OPINION: Indian government is still oiling the wheels for disinvestment of PSUs

OPINION: Indian government is still oiling the wheels for disinvestment of PSUs
PSUs in IndiaPSU Watch
By Shripal Lakdawala, Jatan Shah and Aashni Shah

Even after 6 years of the government providing an ‘in-principle’ approval for strategic disinvestments of 36 of its public sector undertakings (‘PSUs’), the affairs remain in a torpid state. The proposal for such disinvestment was made to ensure reduction of financial burden on the government, elevate the use of technology and thus expand the overall business of the PSUs. However, only 8 out of 36 PSUs have successfully completed their disinvestment procedures and leveraged on the participation of private players. A large chunk of PSUs are still either in the process or haven’t even initiated the process of disinvestment.

The ministry of finance, government of India, announced the policy of strategic disinvestment on 1 February 2021 to fulfil the government’s commitment under the Aatmanirbhar Bharat package. Through this policy, the government aims to sell a substantial portion of its stake in the PSUs and use the proceeds to finance various social sector and development programmes. In cases where there is a sale of the entire or even majority of the stake in PSUs, the decision-making power and the control of the companies will shift to a private player.

Majority of the PSUs for which strategic disinvestment is proposed are loss making companies i.e., these companies have historically carried forward tax business losses, which are allowed to be carried forward for a period of 8 years under the Income-tax Act, 1961 (‘the Act’). Any potential buyer of these PSUs would want to utilise such losses and set it off against any future income generated by the company. Such losses play a crucial role in determining the value for such loss-making companies.

Current scenario

Currently, section 79 of the Act provides that in case of certain companies, the existing business losses shall lapse on account of a change in shareholding by more than 49%. Accordingly, if the government proposes to sell a stake in PSUs which are not listed or are not held by any listed entity and are not acquired by a listed entity, then in such a scenario, changes in shareholding by more than 49% will lead to a lapse of the existing tax business losses of the PSUs.

Proposed amendment


In order to facilitate the disinvestment of the PSUs, Budget 2022 proposes to exempt the erstwhile PSUs (i.e., the PSUs in which strategic disinvestment is made by the government), from the provisions of section 79, subject to the condition that the ultimate holding company of the erstwhile PSUs after the completion of strategic disinvestment, continues to hold, directly or indirectly through its subsidiaries, at least 51% of the voting power of such company in aggregate.

Is this enough to get the wheels rolling?

In Union Budget 2021, a similar relief was granted for amalgamation of PSUs. Further, clarificatory notification in this regard was issued by the Central Board of Direct Taxes ('CBDT') in September 2021, which is now being formalised by proposing an amendment under the relevant provisions of the act. The previous amendment coupled with the proposed amendment, ensures that there is no lapse on account of carried forward tax losses. While this amendment provides a major relief to the loss-making PSUs which are proposed to be acquired by private sector undertakings, there are a few other requests as well from the industry, to make acquisitions of PSUs lucrative from a tax perspective. Exemption of TDS [tax deducted at source] and TCS [tax collected at source] on such transactions, exemption from obtaining ‘no-objection’ certificates from the tax department, exemption on capital gains on sale of PSUs’ shares and deemed gift taxation on acquisition at a lower valuation, are the few requests from the industry.

While there were several expectations from this Budget, only one has been addressed. The proposal in Finance Bill 2022 is a welcome move not only for PSUs which are in the process of disinvestment, but will also speed up upcoming disinvestments.

Shripal Lakdawala is Partner, Deloitte India; Jatan Shah is Senior Manager with Deloitte Haskins and Sells LLP; and Aashni Shah is Deputy Manager with Deloitte Haskins and Sells LLP