by Suman Gupta
Mumbai, 4th July, 2024: According to CareEdge Ratings, a total divestment potential of approximately Rs 11.5 trillion at current market capitalization is estimated, assuming the government retains control over the company’s governance by maintaining at least a 51% stake in these CPSEs and divests any excess shares.
As per CareEdge Ratings, the estimate is little more than twice the total divestment of Rs 5.2 trillion conducted since 2014. Of this Rs 11.5 trillion divestment potential, CPSEs could contribute around Rs 5 trillion, while PSBs and insurance firms could potentially add another Rs 6.5 trillion. This represents the maximum amount that could be raised at current market prices without the government losing governance control of these entities.
However, the government may not opt to divest all its potential and the decision to divest these listed firms may be influenced by the industry’s strategic nature, the companies’ profitability, financial market conditions and welfare/social considerations.
Rajani Sinha, Chief Economist, CareEdge Ratings said, “After missing the divestment target for five consecutive years, taking a fresh look at the divestment strategy is essential. The government over the medium term cannot rely solely on small ticket sales of minority shares by OFS (offer for sale) to meet its divestment target and should take a fresh look at big ticket divestment plans especially if the CPSE has been making losses consistently”.
“The conclusion of the election season, combined with stock market hovering around all-time highs, provides a perfect opportunity to advance some significant divestment initiatives. However, past issues like procedural delays, litigations by labour unions and other interest groups against divestment, and pricing issues continue to slow divestment despite favourable market conditions.”, added Rajani Sinha.
In the interim budget, the FY24 divestment estimate was revised downward to Rs 300 billion from the previously budgeted Rs 510 billion. According to data from the Department of Investment and Public Asset Management (DIPAM), total divestment in FY24 fell short of even the revised estimate, achieving approximately Rs 165 billion, which is about 32% of the initial target. The absence of any big-ticket divestment resulted in the government falling short of its target. We believe that the government will maintain its target of divestment (as miscellaneous capital receipt) at Rs 500 billion in the upcoming budget, the same as that given in the interim budget.
Achieving this target hinges on the government’s ability to proceed with big-ticket divestments. After the demerger of land assets of the Shipping Corporation of India (SCI), its possible divestment looks likely in FY25, provided favourable market conditions prevail. If the government offloads its entire stake in SCI, it could generate ~Rs 125-225 billion as divestment proceeds. Other plausible divestments include Pawan Hans and CONCOR. However, they continue to remain on the slow burner. With a bumper dividend from the RBI, the central government’s fiscal position remains comfortable, which may limit the urgency to push ahead with big ticket divestments. In case divestment lags going ahead due to headwinds, government will continue with its focus on asset monetisation.
As per CareEdge Ratings, the government will stick to the FY25 target of miscellaneous capital receipts (which includes divestment) of Rs 500 billion. In FY24, government has monetised assets worth Rs 1.6 trillion under National Monetisation Pipeline, against the target of Rs 1.8 trillion.
About CareEdge Ratings:CareEdge is a knowledge-based analytical group offering services in Credit Ratings, Analytics, Consulting and Sustainability. Established in 1993, the parent company CARE Ratings Ltd (CareEdge Ratings) is India’s second-largest rating agency, with a credible track record of rating companies across diverse sectors and holding leadership positions in high-growth sectors such as BFSI and Infra. The wholly-owned subsidiaries of CareEdge Ratings are (I) CARE Analytics & Advisory Private Ltd previously known as CARE Risk Solutions Pvt Ltd, (II) CARE ESG Ratings Ltd, previously known as CARE Advisory Research and Training Ltd and (III) CareEdge Global IFSC Ltd. CareEdge Ratings’ other international subsidiary entities include CARE Ratings (Africa) Private Ltd in Mauritius, CARE Ratings South Africa (Pty) Ltd, and CARE Ratings Nepal Ltd.
