Divestment: Weighed down - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Divestment: Weighed down

Sep 30, 2003

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

Ride the Indian Real Estate Revival with this 'Different' Smallcap Stock (Profit Hunter)

Mar 23, 2021

Affordability in the housing segment has never been so good in last one and a half decade. Here's how you could make the most of it...

My Latest Stock Recommendation (Fast Profits Daily)

Oct 9, 2020

How I picked an exciting stock using trends from both the commodity and equity markets.

Data is the New Oil but It's Also the New Sugar. Here's How to Fight it (Profit Hunter)

Jun 1, 2020

Is too much data hurting your quest for market beating returns?

Quantum Mutual Fund: Hum woh nahi hain (The Honest Truth)

Apr 29, 2020

Ajit Dayal on how the mutual fund industry robs you of your wealth.

This One Trigger Could Turnaround Yes Bank's Stock Price (The 5 Minute Wrapup)

Oct 16, 2019

If Yes Bank manages to do this, it could be the start of a much-needed turnaround for the bank.

More Views on News

Most Popular

Hotel Stocks Will Reward Investors (Fast Profits Daily)

Jun 8, 2021

This is why I'm bullish on the hotel and hospitality sector.

My 'Unlock' Investments (Fast Profits Daily)

Jun 11, 2021

The best unlock investments you can make in the market.

The Most Visible Sign of India's Revival is on Two Wheels (Profit Hunter)

Jun 9, 2021

Investing in the best stocks could result in wealth compounding on a massive scale.

How I Discovered a 400-Year-Old Open Secret to Extreme Wealth (Profit Hunter)

Jun 11, 2021

Charlie Munger's open secret about investing success.


India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get this Special Report,
The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms