Need further Divestment for Higher Profitability



Need further Divestment for Higher Profitability

The Economic Survey 2020 has advocated more disinvestment in CPSEs for higher profitability and promote efficiency, competitiveness, and professionalism in these organisations.

Giving the example of an analysis of before-after performance of 11 Central Public Sector Enterprises (CPSEs) -- which underwent strategic disinvestment from 1999-2000 to 2003-04 -- the Survey found significant improvement in financial indicators such as net worth, net profit, returns on assets and returns on equity.

The survey, tabled in Parliament on Friday by Finance Minister Nirmala Sitharaman, said that the realised efficiency gains from privatisation in the Indian context "bolster the case for aggressive disinvestment of CPSEs."

The government would not be able to achieve the Rs 1.05 lakh crore sell-off target in the current fiscal with current disinvestment proceeds having so far totalled only Rs 18,000 crore.

The Survey said that disinvestment improves performance and thus overall productivity of the companies, and in turn unlocked their potential to create wealth.

"This would have a multiplier effect on other sectors of the Indian economy. Aggressive disinvestment, preferably through strategic sale, should be utilised to bring in higher profitability, promote efficiency, increase competitiveness and promote professionalism in managements of CPSEs, the survey said.

The survey suggested that the government could transfer its stake in the listed CPSEs to a separate corporate entity, to be managed by an independent board and mandated to divest government stake in these CPSEs over a period of time.

This would lend professionalism and autonomy to the disinvestment programme which, in turn, would improve the economic performance of the CPSEs.

The survey observed that the focus of the strategic disinvestment needs to be to exit non-strategic business and be directed towards optimising the economic potential of these CPSEs.

This would, in turn, unlock the capital for use elsewhere, especially in public infrastructure like roads, power, transmission lines, sewerage, irrigation systems, railways and urban infrastructure.

It is encouraging that the enabling provisions by the Department of Investment and Public Asset Management are already in place.

According to the survey, the Cabinet has 'in-principle' approved to reduce government of India's paid-up share capital below 51 per cent in select Central Public Sector Enterprises.

These need to be taken up aggressively to facilitate the creation of fiscal space and improve the efficient allocation of public resources, it said.

The survey noted that of the 264 CPSEs under 38 different Ministries/Departments, around 10 each were under the jurisdiction of 13 Ministries/Departments. It is evident that many of the CPSEs are profitable. However, the CPSEs have generally under-performed in the market as is evident from the average return of only 4 per cent of BSE CPSE Index against 38 per cent return of BSE SENSEX during 2014-2019.

The aim of any privatisation or disinvestment programme should, therefore, be the maximisation of the government's equity stake value.

The survey says that in November 2019, India launched its biggest privatisation drive in more than a decade.

The survey examined the change in the performance of each privatised CPSE. It studied the movement in major financial indicators for each of the CPSE 10 years before and after the year of strategic disinvestment/privatisation.

Taken individually, each privatised CPSE witnessed improvement in net worth, net profit, gross revenue, net profit margin, sales growth in the post-privatisation period compared with pre-privatisation period (except for Hindustan Teleprinters, Modern Food Industries Ltd and Tata Communications in case of a few indicators).


 

Source: IANS