Big divestment targets will be a thing of the past post FY19 budget

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26 Aug, 2025 12:21

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Shishir AsthanaMoneycontrol Research

Having exhausted its traditional method of generating revenue through stake sales, the government is increasingly seeking to raise funds through a complete takeover of companies within the same sector.

It is advantageous for the government to push such deals rather than smaller divestments which barely yield meaningful money. These strategic takeovers bring in lump sum as the company taking over has to pay the government the entire amount for its stake rather than a conventional way of the share swap.

Had a private sector player adopted such a route, shareholders would have raised corporate governance concerns. Few protest when public sector companies are taken over this way, despite the fact that non-promoter shareholders of the target companies do not benefit in any way.

Take the case of the recently announced takeover of ONGC and HPCL where the government gets around Rs 33,000 crore when ONGC buys out government’s holding of HPCL. However, as per Sebi rules, government companies are exempted from making the offer open to if the ultimate ownership remains the same and the premium paid for the acquisition is less than 25 percent above the market value.

In many profit-making public sector companies, government stake has fallen over the years through successive divestments. Apart from the oil companies, there are few companies in the mining space like Coal India which can help the government raise big money for its divestment. Going forward, smaller divestments would not be enough to fill the high divestment targets that have been set over the last few years.

Divestment as a source of filling the budget deficit is likely to last a few more years as the government resorts to merging companies in the same sector.

The next big ‘structured divestment’ will be in gas transportation giant GAIL India. Refiners Indian Oil Corporation and Bharat Petroleum Corp are keen to acquire gas utility GAIL that will help it integrate their operations. However, GAIL is keen on being picked up by ONGC, especially after it takes over HPCL.

This naturally makes more sense as the entire gamut of exploration, refining, and transportation will be covered by a single company thus capturing the entire value chain. The government's 54.89 percent stake in GAIL is currently worth about Rs 46,700 crore.

For the companies concerned, it makes sense that they are merged and integrated rather than being islands of growth. With the economy opening up and global players entering the country it makes sense to have strong integrated players.

However, this method of meeting the divestment target cannot last for long. Mainly because there are few companies, apart from the oil sector ones that have cash on their balance sheet or the borrowing power to acquire companies in the same sector.

What the trend suggests is the government is close to selling the last big pieces of family silver. Though it can still sell the stake in the merged entities the amount to be raised through them will be small. In short, going forward the divestment targets of the government will come down drastically. The only way to keep fiscal deficit under control will be through higher taxes.