Mockery of divestment

PSU share buybacks could lead to an investment squeeze

In recent comments to the media, the Union economic affairs secretary has suggested that the government may seek to meet the disinvestment target that it set for itself in the Union Budget for 2018-19 in part through buybacks of shares by public sector undertakings, or PSUs. In other words, PSUs would pay the government for the shares it holds, reducing the number of their shares in circulation. While the effect on government shareholding will depend upon the final construction of the repurchase programme, it seems nevertheless that a move is afoot for oil sector PSUs in particular to buy back shares worth Rs 100 billion; according to some reports, the full buyback programme may raise up to Rs 200 billion. This would go some way in filling the government’s budgeted requirement of Rs 800 billion from disinvestment receipts. However, this simply does not count as disinvestment in any meaningful sense. In fact, it may not yield the benefits that should accrue from a genuine reduction in the fiscal deficit.

From the point of view of disinvestment, it is worth noting that there is a point to disinvestment: To reduce the government’s control over PSUs such that it eventually passes to the private sector, with all the efficiency improvements that it would bring. This purpose is not served, even incrementally, by a share buyback. In fact, share buybacks under pressure from the government, like enforced under-recoveries for political reasons, run directly counter to even the weaker reason for disinvestment, namely that it would enforce market discipline on PSUs, which would have to behave like listed companies. In no case here is the government behaving like a responsible shareholder. This is a time when oil PSUs could be focusing on investment to scale up production, but instead, they are being asked by the government to transfer money to the exchequer. If a private promoter were doing this, he would be accused of being a bad owner and trampling upon the rights of minority shareholders. Share buybacks can send stock prices higher disproportionately if seen by the market as a sign that the companies in question are doing well — but this is not the case here, as it is clear that the government is merely ordering a share buyback because of its own financial constraints.

Meanwhile, from the point of view of the deficit, it is important to consider exactly what the purpose of controlling the deficit is: It is to ensure that the government is not soaking up all the available investible funds. What PSU share buybacks do is precisely the opposite: Transferring resources to the government as principal owner of the PSUs. Meanwhile, economic growth depends upon revitalising investment; profits kept with the PSUs or released to the market, in general, could be spent on such investment. But when it is expropriated by the government, a large part will go to fund government spending. Thus at a time when investment revival needs to be nurtured, the government is instead reducing the resources available for enhancing growth. The government’s disinclination to genuinely privatise is disappointing. If it seeks a method of sustaining growth and revitalising its reformist credentials, it should instead be focusing on genuine, strategic disinvestment.