3 things to know about disinvestment of PSUs

In an attempt to boost revenues, the government has decided to take the disinvestment route. This means, the government is raising money by selling part of its ownership in the various public sector companies it owns.

The government set a disinvestment target of Rs 1.05 lakh crore in its 2019-20 budget. To achieve this, the government intends to start the privatisation of Central Public Enterprises (CPSEs). Disinvestment is being pushed as a reform agenda with the hopes that it will stall the stagnation in the economy. Here are five things about disinvestments that you should know:

Privatisation can offset reduction in government revenues:

The government slashed corporate tax rates from 30 percent to 22 percent last month. While this is a great blessing for Corporate India, it would cause a tax revenue loss of Rs 1.45 lakh crore to the government. The corporate tax cut would also put a strain on direct tax receipts as corporate taxes are a form of direct tax. GST collections have also been unimpressive adding to the burden on revenues.

Coupled with the tax issue, is the problem of economic slowdown. India’s GDP rate has fallen to a six-year low of 5 percent in the second quarter of 2019. When the economy slows down, tax collections are affected, and this can also lead to lead to a revenue fall. Privatisation of PSUs will help the government tackle the problem of revenue shortfall and aid in economic recovery.

Also read: 5 things to know about IPO investment

Valuation boost:

Public sector companies have had a tough time due to low valuations. PSUs have not had attractive valuations due to unfavourable perceptions among investors and businesses. This valuation can be attributed to the negative perception of government control over these companies. Privatisation can help PSUs improve their valuations. Because, if the government decides to part with its controlling shares, it will mean more management freedom, less political interference, better operations, improved efficiency and a more competitive environment. These factors can help drive sales and revenues.

Also read: 6 things to know about equity valuations

Monetisation of other assets:

As part of its attempts to meet its disinvestment targets, the government has also drawn a road map to monetise its assets. The Department of Investment and Public Asset Management (DIPAM) has invited bids seeking global consultants for monetising non-core assets like land, buildings, natural resources and operational assets held by PSUs. This move will help government finance its infrastructure spending.

Also read: 5 ways PSU banks can fund their capital needs

One related number : Rs. 60,000 crore

The Indian government has cleared disinvestment in five Public Sector Undertakings (PSUs) on 30 September 2019. The companies include Bharat Petroleum Corporation (BPCL), Shipping Corporation of India (SCI), Concor, North Eastern Electric Power Corporation (NEEPCO), and THDC India Limited. Proceeds from the disinvestment of these companies could potentially fetch around Rs. 60,000 crore. This is roughly 60% of the total target of Rs. 1.05 lakh crore. This move would not only boost revenues, it would also keep the fiscal deficit in check.

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