What Is the Real Reason Behind India’s PSU Stake Sales?
Explore the real reasons behind PSU stake sales in India, from funding infrastructure and reducing financial pressure to improving transparency and efficiency.
MARKET NEWS
8/11/20265 min read
A portion of the Indian government's stake in Public Sector Undertakings, or PSUs, is usually sold. We refer to this procedure as disinvestment.
Sometimes the government does not sell the entire business. It often retains control of the PSU while selling only a small percentage of its shares. Therefore, stake sales do not always lead to privatisation.
What is a PSU stake sale?
A public sector undertaking (PSU) is a corporation that is partially or entirely controlled by the government. Examples are LIC, Coal India, ONGC, NTPC, and Indian Oil.
When the government sells a portion of its stock in a PSU, private investors, mutual funds, financial institutions, and ordinary investors can purchase those shares.
There are two primary types of disinvestment:
Minority stake sale: The government sells some shares while maintaining managerial control.
Strategic disinvestment: The government sells a significant portion of its stock and may even transfer management control to a private buyer.
According to the government's investment department, minority stake sales can occur through IPOs, offers for Sale, or share buybacks.
Main reasons to sell PSU stakes
To raise money for development
The government needs funds for:
Roads and highways.
Railways and public transport.
Defence and national security.
Schools and hospitals.
Rural development.
Electricity and water projects.
Welfare schemes.
The government earns money by selling a portion of its shares without immediately raising taxes. The funds can later be used for government spending and infrastructure development.
To manage the fiscal deficit
The fiscal deficit is the difference between the government's total income and expenditures.
For instance, if the government earns ₹100 but spends ₹120, it creates a ₹20 deficit. To close this deficit, it may need to borrow money.
Selling PSU shares provides the government with non-debt income. This means that the government can raise funds without borrowing the entire amount. Recent reports have linked the accelerated speed of PSU stake sales to fiscal pressures and the necessity to free up more space in the public budget.
This does not totally eliminate the fiscal imbalance, but it does assist the government manage its finances.
To follow the minimum public shareholding rules
Listed firms are often required to maintain a certain amount of public shareholding.
Simply put, a publicly traded firm should not be almost wholly owned by its promoters. A reasonable number of shares should be available to public investors.
Many government-owned businesses have significant government ownership. As a result, the government may sell some shares to increase public ownership and meet market demands.
The government has also said that minority stake sales can help achieve the minimum public shareholding requirement while also increasing the overall ownership of PSU shares.
To increase public ownership
When the government sells PSU shares, ownership becomes more widely distributed.
New shareholders may include:
Retail investors.
Mutual funds.
Insurance companies.
Foreign investors.
Domestic institutions.
This increases the number of individuals with a financial stake in the company. It also enables ordinary investors to join in the expansion of huge government-owned enterprises.
According to the Department of Investment and Public Asset Management, selling minority stakes can boost the share float and give more investment alternatives for ordinary investors.
To improve the transparency and accountability
A company with more public shareholders faces greater market attention.
Investors regularly examine:
Quarterly results.
Debt levels.
Profit margins.
Management decisions.
Corporate governance.
Dividend payments.
This pressure may drive the PSU's administration to work more efficiently and communicate more effectively with investors.
However, simply selling shares does not necessarily boost a company's success. Real progress also requires competent administration, improved decision-making, and less political involvement.
To earn money while keeping control
This is a key reason why the government sometimes prefers a minority stake sale.
Assume the government owns 80% of a PSU. It can sell 5% or 10% of its shares while remaining the controlling shareholder.
This means that the government can:
Receive funds from the share sale.
Continue to exercise influence over the company.
Continue to receive dividends.
Avoid the difficult task of locating a private buyer.
Central PSUs also distribute dividends to the government. As a result, a minority interest sale enables the government to raise funds today while continuing to receive dividends in the future.
To reduce the government role in business
The government's primary role is to establish laws, provide public services, and ensure national security. It may not be necessary to run enterprises in every field.
The government's disinvestment program seeks to diminish its involvement in certain areas while maintaining control over key essential sectors.
For example, the government may believe that private companies can run businesses like hotels, manufacturing, and non-strategic services more effectively.
The proceeds from the sale of such assets can be utilized to support sectors where government involvement is more crucial.
Why does the government sell profitable PSUs?
Many people have a valid question: if a PSU is profitable, why sell its shares?
The reason is that the government may wish to maximise the value of its investment.
For example, if the government controls 75% of a prosperous corporation, that stake is a significant asset. Selling a little portion during a good market can help the government raise a significant amount of funds.
The government can still retain ownership and receive dividends on the remaining shares.
However, the government must not sell shares at an unreasonably cheap price. The timing, pricing, and method of sale are critical to preserve public wealth.
Impact on investors
A government stake sale can affect investors in different ways.
Possible benefits:
More shares become accessible on the market.
Trading liquidity may increase.
Retail investors have the chance to purchase shares.
Increased public ownership may enhance oversight.
Analysts and institutions may focus more on the company.
Possible risks:
Additional shares may boost supply, putting short-term pressure on the share price.
Investors may be concerned that the government may sell more shares later.
The PSU may lose certain government funding or unique benefits.
A stake sale does not ensure improved management.
The government may lose some of its future dividend revenues.
Is selling PSUs always a good idea?
Disinvestment has both benefits and drawbacks.
It can assist the government in raising funds, increasing public participation, and limiting its involvement in non-strategic industries. It may also inspire PSUs to improve their efficiency and accountability.
However, frequent share sales cannot be a permanent solution to a government's ongoing expenses. After shares are sold, the government owns less of the corporation. It may also receive a reduced portion of future dividends.
There is also the possibility that significant public assets will be sold at a low price due to market pressure or poor timing.
For example,
Suppose the government owns 80% of a PSU valued at ₹100,000 crore.
If it sells 5 per cent of its stake:
The government benefits financially from the sale.
Public ownership grows.
The government still holds 75%.
In most cases, the government retains management control.
The government may continue to receive dividends on its remaining shares.
This is known as a minority stake sale, not complete privatisation.
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