X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Divestment: Weighed down - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Sep 30, 2003

    Divestment: Weighed down

    Divestment has been one of the key issues over the last decade for the Indian government. The past (and present) governments have been consistently looking at disposing off their stakes in various companies – majority of which are loss making. However, their efforts at either to turn them profitable or to divest them have been in vain. In this article, we look at how has the government fared in its efforts to ‘get rid’ of PSUs and what has been obstructing their efforts at going ahead with divestments.

    The unsuccessful efforts of the government at divesting PSUs can be gauged from the table below:

    (Rs bn) Budgeted Actual Actual as % of Budgeted
    FY92 25 30 120%
    FY93 25 20 80%
    FY94 35 0 0%
    FY95 40 51 128%
    FY96 70 4 6%
    FY97 50 4 8%
    FY98 48 9 19%
    FY99 50 59 118%
    FY00 100 17 17%
    FY01 100 21 21%
    FY02 120 36 30%
    FY03 120 34 28%
    FY04* 132 11 8%

    * To date

    Looking at the above table and in the wake of the continuing setbacks that the divestment process has been facing, the government is likley to miss its target of garnering Rs 780 bn from divestment proceeds budgeted in the Tenth Plan period (2002-07).

    However, what has been impeding the divestment process? India has 250 PSUs spread across various sectors, largely in the manufacturing segment. Out of these 250, around 50% are loss making. The loss-making status is one of the key reasons, which has affected the government’s efforts at meeting its budgeted targets, as buyers are difficult to come by. However, apart from this, there are various other factors also, which create a hindrance for the divestment process to gather steam. Some of them have been listed below:

    • Prior to the divestment, loss-making PSUs have to undergo a complete financial restructuring so as to make them saleable. But the Government seems to be hesitant on this front, as it requires huge expenditure to bring these PSUs back on track, which is a big task for the Central and State governments considering their cash-strapped positions and the huge deficits they are currently running.

    • Moreover, there is always the uncertainty of the divestment not actually going through, even after if the respective ministries approve it. This prevents the government from spending for the revamping/restructuring process (if the company is loss making), as ultimately the status (ownership) of the companies may remain status quo. Just to put things in perspective, the recent postponement of divestment of National Fertilisers Ltd. (NFL) was prima facie due to the fact that the bids received were below the reserve price set by the government. Another example could be Shipping Corporation of India (SCI) whereby the prospective bidders backed out (for various reasons) as the bidding process came near.

    • Other hindrances like post-closure adjustments, overdue statutory payments and liquidation of old losses, which sometimes exceed sale proceeds, impede divestment. Examples to this would be I.T.D.C. Hotels and Pradeep Phosphates Ltd.

    However, while the government continues to face problems on the divestment front, whether it is for the reasons stated above or for reasons like the requirement of Parliamentary approval (e.g. HPCL and BPCL), the fact is that the more the delay in the process, the higher the government tends to lose financially in terms of budgetary support, waiver of loan/interest and guarantees, which the government furnishes on behalf of PSUs.

    Moreover, apart from the advantage to the government, change of management is also advisable for the companies being divested and which have the potential to deliver results, albeit under professional management. Some examples, which prove this point, are:

    • Post the acquisition of Modern Foods India Ltd. (MFIL) by HLL, the former has registered an improved performance as its annual sales growth has increased by 80%.

    • In the case of Pradeep Phosphates Ltd., the monthly losses of Rs 120 m have been drastically controlled to about Rs 30 m and the company hopes to break-even in the current fiscal.

    To sum it up, we feel that divestment is in the interest of not only the government (fiscal position) but also for the companies (performance tends to improve), shareholders (better returns) and common man (tax collections are used more efficiently rather than spending the monies to support the loss making units).

     

     

    Equitymaster requests your view! Post a comment on "Divestment: Weighed down". Click here!

      
     

    More Views on News

    Insider Leaks Equitymaster Stock Picks (The 5 Minute Wrapup)

    Jul 25, 2017

    Equitymaster HQ has been infiltrated. Valuable stock ideas have been leaked. Who's responsible?

    Raymond and Other 'For Profit' Companies Who Don't Care about Shareholder Returns (The 5 Minute Wrapup)

    May 27, 2017

    What happens when minority shareholders are short-changed in the normal course of business?

    Why Commission Driven Model In Mutual Funds Should Be Eliminated... (Outside View)

    Feb 15, 2017

    PersonalFN believes SEBI has taken a step back-apparently in the admission of it going overboard with the regulations.

    This Book Changed How I Looked at the World of Man and Money (Vivek Kaul's Diary)

    Aug 24, 2016

    And here's your chance to claim a free copy of this book...

    The Developed World is Dying because of Demographics, Debt, and Deflation (Vivek Kaul's Diary)

    Aug 12, 2016

    And Why India's demographic dividend could turn out to be a doubtful debt...

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    MARKET STATS