In recent years, the proceeds from the sale of shares of public sector enterprises is contributing substantially to the government’s receipts in the budget. For example, in 2017-18, the government got around Rs 1.05 lakh crores from disinvestment. For 2019-20, the government’s target is Rs 90000 crores.
Disinvestment in the budget angle shows the receipts obtained by the government from the sale of the shares of PSEs.
There are different methods for the sale of shares. If the government is selling just minority shares, say, less than 50% of the shares in a PSE, it will continue to the owner of the PSE. In most cases, the government is retaining the majority shares while selling only a minor proportion of the shares.
But in the case of some enterprises, the government will be selling majority shares to a selected private sector or other entity and this method is called strategic disinvestment or strategic sale.
The PSEs for strategic disinvestment will be selected based on certain criteria. One such case is that the government may not be able to economically run the particular firm.
What is strategic disinvestment or strategic sale?
Simply, strategic disinvestment is transferring the ownership and control of a public sector entity to some other entity (mostly to a private sector entity). Unlike the simple disinvestment, strategic sale implies some sort of privatisation.
The disinvestment commission defines strategic sale:
“Strategic disinvestment would imply the sale of substantial portion of the Government shareholding of a central public sector enterprise (CPSE) of upto 50%, or such higher percentage as the competent authority may determine, along with transfer of management control.”
Various associated efforts like addressing issues such as capital restructuring, dividend, bonus shares, etc. will be made as part of this policy.
For 2018-19, the government has identified nearly 25 small CPSEs for strategic disinvestment. But, given the sensitive nature of the process (as strategic disinvestment means sale of the PSE), the process is taking too much time.
As a result, the government is facing difficulty to meet the disinvestment target.
In India, the strategic disinvestment route was less used. It was used only when the ruling party gets considerable majority as it needs substantial political will.
A revival of the strategic sale method occurred from budget 2016 onwards. The Government has proposed strategic sale or strategic disinvestment of PSEs for reviving them as well as to mobilize fund form the sale of shares of PSEs.
Recent changes in the process of strategic disinvestment- formation of Alternative Mechanism
In the past, the NITI Ayog and the ‘Department of Investment and Public Asset Management (DIPAM)’ played a critical role in strategic disinvestment. It was the NITI Ayog that selected the PSEs for strategic disinvestment.
But in March 2019, the government transferred most of the decision-making power to the Finance Minister led Ministerial panel called Alternative Mechanism (AM). This is to speed up the process of strategic disinvestment.
Role of the Alternative Mechanism
The AM is led by Finance Minister and includes Road Transport Minister (Nitin Gadkari) and the minister representing the administrative department concerned.
Formed in 2017, the AM’s role was setting the terms and conditions of strategic sale; but now bulk of the decisions on strategic disinvestment is to be made by the body.
Major decisions associated with strategic sale including the quantity of shares to be sold, the mode of sale and the final pricing of the transaction etc. are to be decided by the AM.
Similarly, decision of designing the principles/guidelines on pricing of shares, the selection of strategic partner/buyer, and the terms and conditions of sale are also to be decided by the AM. The AM can also decide on the timing of the sale and any other related issue regarding the transaction.
The AM earlier decided only the terms and conditions of the CPSE sale from the stage of inviting of expressions of interest (EoIs) till inviting of financial bid.