Govt Needs To Backtrack Their Divestment Roadmap, Says CareEdge

As the finance minister prepares to present the Union Budget, attention turns to divestment plans. Despite missing targets for five years, the government has a significant opportunity to divest up to Rs 11.5 trillion in the coming years, based on current market capitalisation. However, progress has been hindered by various factors, including market volatility, procedural delays and litigation, stated CareEdge Ratings in a report.

While the government has relied on small-ticket Offer for Sale (OFS) divestments, big-ticket sales are necessary for substantial proceeds. With a comfortable fiscal position due to strong non-tax receipts, the government may not prioritise divestment this year. Nevertheless, they are likely to stick to the FY25 target of Rs 500 billion in miscellaneous capital receipts, with potential divestments including Shipping Corporation of India, Pawan Hans, and CONCOR.

The government's divestment performance has been underwhelming. In the interim budget, the FY24 target was lowered to Rs 300 billion from Rs 510 billion, but the actual divestment totalled only Rs 165 billion, a mere 32 per cent of the initial target. The FY25 target was set at Rs 500 billion. The shortfall was due to the lack of big-ticket divestments, highlighting the need for substantial sales to meet targets.

The government's divestment performance has been inconsistent. Despite a strong showing in FY18–FY19, the actual divestment has fallen short of the budgeted target in four of the last five years, with an average achievement rate of just 63 per cent. Although FY23 saw a brief improvement, FY24's performance lagged again. 

The reduced target in FY23 made the achievement seem better than usual. However, the government has consistently set ambitious targets in Union budgets, only to miss them for five years straight since FY20. In FY24, the coal sector led divestment, with Coal India, NLC India, and NHPC Limited contributing Rs 42 billion, Rs 21.3 billion, and Rs 25 billion, respectively, through the Offer for Sale (OFS) route.

The government's strong non-tax revenue collections have cushioned their finances, reducing the urgency for divestment. However, the reliance on small-ticket offer-for-sale (OFS) routes has limitations. To achieve substantial divestment proceeds, the government needs to explore big-ticket strategic divestments, which involve transferring management control. Successful divestments in FY18–FY19 were driven by public offerings, share buybacks, and strategic divestments, including notable sales such as SUUTI holdings, ONGC's acquisition of HPCL, and PFC's acquisition of REC. 

To achieve significant divestment targets, the government must consider big-ticket strategic divestments beyond reliance on OFS routes.

Despite pandemic and geopolitical challenges, Central Public Sector Enterprises (CPSEs) have shown resilience, with aggregate net profits rebounding to Rs 2.1 trillion in FY23, growing at a 10.4 per cent CAGR from FY19. The number of loss-making CPSEs decreased from 70 to 57, but 23 per cent still incur losses, impacting the exchequer. To minimise this impact, the government could consider divesting or liquidating loss-making CPSEs like Bharat Sanchar Nigam and Mahanagar Telecom Nigam.

The analysis of 59 listed CPSEs and 15 PSBs/insurance companies reveals a divestment potential of approximately Rs 11.5 trillion at current market capitalisation, assuming the government retains a 51 per cent stake. This includes Rs 5 trillion from CPSEs and Rs 6.5 trillion from PSBs and insurance firms. Top firms with divestment potential include Indian Railway Finance Corporation, Hindustan Aeronautics, Coal India and Oil and Natural Gas Corporation. However, the government may consider strategic, profitability, and social factors before divesting these entities.

Future Course Of Action

India's government is reevaluating its divestment strategy after missing targets for five years. Despite a comfortable fiscal position, the government aims to meet its Rs 500 billion divestment target for FY25 through big-ticket sales, including the sale of the entire 63.75 per cent stake in Shipping Corporation of India (SCI), which will generate a revenue of Rs 125 to 225 billion. Further, there is a need to speed up the ongoing divestment plans of Pawan Hans and CONCOR. 

The government needs to revamp the IDBI Bank divestment strategy, which seems uncertain. The Petroleum and Natural Gas Minister has already shelved the divestment plans of BPCL, which is another pain point.

The government may focus on asset monetisation if divestment faces headwinds, having already monetised Rs 1.6 trillion in assets in FY24 under the National Monetisation Pipeline. Despite favourable market conditions, procedural delays and litigation may slow divestment progress. This is the opportune moment as NIFTY is soaring around its all-time high to scale up the divestment plans after resolving the potential laggard of procedural delays, litigation issues, and pricing matters.