As the country’s fiscal deficit is expanding, the need for divestments has increased. The government has set a disinvestment target of Rs 2.1 trillion for 2020-21 to help meet its ambitious target of restricting the fiscal deficit to 3.3 per cent of the GDP. This is over three times the disinvestment target for 2019-20 when Rs 650 billion was to be garnered through disinvestments. The bulk of the divestments that have taken place so far have been through the sale of minority shareholdings in central public sector enterprises (CPSEs). Thus, the government has depended on the capital market for raising money and meeting its disinvestment targets.
Buybacks, exchange-traded funds (ETFs), initial public offers (IPOs)/follow-on public offers (FPOs) and offers for sale (OFS) are the various capital market products through which the government makes a disinvestment transaction. Among these, the OFS is the preferred method. An IPO enables listing of CPSEs on stock exchanges thereby opening up channels for further disinvestments through different methods such as OFS, ETF and buybacks.
Key initiatives by DIPAM
Till date, most of the disinvestments have been minority share sales. Recently, the Department of Investment and Public Asset Management (DIPAM) made important announcements and some activity has begun with respect to majority share sales.
- Reduction of shareholding in select CPSEs below 51 per cent while retaining management control: The Cabinet Committee on Economic Affairs (CCEA) has given in-principle approval for reduction of the government’s stake below 51 per cent in select CPSEs while retaining management control. This policy decision will further encourage disinvestments.
- Asset monetisation framework: The union cabinet, in February 2019, approved the procedure and mechanism for asset monetisation of CPSEs/public sector undertakings (PSUs)/ other government organisations and “immovable enemy properties”. This will enable monetisation of identified non-core assets of CPSEs via strategic disinvestment and immovable enemy properties.
- Debt ETF: The CCEA had approved the creation and launch of India’s first corporate debt exchange traded fund that would create an additional source of funds for CPSEs. The Bharat Bond ETF was launched on December 12, 2019 and received a strong response from investors across different segments.
- Strategic divestment: In-principle approval has been granted for strategic divestment of the centre’s shareholding in Bharat Petroleum Corporation Limited, the Shipping Corporation of India, the Container Corporation of India, the Tehri Hydro Power Development Corporation, and North Eastern Electric Power Corporation Limited.
- Union Budget 2020-21 also proposed some important disinvestment deals highlighting the political will to up the disinvestment game.
The government has raised the disinvestment target to an ambitious Rs 2.1 trillion. Of this, Rs 900 billion will be raised by selling stakes in PSU banks and financial institutions while the balance Rs 1.2 billion will come from selling stakes in CPSEs.
The announcement of the Life Insurance Corporation of India’s (LIC) IPO is a crucial and bold move by the government. The government has indicted LIC’s expected valuation to be Rs 13 trillion-Rs 15 trillion and has indicated that a 6-7 per cent stake sale will be enough to generate Rs 900 billion.
The proposed stake sale in IDBI Bank is also expected to be transformative. In a first-of-its-kind initiative for a PSU bank, the government has proposed the sale of its balance holding (47 per cent) in IDBI Bank to private, retail and institutional investors through the stock exchange. This also sets the stage for similar steps for other banks.
Disinvestment experience through IPOs
The change in ownership of a company from a 100 per cent government-owned enterprise to an either 75 per cent or 51 per cent government-owned entity increases the management’s accountability to public shareholders. A misconception about PSU stocks is that investments in these are not profitable. However, this is not true. In fact, all PSU IPOs from April 2018 onwards have yielded positive returns from their respective IPO prices. The Indian Railway Catering and Tourism Corporation (IRCTC), for instance, saw a stellar response to its IPO and was oversubscribed by about 112 times the IPO size of Rs 6.38 billion, indicating high investor appetite for good quality, market-leading PSUs. IRCTC has, since its listing, been able to yield almost five times return on investment based on its IPO price. These listed PSUs now present the government with the opportunity to monetise further stake at a higher valuation, thereby enabling enhanced value monetisation at the time of subsequent stake sales.
In contrast, recent IPOs of larger-sized PSUs (greater than Rs 10 billion issue size) such as those of Cochin Shipyard and Hindustan Aeronautics have underperformed the market and yielded negative returns from their respective IPO prices.
IRCTC operates among the most transacted websites in the Asia-Pacific region. It is the only entity authorised to provide catering services, online railway tickets and packaged water to Indian Railways. IRCTC’s IPO has been one of the most successful initial public floats in the country. With a total subscription of 111.95 times, over Rs 700 billion was mobilised through the issue. During the issue period, markets witnessed significant weakness and volatility against the backdrop of the global economic slowdown and rising US-China trade tensions. Despite these factors, the IPO crossed the 100x subscription mark, the first time for a PSU. There was strong participation from marquee investors such as Morgan Stanley, GIC and Goldman Sachs. The government only offloaded a 12.6 per cent stake in the company, which points towards the fact that there is a lot of scope for the government to raise more funds. The experience with the IRCTC IPO has boosted the confidence of investors in PSU stocks and changed their perception towards CPSEs. This augurs well for the upcoming IPOs of the Indian Railway Finance Corporation, RailTel Corporation of India Limited and Telecommunications Consultants India Limited.
In sum
The disinvestment route in the country is still evolving – from the sale of minority shares to strategic sales and asset monetisation. The government is warming up to the idea of paring significant stakes in CPSEs while retaining management control. The IPO route, in particular, is gaining traction, as it opens up further fund raising avenues through OFSs and FPOs. Investor confidence, too, in well-performing PSUs is soaring. The government must, therefore, time and price the issue correctly in order to attract domestic and foreign investors. w
Based on a presentation by PrateekIndwar, Group Head, Investment Banking, SBI Capital Markets, at a recent India Infrastructure conference