In todays Finshots we see how the government went from being reluctant sellers to prolific disinvestment agents
The Story
Last week the government said that it intended to sell 5% of its holding in IRCTC (Indian Railway Catering and Tourism Corporation) and raise ₹2,700 crores in the process. They were hoping to inch closer to the divestment target for FY23 — set at ₹65,000 crores. And since the government has already met 95% of its target — ₹28,000 crores from selling shares in public sector enterprises and ₹34,000 crores from dividends, they’ll probably get there sooner than later.
However, governments haven’t always had much success with disinvestments and we thought we’d offer you a brief account of the matter and see how far we’ve come with the disinvestment process.
In 1991 India faced a massive financial crisis. The Gulf War in 1990 and the resulting oil shock depleted our resources entirely. We barely had money to pay for our imports. And this is when the government considered the idea of selling bits and pieces of public enterprises to improve the state’s financial health.
The objectives were twofold. One — to promote close collaboration with private sector enterprises. And two — raise money.
Anyway, by 1991, the government began setting up committees to help deal with the many issues associated with disinvestments. Valuation problems, labour issues, sourcing buyers, etc. But since this was a fairly new program it was dogged by issues and controversies. There were allegations that the shares were disinvested inappropriately which ultimately cost the state a good chunk of money. And the government had to go to the drawing board once again. They slowly improved their methods between 1992 and 1993, but then the market conditions took a toll on the process as most buyers didn’t even want to make a bid.
The subsequent years were no better and disinvestment really didn’t take off until the turn of the century. For instance, between 1991 and 2000, the government aimed to raise ₹54,000 crores but only ended up raising just half that sum. However, after the millennium, things changed pretty quickly. The Vajpayee government started privatising entire firms despite severe opposition.
Now here’s the thing. Not all disinvestments are born equal. There’s minority disinvestment. Here the government retains a majority stake (typically greater than 51%) while selling off a small piece of the public sector undertaking to other investors. These are typically low-risk endeavours. The government can pocket a little bit of money and they don’t get a lot of backlash, since the government retains management control. This is how most disinvestments happen. And for the longest time, the government persisted with this idea because they didn’t want to spook people.
But there are other kinds of disinvestments. — a majority disinvestment for instance. This happens when the government sells a majority stake to investors while ceding management control. When the Vajpayee government sold Modern Foods to HUL, they first sold 74% of the company to a private enterprise. That’s a majority disinvestment. And then there’s the most extreme version — complete privatisation when the government sells the whole company off to a private buyer.
This is rare. Very rare. One example includes the sale of Air India to Tata. Anyway, between 1999 and 2004, the government raised ₹24,260 crores by privatising several government-owned firms. The pace slowed down once again between 2004 and 2009 and the government only raised a measly ₹8000 odd crores. However, the next few years would wholly cement the Indian government’s position on disinvestment as the government sold shares to the tune of over ₹1 lakh crores. And the next 5 years, the BJP government did one better as they raised close to ₹2.8 lakh crores.
Now bear in mind, the government wasn’t always selling shares to private investors. Sometimes, they’d simply sell their stake to another PSU. For instance, the sale of HPCL to ONGC. So once again, not all disinvestments are equal and it doesn’t always drive home the point that Prime Minister Narendra Modi made in 2014 — “The government has no business to do business.”
But the fact that subsequent governments have continued to build on the idea of divesting government stake in multiple businesses prove that India is going down the route of privatisation one way or another.
Is it the right thing to do? Well, that’s a contentious topic. If the government can pull off a sale without upsetting a lot of people, then you could argue that they did it masterfully. But when they sell companies with a lot of collateral damage, it can upset a lot of people.
In any case, we’ve already written stories on that subject. So hopefully that wraps up the story for now.
Until next time…
Also, don't forget to share this article on WhatsApp, LinkedIn and Twitter
Ditto Insights: Saving on Taxes
Is your HR asking out to submit proof regarding the tax deductions that you said you'd claim this year? Well then maybe it's time you produce that proof. And if you don't have it yet, you should probably consider buying insurance. They are tax-exempt.
1. Health Insurance:
Under section 80D, you can claim tax deductions upto ₹1 lakh depending on your age.
Let’s say you’re under 60 and paying premiums for yourself and your family (spouse & children). In this case, you can avail up to ₹25,000 in tax deductions. Now add your parents to this and you can save even more. How much? you ask.
If they’re under 60, you can claim tax deductions of up to ₹50,000.
Over 60, and you can claim deductions of ₹75,000.
In case both you and your parents are 60+, you can deduct ₹1 lakh from your taxable income.
2. Term Insurance
Term insurance is quite literally a lifesaver. But you can claim deductions of up to ₹1.5 lakhs under Section 80C.
And hey, if you're looking to buy health or term insurance, talk to our advisors for free today. You'll have some of the best advisors at your fingertips.
1. Go to Ditto’s website — Link here
2. Click on “Book a FREE call”
3. Select Term Insurance or Health Insurance
4. Choose the date & time as per your convenience and RELAX!
And our advisors will take it from there!
