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Disinvestment issues take center stage - Views on News from Equitymaster
 
 
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  • Jul 19, 2000

    Disinvestment issues take center stage

    Once again stock markets will be looking forward to an announcement from the government pertaining to disinvestment of holdings in the oil sector. A positive outcome could provide a much-needed trigger to the stock markets.

    Let's recap. There are 235 central PSUs, employing a capital of Rs 2.7 trillion. Of these, 106 are loss making. The cumulative net profits of these companies amounted to a pathetic Rs 132 bn. Of these, it would not be wrong to say, a bulk of the profitable assets are those of the oil companies. In short, the PSUs are inefficient, but at the same time an asset rich class of companies.

    Disinvestment makes sense, both for the government and for the country. The government because it is in desperate need of funds, over Rs 1,100 bn. Disinvestment has the potential to unlock a huge amount of funds which could be used for various purposes including repaying debt, funding the deficit and upgrading technology in the PSU sector.

    The country should demand such a measure, as privatization will help increase the efficiency with which the capital is deployed in PSUs. Currently the capital generates a pathetic return on capital, a little over 4%. As the public sector accounts for approximately 15% of total output, an improvement in efficiency will have a significant effect on the economy as a whole.

    Even as the case for privatization is undisputed in knowledgeable circles, the government may not hesitate in further delaying reform. This is due to the connotations, which are best understood by politicians themselves. As stock market investors, however, disinvestment has a key significance at this point in time. The markets are in need of a trigger. A well accepted disinvestment plan might as yet boost the buying interest in the markets.

     

     

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