All you need to know about Disinvestment

Last Thursday, government announced its intention to put the disinvestment reform train back on track to unlock values of unlisted public sector units. This very reform process of UPA-II has been put on the back burner last time because of strict opposition from the Left parties, who are not in the government presently. This strategic sale is one of the largest ever plan in the disinvestment arena to unlock the value of public sector units for investors, especially retail.

By divesting and making listing will also improve the corporate governance as it increases the pressure on the employees to scrutiny by investors. Listing is proving to be a major beneficial for the companies as it gets the responsibility to be answerable to the new board after getting listed.

The government has decided to unlock value in more than 100 unlisted public sector units. By this, the government is expected to garner about Rs.250 billion annually through this process and it has instructed other listed public sector companies to come with FPO (follow on Public Offer). It has been advised to the public sector units to maintain a minimum of 10% of its holding by the public. This policy structure is the brain child of Dr. Manmohan Singh, when he was the then Finance Minister way back in 1990’s.

The government wants to divest in companies which are running profitably for the past three years with a positive net worth and no accumulated loss. A minimum of 10% of the stake of these companies will be issued in the IPO. On this announcement by the government, the Prime Minister’s EAC chairman, Mr. Rangarajan had welcomed this move as a positive step in the right direction to support capital expenditure at a time when the financial market is in a tight spot. By deploying this proceedings in the right projects currently under review by the government will be a major booster for the economy and will create asset and employment.

Through this stake sale, the government is expecting to reduce the current huge fiscal deficit which is not seen in for many generations to get reduced to an extent and relieves itself from further market borrowing. The huge fiscal deficit of almost over 10% to the GDP is putting strain on the government balance sheet. By getting such huge cash through stake sale the government can maintain its major financial measures announced in the budget.

Case study of recent listing: National Hydro Power Corporation Ltd., (NHPC)

Mr. SK Garg, the Chairman & Managing Director, of NHPC Ltd, has lauded the efforts of the government in diluting the companies share in the market which has changed the public perception on the company. It has instilled fresh enthusiasm on the employees to perform better has they are now answerable to the new board of Directors and shareholders. This has improved corporate governance. Stake holders like bankers and suppliers are taking a much improved interest in the company after listing, as it make the company to work more efficiently under public view.