The government’s ambitious disinvestment programme offers investors an opportunity to become shareholders in what were so far closely-held institutions.
In this backdrop, here is an assessment of the various opportunities and the risks involved.
What are the plans for disinvestment?
In Budget 2021-22, the government announced a strategic sale/ disinvestment policy for four strategic sectors.
These include banking, insurance and financial services.
The government will have a “bare minimum presence” in these sectors.
The government completely exits PSUs through the strategic sale.
Apart from this, the Centre has lined up minority stake sale through various routes including offer for sale (OFS) and initial public offering (IPO).
The biggest will be the IPO of LIC.
The Budget has also announced privatisation of two public sector banks (in addition to IDBI Bank) and one general insurance company in the upcoming fiscal.
Privatisation of the two banks will set the trend for a long-term project that envisages only a handful of state-owned banks.
The rest will be either consolidated with strong banks or privatised.
The Centre has pegged the disinvestment target for the upcoming fiscal at Rs 1.75 lakh crore.
This is compared to Rs 2.1 lakh crore budgeted in 2020-21.
OFS has been the preferred route for disinvestment.
Increasing the FDI limit in insurance from 49% to 74% is expected to lead to an unprecedented expansion of the insurance sector.
This could also give retail investors the chance to ride this profitable sector on a long-term basis.
How does it benefit retail investors?
The progress on privatisation plans of BPCL, Shipping Corporation of India and CONCOR, among others, has already led to a big rally in their shares.
Investors bet that the new management and private ownership would bring in higher efficiency leading to higher profits.
As privatisation will be a long-drawn process over 5-10 years, patient investors can pick and choose the companies they want to bet on.
What is the scope to buy PSU stocks in the secondary market?
Some do not want to get into the unknown territory of profits resulting out of privatization.
For them, there is an existing pool of PSU stocks and exchange traded funds to choose from.
Central public sector enterprises, public sector banks and the insurance companies have been favoured by institutional investors in recent months.
There has been a steady recovery in PSU stocks, especially after the government announcement on a strategic sale policy and clear intent on privatisation.
As the equity markets are showing steady recovery, the PSU stocks will continue to do well at least in the medium term.
Consumption- and privatisation-focused stocks such as IRCTC, BPCL, Shipping Corporation, BEML, and PSU banks are expected to offer reasonable returns over the medium term.
What are the other opportunities?
As market sentiments have revived after the Covid-19 pandemic, around Rs 1 lakh crore of public issues (excluding LIC) under IPOs are waiting to hit the markets in the near term.
Markets are likely to witness a bull run in the next financial year as well.
IPOs of public sector firms earlier were not very encouraging as the pricing was not proper.
However, recent IPOs provided good gains for investors.
All these hint at a favourable climate for investment.
What are the risks involved?
The fate of the IPO market is clearly linked to the performance of the stock market.
If bond yields in the US rise further, the equity market will get hit as foreign investors might pull out.
For the current economic recovery to sustain, containing bond yields is essential.
It should be done not through ‘yield curve management’ but through moderating inflation expectation.
Other risk factors are the possibility of a spike in Covid and lockdown, further rise in crude oil prices, rise in inflation and a possible rise in interest rates.
