Portfolio

Disinvestment: The lure of the break

| Updated on July 06, 2019 Published on July 05, 2019

The change

The Centre has increased its target of raising funds by disinvestment to ₹1.05-lakh crore in the Budget, up from ₹90,000 crore in the interim Budget in February.

In her Budget speech, Nirmala Sitharaman has proposed further consolidation of the Centre’s holdings in PSUs, both in financial and non-financial sectors. She has also proposed bringing down the government’s stake in CPSEs below 51 per cent on a case by case basis.

New tools

From 2009-10, the total disinvestment proceeds have touched over ₹3.8-lakh crore with nearly ₹2.8-lakh crore coming from the just ended Narendra Modi’s first term (FY15 to FY19).

The Centre had struggled to meet its disinvestment targets in earlier years. However, in 2017-18 by making ONGC acquire its stake in HPCL, the Centre managed to overshoot its disinvestment target of ₹72,500 crore and collect over ₹1-lakh crore. It again used the Power Finance Corporation and REC’s ₹14,500-crore merger to meet its ₹80,000-crore target in 2018-19.

In the past five years, the Centre has used tools such as exchange-traded funds to sell its stake in PSUs. It had to use this new method of selling its stake in PSUs, which were packaged with shares it held in blue chip companies such as L&T, Axis Bank and ITC to make sure that the disinvestment targets were met. There are two ETFs that are currently trading — the CPSE ETF and the Bharat-22 ETF. The Centre has also resorted to giving a 5 per cent discount on the issue price to lure retail investors.

Now the Union Government hopes that by offering tax deductions to retail investors in instruments such as CPSE ETF, akin to the tax benefits for equity-linked savings schemes of mutual funds, it could boost retail participation.

Investors out in the lurch

Retail investors have not made any money in the shares of companies that the Centre has offloaded stakes in, over the last 10 years. Except for the financial services companies, most companies in the S&P BSE PSU Index have delivered paltry returns to investors. Only those who operate in near-monopoly businesses, such as PowerGrid, and oil marketing companies, such as BPCL and IOC, have managed to give good returns to investors. And in case of oil marketing companies, only after the prices of fuel were decontrolled did investors make any money.

Unless there is a natural monopoly, it doesn’t make sense for retail investors to dive right into a share issue that the government is using to shore up its Budget math. It’s best to wait and watch what happens with these companies’ businesses, and their governance.

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Published on July 05, 2019
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