Divestment secretary Neeraj Gupta during an interview. (Source: BloombergQuint)

Union Budget 2018: More Divestment Through Exchange Traded Funds And A Debt ETF, Says Divestment Secretary

The government will meet its divestment target for the financial year 2018-19 through four routes – minority stake sale, economic mergers and acquisitions, debt-related instruments including issues such as CPSE and Bharat-22 ETFs and initial public offerings.

That’s the word from Divestment Secretary Neeraj Kumar Gupta. “We have a long list of IPOs which are coming up,” said Gupta, adding that nearly 14 CPSEs are lined-up on his list for possible listings in FY19-20. Overall, there are 44 listed CPSEs in which the government could sell stake to meet the target, he told BloombergQuint in an interview.

In Union Budget 2018, the government set a target of raising Rs 80,000 crore in FY19 by selling stake in state-owned assets after exceeding its record divestment target in the previous year after selling its 51 percent stake in Hindustan Petroleum Corporation Ltd. to Oil and Natural Gas Corporation Ltd.

The ONGC-HPCL deal was “not a windfall”, Gupta said. Instead, the merger led to the creation of the country’s first vertically integrated economic entity in that space. Going ahead, the government plans to vertically integrate several PSUs into a single entity before listing, he added.

Here are the edited excerpts from the conversation:

How do you expect to reach that Rs 80,000 crore divestment target, which is coming on the back of an already ambitious target of Rs 72,000 crore?

On the Rs 72,500 crore target, we had adopted multiple approaches. We have already crossed Rs 92,500 crore till date. So, Rs 80,000 crore target is for the next year. This year, the target has been revised upward to about Rs 1 lakh crore. We have to work further on that target at this point of time.

But, I can assure you, the paradigm shift, that has taken place in the divestment process to more efficient investment management process, is really opening avenues and possible options for divestment of stakes in different CPSEs. Thereby, we will be using all these tracks and maybe expand more in terms of offerings to the market. You can be assured that investor interest is supreme because that really leads to value creation in CPSEs.

Where do you expect Rs 80,000 crore to come from? Are you factoring in Air India in that? What about the four railway corporations that were to list in this existing fiscal? Are they accounted for in Rs 80,000 crore target as well?

Definitely. There are four tracks: minority stake sale is one. We have a long list of IPOs which are coming up gradually. After a gap of five years, we have listed four companies this year.

Then, we have economic mergers and acquisitions. That policy was announced last year. We also have strategic sales. And we have created more investment instruments like Bharat-22 Exchange Traded Fund which has become very popular. Both ETFs, CPSE and Bharat-22, which are promoted by government, exist as a product and can further be offered.

What is on your minority stake sale list for FY19?

It is highly market sensitive information, so I can’t divulge the details. But, we will wait for the right opportunity to divest one of them or any one of them.

Are you working with the same list of CPSEs from last year?

There are 44 listed companies. So, divestment can be done in any one of them.

In terms of IPOs, are you referring to the four railway corporations? Or are there more? There was a mention in the finance minister’s speech about merging all the other insurance companies and listing them.

The listing of 14 CPSEs, which is on the cards, is progressing well. Four of them have already been listed after a gap of five years. And we will be listing more CPSEs.

On the merger of insurance companies, it has been announced that three general insurance companies will be merged into one entity and that will be taken for listing. That is the second announcement and that too will progress logically.

Does that fall in the economic mergers bracket you were talking about?

Yes, definitely. For creating value of investment in the CPSEs, the policy of acquisitions and mergers on the economic basis was announced in the last budget, and that is a logical expansion of that policy.

Whichever company or CPSE feels that they can acquire more economic assets and create a higher value, the government will look at it in a positive light. Merger of insurance companies is another such announcement along the same lines. 

You made a big windfall this year with the ONGC’s acquisition of HPCL. Do you think that more than one-third of your divestment target next year will come through the insurance companies’ merger, because it will require one insurance company to buy out the government ownership in the other two companies?

You should not refer to the ONGC-HPCL merger as a windfall because the top five oil majors across globe are vertically integrated economic entities. In India, this will be the first vertically integrated economic entity in the oil and gas sector.

Secondly, there are a lot synergies in terms of exploration, refining and distribution. For instance, if a company is getting almost 60-65 percent of synergies in operations, how much of it will get converted into economic gains? That is how we are creating higher value for ONGC, which may be having liquid assets that are not giving sufficient dividends. They have to either expand the business, or acquire another business. So, it is not a windfall, it was actually a dream acquisition by ONGC. It had all economic rationale, and it took place in the most professional manner. We’ll always be on the lookout for such opportunities.

There are talks of some other vertically integrated oil PSUs coming into being after the successful HPCL-ONGC deal. Will those happen in the current financial year?

I have no such proposals in mind, I think it’s just market speculation.

There is also an announcement that the government will launch a debt ETF to raise debt financing for the government. Could you throw some light on this?

As per the investment management policies, the government has insisted that the balance sheets of CPSEs must be leveraged adequately to expand their business, and that there should be expansion of capex and economic activity by CPSEs. This is in line with the drive to improve economic growth in the country.

In the fixed income segment, almost 15 CPSEs have been raising money through the bond route. Almost Rs 3 lakh crore has been raised in the last three years, and the traded volume of these bonds is nearly 34 percent of the traded volume of the fixed income bonds in the market.

So there is a lot of attraction. There is a need to aggregate their strengths and borrowing requirements and I’m sure that if we can come up with larger offerings, it will provide better depth and liquidity to the bond market, especially in the CPSE space.

So we will definitely look into the possibility of creating a bond ETF consisting of CPSEs. Out of these 15 CPSEs, 12 belong to the AAA category, constituting almost 97 percent of the total borrowing.

So a bond ETF from all AAA rated CPSEs is a definite possibility, as it will bring about higher liquidity, ease of trading, and ease of redemption. It will also bring down the cost of borrowing for the CPSEs, which will further help them in expanding economic activities.