Markets
Is now the best time to pursue divestment?
Summary
- In 2023-24, the 56 listed central government public sector enterprises registered a 48% increase in their profits, which exceeded ₹5 trillion.
Central government-owned entities are performing at their best. The stock market has rewarded their performance with high valuations. Mint explains why this is perhaps the best time for the government to divest its stake in public sector units (PSUs).
How are the PSUs performing?
They are doing extremely well. In 2023-24, the 56 listed central government public sector enterprises registered a 48% increase in their profits, which exceeded ₹5 trillion. The State Bank of India is the most profitable, followed by Oil and Natural Gas Corporation, Indian Oil, Coal India and Life Insurance Corporation of India (LIC). PSU banks which were struggling with bad debts have turned around and posted a strong show. The combined profits of all the 12 PSU banks, media reports say, have risen 4.5 times in the last three years from ₹31,818 crore in FY21 to ₹1.4 trillion in FY24.
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How have the markets reacted?
The stock markets have rewarded them handsomely. According to Sachchidanand Shukla, chief economist of L&T, the market capitalization of listed PSUs has risen from $404 billion in FY23 to $804 billion now. In the last one year the BSE PSU index returned 102%. Such is their valuation that some PSUs are delivering better returns than their private sector peers. PSUs’ high dividend payout played a part too. In FY24, the dividend that the government received from PSUs jumped 55% to ₹1.54 trillion compared with ₹99,913 crore in FY23. This year the government has budgeted a similar quantum of dividend.
So, is this the best time to divest?
Yes. With such good valuations, the government will get the best possible price for its stake. It needs money to invest in infrastructure and spend more on education and health without upsetting fiscal consolidation. Divestment will help it raise the necessary resources. The money can also be used to pare its debt which is currently at unsustainable levels.
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What about the government’s past record?
In the last five years, the Centre planned divestments of ₹6.16 trillion and all that it managed to achieve was ₹1.79 trillion. Even here, the bulk of the proceeds came from the sale of minority stakes. The only exception has been the divestment of Air India. Not once since FY19 has the government come even close to meeting its divestment target. This despite the target being reduced every year since FY21. In FY24, all it managed from divestment was ₹30,000 crore and its target for FY25 is ₹50,000 crore.
What is the way forward?
Political opposition and procedural delays frustrated efforts like in the case of Bharat Petroleum Corporation. Minority stake sale has now become its chosen route. Most divestment proceeds in recent years have come from either offers for sale (LIC, Coal India, Hindustan Aeronautics) or IPOs (Indian Renewable Energy Development Agency). Experts say that with less political opposition, as there is no change in government control and fewer procedures, this option is ideal to revive divestment.
