Dis-investment

Dis investment, a term frequently heard from the present government of India. Dis-investment is diluting the investments. As per SEBI’s norms, government should hold minimum 25% of share in every public sector entity. If government has more than 25% of share, it can dilute the holdings to raise capital if and when needed.

Why GOI opt for disinvestment? Government’s most of the income will be from taxes. If the expenses go beyond the income generated, a term fiscal deficit comes into picture. Fiscal deficit, in layman terms “lack of money”.

Fiscal deficit will force government to borrow money from either domestic or international market. GOI will become unviable to move forward in investments. This situation in turn will affect the nation’s private investments as well. Economics says, “Private investments can be accentuated only if public investments are done to an extent”. Fiscal deficit not only affects the efficient governance but also the investment ability of the nation.

Fiscal deficit can be efficiently faced by preventing it rather than curing. In order to prevent fiscal deficit either GOI has to find ways for other income or reduce the expenditure. GOI’s expenditure will be segmented as planned expenditure and unplanned expenditure. GOI, If decides to reduce the planned expenditure it will affect the GOI’s quality and actions to be taken for public. Unplanned expenditure is customarily beyond planning and control. So, with no other option GOI has to beget ways to generate other income.

One of the other income methodologies identified by GOI is to dilute its holdings in public sector entities. If GOI has more than 25% of holding in public sector entities, it can dilute the holding at either current market price, premium or at discount to general public.

For the FY2014, GOI disinvested 10% of its stake in Coal India on January. Coal India disinvestments created a record by generating Rs.22557.3 crore as revenue. Life Insurance Corporation has grabbed 1/3^rd of disinvestment stake, single handedly contributed Rs.7000 crore of the revenue. All insurance companies together contributed to about Rs.11360 crore, FII’s contribution Rs.5919 crore, banks contributed Rs.2500 crore and Rs.603 crore were contributed by mutual funds.

In FY2015, GOI has set the disinvestment target as Rs.41000 crore.  Disinvestment process was successfully started by diluting 5% stake in Rural electrification Corporation Ltd (REC), satisfied Rs.1550 crore of target.  Followed by REC, Metals and Minerals Trading Corporation of India’s (MMTC) 15% stake was diluted couple of days back which further generated Rs.800 crore

NTPC, BHEL, Rastriya chemicals & Fertilizers Ltd, NMDC, IOC are some of the public entities that are in queue for further dilution to achieve the quoted target.

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