Tag: Privatisation

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Editorial

Government To Raise Rs 6 Lakh Crore Through Asset Monetisation: Know More

The Indian Government has announced plans to ‘monetise’ its assets and earn up to Rs 6 lakh crores by the end of 2025 through the National Monetisation Pipeline. Now the question is, what is monetisation? When you monetise something, you either convert it into cash/currency or generate revenue from it. The Indian Government has made plans to generate revenue by monetising assets like Railway Infrastructure, Roads, Public Infrastructure, Coal Mines, Stadiums, Airports, to name a few. Let us do some deeper digging into what exactly the National Monetisation Pipeline is.

What is the National Monetisation Pipeline (NMP)?

Finance Minister Nirmala Sitharaman has announced that the government intends to monetise its assets and generate up to Rs 6 lakh crore between 2022 and 2025. Firstly, private players shall bid for projects and pay the government an upfront amount. Later, the government shall withhold the ownership rights of a project and instead give out the revenue rights to private players. The revenue rights shall be valid only till 2025. A Core Group of Secretaries on Asset Monetization (CGAM) shall be set up under the chairmanship of the Cabinet Secretary.

The NMP will run a co-terminus with the National Infrastructure Pipeline of Rs 100 lakh crore announced in December 2019. The government shall make structured partnerships under defined contractual frameworks with strict performance benchmarks. Companies bidding for these assets will have to keep up with these performance benchmarks. 

Source: NITI Aayog

The government plans to monetise only ‘de-risked or ‘brownfield’ projects. A brownfield project is an already developed project that might be dormant or have some efficiencies that could be corrected. A greenfield project is the construction of a new project on a vacant piece of land. For example – The redevelopment of an old building is a brownfield project, construction of a new building on an empty piece of land is a greenfield project.   

Currently, only assets of central government line ministries and Central Public Sector Enterprises (CPSEs) in infrastructure sectors have been included. This includes more than 12 line ministries and more than 20 asset classes. The sectors included are roads, ports, airports, railways, warehousing, gas & product pipeline, power generation and transmission, mining, telecom, stadium, hospitality and housing. The top 5 sectors (by estimated value) capture ~83% of the aggregate pipeline value. These top 5 sectors include Roads (27%) followed by Railways (25%), Power (15%), oil & gas pipelines (8%) and Telecom (6%). These sectors are expected to catch the most interest from private players. 

Which Stocks Are Likely To Benefit?

  • Roads and Highways: Roads and highways constitute a majority of the monetisation pipeline. Companies like IRB, L&T, GMR Infra, Dilip Buildcon can be on the list
  • Railways: Railways in India are wholly owned by the government. Stocks such aslike IRCTC, IRFC, Ircon, Titagarh Wagon, RITES, and RailTel could likely benefit from the move.
  • Power Sector: Companies like Power Grid, Adani Transmission, KEC Intl, and GE Power, GE T&D could benefit from it.  
  • Adani Group: The Adani Group has its hand in the game. It is the largest private airport operator in the country. Its subsidiary Adani Airport Holdings Limited holds the highest number of airports in India (eight airports across India). Apart from these Adani Gas, Adani Green, Adani Power, Adani Enterprises could prosper from the deal.  

The Way Ahead

The NMP is a part of the Modi government’s divestment and privatisation policy. It is no secret that government-owned companies function less efficiently than private companies. The NMP will enable increased efficiency and optimum utilisation of government assets. The revenue generated by leasing government assets will help fund more government projects. This move shall receive lesser resistance than usual. Unlike privatisation/divestment, the government is retaining the ownership of government assets.

Source: NITI Aayog

Coming to the shortcomings of the NMP. The government still holds troubled assets like Air India and BPCL. It has tried yet failed to privatise them in the past. There might be a lack of identifiable revenue streams in particular assets. As for railways, the government received poor interest in its recent bidding for a Public-Private partnership for trains. The government has taken a halt to the privatisation/divestment process of the railways. 

Tariffs in the power sector are regulated, and there is poor capacity utilisation in the gas and petroleum sector. These factors could hinder the process of asset monetisation plan of the government. The rest depends on how the government incentivises the whole process for private players and executes the entire scheme. 

You can read the entire plan for the National Monetization Pipeline in detail at:  https://www.niti.gov.in/national-monetisation-pipeline

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Editorial

BPCL and its Privatization News. What to Expect?

Bharat Petroleum Corporation Limited (BPCL) has been a hot company to keep an eye on since the Indian government had intended to sell its stake in the company. Why is all the fuss about BPCL? What are the developments in its privatization? Let’s check it out here.

All on the Privatization front

The government plans to sell its 52.98% stake in BPCL as part of its ambitious divestment process. As expected, the company received multiple expressions of interest (EOI) from different entities who were willing to purchase the government’s stake.

To everyone’s surprise Reliance, Saudi Aramco, United Kingdom’s BP or France’s Total didn’t express their interest in buying BPCL. These companies along with Russia’s Rosneft-led Nayara Energy were considered to be the most eager parties but none of them came forward to participate in the bid. Vedanta Group is one of the three entities to submit an EOI for BPCL’s acquisition. 

The other two are private equity firms Apollo Global and I Squared Capital’s arm Think Gas. Currently, BPCL owns 22.5% of Indraprastha Gas Ltd (IGL) and 12.5% of Petronet LNG Ltd and acts as a co-promoter. The rumours were high that BPCL will be selling its stake in IGL and Petronet which could prove to be very destructive for the company.

But the management of the energy company came ahead and squashed all these stories. As a part of their divestment strategy, BPCL sold its entire 61.5% stake in Numaligarh Refinery in Assam to a consortium of Oil India, Engineers India and Government of Assam for Rs 9,876 crore. The majority of the chunk went to Oil India who bought a 54.16% stake. This helped them to increase their refinery shareholding to 80.16%. 

This was done to stay aligned with the Assam Peace Accord which asks the government to keep Numaligarh Refinery in the public sector. The privatization-bound company also bought Oman Oil company’s remaining shares in the Bina refinery project for about Rs 2,400 crore. It already had a 63.68% stake in Bharat Oman Refineries which will get increased to 100% after this purchase.

The most recent update came that the government might tweak FDI policy to allow 100% Foreign Direct Investment (FDI) in BPCL. However, that seems to be confusing because according to the current FDI policy, FDI is restricted to 49% under the automatic route in petroleum refining by PSU. 

Now it has been told that the ministry of commerce and industry will elaborate on this tweak in the coming days. It is definitely something we have to keep a watch on! Can you imagine one of the biggest Indian oil companies run by a foreign entity completely?!

A look at their Q4 performance

BPCL announced a net profit of Rs 11,940 crore for the quarter ended March as against a net loss of Rs 1,361 crore which was reported in the same quarter in the previous year. One of the key things to look at is how much of this came from their operating business. Remarkably, the total revenue from operations increased by 21.5% to Rs 98,755.6 crore for the quarter. 

There was a one-time exceptional gain of Rs 6,992.95 crore in the financial books. The company sold its Numaligarh Refinery (covered in the above section) through which it gained Rs 9,422 crore. After taking an impairment of assets worth Rs 2,032.8 crore and expenses related to employee shares, their total gain reached Rs 6,992.95 crore. Their Gross refining margin (GRM) surged to $4.06 per barrel in FY21 as compared to $2.5 per barrel in FY20. The GRM refers to the earnings by converting one barrel of crude into fuel.

Not only this, BPCL made its investors feel ecstatic by offering a final dividend of Rs 58 per share. This had a one-time special dividend of Rs 35 per equity share which was offered due to the sale of the Numaligarh Refinery. Not to mention, they have already announced an interim dividend of Rs 21 per share. Thus, a total dividend of Rs 79 per share for a stock trading in the range of Rs 400. That is amazing!

Still, a long way to go?

Despite challenges put forward by this pandemic, BPCL has made huge steps towards its privatization. BPCL’s sale will help the Indian government to reach the Rs 1.75 lakh crore disinvestment target set for 2021-22. This disinvestment has become more important in these tough Covid-19 times when the government has to spend a lot from their pockets. 

The revenues of the government are hit due to this pandemic, and on the other side, their expenditure has increased massively. Another roadblock is that the bidder who purchases the government’s stake might have to make an open offer to other shareholders for acquiring another 26% at the same price. 

Also, the final bidders will wish to visit the refineries and sites personally which cannot be allowed completely due to restrictions on international travel. Thus, one can expect another six months to complete this deal. 

Currently, BPCL holds 15.33% of India’s oil refining capacity and 22% of the total fuel marketing share. This means whichever company acquires it, will gain a good hold of energy refinery and distribution in India. Thus, it becomes even more interesting to wait and see who takes control of it.

What are your opinions on BPCL and its privatization? Were you holding BPCL when they announced their special dividend? How happy were you? Let us know in the comments section of the marketfeed application!

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Editorial

Is Privatisation of PSUs Worth It?

Privatisation in India began with some major policy changes in 1991 by the P. V. Narasimha Rao-led government and its LPG(Liberalization, Privatisation, and Globalisation) policy. India witnessed a trajectory in growth after that. Fast forward to 2020, there is a need for further privatisation in certain sectors. In a webinar organized by DIPAM or the Department of Investment and Public Asset Management (DIPAM), Prime Minister Narendra Modi pitched saying “Government has no business to be in business, and businesses have no business to be in the Government.” He went on batting for the privatisation of strategically important public sector companies.

Essentially the government will be selling stakes or divesting from certain companies it feels are inefficiently managed or an added burden to the central government ledger. Privatisation as of now is in its infancy. There were reports that a total of 300 PSUs could shrink to around two-dozen after privatisation and divestment. Why does the centre feel that privatisation is necessary? What can be the consequences of privatisation? Let’s get right into it. 

Why Are PSUs Privatised?

Governments might privatise certain companies to:

  • To generate revenue. 
  • Desire a higher level of service.
  • Get necessary expertise which otherwise might not be available.
  • Allow flexibility in the functioning of the company.
  • Increase competition in a certain sector and invite other private players into it.
  • Reduce debt burden in distressed companies like the national carrier Air India.

In the private sector, employees have incentives to perform better and therefore have their skin in the game. Otherwise, the government employees get a fixed salary irrespective of performance. Due to administrative inefficiencies, public enterprises might not be able to import the necessary technology needed for their functioning. Private players on the other hand will have a lobby to ensure that the right technology is availed. They will also ensure that political interference does not impact business performance. 

Private companies also have the interests of multiple individuals at stake. This interest or stake in the company ensures that any mishappening in the company is corrected. In the public sector, this lack of interest fails to mitigate any mismanagement. In the past, it was seen that public sector banks like SBI or PNB were more exposed to financial fraud and high levels of NPAs. On the other hand, private sector banks have high expertise in credit-management, risk-management, and a more efficient loan recovery system.

DIPAM, and How Privatisation Works

The Department of Disinvestment was renamed as the Department of Investment and Public Asset Management (DIPAM) on 14th April 2016. It is a department under the Ministry of Finance. 

Department of Investment and Public Asset Management (DIPAM) deals with all matters relating to the management of Central Government investments in equity including disinvestment of equity in Central Public Sector Undertakings. DIPAM works in these four areas: 

  • Strategic Disinvestment 
  • Minority Stake Sales 
  • Asset Monetisation
  • Capital Restructuring. 

It also deals with all matters relating to the sale of Central Government equity through an offer for sale or private placement or any other model in the erstwhile Central Public Sector Undertakings. DIPAM and NITI AAYOG together will decide a number of companies to be privatised.

The Impact

PM Modi in his speech said that the government holds underutilized assets worth Rs 2.5 crores. Privatisation might help use these assets efficiently. The Modi government has been emphasizing the privatisation of government entities ever since it came to power for the first time in 2014. 

MALCO, Modern Foods, Hindustan Zinc, Bharat Aluminium, Maruti, Jessop and Co, CMC Ltd are some of the popular companies that were owned by the Government of India and were later privatised. 

Hindustan Zinc was one such company whose majority stake was sold to Vedanta Limited. The company went on in becoming the world’s second-largest Zinc-mining company and one of the top 10 silver producers of silver.

For some period of time, Maruti Suzuki was a government-owned company. It faced a lot of political conflicts, violent workers union protest, political intervention, quality issues, production issues, and much more. Eventually, the company ended up getting privatised and Suzuki later became the majority stakeholder in the company. 

Bharat Aluminium Company is also another such privatised company. Before privatisation, only 50% of the revenue came from profits, the rest came from interest earned over fixed deposits. It was a wholly government-owned company till 2001 when it was sold to Vedanta. What followed was huge protests between supporters and opposers of privatisation. Yet, the company’s revenue rose from Rs 898 crore in FY2001 to Rs 90,000 crores in FY2018. The company made alloys for “Intermediate-Range Ballistic Missile” – Agni and “Surface Missile” – Prithvi.

Future of Privatisation

It’s clear, only a few companies have been privatised so far, but most of them have shown good results. However, the financial and structural condition of some of the state-owned companies like Air India is so bad that private companies refuse to bid for them. The government has been showing quite an inclination towards privatisation. In a historic move, coal mines are going to be privatised, which will transform India’s trajectory in a HUGE way. 

The current Policy For Strategic Divestment states that all sectors in the public domain will be privatised except for 4 strategic sectors. These include Railways, Department of Posts, Airports Authority of India and some major port trusts. Privatisation will definitely have its own devilish impacts. It will give control of public companies in the hands of private players who would forward their own personal interests rather than that of the public.

 There will be lots of restructuring that these public sector companies would require in order to function efficiently, there will be layoffs, wages will be incentivized, benefits will be cut. All in all, theoretically it will be for a greater public good. Let us see if the country can make this theory practical.

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Market News

Government plans to reduce the number of PSU banks to five

PSU Banks

India is looking to privatise more than half of its PSU banks to reduce the number of PSU banks lenders to just five as part of an overhaul of the banking industry. The first part of the plan would be to sell majority stakes in Bank of India, Central Bank of India, Indian Overseas Bank, UCO Bank, Bank of Maharashtra and Punjab & Sind Bank, leading to effective privatisation of these state-owned lenders, a government official said.

“The idea is to have 4-5 government-owned banks,” said one senior government official. At present, India has 12 state-owned banks.

The government official said that such a plan would be laid out in a new privatisation proposal the government is currently formulating, and this would be put before the cabinet for approval.

The government is working on a privatisation plan to help to raise money by selling assets in non-core companies and sectors when the country is strapped for funds due to lack of economic growth caused by the coronavirus pandemic.

“The government has already said that there will be no more mergers (between state-owned banks) so the only option for them is to divest stakes,” a senior official at a state-owned bank said.

Last year, the government had merged ten state-owned banks into four, creating a handful of larger banks in the process.

“Now we are thinking of selling the unmerged banks to private players,” the government official said.

The divestment plans may not happen in this financial year due to unfavourable market conditions, the sources said.