How not to disinvest

Don't repeat the ONGC mistake, instead steadily sell off PSU shares

Gearing up for the budget, the government attempted to keep the fiscal deficit for the current year under control through ONGC disinvestment. The auction did not go well. The events that unfolded only pointed to inherent weaknesses in the implementation capacity of the government.

The ONGC disinvestment process ended up with public sector financial institutions, such as LIC, buying up the bulk of shares on offer. The auction was implemented through an initial change in the auction design, one that seems less transparent than the standard auction, something that would likely not have been allowed for a private company. Later, it was reported that concessions were given by exchanges and the stock market regulator to handle system glitches that arose because of the last-minute load at the time of closing the auction. The disinvestment design also raises issues about the price, which was above the secondary market price and, therefore, enough to turn off most investors. Further, it raises questions about whether public sector financial institutions should have large exposure to public sector enterprises, and what signals such disinvestment gives to international investors and credit-rating agencies who are presumably among the intended targets, looking at disinvestment as a positive signal about the Indian economy.

A reduction in fiscal deficit through disinvestment planned at the beginning of the year should have been rolled out throughout the year. The argument that the market did not look good is flawed as it is circular. Sentiments in the market, apart from being influenced by uncertainty in international markets, are strongly influenced by government actions and policies. If the government had steadily sold shares of PSUs through the year, investor confidence would presumably have been higher and if markets had been upbeat about the economy, disinvestment proceeds would have been larger.

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