Some overall benefits of Disinvestment, irrespective of the approach used are as follows:For the Government
- Raising valuable resources for the government, which could be used to bridge the fiscal deficit for one, but also for various developmental projects in key areas such as infrastructure. The Financial Times (20th May 2009) quotes a report brought out by the French securities firm CLSA to state: "A reduction in shareholding to hypothetically 51% across all the state-owned entities could bring in USD 62 bn (Rs. 2.9 lakh crore approximately) at current market prices (thus valuing the government holdings in listed state-owned companies at Rs. 8.8 lakh crore). Even a 10% stake sale in the ten large public state undertakings that are likely disinvestment candidates can bring in USD 17 bn (Rs. 80000 crore approximately)". Another such estimate by Delhi-based PRIME Database suggests that if the Government follows up on its promise of bringing down its equity stake in listed CPSEs to 20%, it can mobilise Rs. 959 crore going by the current market valuations.
- Apart from generating a one-time sale amount, a lot of these stake sales would also result in annual revenues for the government, as has been shown in the past.
- The government can focus more on core activities such as infrastructure, defense, education, healthcare, and law and order.
- A leaner government with reduction in the number of ministries and bureaucrats.
- Brings about greater efficiencies for the economy and markets as a whole
- Letting go of these assets is best in the long term interest of the tax payers as the current yield on these investments in abysmally low. Even if the funds from the sale are not utilised for bridging fiscal deficit, a much better utilisation of these 'stuck' funds would be into critical sectors such as healthcare, education and infrastructure
- Unlocking of shareholder (in this case the citizens of India) value
- Monetary gains through ESOPs and preferential issue of shares
- Pay rises, as has been seen in past divestments
- Greater opportunities and avenues for career growth- further employment generation
- Greater autonomy leading to higher efficiencies
Benefits specific to each approach used for Disinvestment
In most parts of the world, it has been proven that Privatisation brings the maximum returns to the tax payer, thus making it the best form of Disinvestment. Since complete control is given off by the government, the reforms are immediate, and the results start showing soon.
A majority stake sale to a strategic buyer has its positives in getting a superior valuation (though sometimes not as good as an outright sale) for the government purely due to market dynamics. With some of the PSUs being virtual monopolies, private players have a lot of interest in acquiring stakes in them. It was because of this reason that this became the chosen vehicle for Disinvestment in the early 2000's.
Given the current political and social compulsions, complete privatisation may not be a solution in the Indian context. Even a majority stake sale would be met with opposition.
Offloading a part of the government's equity by way of a minority stake sale is the only workable option, as in this case, the control would still be with the government. Minority stakes can be sold either to selected private players, or to the public by way of a Public Offer or auctioned off to financial institutions. Offloading minority stakes to private players does not make sense for the government since valuations would be driven down by the fact that the government still retains control/ decision making of the company. This has been proven in transactions in the past wherein the P-E ratios typically accompanying such a sale were found to be low.
On the other hand, a minority stake sale via a Public Offer has several benefits.For the Government
Minority Stake sales via Public Offers provide benefits of long term capital appreciation- Disinvestment done in a staggered manner can help the government realize the real 'value' of these PSUs, as has been shown by recent PSU IPOs wherein the valuation that the market has given to the PSUs is far higher than the original offer price. For example, in the case of NTPC, the Government sold each share at Rs. 62 in its IPO in October 2004. In its FPO in February 2010, the Government was able to realise Rs. 201 for the same share!
- Listing leads to better and timely disclosures, bringing in greater transparency and professionalism, thus protecting the interest of the investors
- Greater efficiency by way of being accountable to thousands of shareholders
- Listing provides an opportunity to raise capital to fund new projects/undertake expansions/diversifications and for acquisitions. An initial listing increases a company's ability to raise further capital through various routes like preferential issue, rights issue, Qualified Institutional Placements and ADRs/GDRs/FCCBs, and in the process attract a wide and varied body of institutional and professional investors.
- Listing raises a company's public profile with customers, suppliers, investors, financial institutions and the media. A listed company is typically covered in analyst reports and may also be included in one or more of indices of the stock exchanges.
- Though there could be opposition from employees of some PSUs, this can be countered and also turned into a favourable situation by offering ESOPs/preferential issue of shares to them. This would provide tangible monetary benefits to them, and also make them an interested party in better performance of their companies.
- These PSU IPOs present the best opportunity of widening the equity investing retail base by providing greater and safer investment opportunities. Curbs and measures, however, would need to be put in place to ensure that institutional investors do not run away with the bulk of this sale and only retail participation is allowed in these issues. Public offers have been one of the frequently used techniques in the UK to transfer state assets and businesses to private ownership. The method has been fairly successful, having increased the shareholding population from 4% to 25%. For example, British Telecom alone created 2.1 million shareholders in the UK, when privatized.
- Listed PSUs already form about 30% of the total market capitalisation. With more PSUs being listed, this would provide a greater depth and width to our capital market
- Bidding by a group of large, informed investors would provide the highest likelihood of the assets receiving the best valuation
- The process takes relatively little time as the modalities are less demanding than those for a full-scale public offer process that can take many months.
- This will provide a direct conduit for interested foreign investors
- Retail participation can come in through the mutual funds, Provident Funds and the NPS.