STRATEGIC DISINVESTMENT VIJAYALAKSHMI RAJU BASICS OF LAW Thu, Oct 17, 2019, at ,12:28 PM The Union Cabinet has approved a new process of strategic disinvestment with a view to expediting privatization of select public sector undertakings (PSUs), officials said. The Union Cabinet headed by Prime Minister Narendra Modi in its meeting on October 3 approved the new policy under which the Department of Investment and Public Asset Management (DIPAM) under the finance ministry has been made the nodal department for the strategic stake sale. This was done with a view to streamlining and speeding up the process, reducing the role of administrative ministries, which often used to place hurdles in the path of major stake sales, officials said. While currently PSUs for strategic sale are identified by NITI Aayog, the tweak in policy has now brought DIPAM into the picture. DIPAM and NITI Aayog will now jointly identify PSUs for strategic disinvestment, they said. Also, DIPAM secretary would now co-chair the inter-ministerial group on disinvestment, along with the secretary of administrative ministries concerned. The change comes within a week of a group of secretaries agreeing for the sale of the government’s entire 53.29 per cent stake in Bharat Petroleum Corp Ltd and its 63.75 per cent stake in Shipping Corporation of India (SCI), 30 per cent in Concor, 100 per cent in NEEPCO and 75 per cent in THDC. Officials said the strategic sale may involve two-stage bidding beginning with an expression of interest (EoI) or a preliminary intent showing bid, and a final financial bid. Pre-bid meetings with likely bidders and roadshows to attract potential investors will form part of the process to provide clarity on every aspect of the stake sale. Also, a data center will be set up for bidders to look for information on the PSUs up for sale, they added. The idea is to complete the stake sale within a timeframe, say 4-5 months. WHY IS DISINVESTMENT SO IMPORTANT? The government has set a target of mobilizing Rs 1.05 lakh crore from disinvestment proceeds and achieving this has become more critical after it doled out Rs 1.45 lakh crore stimulus by way of a cut in corporate tax. Disinvestment proceeds will be critical for the government to stick to its target of keeping fiscal deficit at 3.3 percent of GDP in the current fiscal year ending March 31, 2020. While presenting the Union Budget 2019-20, Finance Minister Nirmala Sitharaman informed that the government will undertake the strategic sale of PSUs and continue to do consolidation of PSUs in the non-financial space as well. She said that “strategic disinvestment of select CPSEs would continue to remain a priority of this government. In view of current macro-economic parameters, the government would not only reinitiate the process of strategic disinvestment of Air India but would offer more CPSEs for strategic participation by the private sector.” WHAT IS THE PURPOSE OF DIPAM? Its main aim is to promote people’s ownership of Central Public Sector Enterprises (CPSEs) to share in their prosperity through disinvestment. Enhanced people’s ownership shall lead to better corporate governance. It also aims for efficient management of public investment in CPSEs for accelerating economic development and augmenting the government’s resources for higher expenditure. As per Government of India (Allocation of Business) Rules, 1961 the mandate of the department is as follows… * All matters relating to disinvestment of central government equity from CPSEs. * All matters relating to the sale of central government equity through offer for sale or private placement in the erstwhile CPSEs. * Decisions on the recommendations of the Disinvestment Commission on the modalities of disinvestment, including restructuring. * Implementation of disinvestment decisions, including the appointment of advisers, pricing of shares and other terms and conditions of disinvestment. DISINVESTMENT POLICY The extant disinvestment policy envisages… * Listing of profitable CPSEs on stock exchanges to unlock the value of the company, improve efficiency and promote “people’s ownership” by encouraging public participation in CPSEs. * Disinvestment through “minority stake sale” in listed CPSEs to achieve minimum public shareholding norms of 25 percent. While pursuing divestment through “minority stake sale”, the government will retain majority shareholding, which is at least 51 percent and management control of PSUs. * Strategic disinvestment by way of sale of a substantial portion of government shareholding in identified CPSEs up to 50 percent or more, along with transfer of management control. BENEFITS There are inherent advantages in the listing of shares of profitable CPSEs on the stock exchanges as it triggers a multilayered oversight mechanism that enhances corporate governance as well as provides for a level playing field to CPSEs in regard to accessing the resources through the capital market. * The listed companies are mandated by Company Law / SEBI / stock exchange to comply with a higher level of disclosures. This will bring greater transparency and credibility. * With the induction of independent directors, management accountability, competencies, and performance are enhanced. * Investor-centric research provides on a regular basis third-party professional assessment of risks as well as future prospects to management to help it benchmark its business model with the industry. * Daily trading volume and prices work as a barometer for the management and operate as a concurrent source of feedback with regard to the impact of managerial decisions as well as shop floor developments. The higher levels of public scrutiny promote the ethical conduct of business and improve corporate culture. * Expectations of investors (shareholders) will bring productive pressure upon the management to perform more efficiently to unlock the true value of the enterprise. * Listing of profitable CPSEs on the stock exchanges with mandatory public ownership of at least 25 percent shareholding has been observed to increase significantly the value of the enterprise and government’s residual shareholding as well as those held by the public after listing. * The process also enhances shareholder value in the listed CPSEs and enables that CPSE complies with the Securities Contracts (Regulation) Rules, 1957, for listing. * The process of listing CPSEs on stock exchanges facilitates the development and deepening of capital markets and the spread of equity culture. * Raise budgetary resources for the government. WHAT ARE CPSEs? Central Public Sector Enterprises (CPSEs) function under the administrative control of their respective ministries/departments. The concerned administrative ministry/department takes action relating to improving the performance and efficiency of CPSEs functioning under them, which may include infusion of capital in CPSEs to enable them to remain as market intervention organizations in public interest. As per information available with the department of public enterprises on July, 19 sick and loss-making CPSEs / units have been approved for closure by the government. Out of these 19 CPSEs / units, the process of closure has been completed in respect of two CPSEs, namely Indian Oil-CREDA Biofuels Ltd and HPCL-CREDA Biofuel Ltd. The major reasons for the closure of a CPSE would include continuous losses / suboptimal returns on equity invested by the government and the inability to compete in a competitive market.