Exit strategy

Govt must push its disinvestment agenda aggressively

Marking a major step in the government’s privatisation and disinvestment programme, the Cabinet Committee on Economic Affairs chaired by Prime Minister Narendra Modi finally approved the strategic sale of IDBI Bank, after much back and forth, on Wednesday. Once completed, the transaction will be the largest foreign direct investment (FDI) in India’s financial sector to date. Under the arrangement, the Union government will sell a 30.48 per cent stake in the bank and Life Insurance Corporation a 30.24 per cent stake. They currently hold 45.48 per cent and 49.24 per cent, respectively. Toronto-based Fairfax Financial Holdings will acquire the combined 60.72 per cent for ₹52,878 crore, or about $5.6 billion. 

The strategic sale of IDBI Bank also underscores sustained foreign investor interest in India’s financial sector. RBL Bank, Yes Bank and Shriram Finance have attracted substantial foreign investment in recent years. Fairfax itself has significant holdings in entities such as CSB Bank and IIFL Finance. As reported by this newspaper, Fairfax, which holds a 40 per cent stake in CSB Bank, has been given the option of either exiting the bank or merging it with IDBI Bank to meet regulatory requirements. It will eventually also have to reduce its stake in IDBI Bank to 26 per cent. A glide path for this reduction is likely to be worked out in consultation with the Reserve Bank of India (RBI). The RBI will need to closely monitor Fairfax’s holdings across these financial institutions. 

The approval of the IDBI Bank deal is significant on several counts. The government’s record in strategic sales has not been very encouraging. Only 21 such transactions, including the IDBI Bank deal, have taken place in the past 26 years, partly reflecting limited activity during the United Progressive Alliance government’s tenure. Given the complexities involved in the strategic sale of a bank, it is hoped this will mark a new beginning. The government’s policy, as announced in the Union Budget for 2021-22, is that central public-sector enterprises (CPSEs) will have a bare minimum presence in strategic sectors. The rest will be privatised, merged with other CPSEs, or closed. In non-strategic sectors, CPSEs are to be privatised or closed. However, it is fair to argue that progress on this has so far been limited. Data compiled by the Sixteenth Finance Commission showed that the total number of CPSEs increased from 717 in 2020-21 to 748 in 2023-24. The government’s equity in CPSEs also increased substantially. Notably, over 200 CPSEs made losses during this period. 

Government participation in commercial activity not only ties up resources but also often burdens the Budget. The government, for instance, infused about ₹25,000 crore into IDBI Bank between 2010 and 2020. The bank has since recovered from the bad-loan crisis and posted strong numbers last financial year. Its gross non-performing asset ratio declined to 2.3 per cent from over 30 per cent in September 2018. Once the deal is completed, the government must also aim to sell its residual 15 per cent stake in the bank. It should pursue more such deals and also sell equity in listed CPSEs to push the disinvestment programme. This will not only reduce its footprint in commercial activity, but also raise funds for physical and social infrastructure. Listed companies in which government holdings exceed 75 per cent, including public-sector banks such as Indian Overseas Bank and Uco Bank, should be early candidates for stake sales.