Disinvestment Note

Overview

Disinvestment of the Government’s equity stake in Central Public Sector Enterprises (CPSE) started in FY92, with the sale of minority shareholding in 30 CPSEs to LIC, GIC, and UTI. Later on, MTNL (FY98), VSNL (FY97 and FY99), and GAIL (FY00) used the GDR route to raise capital. Over the years, the policy for disinvestment has evolved, particularly through the budget speeches of Finance Ministers. In December 1999, the Department of Disinvestment was established to focus on all matters related to disinvestment including implementation of disinvestment decisions.

Following are the key objectives behind the Government's disinvestment plans:

* Decrease the government's restructuring spending to support financially weak CPSEs
* Induct a strategic investor with a proven record of technical, marketing, and managerial expertise
* Raise funds
* Induce operational and financial discipline through investors’ scrutiny

Till date, the Government has raised more than Rs. 510 bn by disinvesting its stakes in companies including IPCL, VSNL, MTNL, CMC, Hindustan Zinc, BALCO, Maruti Udyog, and ITDC.

Current Scenario

The re-elected United Progressive Alliance (UPA) is likely to move decisively on the disinvestment front. As the UPA has a clear mandate and the obstructive left-front is not a part of the government, there are chances of limited political resistance pertaining to disinvestment. Moreover, as the Government’s fiscal deficit is expected to balloon to more than 10% of the GDP for FY10 due to the fiscal stimulus packages, farm-loan waiver, and the pay revision for government employees, the Government is looking at disinvestment as a viable option to improve its finances.


Proposed Disinvestments in FY10

The Government has identified unlisted Oil India Ltd. (OIL) and National Hydroelectric Power Corporation Ltd. (NHPCL) for its disinvestment plans in FY10. These companies are likely to proceed with their IPOs before September 2009 as their regulatory approvals for listing lapse on September 12 and September 15, respectively. According to draft red hearing prospectus, the government may dilute 11% of its stake in OIL and 13.5% stake in NHPCL. Besides, the government has proposed to dilute its stake in Mineral & Metals Trading Corporations (MMTC) and National Mineral Development Corporation (NMDC) in the current fiscal, according to a preliminary draft of the disinvestment road map prepared by the Finance Ministry.