Poor monsoon could derail disinvestment plan

Poor Monsoon could slow down Disinvestment
Poor Monsoon could slow down Disinvestment

Navin Upadhyay


  • A Poor monsoon could lead to a downward correction in the stock market
  • US Fed rate increase could lead to a flight of capital away from India
  • By end September, impact of monsoon will be known and a small window of 3-5 months maybe available to sell stocks in a measured manner
  • About 20 Public Sector Undertakings are being disinvested


The forecast of a poor monsoon and resultant crash in the stock market are going to hamper Modi Government’s ambitious disinvestment target of Rs 69,500 crores ($10.85 billion). Of these, the Government has planned to mop up Rs 41,000 crores ($6.4 billion) through dilution of stakes in Public Sector Undertakings (PSUs) and the remaining from strategic stake sale that involves ceding management control.

The government has obvious reasons to be in denial mode—Finance Minister Arun Jaitley on June 5 said that disinvestment plan will remain intact, but high-ranking officials feel that it was next to impossible to meet the target.

They contended that the overall economic situation will remain less than cheerful in the short term, and this would  act as an overhang on the market. Unless the market condition improves substantially, it will be imprudent to go for such large scale disinvestment or strategic sale, an official said.

The fear of US Fed rate hike is another overhang on the India market. Officials fear that by September-October when the worst of the monsoon has played out in the stock market, the US Fed could raise interest rates.

If that happens (US Fed raises rates) there will be a flight of capital from the India market and it will be difficult for us to offload stakes in such a depressing scenario.

– Ministry of Finance official

A window that could be available for the government to go for both minority stake sale and strategic stake sale will be around two to three months from year end to the next budget. “We hope to see a recovery in the stock market by year end, an official said, adding, “but even if that happens, it will not be easy to put so many companies on the block in such a short span of time”, he said.

The official explained that the best strategy for such sale (both minority and strategic) would have been a staggered one. “That’s the best way to get the best price for the stock. Because if you offload a great deal of scrips together, the market cannot absorb it. It will lead an inevitable disaster.” he said.

This fiscal year the government has sold minority stake in only one PSU – Rural Electrification Corporation. The 5% equity dilution in April, 2015 got a good response and fetched Rs 1600 crores ($250 million) to the exchequer.  But since then the stock is sulking due to poor market conditions.

The Union Cabinet has already approved the sale of 5% stake in Oil and Natural Gas Corporation Ltd. (ONGC), Bharat Heavy Electricals Limited (BHEL) and National Thermal Power Corporation (NTPC), and 10% each in Indian Oil Corporation (IOC), National Aluminium Company Limitied (NALCO) and National Mineral Development Corporation Limited (NMDC). Minister of Heavy Industries and Public Enterprises Anant Geete had gone on record saying the government is considering sale of HMT Watches, HMT Chinar, HMT Bearings, Tungabhadra Steel and Hindustan Cable Corporation to garner Rs 22,000 crores ($3.43 billion).

The Government is also planning to go for a strategic sale of eight loss-making hotels under the Indian Tourism Development corporation (ITDC). These are some of the finest properties, but a victim of years of mismanagement and  profligacy. The names could include Delhi’s famous Ashoka Hotel, which overlooks Prime Minister Narendra Modi’s residence at 7 Race Course Road.

Other hotels that could be placed on the block could be ITDC properties in Jammu & Kashmir, Guwahati, Bhubaneswar and Puri. In addition, two Centaur Hotels, part of Hotel Corporation of India under Air India – at Delhi and Srinagar could also be sold, sources said.

“The government has decided not be involved in running enterprises that could be more effectively run by others.”

– Minstry of Finance official

However, a section in the government hopes that the monsoons session of parliament could come as a major trigger for the stock market if crucial legislation like The Goods and Services Tax bill and Land acquisition Bills are passed.”If that could happen and the monsoon surpasses expectations, the market could see a major upsurge. And that could give us elbow room for pushing forth the disinvestment process,” an official said.

The government has a three-pronged strategy to deal with the sick Central Public Sector Enterprises (CPSEs): statistic sale, revival, and closure.

According to government rules, a CPSE is classified as sick when its accumulated losses in any financial year is equal to 50% or more of its average net worth in the  preceding the year.

Apart from the five sick companies listed by the Minister Geethe for sale, some other  CPSEs in the sick list are: Air India (AI), Fertilizer Corporation of India, Hindustan Shipyard, Hindustan Machine Tools (HMT), Mahanagar Telephone Nigam Ltd (MTNL), Bharat Coking Coal and Indian Telephone industries, Bharat Wagon and Engineering, Heavy Engineering Corporation, Tungabhadra Steel, Scooters India, Bengal Chemicals, National Jute Manufacturers, Burn Standard, Konkan Railway Corporation and British India Corp.

Sources said the government is also preparing a comprehensive plan for the revival of many of the sick CPSEs, and the funds will be raised through sale of un-utilised real estate assets of state-owned pharma firms such as Hindustan Antibiotics, Brahmaputra Cracker and Polymer Limited (BCPL) and Indian Drugs and Pharmaceuticals Limited (IDPL) in  Mumbai, Pune and Hyderabad respectively.

Strategic sale as defined by the Government of India, Department of Disinvestment, Ministry of Finance. In the strategic sale of a company, the transaction has two elements:

  1. Transfer of a block of shares to a Strategic Partner and transfer of management control to the Strategic Partner
  2. The transfer of shares by Government may not necessarily be such that more than 51% of the total equity goes to the Strategic Partner for the transfer of management to take place. In the case of PSUs, in order that the company no longer has the character of a Government company, the transfer of shares involves bringing down Governments shareholding below 51%. In fact, it must be remembered that Companies Act, 1956 only defines a ‘Government Company’, which in common parlance, is a company in which Government holds more that 51%. PSU is not defined in the Act. Once the Governments shareholding goes below 51%, it ceases to be a Government company and hence, it requires changes in the Articles of Association of the company especially in relation to the Presidential directives etc. The Strategic Partner, after the transaction, may hold less percentage of shares than the Government but the control of management would be with him. For instance, if in a PSU the shareholding of Government is 51% and the balance is dispersed in public holdings, then Government may go in for a 25% strategic sale and pass on management control, though the Government would post-transfer have a larger share holding (26%) than the Strategic Partner (25%).
  3. It may be noted here that the number 26% has a special significance in Company Law so as to get a special resolution passed, one requires at least ¾ majority in a general meeting. Therefore, the 26% block acts as a check. Special resolutions are required under law in case of certain critical decisions by the company such as reduction of capital, alteration in Articles of Association and Memorandum of Association, winding up of the company, issue of share with variation of rights of special classes of shareholders etc.


  1. 1 US Dollar = Rs. 64.025.
Navin is a senior journalist with years of experience in covering India’s Capital city. His keen observations and ability to create the big picture from disparate pieces of information is invaluable.
Navin Upadhyay



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