The story of disinvestment in India is a long-drawn and complicated saga. Initiated during the liberalization of the 90s, disinvestment continues to take centre stage before the onset of every budget session. While the underlying premise for disinvestment has always been to reduce the financial burden on the government, the overall contours of disinvestment have undergone significant changes over the years.

Barring a few businesses that are concerned with national security, governments are better suited to running public services and ensuring the creation of a conducive environment for the private sector to engage in commerce.

While the government plans to roll out its disinvestment policy, a clear vision and a strategy rethink is required, to ensure optimum realisations are achieved from disinvestments. 

Strategic disinvestment vis-à-vis strategic investment

The PSUs have had an important role in shaping the economy undoubtedly. The disinvestment route has always been cautiously used by governments to bridge the fiscal deficit through sale of non-strategic or loss-making assets. However, the government needs to shift its focus from strategic disinvestment to strategic investments.

Government should not focus on which companies are to be disinvested, rather, which ones to stay invested in. While this seems obvious, the ask here is a diametric shift in approach and culture where focus shifts to staying invested in only limited number of companies which are of strategic importance and consequently, disinvesting most PSUs.

The Asset Management Structure

As per the annual Public Enterprise Survey 2018-19 released in Feb 2020, there are 348 centrally controlled PSUs; this is in addition to the 10 plus banking and insurance companies and multiple state government-controlled PSUs. Assuming a very limited number will be categorised as ‘strategic assets’, most of the companies could be contenders for disinvestment.

Considering the sheer scale of disinvestment, it would be advisable for the government to form a separate “Asset Management” entity – ‘a trust fund’ which would have a controlling stake in all the individual PSUs to be disinvested. The number of such trust funds should be limited, however, sector aligned funds would be ideal. Each of these trusts needs to have a ‘management company’ whose sole objective should be to:

  • Optimise valuations
  • Optimise disinvestment route
  • Act as a strategic investor for startups and emerging technology companies in its respective sector.

This ‘trust’ and ‘management company’ should be managed by an independent board with an autonomy to make decisions. Its management would comprise of experts from relevant sectors and executives with prior experience in managing large funds. 

The monetisation structure

A broad-brush disinvestment strategy is not a sustainable approach. A management company should conduct a detailed diagnostic of each of the companies in the trust in line with the objectives previously stated. A detailed roadmap may be created to ensure that the peak strategic value is created over a period of (maximum) 5 years. Of course, there will be PSUs which will require ‘as is’ immediate sell off. In such cases identification of hidden value and most optimal structure will be needed. 

Strategic Alignment

The entire PSU space needs to be revisited from the point of strategic importance when it comes to strengthening bilateral relations between countries. While having broad stroke liberalised FDI policies may prove beneficial, it would be crucial to make a concerted effort to cement ties among nations through such cross investments which would be critical for the long-term success. 

The Long Game

While the success of this model may not be immediate, it is likely to bring returns in the long run. The potential of these companies will grow manifold, they will actively contribute in wealth creation, ensure government enjoys sustainable income (through dividends from the holding company), ensure asset appreciation through external markets, support to startup ecosystems, anchor bi-lateral ties, amongst other things. While these measures are absolutely radical in the Indian context, they are not unheard of and could be an interesting – and potentially valuable – experiment that may pivot ailing PSUs.

(A version of this article appeared in The Economic Times dated 25 June 2020)