This article is written by Indrasish Majumder, a student of National Law University Odisha. 

The resolution is in line with the aim of the government to ponder on stake sale in government institutions, shore up finances thereby allowing the PSUs to generate resources. Disinvestment for FY21 by the government has been marked at Rs. 2.11 lakh Crore. 

For the FY20 a target of Rs. 1.05 lakh crore has been decided by the Government. The process relating to the disinvestment of Air India has already been commenced, and bids for a 100 percent stake in the Air line has been requested from potential buyers.

Meaning of Disinvestment 

The selling or liquidation of assets by the Central and State Public Sector Enterprises, projects or any other fixed assets is referred to as disinvestment. Disinvestments are undertaken by the Indian Government for several purposes from aiming to lessen burden on the exchequer, gather money for specific purposes so as to reduce shortfall in revenue collection from other regular sectors of the economy. However, in certain situations disinvestment may be undertaken by the government for privatization of assets as well. It would however be incorrect to assume all disinvestments as privatization. Disinvestments are often initiated by the government to aid country’s growth in the long term; additionally, it also aids the government and the concerned companies to reduce their debt ratio. The capital market of India is strengthened and advanced as Disinvestment brings forth a significant share of PSU ownership in the market.

Merits and demerits associated of Disinvestment 

Disinvestment allows the utilization of large proportions of public resources in non-strategic public sector subdivisions for employment in arenas located on a much higher pedestal in the social priority namely: health, family, philanthropy. Disinvestments additionally aids in the easing of the sizable public sector debt in the International arena. Some benefits of disinvestment can be as follows:

Privatization would help in reduction of the outflow of sparse public resources, assisting the “non strategic public sector units, consequently.

Transference of commercial risks wherein the money of the taxpayers locked up in the public sector is left vulnerable to the private sector whenever a company steps in is facilitated by the process of privatization.

The release of tangible and intangible assets would be ensured in the process of Privatization, e.g. significant manpower stuck in the management of PSU’s and ensure the reallocation of such assets in sectors of greater priority.

Private companies would become more self-sufficient upon being subjected to the plethora of market disciplines in the process of Disinvestment.

Greater wealth distribution would be ensured in the process of Disinvestment by presenting shares of privatized companies to interested small scale investors and workers.

The exposition of the public sector to investment from the private sector shall ensure a holistic augmentation of economic activities, employment opportunities and greater tax returns in the long run.

Privatization because of the competitive nature of companies shall ensure greater choices and increased product quality for customers.

However, the amount earned by means of disinvestment per year from 1990-2004 amounted to 2056 crore, which is inadequate considering the debt ratio of the Indian Government. Furthermore, the process of disinvestment lacks transparency as how the money earned from disinvestment is being utilized is never publicized.

Despite the benefits of Disinvestment for the economy and companies, the disinvestment of profit earning public sectors will snatch away from the government significant monetary returns. There is additionally no reason behind the department of disinvestment retaining equity in disinvested PSU’s e.g. Modern Foods (26%), if it is ultimately governed by the ulterior motif of skimming commercial risks.

The unavailability of sufficient manpower never hinders the growth rate of the social sector, therefore the same reason should not be cited by the government to justify Disinvesting.

Only the government can best ensure the market system is adequately regulated and make sure, the private companies are not purely profit motivated and take care of the customers’ interest.

It would be incorrect to assume that Privatization is influenced by the public selling of shares. There have been instances wherein the sale of shares between 1991-1996 has attracted only a limited number of employees, and were not very affable to small investors and employees. 

Monopolies can never bring forth any good, fair and healthy completion is what can benefit the customers the most. Perceiving from this angle, disinvestment might not be the most effective of options.

It has been explicitly mentioned by Hindustan levers that it harbors no plans for amalgamating with Modern Food Industries for capital infusion on January 2002.The party in support of this disinvestment had via this private sector investment the taxpayer’s money would be secured.

Therefore, as can be perceived disinvestment has competing effects, and it should be left unto time to ascertain the effectiveness of the current Disinvestment policy.

Explaining the Rationale behind the LIC Disinvestment policy 

The government in clarifying the rationale behind the LIC stake sells policy comments, the categorization of companies on the stock exchange in addition to regulating a company allows access to markets (financial) and determines its value. Retail investors are also in process allowed an opportunity to get a share in the wealth created. The government has agreed to auction a part of tis holding to the to LIC by IPO (Initial Public Offering). However, with regards to the IPO there are a few things that needs to clarified and borne in mind:

Firstly, the LIC is owned 100 percent by the Government and even if there is a disinvestment of shares it is not likely to exceed 10% of the shares to the public sector insurance firm. It needs to be taken into consideration LIC is governed by the LIC act, so before the IPO is executed the act needs to be amended accordingly.

As mentioned above the Modi government for the FY20 has set a disinvestment target of 2.1 lakh crores and the disinvestment of LIC is supposed to fetch 70-80 thousand crore. The listing shall make the IPO one of India’s largest in terms of “market capitalization”. It is being contemplated by experts the IPO shall attract foreign investors as well.

LIC has consecutively been ranked as the country’s biggest insurer, with a share of 76.28%. LIC has a plethora of subsidies e.g. IDBI Bank. NPAs for LIC increased to 6.10 for the initial six months of 2019-2020. Insurers have successfully doubled the Gross NPAs in the last five years. Therefore, perceiving the initiative from a holistic perspective entails certain pros to it as well.

Adverse Employee reaction to the Disinvestment 

In reaction to recent disinvestment plan Employee unions however have carried out demonstrations opposing the IPO alleging the move to be in opposition to national interest.” The general contention of the employee union asserts LIC has contributed significantly to the economic augmentation of the country and dissolution of the government’s power hold would jeopardize the country’s fiscal and financial autonomy. The statement has been issued while posing threats that the LIC employee unions would go on an indefinite protest to the plan of the government.

The plan of disinvestment has been proposed by the government in lines with the “maximum governance, minimum government” policy but straightforwardly the government is not entitled to authorized or impede the machinations of a business by being in the business mantras and increasing its fiscal revenues. As commented by the BSP MP Danish Ali “Congress is also against this step of the government. The employees are against the disinvestment and say that this is against the national interest. It will endanger the economic sovereignty of the people and will put the savings of crores of policyholders at stake.”

Although nothing conclusive can be inferred from the immediate public reaction, there has been deliberations on the policy from both factions of those in support of the policy and those who oppose it, commenting on the initiative to be in refutation of the interests of the public and terms it a “family jewel being sold out”. However, on the other side of picture the government assures the decision has been arrived at only after taking the interest of the public in consideration and that in the long run greater transparency shall be ensured and increased public participation be allowed.

Ways to disinvestment 

For the purpose of attaining the various goals and objectives related to disinvestment, a plethora of methods of disinvestment has been suggested and implemented e.g. Public offer, refers to the distribution of shares of the public sector at a predetermined price, via a general prospectus. The offer is reached out to the public via known market intermediaries. The disinvestment of LIC can be brought in the purview of this category of disinvestment.

Equity sale refers to the selling of equity via auction of shares between pre-determined clients, which can extend to large numbers. Merchant bankers can aid in the determination of price for PSE’s.

Offer for sale refers to a definitive price for selling of public enterprise, attracting bidders and allowing the tender to the highest bidder.

In cross holding disinvestments, the government sells a part of its shares to one or more PSU’s.

The Golden share manner of disinvestments ensures the government retains a 26% share in the PSU, thereby ensuring the government status as the majority shareholder.

In Warehousing manner of disinvestment, financial institutions which are government subsidiaries are expected to purchase the shares from the government in select PSU’s and keep it until a third buyer agrees to purchase it.

Finally, there is the strategic sale manner of disinvestment, wherein the government sells the major portion of shares (51%) and also bestows the power of management to a strategic purchaser. The PSU’s share shall be domineered by the department of investment and the price of disinvestment shall be based on the market prices and is not prefixed.

What is IPO?

IPO or Initial Public offering refers to the procedure via which a private company is made public by the selling of its shares and stocks to the public. The company that agrees to be listed on exchange and go public in process can be either a newly incorporated start up or old company. By disinvestment the company can acquire “equity capital”, either in manner of issuing new shares to the public or by selling existing shares without trying to acquire any new capital. The company offering to sell shares is termed the ‘issuer’ and the aim of the company is furthered with the help of investment banks. The shares of the company post IPO are bartered in the open market and can be sold further in manner of “secondary market trading” by investors.

Conclusion 

It can in the end be concluded it is too soon to reach make any deductions relating to the disinvestment of LIC. The government in the FY20 has projected an enterprising disinvestment target. The disinvestment policy of LIC, is a humongous initiative and a significant “leap of faith” in furtherance of the same aim. An improvement at the operational level of state insurer might be hopefully witnessed in due course. The decision shall ensure LIC does not go in the direction that was followed by BSNL and lose out on its share of markets in future. The IPO shall strive towards making the company more competitive and vigorous. However as has been mentioned above and exemplified in the contention of majority employees the dissolution of the government shares might in the long run threaten the financial sovereignty of India.

The effectiveness of the policy can only be adjudged in the long run. However undoubtedly the government has ensued a valiant step by incorporating LIC in the category of Public Listing Disinvestment list of the budget 2020. There are pros and cons to the plan, but the effectiveness of the plan shall gain prominence, only after the negative reactions to the policy (protest of the LIC employees) change has been addressed, the concerns assured, additionally the legal hurdles related to the plan needs to be exonerated in due course. If the same concerns are addressed and the hurdles removed the disinvestment plan of LIC can even out or reduce the budget deficit that has been multiplying over the years, while at the same time ensuring a humongous leap in the price of per incremental disinvestment.

Bibliography

1. https://economictimes.indiatimes.com/markets/ipos/fpos/government-to-disinvest-lic-partially/articleshow/73835117.cms
2. https://www.financialexpress.com/what-is/disinvestment-meaning/1762574/
3. https://economictimes.indiatimes.com/news/politics-and-nation/mps-curious-about-government-roadmap-for-lic-listing/articleshow/73973909.cms
4. https://psuwatch.com/heres-all-you-wanted-to-know-about-lic-disinvestment/
5. https://www.thehindu.com/business/budget/budget-2020-unions-protest-lic-stake-divestment-move/article30715821.ece
6. http://iasmaker.com/contents/display/methods-of-disinvestment-in-india/
7. https://economictimes.indiatimes.com/definition/ipo
8. https://www.business-standard.com/budget/article/divesting-stake-in-lic-a-leap-of-faith-i-t-structure-now-more-complicated-120020101067_1.html

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