Strategic sale

Also called: Strategic disinvestment · Topic: Industrial Policy, Public Sector, MSMEs and Disinvestment · NCERT: Beyond NCERT

Meaning

A strategic sale (also called strategic disinvestment) is when the government sells a large block of its shares in a public sector enterprise, usually 50% or more, and also hands management control (the power to run the company) to the buyer. It matters because this is the route by which the state actually leaves a business. A normal share sale only raises money while the state stays in charge. A strategic sale is the main tool of the New Public Sector Enterprise Policy 2021 [1].

Strategic sale = large stake (≥ 50%) + transfer of management control

Explanation

How it works

• Disinvestment means the government sells part of its equity (shares) in a public sector enterprise (PSE). There are two routes:
• Minority stake sale. A small share is sold. The state keeps majority and control.

• Strategic sale. A large stake is sold plus management control. The buyer now runs the company.

• Why control is the key test

• A CPSE (central public sector enterprise) is a company where the Centre, other CPSEs, or both hold ≥ 51% of the shares.
• When the state's holding goes below this level and control passes to the buyer, the firm stops being a government company.

• The buyer brings its own money, technology and way of running the business.

• Who decides the terms. The Alternative Mechanism is a group of ministers that decides the terms of a sale. In 2022 the Cabinet gave it more powers [4].

• Golden share. The state may keep a special share in the sold firm. This share gives it a veto over key decisions even though it holds little equity. It protects public interest after the sale.

Who buys: private firm or another CPSE

• Buyer is a private firm → this is privatisation. Example: Air India was sold to the Tatas.
• Buyer is another CPSE → this is not privatisation.
• Examples: HPCL was sold to ONGC. REC was sold to PFC [2].
• The stake changes hands, but control stays with the state.
• Trap: these deals count as strategic sales in disinvestment receipts, but the state has not left the business.

Worked example (made-up numbers, for illustration)

• A CPSE has 100 crore shares. The government holds 60 crore of them (60%). The share price is Rs 200. The dividend is Rs 10 per share.
• Minority sale: the government sells 6 crore shares.
• It gets 6 cr × Rs 200 = Rs 1,200 cr.

• It still holds 54%. That is above 51%, so the company is still a CPSE and the state still runs it.

• Strategic sale: the government sells 51 crore shares and hands over control.

• It gets 51 cr × Rs 200 = Rs 10,200 cr as a non-debt capital receipt (money received without borrowing).
• It now holds 9%. The company is no longer a CPSE.

• It loses 51 cr × Rs 10 = Rs 510 cr of dividends every year.

• Lesson: the sale gives a large one-time receipt but cuts future income. So the money should go into capital spending, not day-to-day expenses.

What makes strategic sales succeed or fail

• Helps: good market conditions, a clear policy on which sectors to exit, and strong interest from buyers.
• Hurts: few serious bidders, weak markets, worker protests, disputes over valuation, and long legal steps. For example, the BPCL bid was withdrawn in 2022.

In India

• Institution. DIPAM (Department of Investment and Public Asset Management) handles disinvestment. It was renamed from the Department of Disinvestment in 2016.
• First wave (1999-2004). A separate Disinvestment Ministry ran strategic sales of Modern Foods, BALCO, VSNL, Hindustan Zinc and IPCL.
• CPSE-to-CPSE deals
• In 2017-18, 37% of disinvestment receipts came from the strategic sale of HPCL to ONGC [2].

• In 2018-19, REC was sold to PFC for Rs 14,500 cr [2].

• New PSE Policy 2021 (Budget 2021-22) [1]

• Strategic sectors are sectors where the state wants to stay present for security or public-interest reasons. There are four groups:
  1. atomic energy, space and defence;
  2. transport and telecommunications;
  3. power, petroleum, coal and other minerals;
  4. banking, insurance and financial services.
• In these sectors only a bare-minimum presence of CPSEs stays. The others are privatised, merged, made subsidiaries of other CPSEs, or closed [1].

• In non-strategic sectors, all CPSEs are to be privatised, or else closed [1].

• Recent strategic sales

• Air India to Tata Sons: approved on 8 October 2021 [2], with handover completed in January 2022.
• NINL: 2022.

• IDBI Bank: the Cabinet approved its strategic disinvestment with transfer of management control in 2021. The Government of India and LIC are to sell their stakes jointly [3]. The sale is still in progress; check the latest status.

• Subsidiaries. In 2022 the Cabinet let the boards of holding (parent) CPSEs recommend and carry out the disinvestment or closure of their subsidiaries, units and JV stakes [4].

• Budget treatment. Since 2024-25 there has been no separate disinvestment target. Sale proceeds are counted under "miscellaneous capital receipts".

Don't confuse with

• Minority stake sale (IPO, OFS, CPSE ETF): the state sells a small share but keeps majority and control. A strategic sale transfers control.
• Privatisation: this means the state gives up ownership or management to a private party. A strategic sale is privatisation only when the buyer is private. HPCL→ONGC and REC→PFC were strategic sales but not privatisation [2].
• Asset monetisation (NMP 2021): a public asset is leased for a fixed period and ownership stays with the state. In a strategic sale, ownership and control are sold.
• Golden share: this is a special share kept after a sale, which gives a veto with little equity. It is a safeguard used with a strategic sale, not a type of sale.

Prelims Hooks

• Strategic sale = large stake (≥ 50%) + management control. Air India and NINL are examples.
• Trap: HPCL→ONGC (2017-18) and REC→PFC (2018-19) were CPSE-to-CPSE strategic sales. Control stayed with the state, so they were not privatisation [2].
• Strategic sales of 1999-2004 covered Modern Foods, BALCO, VSNL, Hindustan Zinc and IPCL, under a separate Disinvestment Ministry.
• New PSE Policy 2021 has 4 strategic groups with a bare-minimum CPSE presence. Non-strategic CPSEs are privatised or closed [1].
• Strategic sale proceeds are a non-debt capital receipt, not a revenue receipt. DIPAM (2016) manages the process.
• IDBI Bank: in 2021 the Cabinet approved strategic disinvestment with transfer of management control, with stakes sold jointly by GoI and LIC [3].

Mains Points

• Efficiency vs concerns
• The Economic Survey 2019-20 found that privatised CPSEs improved their net worth, net profit and productivity after strategic disinvestment [5].
• Weigh this against the risks: assets may be undervalued, workers and society may be hurt, and receipts have often been used to fill revenue gaps.

• Fixes: transparent valuation, using proceeds for capital spending, and a golden share where public interest must be protected.

• Fiscal reality

• A strategic sale can raise large one-time money, but deals are slow and uncertain. In 2020-21 only 16% of the disinvestment target was met [2].

• This explains the move to no separate target from 2024-25, and the greater focus on CPSE dividends and asset monetisation.

• Keep, empower or exit (GS-III / GS-II)

• A balanced answer keeps strategic, profitable CPSEs and gives them autonomy through Ratna status and MoUs.
• It sells loss-making or non-core CPSEs through strategic sale, as the 2021 policy plans [1].
• It prefers real privatisation over CPSE-to-CPSE transfers, which only move government money from one company to another.

Related concepts

• Central public sector enterprise
• Maharatna, Navratna and Miniratna status
• Maharatna status
• Navratna status
• Miniratna status
• Disinvestment
• Minority stake sale
• Strategic sector (public enterprise policy)
• Golden share

Read more

• Public enterprises after 1991: CPSEs, the Ratna system, disinvestment and privatisation