The New Disinvestment Strategy of India

Historically, India had placed a greater emphasis on government control and the public sector in the economy. After independence, in order to expand on wealth and income of individuals and to stimulate economic growth, the majority control was continued in the public sector with restrictions on the private sector. Then with the advent of globalization, liberalization efforts were undertaken to open up the public sector and to create a better functioning private sector.

Even still, the majority stake hold in several sectors like banking, energy, oil, railways, etc. continued to be in the hands of the government. However, the last several years have seen a reversal with India opting to ‘disinvest’ several public sector undertakings by inviting investment from the private sector both domestic and foreign. 2021 has been a landmark year for disinvestment as India has finally announced a ‘New Public Sector Enterprise Policy’ that lists out specified sectors for strategic disinvestment and the rules that will be followed for this process.

A state-owned enterprise i.e. an enterprise where the government has a majority stake (51% or more) is known as a public sector undertaking in India. India has an expansive public sector including central public sector undertakings (CPSUs), public sector banks, public sector insurance companies, public sector not for profit enterprises, etc.

Disinvestment is the process of divesting the stake of the government in such public sector undertakings as a means of increasing government revenue and restructuring such PSUs to make them more efficient. Since the early 2000s, India has been slowly disinvesting PSUs with allowing up to less than 26% shareholding in notified sectors.

However the last few years have seen the biggest change. With the announcement of Atamnirbhar bharath, the new policy of making India self-reliant while promoting foreign investment, a new effective disinvestment policy has also been announced.

Disinvestment can be done through a number of ways, and the following have been earmarked by the Indian government:

1. Minority Stake Sale: Under this method, the government proposes to continue holding the majority shareholding post the sale. Already listed profitable central public sector enterprises will be made compliant through an offer for sale by the government or through a fresh issue of shares by the CPSEs. The need for the disinvestment would be decided on a case by case basis.

2. Strategic Disinvestment: This method is when the government proposes to divest the majority stake i.e. more than 50% and the effective management and control off a PSU. India has announced a new strategic disinvestment policy (as part of the 2021 disinvestment reforms), and new sectors and CPSUs will be notified by the relevant ministries. Niti Aayog will identify PSUs for strategic disinvestment as well as the method recommended, and will be taken into consideration by the Core Group of Secretaries on Disinvestment (CGD).

3. Comprehensive Management of CPSE: Under this method, the government proposes to utilize means of asset management like corporate restructuring, leveraging of assets to attract fresh investments, financial restructuring, etc. Different investment management strategies will be implemented to manage the CPSEs, as and when required.

 

The new public sector policy of 2021 was announced as part of the reforms introduced by the Union Budget 2021-22022. The new policy marked a difference for India, as the policy now details out the sectors that have been identified, and lays out the plan India intends to follow for disinvestment.

The Policy has the following objectives:

• To minimize the presence of the Central Government in the Public Sector Enterprises and to create new spaces for the private sector.
• To initiate economic growth among PSUs, financial institutions with infusion of private funding, technology, and management practices.
• That the proceeds from the disinvestment will help finance various social sector development

The Policy is applicable to central public sector undertakings, public sector banks, and public sector insurance companies. It marks out sectors as ‘strategic’ and ‘non-strategic’. Strategic sectors have identified based on criteria such as national security, energy security, infrastructure, availability of important minerals, etc. The presence of the Indian government in such sectors will be limited, and only the bare minimum presence at the existing public sector commercial enterprise at the holding company will be retained by the government. Other enterprises will be privatized, subsidized or merged with other PSUs.

The following sectors have been classified as ‘strategic’:

• Atomic energy, space, and defense.
• Transport and tele-communication.
• Power, petroleum, coal, and other minerals.
• Banking, insurance, and financial services.

The complete list of central public sector enterprises to be disinvested from the above sectors, will be provided by Niti Aayog with the recommendation of other ministries. Sectors other than the ones mentioned above will be considered as ‘non-strategic’ sectors. These sectors will be considered for privatization or mergers with other PSUs, as and when applicable.

 

As part of the new policy, India has also announced the disinvestment of the following undertakings for 2021-2022:

• India will be completing the disinvestment transactions of Bharath Petroleum, Air India, Shipping Corporation of India, Container Cooperation of India, Bharath Earth Movers, Pawan Hans, Nilanchal Ispat Nigam and more in 2021.
• IDBI and two other public sector banks will be privatized in 2021, along with one general insurance company.
• An initial public offering of Life Insurance Corporation of India will also be competed in 2021.

In order to incentivize disinvestment for investors, India is also offering several incentives from tax exemptions and deductions to reforms in the FDI sector. India is offering the following incentives for investment in disinvested PSUs:

• Relaxation for carry forward of losses for disinvested public sector undertakings in amalgamations.
• The transfer of assets from a public sector undertaking to the resulting company as part of a demerger will be considered tax neutral.
• Ahead of disinvestment of public sector insurance companies, FDI in the insurance sector has been raised to 74% from the earlier 49% under the automatic route.
• Non-resident Indians are allowed to invest up to 100% in Air India under the automatic route, and have reduced compliance requirements. Foreign entities are allowed to invest up to 49% under the automatic route.

 

While problems may arise in the implementation of the disinvestment strategy, it provides a great opportunity for investors as several central public sector enterprises are being notified for disinvestment, in a way that the public sector in India has not seen before. India is also highly keen on using the proceeds from such investment towards crating better social welfare institutions; hence the disinvestment of such PSEs is a major goal for India in the upcoming year.

India also recognizes the need to incentivize such transactions for investors. From the announcements already made it is clear that India is committed to providing tax and FDI reforms to incentivize such transactions, and when they arise.