Cabinet approves strategic disinvestment of IDBI Bank Limited

About Disinvestment

1. Disinvestment refers to sale or liquidation of an assets or subsidiary of an organization or government but any condition Govt share should not go below 51%.
2. It is done by Dept of Investment and Public Asset Management (DIPAM), Ministry of Finance from 2016.
3. Industrial Policy Resolution,1956 talks about the growth of the country through PSUs. Hence, from 2nd Five Year Plan we started focusing on PSEs.
4. Salient Features of Disinvestment Policy
   1. PSUs are wealth of Nation and it ensures that wealth rests in hands of people, promote public ownership of CPSEs.
   2. Govt must retain at least 51% of shareholding and management control of PSUs.
   3. Strategic disinvestment by way of sale of substantial portion of Govt in identified CPSEs upto 50% or more along with transfer of management control.

Phases of Disinvestment

• Phase I: In 1991 PVNR Govt initiated disinvestment: In 1991 policy it was announced that government would disinvest upto 20% of its equity in selected PSUs mainly through MFs and FIIs (Financial institutions investors).
• Phase II: More people allowed in disinvestment like FII, Employees of the Company etc.
• Phase III
  • The Govt appointed C Rangarajan Committee: who recommended ~49% of disinvestment.
  • Atal Bihari Vajpayee adopted major disinvestment policy HINDALCO, BALCO. It talked about Stake Sale.
  • Stake sale is a larger share that can be sold to LIC or other profitable PSUs not individual investors.
  • PSUs were bifurcated into 2: Strategic (defense, atomic) and Non strategic.
  • 2005: Govt came out with National Investment Fund under Public Accounts of India.
    1. Purpose of the fund was to receive disinvestment proceeds of CPSEs.
    2. Money from disinvestment is put upon this money is invested in stock market or other investment instruments the income of which
       1. 75% of returns are used in social sector NREGA, Housing for All, AIBP, Health, Education, Employment etc.
       2. 25% can be utilized for Profitable PSUs and revival of PSUs.
    3. This fund was professionally managed by 3 Fund Managers: UTI, SBI and LIC. But CCEA restructured the NIF and decided to do away with the management of the disinvestment proceeds by the Fund Managers of NIF. Now from 2013, all the money is credited to Public Accounts.
    4. Special NIF
       1. It is kept outside the CFI to transfer the shares of only certain loss making CPSEs which are non-compliant with the rule that minimum 10% of shares issued be held by public.
       2. Only shares are transferred here and not receipts from the sale of shares of CPSEs
• Phase IV: Current Disinvestment.
  1. In last 3 years, Govt is increasing their disinvestment targets from 80000 crore rs to 1.05 lakh crore rupees.
  2. But as per Economists, Hyper Disinvestment because of declining revenues of Govt due to GST and Demonetization to achieve targets of FD and to achieve poll promises is not good. This led to disinvesting BPCL, Concor etc. even breaching the 51% limit.
• Strategic Disinvestment in 5 PSEs
  • Government to sell entire stake in Bharat Petroleum (BPCL), Shipping Corporation of India (SCI), Container Corporation of India (CONCOR). Also THDCIL and North East Electric Power Corporation (to NTPC). Disinvestment done because of massive shortfall in revenue and capital receipts (according to Controller General of Accounts).
  • BPCL was a profitable, yet they disinvested it. This is a concern. Numaligarh refinery is in Assam.
  • How the Government completes the transaction is a concern – from appointment of advisers, to deciding the pricing mechanism and initiating a transparent bidding process before finalizing a buyer - is a big question.
• Bharat Bond ETF (Exchange Traded Fund) to be India's 1st Corporate Bond ETF
  • ETF to comorise basket of bonds issues by CPSEs, CPSUs, CPFIs and other government entities and all will be initially rated AAA with ?1000 for each unit to attract retail investors.
  • DIPAM (Department of Industry and Public Asset Management) is responsible for disinvestment in the country.
  • Each ETF will have a fixed maturity dates initially to be issued in 2 series of 3 years and 10 years.
  • Benefits
    1. Bond ETF will provide safety (issued by CPSEs & govt owned agencies), liquidity (tradability on exchange), additional source of funding for issuers (apart from banks) and predictable tax efficient returns.
    2. It would help deepen India's bond market as it will encourage participation of those retail investors who are currently not participating in bond markets including HNI participants.
• In Budget 2020, FM announced to sell a part of its 100% stake in LIC by an IPO.
  • LIC was established in 1956 through an Act of Parliament.
  • Before Govt divests a part of its stake through a public issue, it will have to ensure that it amends the LIC Act, which ensures a sovereign guarantee for all policies under Section 37 of the Act.

What is the news?

• Chief Economic Adviser Krishnamurthy Subramanian has expressed confidence that the ?1.75-lakh crore disinvestment target of this fiscal will be achieved, with a good part coming from the
  1. 1. proposed IPO of insurance behemoth LIC and
     2. privatisation of Bharat Petroleum Corporation (BPCL).
• While LIC’s public issue and BPCL privatisation are expected to contribute a chunk of the target, from a signalling perspective, Air India’s privatisation is also very important, on which too work is happening, the CEA said.

• The Cabinet Committee on Economic Affairs, chaired by Prime Minister Shri Narendra Modi, has given its in-principle approval for strategic disinvestment along with transfer of management control in IDBI Bank Ltd.
• The extent of respective shareholding to be divested by GoI and LIC shall be decided at the time of structuring of transaction in consultation with RBI.
• Government of India (GoI) and LIC together own more than 94% of equity of IDBI Bank (GoI 45.48%, LIC 49.24%). LIC is currently the promoter of IDBI Bank with Management Control and GoI is the co-promoter.
• LIC’s Board has passed a resolution to the effect that LIC may reduce its shareholding in IDBI Bank Ltd. through divesting its stake along with strategic stake sale envisaged by the Govt. with an intent to relinquish management control and by taking into consideration price, market outlook, statutory stipulation and interest of policy holders.