Arguments against Disinvestment (and Defenses)

There have been several arguments that have been raised against disinvestment, both specific as well as general in nature. Some of them are listed below, with their counter-arguments (in bold italics):

  • The Government will forego dividends on the equity holdings by selling off its stakes. According to the Public Enterprises Survey 2007-08, the Central PSUs taken together contributed Rs. 19,423 crore to the central exchequer in 2007-08 as dividends, witnessing an increase of over Rs. 4,000 crore from 2005-06. Considerable disinvestment of government's stakes in CPSEs would squeeze this important source of revenue for the Government. 

    Apart from generating a one-time sale amount, a lot of these stake sales have also resulted in higher annual revenues for the government, thus nullifying the effect of loss of dividends. More so, while they were dividend yielding, there were annual outgoes associated with them, thus again nullifying the effect of dividends. Moreover, the loss of dividends, if any, is well compensated by gains in capital appreciation.

  • A nationwide survey conducted by the NCAER in 2007-08 revealed that only 0.5% of Indian households invest in equities. A recent article in The Economist (21st May 2009) estimates this section to be 0.7% of Indian households. Thus, in case the public offer route is followed, it would imply transferring the common ownership of the PSUs by all Indians into the private ownership of 0.5-0.7% of Indians. Thus essentially implying that the real beneficiaries would not be the ordinary retail investor but institutional investors. 

    While the current equity penetration remains low, it is precisely these PSU IPOs themselves that present the best opportunity of widening the retail base. To also ensure that institutional investors do not run away with the bulk of this sale, curbs and measures can be put in place that ensure only retail participation in these issues.

  • Using funds made available from disinvestment to bridge the fiscal deficit is an unhealthy and a short term practice. It is said that it is equivalent of selling 'family silver' to meet short term monetary requirements. Borrowing which is the currently used practice for bridging fiscal deficit, should continue to be used since while borrowing, the government has to make interest payments in the future against a one-time borrowing from the market, in the case of disinvestment, future streams of income from dividends are forgone against a one-time receipt from the sale of stakes.

    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 funds would be investments into critical sectors such as healthcare, education and infrastructure or for retiring government debt rather than letting the low yielding capital remain locked in these assets. 

  • Effective tax rate for the CPSEs taken together in 2006-07 was 30.78%, while the average effective tax rate for private sector companies in the same year was 19.5% only (as per the Statement on Revenue Forgone, Receipts Budget, 2008-09). Criticism stems from the fact that while not only a major tax revenue source will be lost, the private sector which ideally should be paying an equivalent tax rate is exempted due to tax concessions. 

    As mentioned above, while there will be a loss in terms of dividend and tax income, this shortfall would be more than adequately compensated by revenues and capital gains. More so, the returns on capital employed for the entire PSU sector is very low and the government can find alternate avenues for deploying this capital which would yield far better returns, both monetarily and otherwise. All the same, revisions need to be made in tax laws to ensure that all such loopholes currently being exploited by the corporate sector are closed. 

  • Profit making PSUs should not be disinvested as they are performing well in any which way

    A good example against this criticism would be BALCO which was a profit making company that earned the Government an average dividend (over eight years) of Rs. 5.69 cr every year on the equity sold. The Government post-disinvestment, however started getting Rs. 82.65 crore every year. Similarly, CMC was a very well managed and profitable company, yet the average dividend was only 0.80 crore. The Government's benefit, post-disinvestment however was Rs. 15.2 crore annually. Similarly, Maruti Udyog Ltd. gave average returns to the tune of Rs. 13 crore annually to the Govt. and IPCL gave Rs. 16.24 crore on equity sold against Rs. 242 crore and 149 crore respectively post-disinvestment. There can possibly be no justification of maintaining public sector character in such companies, especially them being non-core sectors.

  • Employees of PSUs would lose jobs

    Past privatisations have shown that these fears are totally unfounded. Some of the companies started the process of restructuring and accepted some voluntary retirement applications but no retrenchments were made. These companies gave VRS to the employees, at scales, which were normally higher than the Government VRS. Shareholders Agreement with private companies normally have a provision that employees interest would be protected by ensuring VRS, which is higher or equal to the Government VRS, if there is a need for restructuring in the number of employees. More so, such exercises were done during the public sector regime also. It has been reported that the response to VRS offered to employees before disinvestment was also sometimes lukewarm as the employees expected a better package after privatisation by the strategic buyer, if and when VRS was offered to them. Very often additional recruitment also took place in privatised companies and the wages increased. To give an example, wages increased by an average of Rs. 1600 per employee in Modern Food Industries Limited in spite of the fact that the company had to approach BIFR within months of being privatised. Hindustan Levers took measures to financially restructure the company and bring it out of BIFR, at their own expense. Had Modern Foods remained a Government Company, the tax payer would have paid for financial restructuring of the company perhaps repeated by another restructuring a couple of years later, as is usual in the public sector. In BALCO, wages had not been increased after April 1999, even though a revision was due. In spite of a loss of about Rs. 200 crore due to the strike which happened as a result of the privatisation exercise, an ex-gratia payment of Rs. 5,000/- was paid to all employees and a long term wage agreement for a period of five years was entered into by the Management with the employees in October 2001, which guaranteed benefits of 20% of basic pay to each employee, besides increase in a number of allowances. 

  • Complete Privatisation may result in public monopolies becoming private monopolies, which would then exploit their position to increase costs of various services and earn higher profits

    It needs to be ensured that Privatisation leads to greater competition in all cases

  • Complete Privatisation results in a situation where political compulsions may make companies being sold cheap to preferred parties

    The process followed for Privatisation needs to be very fair and transparent to ensure a situation such as this does not arise

  • A majority stake sale done to another CPSE results in no real change in ownership, and is thus just hogwash

    This is fair to some extent, though it must be realized that some of the CPSEs are very well run, competitive and profit making. Thus, a sale of a loss making CPSE to a well performing CPSE can be a proposition well worth considering.

  • Public Offer being the chosen approach for Disinvestments does not yield the best realisation on the assets and is a far too time consuming process. Auctioning to financial institutions (QIBs) should be the preferred modus operandi since it gives the best realisation on the assets, and has minimal transaction cost

    While the realisation on assets might be higher in case of an auctioning process, it must be remembered that the Government is not a private enterprise and hence should not be looking at short-term gains. It should look at the greater good and sell these stakes by public offers to increase retail participation in the capital markets as well as to increase the depth and width of the capital markets. In any case, the loss is minimal as very small stakes are being sold. The real gains for the government lie in the appreciation post-listing. Let us look at the PSU IPOs since 2004 with a trading period of over 1 year. The value of the government holding, courtesy the market, has gone up nearly 3 times from Rs. 1059312 crore on the issue date to Rs.2426249.09 crore (as on 15 July 2024).