Central Public Sector Enterprises (CPSEs) continue to dominate the Indian economy, contributing around 20% to the GDP. With an aggregate turnover of R20.62 lakh crore from 230 operating enterprises in 2013-14, CPSEs have recorded a compound annual growth rate of 11% over the previous five years. While 72% of CPSEs recorded profits, of R1.49 lakh crore, in 2013-14, the top 10 profit-making CPSEs comprising enterprises in mining, oil & gas and electricity contributed 57% of the CPSE profits.
While CPSEs engaged in oil & gas, mining, steel and electricity contributed over 78% of the aggregate 2013-14 CPSE turnover, it is observed that CPSEs are engaged in sectors like agro-based industries, chemicals & pharmaceuticals, medium & light engineering, consumer goods, textiles, tourist services, etc. where there is a major presence of the private sector.
Since adopting the economic liberalisation policies in the early 1990s the government also initiated the disinvestment policy for CPSEs. Disinvestment was initially viewed as a measure for supplementing financial resources and was largely confined to divesting equity shares in select CPSEs in favour of public sector financial institutions.
Subsequently, the government announced privatisation of non-strategic CPSEs through gradual disinvestment by sale of equity through public offerings or strategic sale to a private sector partner, with the government retaining at least 26% holding. The definition of strategic CPSEs were limited to defence, atomic energy and railway transportation sectors.
Disinvestment transactions were observed in the following categories: (i) Sale of minority shareholding of CPSEs through public floatation with the government retaining at least 51% equity stake—e.g. initial public offerings of Sail, Coal India, etc. (ii) Sale of majority shareholding in one CPSE to another CPSE – e.g. sale of Chennai Petroleum Corporation to Indian Oil Corporation and Kochi Refineries to Bharat Petroleum Corporation, (iii) Sale of a large block of shares with management control to a strategic partner through competitive bidding e.g. VSNL, CMC, IPCL, Balco, etc., (iv) Slump sale of CPSE assets— e.g. hotels of ITDC & Hotel Corporation of India, and (v) Sale of all or part of government residual shareholding—e.g Maruti Udyog, CMC, IPCL, etc.
However, over time, the disinvestment policies changed and decisions were taken to generally prohibit CPSEs from participating in disinvestment transactions, and sale of large block of equity shares with management control to strategic partners was effectively discontinued. The current disinvestment policy envisages: (i) Public offering by listed profitable CPSEs which do not meet the 10% mandatory public shareholding, (ii) Listing of unlisted net worth positive & profit making CPSEs through sale of government equity and/ or fresh issue of equity, (iii) Public offering by listed CPSEs through fresh equity issues to fund capital investment plans.
In all these cases, the government intends to retain at least 51% equity and management control in CPSEs. Strategic sale along with management control is to be considered only for loss-making CPSEs where efforts to revive the CPSE had failed.
The benefits to CPSEs, in the current disinvestment policies, are largely in improving corporate governance measures, as CPSEs are required to comply with the listing requirements mandated by Sebi/ stock exchanges and the Companies Act requirements in terms of disclosure norms, induction of independent directors, etc. Additionally, listed CPSEs have the option of raising resources for meeting capital investment through equity offerings, thus, reducing dependence on government funding as well as providing an avenue for government to raise resources through equity dilution.
The key requirements for CPSEs to remain relevant in today’s competitive world are (i) adopting a performance-driven culture, (ii) attracting experienced professionals with performance-linked compensation, (iii) ensuring that product/ service portfolio remains contemporary by developing/ acquiring technology, and (iv) building scale for addressing domestic market needs and expanding overseas. Most of these requirements can be met by providing requisite autonomy to the CPSE boards in taking timely decisions, without having to refer to their administrative ministries.
While the government has adopted a categorisation framework for CPSEs, giving graded levels of financial & operational empowerment to boards of CPSEs in line with their categorisation as Maharatnas, Navratnas and Miniratnas, there still remains a need to attract and induct talented and experienced professionals through adequate empowerment and autonomy in operations as well as strategic partners for accessing contemporary technology & knowhow and addressing go to market needs. A catalyst for these changes could be either through greater public shareholder scrutiny and investor involvement in general meetings or by induction of strategic partners.
In budget 2015, the government has set a disinvestment target of R69,500 crore, with an estimated Rs 41,000 crore through sale of equity stake in select CPSEs and R28,500 crore through strategic disinvestment, which could consider both loss-making and profitable CPSEs. In 2014, only R24,250 crore were raised against a target of R58,425 crore largely on account of stock market conditions not being conducive for achieving the desired valuations.
Essentially, disinvestment policy should focus on: (i) in the case of profit-making CPSEs, to broad-base shareholding, which enables public participation and adoption of good governance practices; and (ii) in the case of loss making CPSEs, inducting strategic partners with management control, which will bring in required investments, technology & knowhow and market access, along with effective utilisation of assets as part of its restructuring scheme.
It is important that CPSE performance be continuously monitored and whenever its sustainable viability is assessed to be doubtful, immediate steps be taken for inducting a suitable strategic partner to minimise net worth erosion.
The author is senior director, Deloitte Touche Tohmatsu India
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