Share buybacks: Disinvestment done the wrong way

Disinvestment through share buybacks have no bearing on reducing the government's stake in PSUs as the government continues to be the majority shareholder.

The government has come up with a new strategy to meet its disinvestment target for this year – share buybacks by public sector companies (PSUs). This new strategy contradicts the very objective of the disinvestment policy as laid down by the Department of Investment and Public Asset Management (DIPAM), which is to reduce government stake in PSUs. The right way to do this is by selling government’s share in PSUs to private entities through public offers, minority stake sales and strategic sales.

Instead, share buybacks have absolutely no bearing on reducing the government’s stake in PSUs as the government continues to be the majority shareholder. When a company initiates a share buyback, shareholders give up their shares in exchange for cash. Clearly, the government benefits from PSU share buybacks as it is selling stake in the very PSUs it owns while continuing to be the promoter, in exchange for cash. Now, why is it so important for the government to meet the shortfall in this year’s disinvestment target through such an unconventional method?

Conventionally, proceeds from disinvestment are parked in the National Investment Fund (NIF) which is utilised for various purposes like investments in social welfare projects related to healthcare and education, infrastructure projects, capital infusion in debt-ridden public sector banks and most importantly, to finance the fiscal deficit. PSU share buybacks are just another accounting maneuver, wherein money is transferred from one government controlled account i.e PSU balance sheets to another i.e. NIF.

Further, in case of the PSUs shortlisted for share buybacks, only the promoter i.e. the government of India is being returned cash. What about the minority shareholders who have equal right to receive cash rewards from share buybacks by these PSUs? Through this restrictive buyback exercise, the government is robbing minority shareholders of their rightful share and is feeding off the surplus cash balances of PSUs so it can divert the proceeds towards financing the fiscal deficit through the NIF. Successive governments have been misguided in their approach towards disinvestment. For instance, recently, a government owned oil & gas PSU was asked to buy government’s own stake in another oil and gas PSU simply to help meet the fiscal deficit target.

In a broader sense, disinvestment also ensures efficiency in operations of loss-making PSUs as it shifts ownership and management to the private entity. Unlike a PSU, a private entity is directly responsible for proper functioning of the company and has all the right incentives to ensure efficient utilisation of resources. There are numerous success stories of privatisation deals made by the government that underpin the rationale behind reducing government stake in PSUs.

PSUs run on taxpayer’s money and it is these unsuspecting taxpayers who are funding the gap in this year’s disinvestment target. The DIPAM in its disinvestment policy document, defines PSUs as the wealth of the nation and promotes public ownership to ensure this wealth rests in the hands of the people. Does this allow the government to treat PSUs, the wealth of our nation, like their rainy-day fund to be used whenever they overspend? Is the government sincere in its efforts to reduce its stake in PSUs? Or is it just milking PSUs for all they are worth in the name of ‘Sabka Saath, Sabka Vikas’?    

We need a comprehensive mechanism that will enable the government to sell its surplus public assets that exist in the form of unused or misused public land and minerals, non-strategic PSUs including sick and loss-making public sector companies. The Dhan Vapasi Bill lays down one such mechanism to identify and sell surplus public assets and return the public wealth back to the people of India. The Bill recognises that it is wasteful for the government to own any surplus public asset and provides a roadmap to achieve proper disinvestment and return of public wealth to every citizen.

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