The Government should also unshackle the process of strategic disinvestment from bureaucratic red-tape

The ministry of finance has barred public sector undertakings from bidding for other Central Public Sector Undertakings which are on the block for privatisation.

The Department of Investment and Public Asset Management has stated: “As a general policy, PSUs (Central/ State/ Joint)/State Governments and Cooperative Societies controlled by the Governments are not permitted to participate in the strategic disinvestment of other PSUs as bidders unless otherwise specifically approved by the Central Government in public interest”.

PSUs are undertakings in which the Centre/State Governments or jointly with central and/or State Governments have majority ownership (with shareholding of 51 percent or more) and control. If, the Government decides to shed at least 51 percent, it is termed as strategic disinvestment or to put it plain words, privatisation.  

The logic given by MoF is that transfer of management control of the undertaking from the Government to any other Government organization or state Government will result in continuation of the “inherent inefficiencies” of state-run firms; hence such transfer would defeat the very purpose of the policy.

This is a candid acknowledgment that generally PSUs are prone to ‘inefficiencies’ and ‘mismanagement’. The overarching reason behind this is bureaucratic and political interference in the working of these undertakings - not merely in policy-making but also in their day-to-day functioning. Although things have improved under the Narendra Modi dispensation (courtesy its focus on a ‘policy driven state’, and increase in ‘transparency’), the basic ingredients remain intact.

Under Prime Minister Modi who is committed to what he himself described as ‘naa khaoonga, naa khaane doonga’, while it is hard to fathom cases of the ministers asking the managements of PSUs for favors, one cannot rule outgross interference in their working which undermines their ability to achieve high efficiency, keep costs low and stay afloat in a competitive environment. 

The majority ownership and control by the Government gives the bureaucrat a feeling of exercising command (albeit remote) over management of the PSU. The latter readily acquiescing adds to the sense of bureaucratic power. Indeed, it is this perverse relationship that lies at the root of problems afflicting most of the PSUs.

The way forward is for the Government to relinquish majority ownership and control. It must not exercise even ‘indirect’ control in a PSU which would happen if another CPSU is allowed to bid for it. Therefore, the decision of the MoF is very apt. But, is the Government serious? The facts don’t instill confidence.

In 2017-18, Union Government sold 51.11 percent of its shareholding in Hindustan Petroleum Corporation Limited (HPCL) - an oil refinery and marketing PSU - to another PSU in the upstream oil and gas segment namely, Oil and Natural Gas Corporation (ONGC). During 2018-19, it sold 52.63 percent of its stake in the Rural Electrification Corporation (REC) to Power Finance Corporation (PFC) - both PSUs in the power sector. Going forward, during 2019-20, it sold 100 percent of its shareholding in NEEPCO and 75 percent in THDC India Limited to National Thermal Power Corporation (NTPC).

In all the aforementioned sales, the purchaser being another CPSU namely ONGC/PFC/NTPC, the Government continues to have effective ownership and control over the divested undertaking viz. HPCL/REC/ NEEPCO/THDC. This defeats the very purpose of the disinvestment policy.

Second, in her Budget speech for 2019-20, the Finance Minister, Nirmala Sitharaman had stated that the intent of the government was to change the existing policy from “directly” holding 51 percent or above in a CPSU, to one whereby its total holding, “direct” plus “indirect”, is maintained at 51 percent.This too militates against the objective of privatisation. To illustrate, let us take the case of Indian Oil Corporation Limited (IOCL). In addition to its direct stake of 51.5 percent, the Union Government holds more than 51 percent in other CPSUs, which in turn,  hold shares in IOCL. Thus, Life Insurance Corporation (LIC), which is 100 per cent owned by the GOI, holds 6.5 percent in IOCL. ONGC which is 63 percent Government-owned, holds 14 percent in IOCL. Oil India Limited (OIL), which is 60 per cent owned by the Union Government, holds five percent shares in IOCL.

The “indirect” stake of the Union Government in IOCL via LIC/ONGC/OIL being 25.5 percent, it can reduce its direct stake in IOCL to 25.5 percent (thereby sending a message that it has been privatized) and yet, including the “indirect” control, it will still have majority stake of 51 percent.

The direct shareholding of the Government being less than 51 percent, the concerned PSU (read: IOCL) can avoid coming under the scanner of the statutory watchdogs viz. Central Bureau of Investigation (CBI), Central Vigilance Commission (CVC), and the Comptroller and Auditor General (CAG). It leads to a disturbing scenario in which the bureaucrat will be calling the shots sans accountability.

There is nothing to suggest that the Government has backtracked from the above proposition of retaining ‘indirect’ control.

In the order of MoF, prohibition on PSUs from bidding for other CPSUs is not absolute. A caveat in the order “…unless otherwise specifically approved by the Central Government in public interest” allows for the possibility of the former purchasing shares of the latter subject to the approval by the Union Government.

Put simply, the GOI can always ask a PSU to buy the shares of another CPSU it wants to divest (as it has been doing in the past) and justify the same in the public interest. For instance, all aforementioned share sales during 2017-18/2018-19/2019-20 were made primarily to achieve the target of disinvestment proceeds in turn, the fiscal deficit target - fixed for the respective years. The central government can argue that this was in public interest.

Likewise, while permitting PSUs to take charge of other CPSUs in future it could take recourse to this very argument and get away from the rigor of the MoF circular.

The MoF circular is also anomalous in as much as a State government keen to allow its PSU to buy shares of another PSU - albeit in public interest - will need the permission of the central Government.

To conclude, having taken a conscious decision for undertaking ‘strategic dis investment’ of a CPSU (in the budget for 2021-22, FM had announced privatization of’all’ CPSUs in non-strategic sectors and privatization of PSUs even in the strategic sector subject to retaining at least one firm in the public sector), the government should go lock, stock and barrel and ensure that the process results in vesting majority ownership and control with the private player.

This will require modification of the MoF circular to delete the wordings “……. unless otherwise specifically approved by the central government in public interest”. If, public interest is so compelling, this could be served by not divesting the concerned PSU rather than throwing it in the lap of another PSU which raises many hackles. The Centre should also ensure that it doesn’t hold any shares in the divested entity even indirectly.  

The Government should also unshackle the process of strategic disinvestment from bureaucratic red-tape. It may set up a holding company (HC) where all its shares in PSUs are vested. The HC to be manned by eminent professionals should be fully empowered to take all decisions in regard to valuation, quantum of shares, timing of sale, etc., keeping in mind the market conditions.