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CPSEs Require Special Permission To Sell Stakes To State Governments

Opportunity India Desk
Opportunity India Desk Sep 16 2022 - 3 min read
CPSEs Require Special Permission To Sell Stakes To State Governments
The Dipam said all such privatisation or stake sales proposals would be sent for approval of the ministerial panel on such matters for in-principle approval.

Acting on a recent Cabinet decision to empower the boards of the Central Public Sector Enterprises (CPSEs) to privatise, disinvest or close their subsidiaries and sell stakes in joint ventures, the department of investment and public asset management (Dipam) issued a directive according to which Central Public Sector Enterprises (CPSEs) will now require to take special permission from a ministerial panel to sell their stakes to state governments or other government-owned companies.

Recently, the Union Cabinet empowered the boards of the CPSEs to privatise, disinvest or close their subsidiaries and sell stakes in joint ventures. There have been a few instances of some state governments wanting to purchase CPSEs which are on the block or are being closed down.

Issuing detailed guiding principles for strategic disinvestment or minority stake sale of subsidiaries or units or sale of stakes in JVs by the holding or parent PSE, the Dipam said all such privatisation or stake sales proposals would be sent for approval of the ministerial panel on such matters for in-principle approval.

“These proposals would have to be routed by the PSEs through the administrative ministry to Dipam, which will take the approval of the alternative mechanism (AM) consisting of ministers without having to secure the approval of the Cabinet,” Dipam said.

So far, the CPSE Boards did not have powers for disinvestment or closure of their subsidiaries or units or stake in JVs.

“In case of any compelling reason shareholding in any subsidiary or unit or JV is required to be sold to state government or PSEs, approval of AM may be taken at the time of taking “in-principle” approval after giving adequate justification,” Dipam said.

In April, the Centre had explicitly barred the CPSEs as well as state governments and companies and co-operatives owned by them from bidding for CPSEs being put on the block by the government. The move is intended to ensure that the government’s policy to privatise most CPSEs while keeping only a few under its ownership in strategic sectors is not thwarted by CPSEs buying one another.

The move will give a fillip to the government’s new public sector enterprises policy to unlock capital, which is either stuck or sub-optimally employed in state assets, and put these into more productive use.

Many large profit-making CPSEs like Coal India, ONGC and NTPC have valuable subsidiaries or JV partnerships, which they can monetise on their own following the guiding principle of Dipam. The move is also expected to reduce the burden on Dipam, which could now focus on privatisation of holding companies or parent CPSEs.

According to the guidelines, the disinvestment of subsidiaries, JVs or minority stakes would be driven by the board of the CPSEs. They have to follow transparent processes for the appointment of professional agencies such as bankers, transaction advisors, legal advisers as intermediaries; structure the strategic disinvestment transaction; transparent bidding process in case of privatization; due diligence on qualified bidders including security or political clearance; share purchase agreement (SPA) or shareholders agreements (SHA); valuation and reserve price; etc.

Currently, there are about 380 PSEs (including subsidiaries), 20-30 per cent of which may be closed for being sick or unviable. The government has made it clear that except for the sake of having its minimum presence in the four strategic sectors, other companies in the strategic sectors and all in non-strategic sectors will be privatised or closed.

The strategic sectors are atomic energy, space and defence; transport and telecommunications; power, petroleum, coal and other minerals; banking, insurance and financial services. In the non-strategic sector, all CPSEs will be privatised or closed in case privatisation is not possible.

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