Over the past few years, the government has shifted its focus towards mobilising private capital to meet infrastructure financing needs, through disinvestment in public sector undertakings (PSUs). However, amid the economic slowdown and the Covid-19 pandemic, the government has been facing several issues in achieving the ambitious disinvestment targets. It has already missed the budgeted disinvestment target of Rs 1.05 trillion set for 2019-20 by a huge margin, since it has only been able to mop up about Rs 503 billion, even lower than the revised disinvestment estimate of Rs 650 billion for the fiscal year.
However, the government is confident of shoring up capital through the disinvestment route and hence has set a tall target of Rs 2.1 trillion for 2020-21. This is a threefold increase over the revised estimate of Rs 650 billion for 2019-20. The latest target of Rs 2.1 trillion includes Rs 1.2 trillion expected from stake sales in central public sector enterprises (CPSEs), while the balance Rs 900 billion is expected to be raised from divestment of its stake in public sector banks and financial institutions. Stake sale in the insurance behemoth Life Insurance Corporation [LIC] of India through an initial public offering (IPO) and exit from IDBI Bank are key disinvestment examples.
Strategic sale of PSUs
In October 2019, the union cabinet approved a new process for strategic disinvestment to expedite privatisation of select PSUs and made the Department of Investment and Public Asset Management (DIPAM) the nodal department for strategic stake sales. Since 2016, the government has given in-principle approval for strategic disinvestment in 34 CPSEs, including subsidiaries and units of CPSEs. Of these, strategic disinvestment in eight cases has been completed, six CPSEs are under consideration for closure and litigation, and the remaining 20 transactions are ongoing.
In March 2020, the central government raised Rs 115 billion through a strategic sale of its stake in two state-owned power companies, THDC India Limited and the North Eastern Electric Power Corporation (NEEPCO), to NTPC Limited. Besides, transactions are in progress for some other key CPSEs such as Engineering Project (India) Limited, Central Electronics Limited, BEML Limited, Air India, Bharat Petroleum Corporation Limited (BPCL), the Shipping Corporation of India (SCI), Container Corporation of India Limited (CONCOR), and units of Cement Corporation of India Limited.
Covid-19 impact on strategic sale
The government’s disinvestment plan has been strongly hit by the Covid-19 pandemic, with investors unwilling to bid for acquisitions in the uncertain market environment.
For instance, investors are not showing much interest in the sale of the government’s 53 per cent stake in BPCL and the privatisation process is expected to be derailed further. In the wake of the pandemic, the government had extended the deadline for preliminary expression of interest (EoI) in BPCL multiple times this year. The Vedanta Group is among the very few investors that have submitted their EoI for the proposed acquisition. Besides, the government has decided to speed up the divestment process for CONCOR and SCI with fresh bids, since the divestment plans had been put on hold amidst the pandemic and volatile stock markets. Meanwhile, domestic and global players have expressed interest in the acquisition of a 63.75 per cent stake and management control in SCI.
The turmoil in the aviation industry brought about by the Covid-19 outbreak also derailed the government’s privatisation plan for national carrier Air India. The centre has had to push out bids four times for the stake sale in the airline since it is finding it hard to find any takers during the pandemic. In order to woo investors, the government has recently introduced a new bidding structure for the airline as per which interested bidders will bid for Air India’s enterprise value, which will be an aggregation of the debt and equity of the airline as assessed by the bidder in its financial bid. The Tata Group has reportedly started negotiations with Singapore Airlines, its joint venture partner in Vistara, to jointly bid for Air India. Moreover, Air India’s employees are also planning to bid for a managing stake in the airline.
IPOs and offer for sale
In addition to the strategic disinvestment of PSUs, the government has also come up with a policy of a minority stake sale without transfer of management control through various Securities and Exchange Board of India (SEBI)-approved methods. The modes of disinvestment commonly used for a minority stake sale are IPO/follow-on public offer, offer for sale (OFS), buyback of shares and exchange-traded funds.
During 2020-21, the government has already disinvested 15 per cent stake each in Hindustan Aeronautics Limited and Bharat Dynamics Limited through the OFS route, while stakes in PSUs such as Mazagon Dock Shipbuilders Limited, RITES Limited and holdings of Specified Undertaking of the Unit Trust of India have been disinvested through the IPO and other routes. Meanwhile, the recent OFS for a 20 per cent stake in Indian Railway Catering and Tourism Corporation (IRCTC) has received a good response from non-retail investors. It witnessed about 198 per cent subscription on the first day with an indicative price of Rs 1,391.42 per unit.
Following the success of IPOs of PSUs such as Mazagon Dock and IRCTC, the government is actively eyeing IPOs/OFS for PSUs for generating value for the government in the future. State-owned RailTel Corporation of India Limited has recently received SEBI’s approval to raise Rs 7 billion through an initial share sale. Through the OFS, the government will offload 86.6 million equity shares. The union cabinet has also approved RailTel Corporation’s IPO for diluting up to 25 per cent government stake. Meanwhile, the Indian Railway Finance Corporation’s IPO of about Rs 46 billion is also likely to hit the markets soon, and the government has made provisions for allotment to anchor investors. The government is also in the process of determining the embedded value of LIC for the necessary disclosures in the proposed IPO. The LIC IPO is expected in 2021.
Asset monetisation
The government has been encouraging all the infrastructure sectors to look for opportunities in asset monetisation. The infrastructure investment trust (InvIT) is a model that has been adopted for monetising operational assets such as roads and transmission lines, and is slowly gaining acceptance in the country. Assets such as roads, gas pipelines, transmission grids, telecom towers and renewable projects are being identified for monetisation through the creation of such unit trusts. The National Highways Authority of India (NHAI) has already set the ball rolling for private placement of its proposed InvIT to fund highway projects. As part of the exercise, it will appoint an international legal counsel soon. Meanwhile, Power Grid Corporation of India Limited’s InvIT has also recently received approval from the Cabinet Committee on Economic Affairs. In the first lot, the InvIT will monetise assets with gross block value of over 70 billion.
Apart from InvITs, toll-operate-transfer (TOT) is another instrument for monetisation of operational highway assets in bundles. While NHAI has successfully concluded the sale of the first and third bundles, it has also recently put the fifth bundle on the block, without declaring the initial estimated concession value (IECV) in advance this time so as to attract more investors. The fourth bundle, which had been facing lack of investor interest due to the pandemic, has been withdrawn for the time being, to be launched again in line with the new policy of not disclosing the IECV. While the upcoming InvIT is considered to be well timed on the part of NHAI to raise funds for upcoming projects, investor interest in the new TOT bundles needs to be gauged, given the uncertainty surrounding future traffic trends.
The success of the first round of airport privatisation has incentivised the government to tap this route further. In the recently announced Atmanirbhar Bharat initiative, airport privatisation has been given a significant impetus. Another three airports, in Jaipur, Guwahati and Thiruvananthapuram, have recently received cabinet approval for privatisation. These airports will now be managed by Adani Enterprises.
Summing up
Given the fact that so far the government has been able to raise Rs 65 billion through disinvestment receipts and Rs 110 billion via the Bharat Bond Exchange Traded Fund, the current disinvestment target of Rs 2.1 trillion seems unlikely to be met. A lot depends on the listing of LIC through which the government expects to raise close to 50 per cent of this target. The Covid-19 pandemic has had severe implications – subdued investor demand for asset acquisition, volatile markets, delays in strategic sales, etc. That said, disinvestment and public asset recycling have emerged as important alternative fundraising routes for infrastructure development. There is need for greater visibility and a single-window approach to resolve issues that institutional investors face in pursuing opportunities from asset monetisation.