Privatization a better bet than divestment: Kotak Sec

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26 Aug, 2025 12:21

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Moneycontrol Bureau

The government is all set to embark upon its journey to divest stake in select public sector units (PSU) to raise Rs 63,400 crore in a bid to bridge the fiscal gap. But the big question here is – is divestment the best solution?

According to a Kotak report titled ‘Strategy: Divestment versus privatization’, it may not be the best idea. “We believe it is important for the government’s divestment imperative to include a longer-term plan to improve the performance of public sector entities,” the report added.

While it will definitely help the government raise funds to meet current expenditure, is it prudent to forget the lessons of similar such divestment plans in the past. State-owned Life Insurance Corporation (LIC) had to ultimately bail out the government in the previous round of divestment. LIC purchased shares worth Rs 16,000 crore, out of the total Rs 33,000 crore raised, in government’s divestment programme. The government divested stake in 11 companies since March 2012, beginning with ONGC.

According to the Kotak report, privatization may be a much better option than divestment as it does little in terms of improving the operational efficiency of PSUs and/ or also returns for the government.

If the government were to cede control of these PSUs, such units would be better managed by professional managements without any government interference, also raising the free-float of several large PSUs, the report added. India has low weight in various global indices due to high promoter holdings. Additionally, in that case, the sale of government stake to financial investors will raise large funds for the government, the report added.

There are several and sufficient reasons for the government to cede control of PSUs - the rising market share of private sector companies in all areas of the Indian economy proves it may be a far better bet; also the government’s reliance on PPP for basic infrastructure projects and defense equipment doesn’t say much about their capabilities, and lastly, the under-performance of many state-owned entities, according to the report.

There are as many as 79 sick public sector companies. These entities had an accumulated loss of Rs 55,656 crore in 2012-13, according to data.

Also, more clarity on pricing and regulation is needed for sectors such as oil and gas and coal, the Kotak report said. This will help the government realise better value for its stakes in PSU energy companies.

In recent times, market has been rife with speculations of ONGC divestment by November end. Coal India is another company that finds a mention in the context.

The Economic Times, on Monday reported that the government had finally decided to shut terminally ill PSUs like HMT Watches, Tungbhadra Steel and others.

Posted By: Devika Ghosh