Economic Survey redefines 'govt company' to ease stake dilution in CPSEs

Survey moots changes to Companies Act, so that CPSEs remain govt firms even with a 26% stake

The Economic Survey 2025-26, tabled in Parliament on Thursday, suggested that the government consider amending the definition of a “government company” under the Companies Act, limited to listed entities, to allow such firms to retain government company status with a minimum 26 per cent government ownership, while enabling higher equity monetisation through disinvestment. 

“Going forward, receipts from equity monetisation can be strengthened by selectively reducing government equity in certain CPSEs (Central Public Sector Enterprises) beyond the minimum public shareholding norms, guided by market conditions and enterprise-specific factors,” said the Survey. 

The Survey further noted that effective control over a company requires only about a 26 per cent stake, as this allows the shareholder to retain special resolution rights. However, under the existing provisions of the Companies Act, a firm qualifies as a government company only if at least 51 per cent of its equity is held by the Centre or state governments, which constrains further stake dilution. 

 

“The Economic Survey has given an option to explore the possibility of monetising the government stake. It's not about lock stock and barrel sale of the company. That is not what is written out there. What we have mentioned is, in the case of listed companies, only for listed companies, what we effectively need is 26 per cent stake, which is the special resolution right stake,” Rose Mary K Abraham, advisor, Department of Economic Affairs (DEA), said while briefing the press. 

“Currently, in about 30 per cent of listed CPSEs, the government shareholding is already below 60 per cent, limiting further disinvestment through OFS (offer for sale), as it is stipulated in the Companies Act that a ‘government company’ must have at least 51 per cent of its stake held by the central or state government,” said the Survey. 

As an alternative approach, the Survey further said that if the objective is eventual privatisation, the government could continue phased OFS below the 51 per cent threshold and even move towards a full exit without changing the legal definition of a government company. This, it said, would allow CPSEs to operate post-disinvestment as professionally managed entities with dispersed ownership, clear governance standards, and transparent succession frameworks. 

“The government wants to move forward and rationalise its presence in certain static sectors. It should move in this direction to help these sectors contribute more effectively to the economy. This is an evolutionary process, and it cannot be done overnight,” said Dinesh Kumar Mittal, former financial services secretary. 

Mittal further added that a government company or entity typically comes with certain conditions — appointments are made by the government, it is under the purview of the Comptroller and Auditor General (CAG), the Prevention of Corruption Act applies, and the compensation structure is also decided by the government. 

“If all these constraints continue even after the government dilutes its holding, there is a question of whether such companies can truly perform better,” he said. 

“However, if the structure suggested in the Survey is followed and the government retains 26 per cent while the company continues to be classified as a government company, all these controls will still apply. That could limit both valuation and performance,” he added. 

The Survey further pointed out that strategic disinvestment has progressed in a calibrated manner over recent years. Since 2016, in-principle approval has been accorded for strategic disinvestment for 36 CPSEs, of which 13 transactions have been completed, with the remainder at various stages of implementation. During 2025-26 (FY26), approvals were also accorded for stake dilution in or exit from select joint ventures, including NTPC’s divestment from Utility Powertech Limited. 

“These actions were complemented by governance reforms that empowered CPSE boards to undertake closure, merger, or disinvestment of subsidiaries,” the Survey said. 

New frontiers

• Survey suggests receipts from equity monetisation can be strengthened by selectively reducing govt equity in certain CPSEs
• Adds that this should be guided by mkt conditions and enterprise-specific factors
• If objective is eventual privatisation, govt could continue phased OFS below 51% threshold, and even move towards full exit without changing legal definition of govt company
• This would allow CPSEs to operate post-disinvestment as professionally managed entities