Modi’s New Privatisation Policy Changed Gears, Took Short-Cut Before Budget Reveal
(Source: BloombergQuint)

Modi’s New Privatisation Policy Changed Gears, Took Short-Cut Before Budget Reveal

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In a span of six months, India’s new, bold privatisation policy became bolder. It narrowed criteria to retain ownership in public sector companies, added more sectors to the divestment list and rolled back a proposal on minimum number of PSUs to be retained. In doing so, the team shepherding the policy also skipped over some of the processes laid down for inter-departmental consultations, thereby finalising it in time for Finance Minister Nirmala Sitharaman’s Budget speech on Feb. 1.

BloombergQuint has accessed a series of communications between the Finance Ministry’s Department of Investment and Public Asset Management and different ministries starting July 2020, which culminated in a cabinet note dated Jan. 23. These documents were accessed through the Right To Information Act.

The first part of BloomberQuint’s series ‘The Privatisation Files’ detailed the numerous objections raised by key ministries, in some cases backed by the cabinet ministers themselves. In most cases, the objections and concerns were not accommodated with DIPAM providing a counter-rationale.

But the documents also show that the policy finally approved by the Cabinet just ahead of the Budget announcement was far more ambitious and wide-ranging than the proposal which was first circulated in July 2020.

DIPAM officials declined to comment on the story and emails sent on March 19 remained unanswered.

Modi’s New Privatisation Policy Changed Gears, Took Short-Cut Before Budget Reveal

Going ‘All-In’

The Finance Ministry’s Department of Investment and Public Enterprises framed a draft Cabinet Note on Economic Affairs, which was sent for consultation on July 6, 2020. The policy was then named as ‘Redefine Public Sector Participation in Commercial Enterprises for a New Self-reliant India (REPUB-SPACE Policy).’

Comments were sought from as many as 49 ministries/departments. A week before the Budget was to be presented on Feb 1, DIPAM decided to convert the proposal, which was intended for the Cabinet Committee On Economic Affairs. into a note for the approval of the Union Cabinet. The final policy was approved in a Cabinet meeting chaired by the Prime Minister on Jan. 27.

A study of the draft note prepared in July and the one approved in January suggests that somewhere along the way the government decided to go ‘all-in’ on its attempt to privatise.

For instance, the July draft note had laid down very broad criteria on sectors that qualify as ‘strategic’. These are areas where the government has said it will retain some presence. “National security, sovereign function at arm’s length, market imperfections and public purpose...” were listed as the criteria. The result, a far wider set of sectors classified as “strategic”, potentially limiting the scope of privatisation.

Then came the January note which went to the cabinet. Here, the criteria for strategic sectors was more specific. “National security, energy security, critical infrastructure, provision of financial services and availability of important minerals...” were listed as the criteria.

Immediately, the list of strategic sectors whittled down.

“Based on inter-ministerial consultation, it was observed that the private sector has come of age and contributes significantly to the following sectors, the same have been excluded from the list of strategic sectors,” the final note put up for the Finance Minister’s approval mentioned.
Modi’s New Privatisation Policy Changed Gears, Took Short-Cut Before Budget Reveal

Other subtle changes between the first draft in July and what was approved in January also gave the government a wider berth in proceeding with privatisation decisions.

While the July draft note spoke of retaining one-to-four public enterprises in strategic sectors, the final policy only spoke of a minimum number of firms. “The policy intends to minimise the presence of government in PSEs across all sectors of the economy,” the draft Cabinet note dated January 23 mentioned in its introduction – a statement of intent that was not mentioned in the draft note circulated for inter-ministerial consultations.

That may be interpreted as a further expansion in the list of companies to be divested, though a finance ministry official, speaking on condition of anonymity, said that the change introduced here was meant to “accommodate” the concerns of many departments over retaining only four state-owned firms under their control.

The final note also did away with a specific reference that in strategic sectors, “GoI shareholding (beyond the extent needed for retaining control) may be considered for divestment, following any of the SEBI approved modes of minority stake sale.” This was replaced by a provision which opened up the option of the government retaining control at a ‘holding company’ level. “In strategic sectors, bare minimum presence of the existing public sector commercial enterprises at holding company level will be retained under Government control,” the note said.

Finally, to shorten the time period over which privatisation deals tend to close, the government decided that for non-strategic sectors, DIPAM will move a proposal directly for the approval of the CCEA, eliminating the need for a second layer of inter-ministerial consultation.

The finance ministry official quoted above said this is aimed at giving a sense of clarity to a pool of investors that firms in the non-strategic sectors will be taken up for privatisation in a shorter span on time.

Bending The Rulebook

The changes to the proposed privatisation policy between July and January were significant. Was it then incumbent upon DIPAM and the Finance Minsitry, which was driving the process, to consult other ministries a second time on the new privatisation policy?

The rule book says yes.

“If a sponsoring ministry/department makes a substantive change in original proposal(s) after inter-ministerial consultations, it would be incumbent upon them to re-circulate the note for completing inter-ministerial consultations. A failure to do so would render the institutional mechanism of inter-ministerial consultations infructuous (meaning: ineffective), while giving the impression that the requisite inter-ministerial consultations have been undertaken,” say instructions by the Cabinet Secretariat.

DIPAM chose not to do this.

Official records reviewed by BloombergQuint show that DIPAM made a case, in a file noting dated Jan. 23, 2021, that the final note need not be circulated for inter-ministerial consultations again.

The department argued that the policy will only classify state-owned firms into strategic and non-strategic sectors. There will be multi-layered consultations that will happen at a later stage. At the time of majority stake sale, ministries will be “duly consulted by Niti Aayog” and the ministry, which has administrative control over a particular company, will also be a member of a core group of departments so their views will be incorporated again, it said.

“In view of this, therefore, this note for the Cabinet may not be circulated for inter-ministerial consultation,” a correspondence from DIPAM to the Finance Minister’s office shows. “Approval of FM is sought on the draft Note for the Cabinet and on para 4.4 (above proposal),” the DIPAM said in the file noting.

The FM’s approval came within hours.

An email sent to the office of the Finance Minister on March 19 was not answered.

Modi’s New Privatisation Policy Changed Gears, Took Short-Cut Before Budget Reveal

The finance ministry official quoted above said that the final note did not have “substantial” changes so the need for another round of consultation was not felt. Since the Cabinet discussed the final note, ministers had an opportunity to express their concerns, this person said.

A former secretary-level official, speaking on condition of anonymity, said that while there is no "illegality" but there may be a departure from the procedure in this case, which has happened in past instances, too. Another former government secretary, who did not wish to be named, however, said that since a note which was originally intended for the Cabinet Committee On Economic Affairs was replaced by a Cabinet note, it should have been ideally re-circulated for receiving comments.

While clarifying that he was not familiar with the precise facts of the case, Former Cabinet Secretary KM Chandrasekhar said that whether the new note includes substantial changes is “essentially a matter of judgment”.

“If there is any doubt, the Cabinet Secretariat can examine it and take a decision on whether the Note is ripe for placing before Cabinet or needs further consultation. In the process of examination of the Note, the Cabinet Secretariat also looks at the views expressed by Ministries/Departments. Besides, if any Department or Ministry feels that its views have not been taken on board, the Minister concerned can raise it in the Cabinet,” Chandrasekhar said.

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