Strategic Disinvestment

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Recently, the Government allowed disinvested PSUs to set off previous losses.

About the recent developments

• In order to facilitate the strategic disinvestment, it has been decided that Section 79 of the Income-tax Act, 1961, shall not apply to an erstwhile public sector company that has become so as a result of strategic disinvestment.
  • The above relaxation will cease to apply from the previous year in which the company, that was the ultimate holding company of such erstwhile public sector company immediately after completion of the strategic disinvestment, ceases to hold, directly or through its subsidiary or subsidiaries, 51 per cent of the voting power of the erstwhile public sector company.
• Finance Act, 2021 has amended section 72A of the Income-tax Act, 1961 that deals with the amalgamation of a public sector company (PSU) which ceases to be a PSU (erstwhile public sector company) as part of strategic disinvestment, with one or more company or companies and carry forward of losses in case of change in shareholding following the sale by the government.

(Image Courtesy: PIB )

Strategic Investment Policy

• Aim: 
  • The government aims at making use of disinvestment proceeds to finance various social sector and developmental programmes and also to infuse private capital, technology and best management practices in Central Government Public Sector Enterprises. 
•  Budget FY 2021-22 Announcement : 
  • In the Union Budget FY 2021-22, it was announced that the government has approved a policy of strategic disinvestment of public sector enterprises that will provide a clear roadmap for disinvestment in all non-strategic and strategic sectors.
• Policy on Strategic Disinvestment:
  • Fulfilling the governments’ commitment under the AtmaNirbhar Package of coming up with a policy of strategic disinvestment of public sector enterprises, the following were highlighted as its main features:
    • Existing CPSEs, Public Sector Banks and Public Sector Insurance Companies to be covered under it.
    • Twofold classification of Sectors to be disinvested :
      • Strategic Sector : 
        • Bare minimum presence of the public sector enterprises and remaining to be privatised or merged or subsidiaries with other CPSEs or closed.
        • Following 4 sectors to come under it :
          • Atomic energy, Space and Defence
          • Transport and Telecommunications
          • Power, Petroleum, Coal and other minerals
          • Banking, Insurance and financial services
      • Non- Strategic Sector : 
        • In this sector, CPSEs will be privatised, otherwise shall be closed.
• Moving forward task: 
  • Further to fast forward the policy, NITI Aayog has been asked to work out on the next list of Central Public Sector companies that would be taken up for strategic disinvestment.
• Incentivising states for disinvestment:
  • To incentivise States to take to disinvestment of their Public Sector Companies, an incentive package of Central Funds for them will be worked out.
• Special purpose vehicle for monetising idle land:
  • Recognising that Idle assets will not contribute to Atma Nirbhar Bharat and the non-core assets largely consist of surplus land with Government Ministries/Departments and Public Sector Enterprises,it was proposed to use a Special Purpose Vehicle in the form of a company to carry out monetization of idle land. 
  • This can either be by way of direct sale or concession or by similar means.
• Exit mechanism:
  • It was proposed to introduce a revised mechanism that will ensure timely closure of sick or loss-making CPSEs.

Benefits

• Improved efficiency:
  • The main argument for privatization is that private companies have a profit incentive to cut costs and be more efficient.
  • Data presented in the Economic Survey 2019-20 showed that State-run entities where government offloaded stakes were found to have performed much better than those under government control.
• Lack of political interference:
  • It is argued governments make poor economic managers. They are motivated by political pressures rather than sound economic and business sense. Privatization can minimise political interference.
• Long term view:
  • Strategic disinvestment will benefit the firm in the long term because private managers are more concerned about projects that give a benefit in the longer run.
• Pressure from Shareholders:
  • It is argued that a private firm has pressure from shareholders to perform efficiently. If the firm is inefficient then the firm could be subject to a takeover. A state-owned firm doesn’t have this pressure and so it is easier for them to be inefficient.
• Increased competition:
  • Often privatization of state-owned monopolies occurs alongside deregulation – i.e. policies to allow more firms to enter the industry and increase the competitiveness of the market. 
  • It is this increase in competition that can be the greatest spur to improvements in inefficiency.

Associated Issues

• Reforming PSUs has taken a back seat: 
  • The Sale of profit-making and dividend-paying PSUs would result in the loss of regular income to the Government. It has become just a resource raising exercise by the government. There is no emphasis on reforming PSUs.
• Loss of regular income to the Government:
  • As the amount that will be received from disinvestment will be for one time only which will impede the process of regular income received by GoI from the PSUs.
• Inefficiency will remain: 
  • The valuation of shares has been affected by the government’s decision not to reduce government holdings below 51 per cent. With the continuing majority ownership of the government, the public enterprises would continue to operate with the earlier culture of inefficiency.
• Government Control:
  • Government is not willing to give up its control even after strategic disinvestment. The government is willing to change the extant policy of the government. 
  • It will change the policy of “directly” holding 51 per cent or above in a CPSU to one whereby its total holding, “direct” plus “indirect”, is maintained at 51 per cent. It means the government will still exercise its control over PSUs.
• Uncertainty of Competition:
  • Privatization doesn’t necessarily increase competition; it depends on the nature of the market. E.g. There is no competition in railways if it is privatized, as the sector is a natural monopoly.
• Chances of “Asset Stripping” by the strategic partner: 
  • Loss-making units don’t attract investment so easily. It depends upon the perception of investors about the PSU being offered. This perception becomes more important in the case of strategic sales, where the amount of investment is very high.
• Bureaucratic Control:
  • The process of disinvestment is suffering from bureaucratic control. Almost all processes starting from conception to the selection of bidders are suffering due to it. Moreover, bureaucrats are reluctant to take timely decisions in the fear of prosecution after retirement. 
• Strategic and National Security Concerns:
  • Strategic Disinvestment of Oil PSUs is seen by some experts as a threat to National Security. Oil is a strategic natural resource and possible ownership in the foreign hand is not consistent with our strategic goals. For example, disinvesting Bharat Petroleum Corporation Limited (BPCL).
• Fund utilization: 
  • Using funds from disinvestment to bridge the fiscal deficit is an unhealthy and short term practice. It is the equivalent of selling ‘family silver to meet short term monetary requirements.
• Complete Privatisation may result in public monopolies: 
  • Complete Privatization may result in public monopolies becoming private monopolies, which would then exploit their position to increase costs of various services and earn higher profits

Way Ahead

• Ensuring that disinvestment is not used for filling the deficit.
• Stringent regulations to curb insider trading.
• Reviewing the disinvestments involving a national security concern by a special committee.
• Ensuring that the welfare function of the government is not compromised.

Sources: IE