Why Was Indian Railway Finance Corporation (IRFC) Listed on the Stock Market Instead of Indian Railways?

The decision to list the Indian Railway Finance Corporation (IRFC) on the stock market rather than Indian Railways is rooted in a strategic reorganization by the Government of India aimed at enhancing financial sustainability and accountability. This article explains the rationale behind this decision, highlighting the key benefits and the context of the broader restructuring efforts.

Background and Classification of Indian Railways and IRFC

While Indian Railways operates like a transport company, it is not classified as one. It is a department of the Government of India, and hence, government departments are not allowed to be listed on stock exchanges. This distinction is crucial to understanding why IRFC, a government-run entity under the Ministry of Railways, can be listed on the stock exchange, whereas Indian Railways itself cannot.

The Case of IRCTC

This situation is similar to the case of the Indian Railway Catering and Tourism Corporation (IRCTC), another public sector unit (PSU) under the Ministry of Railways that was listed on the National Stock Exchange (NSE) in 2019. IRCTC serves as a crucial revenue generator for the Railways and provides essential services to the traveling public. The historical precedent set by IRCTC offers insights into the Government of India's strategy for listing PSUs.

Government of India's Strategy

The Prime Minister of India, Narendra Modi, has been implementing a strategy to restructure public assets and maintain a healthier financial balance. Public Sector Undertakings (PSUs) are companies where the government retains the majority stake and control. However, many of these companies, apart from a few profitable ones, have been underperforming and have become a financial burden on the government.

The decision to list IRFC on the stock market is part of this broader strategy. The government aims to address this issue by increasingly listing some of its major companies on the stock exchange. This approach serves multiple purposes:

Competitive Pressure and Accountability

Listing companies like IRFC makes them more competitive and subject to public accountability. This ensures that these enterprises are held accountable for their financial performance and operational efficiency, driving them to continuously improve their practices and performance.

Capital Raising and Financial Burden Reduction

Another key benefit of listing is the ability to raise capital through the sale of shares. By divesting its shares, the government can reduce its financial burden while encouraging these companies to either improve their performance or face the consequences of a competitive market. This dual approach ensures that public funds are efficiently utilized while promoting corporate responsibility.

IRFC: A Dedicated Borrowing Arm for Indian Railways

IRFC is specifically designated as the borrowing arm of Indian Railways, primarily financing the purchase of rolling stock assets and leasing of railway infrastructure assets. Listed status allows IRFC to raise funds more efficiently for railway development and infrastructure projects, supporting the overall growth of the Indian Railways system.

Unlisted Indian Railways, on the other hand, remains a government-owned entity focused on its core transportation functions. This separation allows for more focused financial management and investment in railway projects, enhancing the overall efficiency and sustainability of the Indian Railways system.

Conclusion

The Government of India's decision to list IRFC on the stock market is a strategic move aimed at improving financial accountability and competitive performance while reducing the financial burden on the government. This decision reflects a broader initiative to restructure public assets and enhance the sustainability and efficiency of major PSUs.