Costly delay

Slow approach upsets government's divestment plan

The government's ambitious disinvestment target for financial year 2014-15, Rs 69,500 crore, looks ever more daunting. Last year the government raised Rs 26,353 crore - not too bad, given earlier years' takings, but well short of the target of Rs 58,425 crore. For this financial year, the Budget revised last financial year's target upwards. But, sadly, it did not take advantage of favourable market conditions. In the quarter and a half of this financial year so far, it has raised only Rs 12,563 crore. Again, this is easily better than the collection for equivalent periods in previous years. But most of this came on Monday, when 10 per cent of Indian Oil Corporation, or IOC, went on sale, fetching about Rs 9,300 crore. However, this Monday was also the day that China's stock-market collapse spooked investors around the world, and the Indian indices fell almost six per cent. Unsurprisingly, the section of the offer reserved for retail investors was undersubscribed - barely a fifth of the quota was picked up.

The government continues to have trouble with timing disinvestment. Once decisions are taken to sell stock in certain state-controlled enterprises, there is no reason to not start scheduling sales immediately. If necessary, the shares that have been approved for sale can be put on the block in tranches, so as to minimise market risks and strains on liquidity. It seems the government has learned little from past experience, not just of its predecessor but also of its own problems last financial year when it strained the market in January by selling Rs 22,577 crore worth of stake in Coal India Limited at around the same time that several other issues were about to hit the market, such as a Rs 10,000-crore one for HDFC Bank as well as ONGC and some state-controlled banks. On that occasion, retail investors bought just 8.2 per cent of the offer for sale; by way of comparison, in 2010, when a similar number of shares hit the market, retail investors bought 35 per cent. At least, in January, bullish foreign investors picked up some of the slack for CIL. But, given fading global risk appetite, that buffer was not available to IOC on Monday.

And so the government turned to the old reliable: the state-owned insurance behemoth, Life Insurance Corporation of India, or LIC. According to filings by the insurer reported by the Press Trust of India, it raised its stake in IOC from 2.5 per cent to 11.1 per cent on Monday; in other words, it bought almost 90 per cent of the shares on offer! This is not the first time, of course, that LIC has bailed out a government stake sale, but it is among the largest such deals. On the one hand, this may be unfair to LIC's policyholders and stakeholders; it suggests that the state-controlled corporation is doing the bidding of the government in taking such positions in other public sector enterprises, and may not be acting purely on sound economic principles in the sense that investments in other instruments could have yielded it better returns without necessarily the risks associated with it. The decision by the insurer's board to raise its equity investment this year to Rs 60,000 crore - suspiciously close to the government's disinvestment target - has only made such questions louder. On the other hand, it means that the disinvestment in IOC is in name only: purely a transfer from one wing of the government to another, with little actual funds raised and no greater control ceded to the private sector. Simply put, the government must learn from the past, and time disinvestment better - and ensure that it is real.