crore, but with the outbreak of war in Ukraine, the government could choose to delay the launch, impacting its divestment agenda. Meanwhile, Tata Steel has also acquired a 93.2 percent stake in Neelachal Ispat Nigam, a government steelmaker, for Rs 12,100 crore.
The list of missed divestment targets includes companies that have been in the bloc for years now. Pawan Hans, for example, has been on sale for 10 years. The company’s revenues have reportedly fallen since 2016, with losses in 2019 and 2020. Last year, the Center made another bid to sell it, easing previous terms to attract more buyers. In December, it announced that it had received bids, but little has been said about it since.
Another example is the sale of BPCL. So far, the government has had to extend the deadline for submitting preliminary expressions of interest four times. Part of the problem has to do with the sector: With the highly volatile crude oil prices in recent years, it has been difficult to generate investor interest in energy companies. The block holds the government’s entire 52.98 percent stake in BPCL, for which it says it has received three expressions of interest. Rating agency Fitch rates the company BBB- with a negative outlook, saying “uncertainty about the bidder consortia and the complexity of the process, including valuation, could lead to potential delays in the privatization of India’s second largest fuel retailer.” Likewise, the sale of SCI remains in limbo as bidders have found it difficult to complete their due diligence on the company’s assets.
A major hurdle to privatization, across all sectors, has been the downsizing of unions. On the morning of January 27, the day DIPAM Air India was to officially hand over to the Tata Group, officials attended a virtual hearing of the Madras High Court. The court had heard an employee union petition against the sale of Air India, citing concerns about the future well-being of current employees. Concerned that employee activism and lawsuits could thwart the sale, the government agreed to nearly all of the union’s demands in this particular case, including the continuation of medical benefits for retired and retired Air India employees, the collection of leave, and so on.
Unions are almost never in favor of divestment. Important reasons include job security and wage levels. “PSU employees want to stay” [in the public sector] because they get three times the salary of their private sector counterparts,” said Nilesh Shah, MD of Kotak Mahindra Asset Management. “The average BPCL salary is Rs 20 lakh per year – the average private sector worker earns a third of that.”
Another systemic problem is the complexity of PSU balance sheets, which makes it difficult to value such companies. In addition to the huge debts they often carry, many government enterprises are also bundled with unwanted assets. Air India is another prime example: The sale required the sale of the airline’s non-core assets (including real estate such as Centaur Hotel) and about Rs 51,000 crore of its debt to be spun off into a special purpose vehicle (SPV). After many rounds of talks, it was also decided to sell the airline based on its enterprise value (market capitalization plus net debt) rather than its equity. An official closely involved with the project says the Center was only able to find bidders after these decisions. “We have faced many hurdles in selling Air India,” Pandey admits. “Bidders were scared.” When it comes to selling BPCL, the government may have to go down the asset segregation route again, as a major stumbling block is the company’s vast real estate assets.
According to DIPAM, in 2021-22 as of January 3, the government had received about Rs 44,450 crore from various subsidiaries. Of this, only Rs 9,329.9 crore was from divestment while the remaining Rs 35,116.72 crore was dividend receipts.
In a sense, the government’s divestment task gets harder with each success, since what’s left are companies that investors have already passed on. Pandey says: “Except for the new listings – for example the IPO of LIC, which is a big opportunity because we’re bringing something new to the market – the scope for the government to raise money through divestments is very limited. We have diluted our interests in existing companies. If we want to [reduce our stake] below 51 percent, we are talking about privatization and relinquishing management control.”
On the to-do list so far are IDBI, SCI, BPCL and Pawan Hans, which have proven difficult to sell for a variety of reasons. A senior official closely involved in the divestment efforts said: “Pawan Hans has been on the shelf for 10 years and it will be difficult to find buyers for IDBI due to the bank’s poor competitiveness. Most companies are also saddled with degraded assets.”
One challenge the government will have to grapple with is how to maintain investor interest in the process. Often bidders have grown cold midway through their valuation/due diligence assessments, perhaps realizing how difficult it will be to take over the management of a PSU. In addition to the depreciated assets, huge debts and complicated assets, there is also the challenge of getting many different stakeholders – unions, existing PSU management, bidders, regulators and policy makers – all on the same page. While political leadership appears determined to push through, the narrowed divestment targets in the 2022-23 budget reflect the magnitude of this challenge.
The difficulty is also compounded by continuity issues in DIPAM. Secretaries have a relatively short term of office – three years – but building, sustaining and channeling the investor interest needed to divest a PSU is a huge effort. It includes not only a marketing flash, but also careful financial analysis and a strategic regulatory and political campaign to bring the deal to a close.
There are no easy answers to privatization. Experts say clear plans and quick decision-making can help. Accelerating sales to counter asset erosion is also critical: Air India’s debt doubled in the period between the initial privatization announcement and its eventual transfer to the Tata Group. The reopening of old cases by the judiciary – such as those related to a divestment deal overseen by former IAS officer Pradeep Baijal, or one related to the divestment of Hindustan Zinc years after the deal was closed – is also having a chilling effect on bureaucratic speed.
Shah says the Center may find it efficient to adopt the Singapore model. In that country, one company, Temasek Holdings, manages the investments and assets previously held by the government, while another – GIC (formerly the Government of Singapore Investment Corporation) – manages the government’s financial assets. This frees up ministries to do policy work by transferring the privatization process to professionals. Yet another option is to tap stock markets to dilute PSU stakes and privately run these companies. Meanwhile, during the monsoon session of the House of Representatives, amendments to the Non-life Insurance Nationalization Act were approved. The Banking Laws (Amendment) Bill 2021, which covers the privatization of two PSBs, was also presented for introduction in the winter session of 2021, but opposition from banking unions and state elections have delayed its submission.
The fact that billionaire investor Rakesh Jhunjhunwala chose to launch his own airline instead of bidding on Air India is a lesson for the Centre. There are many reasons why India’s ailing PSUs remain stuck – from their poor competitiveness and massive debt to ongoing asset erosion and union shrinkage. If the Center is committed to meeting its divestment targets, it is vital that these issues are addressed promptly and comprehensively.