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Bailing out a PSU
Context:
The Union Cabinet approved a ₹11,440 crore package to revive the struggling Rashtriya Ispat Nigam Limited (RINL), operator of the Visakhapatnam Steel Plant.
Key components of the package:
- ₹10,300 crore equity infusion.
- Conversion of ₹1,140 crore working-capital loans into 7% non-cumulative preference shares redeemable after 10 years.
Current Financial Challenges
- RINL’s liabilities have risen to over ₹35,000 crore, with loan repayment and interest defaults.
- The bailout aims to stabilise RINL’s finances, secure working capital, and achieve its production capacity of 7.3 million tonnes annually.
Disinvestment Process in India
Disinvestment in India refers to the government’s process of reducing its stake in public sector enterprises (PSEs) to raise funds, improve efficiency, and reduce fiscal deficits. It is managed by the Department of Investment and Public Asset Management (DIPAM) under the Ministry of Finance.
Process of Disinvestment:
- Identification of PSEs: The government identifies public sector enterprises for disinvestment based on their strategic importance, financial performance, and market conditions.
- Approval: The Cabinet Committee on Economic Affairs (CCEA) approves the disinvestment plan for specific companies.
- Valuation: The enterprise’s valuation is determined through due diligence, market analysis, and consultations with financial advisors.
Mode of Disinvestment:
- Minority Disinvestment: Government retains majority control (>51%).
- Majority Disinvestment: Government transfers management control but retains some stake.
- Complete Privatisation: Government sells 100% ownership.
Status as of January 2025:
- Targets for FY 2024-25: The government set a disinvestment target of ₹50,000 crore for FY25 as per the Union Budget. This is higher than the revised target of ₹30,000 crore for FY24.
- FY 2023-24 Performance: The government raised only ₹12,504 crore, about 24.5% of the original target of ₹51,000 crore. Successful transactions included minority stake sales in Coal India, NHPC, and IPOs like Indian Renewable Energy Development Agency (IREDA).
Challenges:
- Strategic sales like Bharat Petroleum Corporation Ltd (BPCL) were canceled due to lack of buyer interest.
- Delays in privatisation processes for entities like SCI and BEML due to public resistance and complex demergers.
Funding Source Uncertainty
- The Ministry of Steel’s budget for 2024-25 has no provision for the ₹10,300 crore equity infusion, with only ₹620 crore allocated for RINL, to be raised via unspecified “other” routes.
- The infusion is expected to be funded from unspent capital outlay (~₹62,593 crore) allocated for new schemes in the 2024-25 budget.
Abandonment of Privatisation Plans
- In January 2021, the government approved the 100% disinvestment of RINL. However, this plan has now been shelved.
- Previous efforts at privatisation included interest from the Adani Group in 2022, but these were discontinued post-2024 elections.
Shift in Policy Approach
- The decision to revive RINL reflects a broader shift away from the government’s stated policy of strategic disinvestment.
- The merger of RINL with Steel Authority of India Limited (SAIL) and land sales to other PSUs were considered but not pursued.
Decline in PSU Financial Health
- Over the past five years, PSUs’ capacity to raise funds independently has declined significantly.
- Internal and extra-budgetary resource generation by PSUs fell from ₹6.4 trillion in 2019-20 to ₹3.2 trillion in 2023-24.
- Dependence on government support increased from 25% to 61% of PSUs’ total capital outlay in the same period.
Strategic Disinvestment Slowdown
- Several disinvestment plans for key PSUs like Bharat Petroleum, Shipping Corporation of India, and Container Corporation have stalled or been abandoned.
- Recent sales, like that of Ferro Scrap Nigam for ₹320 crore, have been rare exceptions.
Questions on Future Policy Direction
- The reliance on government support underscores the inversion of the strategic disinvestment policy into one of strategic investments in PSUs.
- Key questions remain:
-
- Will PSUs generate more internal resources in 2025-26?
- Will reliance on government funding decrease?
- Will the government return to its disinvestment agenda?
Budget 2025-26 Expectations
- Finance Minister Nirmala Sitharaman’s Budget presentation is expected to shed light on the government’s stance on PSU reforms and strategic disinvestment.
- In the absence of clarity, the government may need to formally revise its disinvestment policy to reflect the current approach
