A template of Disinvestment for Modi Government

Modi Government has been going all out on the theme of all-inclusive development and we have been seeing that a large part of the agenda of this Government is welfare for the poor. Government has been pumping money into schemes like Ujjwala, UDAN, UDAY, NREGA, insurance for Farmers and so on. Along with these schemes, the Government has been vigorously implementing the JAM (Jan Dhan-Aadhaar-Mobile) trinity, thereby bringing down losses & corruption in the system drastically and attaining vital savings for the Exchequer.

Another aspect of governance has been simplifying various laws with an aim of delivering Ease-of-business regime. Outdated laws have been culled, plethora of compliances have been bundled into few and with advent of GST (Goods and Services Tax), much more will happen on this front. A small exception has been the Finance Ministry under Arun Jaitley, which has been trying to lift the current extremely poor Tax base, by increasing compliances which are unpopular with the business community, across the board. As some commentators have opined, maybe it’s time to do away with Income-Tax (74 lac people pay Income Tax in India, out of which 56 lac are Government servants). Income Tax is considered as unjust in Indian culture. My small suggestion is to keep Income Tax as a form of Wealth Tax, by levying it only on incomes above Rs. 1 crore per year and including Agriculture and with no exceptions in it. This would again be populist as big Landowners and pseudo-Farmers will come under the Tax net and poor common man will support it as was seen by across-the-board support for demonetization.

From a Budgetary perspective, losses arising out of levy of Income Tax only above Rs. 1 crore annual income and Funds needed for the schemes for the poor would call for more avenues for raising Funds by the Government. Here I suggest the way forward based on disinvestment of Public Sector Undertakings, in a way which will unlock efficiencies in these mammoth companies, enhance their long-term value and simultaneously bring much-needed returns for the Government.

We have seen that the companies which were privatized under Vajpayee Government have all boomed and their value has increased multifold over the years. The Government’s residual stake in Hindustan Zinc and BALCO is now exponentially more than the value which Government received for selling majority stakes in these companies.

Many of these companies are currently faced with declining market share, over staffing and losses. Once monopolies, they have seen private enterprises grow the market to a point where the business model of these companies need fresh dose of animal spirits with restructuring. Case in point can be BSNL/ MTNL, which are a distant 5th operator among 5 operators which will remain in Telecom. Or Air India, which is mired in losses, humungous debt and over staffing. Then there are the Unions, which blindly resist any move towards making these companies profitable, which can result in short-term pain for the workers.

We have seen how Bureaucrats and Ministers lording over these companies treat them as milch cows, deriving benefits in their rule. We saw unique ways of corruption under Congress Government, like the Aviation Minister getting Air India to buy paintings of his wife at nonsense prices in auctions, or how Mamta Banerjee earns by the same model (getting these companies to buy her paintings in auctions). Not to mention how ex-Aviation Minister Praful Patel got Air India to buy 111 new aero planes when the only profitable model in the airline industry is Sale-and-Leaseback. If few helicopters by AgustaWestland was such a mammoth scam, how big would a 111 plane order from Boeing be?

In a time when Government seeks to create private sector behemoths even in Defence sector, why is it sitting with such companies which can boom under Private hands? They hardly pay any dividend, rather demand regular infusion of public money just to keep running. There are hardly some lac of employees in PSU’s (Public Sector Undertakings) but these companies get combined thousands of crores from Government each year, a totally unproductive investment, which can rather be utilized in better schemes. The most ideal situation is for Government to have only regulators under each Ministry – and this calls for a Thatcher moment with Modi!



NITI AAYOG has come out with a paper on schematic disinvestment from some of these companies. The Government is on record to say that a host of PSU Banks should merge – given lack of control over Rajya Sabha by BJP, it seems to be a practical way out in the short-term. The Government also wants to merge all Oil companies to create an International scale company, which can compete for Global Oil assets. We also have the example of Coal India, which ran sub-par under Congress and only under Piyush Goyal, has shown massive enhancement in productivity. There is a committee report already with the Government which suggests corporatization of Railways as a first step towards bringing the Private sector in it in a big way. All welcome steps but lack of urgency is a worrying factor. One just sees reports on huge requirement just in one sector – Airports – and understands that bringing in Private money is the way forward!

One over-reaching problem seems to be possession of huge legacy Land banks with these PSU’s. This can be solved simply by having a nodal agency of the Government which will act as a Land-owning agency and PSU’s can sell their surplus land to it. This would avoid the kind of issue which erstwhile-VSNL disinvestment seems to have brought.

Currently, Disinvestment Ministry is taking many approaches to liquidate stakes in Government firms. In case of stake in many firms like ITC, Axis Bank etc held by erstwhile UTI, it has, till now, sold stakes to Government-owned LIC. There are further plans to sell small Government companies to big Government firms. In cases where FPO’s/ IPO’s have been done, many times it is LIC which has come to rescue the offering. I personally feel there is nothing wrong in getting LIC or big Government firms to pick the tab because further down the line, these companies can better offload the shares or companies wholesale, owing to less approvals required.

The most pertinent issue in disinvestment is the lack of majority in Rajya Sabha for the BJP. Since Banks were nationalized by an act of law, the Government would have to go to the Parliament for privatizing Banks, as an example. Then, as Hindustan Zinc and BALCO cases have shown, the Courts sometimes have their own interpretations and hence the process could get mired in legal hassles.

Whatever be the hurdles, the Modi Government has to bite the bullet on the issue. It is imperative that Government firms are handed to Private parties by a transparent process of e-auctions, so that these companies can get their animal spirits back and start contributing to the economy. The Government may initially sell 75% stake and retain 25%, so that in future, once these companies grow exponentially, the residual stake will fetch the necessary returns to the Public exchequer.

Author: Tushar Kansal

Tushar has been associated with the Project Assessment, Fund-raising & Financial Advisory realm in India for 2 decades. He has straddled multiple roles in Financial Advisory in Deloitte Touche Tohmatsu, PE Deal-maker in Times of India’s Brand Capital, in Corporate Finance roles in Aircel, as an Entrepreneur in Education field and as a CFO (Chief Financial Officer) till 2014. Prior to that, he was the Head of Debt for MTS India, where he was instrumental in raising $2.5 billion structured debt. Tushar has been involved in $6 Billion of transactions in Debt/ PE/ M&A across all asset classes. He has major experience in Education domain – From 2001 to 2006, Tushar led his Education entrepreneurship venture which provided Entrance examination training for Engineering colleges in India. The venture grew to 800 students and then was bought out by a marquee pan-India player in this space, as a strategic sale. Tushar is a panel member at CNN-News18. He is also a Columnist @ Business World, Indian Defence News, Business & Economy, Indian Economist, Digital Market Asia, OpIndia & Growing India.

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