Axis Capital suggests reducing government holdings in listed Public Sector Units by 15% to raise Rs 6.6 lakh crore. This proposal aims to boost stock market liquidity, lower high valuation premiums, and create a fiscal buffer for upcoming government expenditures like the 8th Pay Commission.
Axis Capital has proposed a strategic plan for the Indian government to reduce its stake in listed Public Sector Units (PSUs) by 15% over a three-year period. According to the brokerage, this move could unlock approximately Rs 6.6 lakh crore, providing the government with a significant non-tax revenue stream to strengthen its national balance sheet.
The brokerage argues that this divestment is essential to address the structural imbalances in the Indian stock market. Currently, domestic institutional investors are absorbing consistent selling by foreign portfolio investors. By increasing the public shareholding, or free float, in these state-owned companies, the government can help improve market liquidity. This expanded float could allow larger global funds to deploy capital more effectively, as they often face constraints on investing in stocks with limited available shares.
From a market perspective, the proposal addresses concerns regarding high valuations. Axis Capital notes that Indian equity valuations are currently trading about 12% above historical averages. A larger supply of quality PSU shares could help moderate these premiums, making the market more balanced for long-term investors.
Beyond market dynamics, the report highlights a clear fiscal necessity. The government faces potential budgetary pressures for FY27 and FY28, driven by factors such as income-tax shortfalls and the implementation of the 8th Pay Commission. A sustained, multi-year divestment program could provide a predictable fiscal cushion, reducing the government's need to cut back on economic spending to meet its financial targets.
However, this strategy comes with inherent risks that investors should consider. Historically, the government has struggled to meet its ambitious annual disinvestment targets, with several past attempts falling short of projections. Furthermore, there is a trade-off involved: while selling stakes generates one-time cash, the government would lose the recurring annual dividend income from these profitable entities. Reliance on asset sales to bridge fiscal gaps can also be affected by market volatility, which may impact the timing and realization of these funds. Moving forward, the key monitorable for market participants will be whether the government adopts a structured, long-term divestment roadmap or continues with opportunistic, one-off sales that have defined recent years.