India's PSU privatisation roadmap stuck in the slow lane — what are the roadblocks?

The government’s strategic divestment plan appears to have slowed down. With lengthy regulatory and due diligence processes to be followed, the timeline for a PSU privatisation is turning out to be at least 12 -18 months from the day of submission of the expressions of interest.

The delay in the privatisation of Bharat Earth Movers Limited (BEML) and Shipping Corporation of India (SCI) is particularly noteworthy due to the demerger of land assets from the core divestment activity. Additionally, the waiting in the IDBI Bank stake sale has become yet another addition to the growing list of delays.

Even seven months after the government received initial bids for IDBI Bank, the Reserve Bank of India's Fit & Proper exercise on the bidders has yet to be completed. Officials explain this is a critical part of whetting of bidders as the government does not want surprises once the financial bids have been called.

After RBI’s Fit & Proper exercise, the qualified bidders will conduct their own due diligence on the bank which again will take a few months. Following this, the government will finalise the share purchase agreement with the qualified bidders and invite financial bids.

The Fit & Proper exercise, as per the RBI's new regulations for bank acquisitions and holding substantial equity stakes, requires prospective investors to obtain a 'fit and proper clearance from the RBI before acquiring shares.

These new regulations have been introduced to ensure the credibility of potential stakeholders. Notably, the rules for individuals acting in concert have been made more stringent, and provisions have been set for a minimum lock-in period for strategic shareholders, along with a time limit for share acquisition post-RBI approval.

Under the new norms, if the bank's board determines that a shareholder is seeking a strategic stake, they are obligated to inform the RBI, even if the shareholding remains below 5 percent.

Due to the cumbersome and time-consuming nature of the process, it is possible the government will be able to invite only the financial bids for the IDBI sale in the current fiscal, with the actual transaction getting pushed to next fiscal.

On June 26, Tuhin Kanta Pandey, Secretary of DIPAM, told CNBC-TV18 that the RBI is currently conducting the 'Fit & Proper' test for the IDBI Bank bids. The due diligence on IDBI Bank by the bidders will occur after receiving the 'Fit & Proper' nod. Importantly, he mentioned that the government is “proceeding well” on IDBI Bank stake sale.

In the meanwhile, the awaited listing of SCI land assets is still pending. Only upon the completion of this listing exercise will the government proceed to solicit financial bids for the exit of Shipping Corp.

Approvals from the Karnataka government are also awaited for the transfer of title deeds of BEML to BEML land assets, following which the govt will call for financial bids. In both cases, the Centre is hopeful of successfully concluding these transactions within the ongoing fiscal year.

However, with general elections next year, the government is playing it safe in readying a new pipeline of privatisations . There is no approval for new strategic sales so far and it is likely that call will be taken after the 2024 election mandate.

In FY21, there was an ambitious divestment target of Rs 2.10 lakh crore, but the achieved amount was Rs 37,896 crore. For FY22, the target was reduced to 1.75 lakh crore, but the actual amount reached was Rs 13,627 crore. These figures, derived from the Budget, illustrate the challenging nature of divestment efforts.

Moving into FY23, the divestment target was set at Rs 65,000 crore, yet the actual amount attained was Rs 50,000 crore. The decision to lower the target seems to stem from a practical perspective, as the emphasis shifted towards achievable objectives rather than setting overly ambitious goals.

The significance of this lies in the recognition that mere targets do not necessarily equate to successful sales.

The disruptive influence of the pandemic, especially the emergence of the Delta variant, significantly impacted the 2021-22 fiscal.

In fact, the last three years have been marked by challenges stemming from pandemic-related uncertainty, geopolitical tensions, and associated risks, which have affected the government's plans and prospects for disinvestment transactions.