Disinvestment: PSEs’ sale important for NIP agenda

By Kushal Kumar Singh - Partner, Corporate Finance, Financial Advisory

Budget 2021-22 has been lauded by many as a step in the right direction. It lays a strong emphasis on infrastructure development – economic and social. Realising this infrastructure plan would require significant spend. With the economy still reeling from the COVID-19 shock, the government has hinged its funding strategy on the prime minister’s mantra – “the Government has no business to be in business”. The ambitious infrastructure development plan rests on three pillars – monetisation, divestment, and public-private partnerships (PPPs).

Compete or exit: Amongst the three pillars, divestment of Public Sector Enterprises (PSEs) will be a significant contributor to the success of the infrastructure plan. With strategic sale and disinvestment of PSEs, the government intends to achieve the stated objective of tapping private-sector efficiency as well as ability to invest. Recent progress in PPP projects in sectors like airports, highways, and ports indicates investor appetite, and strengthens the efficiency argument in favour of PSEs’ strategic sale. Also, over the years, the government has ended up with a number of businesses that are either obsolete in today’s context, unsustainable, or have multiple overlaps with other PSEs. The message is unequivocal for PSEs – compete or exit.

The Rs 1.75-trn question: The Centre has set a steep target of Rs 1.75 trn for disinvestments and strategic sale for FY2021-22. While the government’s intent is clear and undeniably has strong merit, the moot question is whether the target is achievable in an economy significantly impacted by COVID-19. In FY21, the disinvestment proceeds were about Rs 310 billion, as against a target of Rs 2,100 billion, with COVID-19 arguably playing spoilsport. In FY20, the disinvestment receipts were budgeted at Rs 1.05 trillion, but less than half of this amount could be realised. Going by the past achievements vis-à-vis targets, the FY22 figure appears to be ambitious. Although COVID-19 did push back the Centre’s plan, it has afforded time to undertake the much-needed preparatory groundwork for these transactions, including an exercise to identify monetisable assets and a disinvestment pipeline.

Caveat emptor: In theory, the merit of the idea, preparatory work, and private-sector sentiment and momentum should lead to favourable results. However, some aspects and structural issues need to be addressed to ensure realisation of the ambitious target:

  1. Cautious optimism is the key: Adequate care must be taken to value publicsector assets or enterprises realistically. It is imperative to undertake proper due diligence before putting up such assets for sale, and, more so, depend on the competitive bidding process.
  2. Complementing yet competing priorities: Monetisation of PSEs’ core and non-core assets and PSEs’ strategic sale are complementing and competing priorities. In some cases, there have been initiatives to dispose of monetisable assets while the disinvestment process is underway. Such efforts are likely to adversely impact the disinvestment/strategic sale potential.
  3. Structuring aspects: There has been much talk about structuring divestment deals with specific provisions pertaining to employee protection, restriction on asset monetisation, etc. While building a certain level of protection for various stakeholders is important, this must be weighed against the objective of the strategic sale exercise, i.e. tapping private-sector efficiency and ensuring additional investments. This is especially important in the case of PSEs that are loss-making or obsolete in today’s context.
  4. Protection against undiscovered liabilities and lawsuits: A mechanism is needed for protecting against undiscovered liabilities and taking appropriate legal or regulatory action to ensure that investor confidence is sustained. This would also require a mechanism to fast-track the resolution of any pre-deal and post-deal legal action.

Views expressed are personal to the author. The article was earlier published on Financial Express on May 10, 2021

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