Disinvestment 6

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Disinvestment in public sector enterprises

V. Gangadhar Dr. M. Yadagiri

Cover Feature

Department of Commerce & Business

Management, Kakatiya University,

Warangal-506 009, A.P.

Lecturer in Commerce, L. B. College,

Warangal-506001

The new economic policy and economic reforms in India have given rise to

significant focus for disinvestments or privatization of Public Enterprises. The

basic objective of this process is to mitigate the budget deficit of the government

on the one side and reduction of the burden of financing public enterprises

through budgetary support on the other. The Government of India has taken

several measures for disinvestment and had setup an administrative machinery

to implement its disinvestments programme. This disinvestment process involves

valuation of assets, selecting appropriate modalities, inviting bids and decidingappropriately based on the bids. The disinvestment in practice of the Central

Government is not encouraging. The amount of proceeds realized is only 40.9%

of the target of the disinvestments for the decade of 1991-2001. The

performance of the disinvestments policy in relation to budget deficit and capital

receipts is also not much significant. If government decides to dispose off 23

selected listed public sector enterprises for a 10% and 20% of equity can realize

Rs.8,060.04 crores and 16,120.08 crores respectively. The overall performance

of the Government with regard to disinvestment is not much appreciable.

The public sector is at the cross

roads. A sector which was to

achieve commanding heights

and was taught to be the correct path

for India's economic growth, right from

independence stands today condemned

not only by those whose tax paid money

went into its expansion but also by our

makers. A sector which characterised

as over invested but gives poor returns,

over employed but yields low produc-

tivity, excessive capital equipment but

under utilised capacity, excessive con-trols but lower efficiency, abandoned

assets but lack of resources and lots of

talent but under utilised. A sector which

Government wants get rid off1.

The New Economic Policy initiated

in July 1991, clearly indicated that the

Public Enterprises have shown a very

negative rate of return on capital em-

ployed. On account of this phenomenon

many public sector enterprises have

become more a burden than an asset to

the Governmeznt2. The economic

policy comprises various policy meas-

ures and changes. The objective of such

policy is "to improve the efficiency of

the system" 3.

In order to give some concreteness

to changing role of the public sector,

the VIII Plan has identified the princi-

ples governing public sector invest-

ments in the following manner:

i) The public sector should make

investment only in those areas

where investment is mainly

infrastructural in nature and where

private sector participants are not

likely to come forth to an adequate

extent within a reasonable time

prospective.

ii) The public sector must withdraw

from the areas where no public

purpose is surved by its presence,

and

iii) The principle of market economy

should be accepted as the main

operative principle by all public

sector enterprises, unless the

commodities and services

produce and distributed are

specifically for protecting the

poorest in the society.

The approach paper of IX Plan also

states that "Disinvestment will be

considered up to 51 per cent and

beyond in the case of PSUs operating

in a non-strategic and non core sector".

Further, the Government is of the

view that the public enterprises have

not generated internal surpluses on

account of heavy losses. In view of this

the Government has changed its

direction in favor of the private sector

and the market economy. The reasons

for such perceptible change in the


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aptitude of the Government are as

follows:

i) PEs seldom take advantage of acompetitive profit maximizing

market environment.

ii) They are encountered with nu-

merous non-commercial objec-

tives.

iii) They operate in non-competitive

markets.

iv) Their management is more

bureaucratic entrepreneurial.

v) They are impeded by the execu-

tive, legislative and even the ju-

diciary wings of the system in

day-to-day management deci-

sions.

vi) They lack initiatives to improve

performance ("The carrot is stale

and the stick is almost broken").

vii) The accountability for perform-

ance is hazy, and

viii) The final sanction of going

bankrupt is non-existent.

In this direction the reforms to

improve the PEs performance havebeen recognised, appreciated and

identified. To provide a solution to the

problems of public sector the

Government has decided to adopt a

new approach i.e., disinvestment

policy. The disinvestment policy is a

gaining lot of significance. The

Government of India and the State

Governments have seriously perceiving

the policy of disinvestment to lesson

the burden of financing public

enterprises."Disinvestment is a wider term

extending from dilution of the stake of

the Government to a level where there

is no change in the control to dilution

that results in the transfer of

management" 4. The transfer of

ownership may occur when in an

enterprise the dilultion of Government

ownership is beyond 51 per cent. The

disinvestment implies that the

Government will sell to public or

private entreprises / public institutes

part of its holding in public sector

enterprises.

Objectives of the study :The study of disinvestment of

Central Government Public Sector

Enterprises is aimed at examining the

following :

Firstly, to analyze the objectives,

existing procedures, administrative

machinery for disinvestment.

Secondly, to examine the

performance of the disinvestment

against the target set for a current

decade of 1991-2001 and bring out the

difficulties in achieving the target ofdisinvestment.

Thirdly, to relate and bring out the

significance of disinvestment proceeds

vis-a-vis the budget deficit and capital

receipts.

Fourthly, to present the progress

and prospects of disinvestment.

Finally, to bring out the findings of

the study.

The reasons for disinvestment

There are basically two main rea-sons in support of disinvestment. One

is to provide fiscal support and the

other is to improve the efficiency of the

enterprise. The argument for fiscal sup-

port emphasises that the resources

raised through disinvestment must be

utilised for retiring past debts and there

by bringing down the interest burden

of the Government.

The second argument in support to

improve the efficiency of public

enterprises through disinvestment is thecontribution that it can make to

improve the efficiency of the working

of them.

The objective of the disinvestment

The following are the main

objectives of disinvestment policy of

the Government.

i) To reduce the financial burden on

Government.

ii) To improve public finances.

iii) To introduce, competition and

market discipline.

iv) To find growth.

v) To encourage wider share ofownership.

vi) To depoliticise essential services.

As a part of the economic reforms,

the public sector reforms are also

initiated to improve their efficiency and

productivity. In this direction

disinvestment and privatisation are

gaining attention of the Government.

The New Industrial Policy provides

that "In order to raise resources and

encourage wide public participation, a

part of the Government share holing inthe public sector, would be offered to

mutual funds, financial institutes,

general public and employees". This is

a process for disinvestment in the

public enterprises.

Goals of the disinvestment

The Goals of the disinvestment are

clearly identified and classified into

short term and long term. Disinvestment

may be undertaken to reduce or mitigate

fiscal deficit, bring about a measure of

economic stabilisation or to improve

efficiency in public enterprises through

structural adjustments. It is in this

context the PE's have been demanding

that a part of the disinvestment process

should be allowed to retained by PEs in

order to:

i) Help them upgrade their technol-

ogy to become competitive.

ii) Build competence and strengthen

their R & D.

iii) Rationalise and retrain their workforce.

iv) Initiate diversification and

expansion programmes.

In the present era of globalisation,

disinvestment could provide the stimu-

lus to some robust PE's to grow and

become truly global corporations.

The disinvestment process

The disinvestment process is

related to the procedure adopted by the

Government. This procedure involves

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the valuation of shares and modalities

to be adopted for sale of such shares.

There are three broad methods whichare used for valuation of shares:

1. Net Asset Value Method: This will

indicate the net assets of the

enterprise as shown in the books of

accounts. It shows the historical

value of the assets. It is cost price

less depreciation provided so far on

assets. It does not reflect position

of profitability.

2. Profit Earning Capacity Value

Method: The profit earning

capacity is generally based on theprofits actually earned or

anticipated. It is an accounting

profit. It is excess of earnings over

expenditure. It does not really

indicate the intrinsic value of the

enterprises.

3. The Discounted Cash Flow

Method: This technique is popu-

larly used to evaluate viability of

an investment proposal. In this

method the future incremental cash

flows are forecasted and discountedinto present value by applying cost

of capital rate. This method indi-

cates the intrinsic value of the en-

terprise. This method is a far more

comprehensive and complicated

method of reflecting the expected

income flows to the investors.

Out of these three methods the

discounted cash flow method is greatest

relevance though it is the most difficult.

Modalities of disinvestment

There are three broadly acceptable

and transparent modalities for

disinvestment. These are given below:

(a) Offering shares of public sector

enterprises at a fixed price through

a general prospectus. The offer is

made to the general public through

the medium of recognised market

intermediaries.

(b) Sale of equity through auction of

share amongst pre determined

clientele, whose number can be a

large. The reserve price for the

PSE's equity can be determined

with the assistance of merchantbankers.

(c) Offer for sale determining the fixed

price for sale of a public enterprise,

inviting open bidders and accepting

highest bidders quotation for sale.

Privatisation

The privatisation of PE's as a

concept is a fairly new. It was originated

in 1980's. The word privatise first

appeared in the dictionary in 1983,

which defined "privatise" as "to make

private, especially to change frompublic or Government ownership to

private control or ownership".

Privatisation is the act of "relying more

on societies, private institutions and

less on Government to satisfy the needs

of the people" 5.

Privatisation implies a change in

ownership resulting in a change in a

management6 . The privatisation of

public enterprises will occur only when

the Government sells more than 51 per

cent of its ownership to private entre-preneurs. "The issues relating to the

disinvestment revolve around three

principal questions. Why, how and how

much? The tress on disinvestment, as

against privatization is significant. Pri-

vatization aims at shrinking the role of

the state in economic activities.

Disinvestment on the other hand, has a

much wider connotation as it could ei-

ther involve dilution of Government

stake to a level that result in a transfer

of management or could also be lim-ited to such a level as would permit

government to retain control over the

organization. Disinvestment beyond 50

per cent involves transfer of manage-

ment, whereas disinvestment below 50

per cent would result in the government

continuing to have a major say in the

undertaking" 7.

However the impression did gain

ground that all efforts at public sector

disinvestment has as their aim, the

reduction of the budget deficit and not

Cover Feature

the efficiency of these undertakings or

investing the funds so realised in the

social sector.Types of privatisation

Privatisations are broadly catego-

rised in to following three types:

i) Privatisation of competitive

firms: Generally, it involves

transfer to the private sector.

Under this method the PE's

operating in competitive markets

free from substantial market

failures. For example privatisation

of competitive industries like

banking and insurance in publicsector .

ii) Privatisation of Monopolies:

This type implies that transfer of

public enterprises with substantial

market power to private sector.

The utilities like telecommunica-

tions, electricity belongs to this

category.

iii) Transfer of public organizations

to private sector: This process of

privatisation involves transfer of

public financed services to the

private sector, which were previ-

ously performed by the public or-

ganisations. This type does not

involve the sale of physical assets.

For example garbage collections,

hospital cleaning, street sweeping,

street repairing, street lighting,

transportation services, water sup-

ply, health and ambulance serv-

ices, fire protection, maintenance

of parks, marines and swimming

pools etc.

Disinvestment machinery

The following is machinery for

disinvestment:

(i) Cabinet Committee on

Disinvestment

The Central Government has set

up a separate "Ministry for

Disinvestment with a cabinet rank

Further the Government has

appointed Cabinet Committee on

Disinvestment (CCD) consisting


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of Minister for disinvestment,

Minister for industries and

Finance Minister as its members.(ii) The Disinvestment Commis-

sion

Disinvestment Commission was

set up by an executive order in

August 1996 as an advisory body

and not as a statutory commission.

It is located in the Ministry of

Industry and that has led to some

difficulties in its smooth

functioning. The Chairman of the

Commission is Mr. G. V.

Ramakrishna.The primary terms of reference are

to draw up an overall long-term

programme recommend a mode of

disinvestment, supervise the sale

process and monitor the progress of

disinvestment.

The mechanism available to the

Disinvestment Commission in terms of

administrative support, professional

technical inputs has been in adequate

and raises questions about it success-

ful functioning. In the light of this itmay be advisable to have a permanent

statutory disinvestment body under a

separate act which should function in

decentralised manner. Its recommenda-

tions should have credibility and bind

the Government to a transparent proc-

ess of disinvestment. The Disinvest-

ment Commission was abolished in

November 1999.

(iii) The Department of Public

Enterprises (DPE):

DPE was the nodal agency tosteer the disinvestment process.

The department was empowered

to prepare the bundles, advertise

the bids, select the bidders, final-

ize the price and effect the

disinvestments. An empowered

committee of Secretaries was ap-

pointed to oversee the process of

disinvestment affected by the

DPE. The DPE had to furnish the

recommendations on behalf of

the committee to the Cabinet

out to a mere 1.25 per cent. On the other

hand fresh investment in PSE's were

about 4 times the disinvested amountduring the period 1991 to 97. This in-

dicates the slow pace of disinvestment

process in India and also questions ex-

tent and order of effectiveness of the

disinvestment programme in relation to

the goals and public policy. Since the

disinvestment has initiated by the Cen-

tral Government, it is identified that in

39 Central Public Sector Enterprises

enabling the Government to raise about

10,000 crores over the last 6 years. For

this purpose, the Government has ac-

cepted the Commission's recommenda-tion with respect to Gas Authority of

India Ltd. (GAIL), Container Corpo-

ration of India (ConCol) Ltd. and

Mahanagar Telephone Nigam Ltd

(MTNL). An international issue of

GDR with respect to GAIL and MTNL

is planned, which will help the Gov-

ernment to raise about Rs.35,000 crores

in the current fiscal year.

The Chairman of Disinvestment

Commission, Mr. G. V. Ramakrishna

has given its recommendation on 19PSE's for disinvestment. (Table -1)

The United Front Government has

initiated an important move for

disinvestment up to 74 per cent or more

of Government holding in 9 loss

making PSEs of the Ministry of Heavy

Industry by the induction of joint

venture. This is also on line with the

report of the Committee on

Disinvestment of shares in Public

Sector Enterprises headed by Sri C.

Rangarajan, former Governor, ReserveBank of India, which had indicated that

the level of Central Government

holding in PSE's could be reduced to

less than 51 per cent.

The disinvestment in practice of

central government undertakings

The Group of Ministers (GOM)

consisting of Finance Minister, Petro-

leum Minister, Fertiliser and Chemicals

Minister and Disinvestment Minister,

on the disinvestment of Indian Petro

Chemical Corporation Limited (IPCL)

Committee on economic affairs,

whose approval was necessary

for seeing the transactionsthrough.

(iv) Department of Disinvestment:

The Government has set up a new

Department of Disinvestment

after the tenure of the

Disinvestment Commission

ended in Nov, 1999, to establish

a systematic policy approach to

disinvestment and to give a fresh

impetuous to the program

disinvestments, which will

increasingly emphasize strategicsales of identified PSU's.

Recent trends in disinvestments:

The Finance Minister, while

proposing budget for the year 2001-

2002 has estimated Rs.12,000 crores

from the privatisation proceeds.

In the first round of disinvestment,

began by the P .V. Narsimha Rao,

Manmohan Singh combine in 1991,

driblets of the Equity of 47 PSU's were

sold in bundles consisting of "very

good", "good" and "average" compa-nies. The rationale then was that it

would be difficult to get rid off "the

average" (loss making) companies. In-

vestors could only buy such companies

if they were tagged on to better per-

forming companies.

In the year 2000-2001, the

Government of India has raised

Rs.1,868 crores against a target of

Rs.1 0,000 crores. In the past 10 years,

the Government has been able to

mobilise only Rs. 20,506 crores fromsale of equity of PSU's against a target

of Rs. 54,300 crores. On account of

this, the Government has lost the

fundamental reason for disinvestment.

The total disinvestment in India

between 1991-97 had up to Rs. 11,291

crores. The target for 1997-98 was

Rs. 4,500 crores, which would reverse

the total to 16,500 crores. On an invest-

ment of Rs. 2 lakh crores in the public

sector, an average annual order of

disinvestment of Rs.2,500 crores works

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is in favour of its outright sale. The

GOM will refer a proposal to the Cabi-

net Committee on Disinvestment for

further approval and necessary action.

The IPCL's one of the units at Vadedra

(Gujarat) with a capacity of 130 mil-

lion tonnes would be given on nomi-

nation basis to IOC. The Government

has decided to sell its stake in the other

two units of IPCL Gandhar and

Nagothane would be divested through

the bidding process.

The Central Government has

decided to close down 5 public sector

industries under the control of the

Heavy Industries and PublicEnterprises as they could not be

revived. These were established in

West Bengal. The 5 Enterprises are as

follows:

i) Bharat Process and Mechanical

Engineering Company

ii) Weigh Bridge India

iii) Rehabilitation of Industries

Corporation

iv) Tanner and Footwear Corporation

and

v) National Bicycle Corporation of

India.

According to the Secretary, Union

Ministry of Heavy Industries and Pub-

lic Enterprises, "The. Government was

trying to distance itself from the PSU's

and the Government was above respon-

sible for the bad perfonnance of PSU's".

He has also stated that the PSU's were

being freed from the burden of innu-

merable guidelines issued over the 5

years. As many as 696 guidelines had

been scraped based on the recommen-

dation of the Vittal Committee and units

had been given higher autonomy and

functional freedom. Another Commit-

tee headed by Mr. T. K. A. Nair had

submitted its report on further freeing

of the PSU's from Controls of the Un-

ion Government.

The Central Government

announced its proposal to divesting

majority stake in 5 key heavy industrial

PSU's, including BHEL, HMT, and

Table - 1

Disinvestment modalities recommended by disinvestment

commission in its reports I, II, III & IV

Modality of No. Name of Public Enteprise

Disinvestment

Trade Sale 3 India Tourism Development

Corporation@, Modern Food

Industries (India) Ltd., Pawan Hans

Limited.

Strategic Sale 7 Hindustan Teleprinters Limited,

Indian. Telephone Industries Limited,

Bharat Refineries & Petrochemicals

Limited, Bangaigaon Refineries &

Petrochemicals Limited, Kudremukh

Iron Ore Co. Ltd., Madras Fertilisers

Limited.

Stable Shareholders 1 Shipping Corporation of I ndia

Limited

Offer of shares 4 Gas Authority of India Limited,

Container Corporation of India

Limited, Mahanagar Telephone

Nigam Limited, Manganese Ore

(India) Ltd.

No disinvestment 1 Rail Technical & Economics

Services

Disinvestment deferred 3 Oil India Limited, Oil & NaturalGas Corporation, Power Grid

Corporation of India Ltd.

@ lease-cum-management contracts for hotels in prime locations like

Delhi and Bangalore

business like efficiency. Further, the

Government has also taken up the

disinvestment of Hidusthan Zinc.

According to the agenda of the

Government it is proposed to sell off

12 more PSUs including gaints like

BSNL, Maruthi and IPCL.

On 16th October 2001 the

Government of India through Ministry

of Disinvestment has transferred 74 per

cent equity of HTL incorporated in

1960 (Hindustan Teleprinters Ltd.,) to

Himachal Futuristic Communications

Ltd., (HFCL) for a consideration of

Rs.55 crores. A tripartite agreement to

this effect was signed by HFCL, the

department of Telecom and the

Department of Disinvestment. The

HTL is among the 13 PSE's listed for

HEC, instead of diluting only minority

stakes in these companies.

The Central Government's

disinvestment programme seems to

have finally taken off. In this current

financial year, the first sell of the

management control of CMC and HTLwill pass on to private companies TCS

and HFCL respectively. The sale of

CMC and HTL will fetch the

Government Rs.207 crores amounting

to less than 2% of the disinvestment

target of Rs.12,000 crores for the year

2001. If the pace of the disinvestment

is maintained the Government will get

closure to the target than ever before

the way CMC and HTL sell-offs have

gone through raises the hope of

remaining once rolling of with similar

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disinvestment during 2001-2002 is

the 3rd privatisation deal after Modern

Foods and BALCO.Government has decided to sell 6

Hotels owned by the Indian Tourism

Development Corporation (ITDC)

while the 2 Five Star Ashoka Hotels in

Delhi and Bangalore will be offered on

30 years lease to the private parties. In

addition the 3 Centaur Hotels run by

the Hotel Corporation of India in Delhi

and Mumbai will be hived off along

with the Chefair subsidiary and small

Hotel Rajgir.

The transaction documents for thesale have been cleared by the Cabinet

Committee on Disinvestment (CCD)

setting the stage for disinvesting

Government equity in these 13 entities

for which the price bids will be invited.

The CCD also decided that in the case

of IBP disinvestment, the bidding will

be restricted to companies which or

prepared to invest Rs.2,000 crores in

the Hydro-Carbon sector within 10

years. Further, it is also proposed for

26 percent disinvestment in HindusthanZinc Limited (HZL) will begin

immediately as the transaction

documents had now been approved.

For disinvestment of Hotels, the

Government of India has invited bid-

ders, 124 bidders have submitted for

purchase of these properties of which

97 had shown interest in the ITDC

Hotels and 18 in the HCL Hotels.

Therefore, it had been decided to stag-

ger the bidding since it would be diffi-

cult for so many bidders to arrange for

bank guarantees altogether.

The more to withdraw Govern-

ment from the business of running ho-

tels had been initiated shortly after

market reforms and liberalization poli-

cies were put in place by the Narasimha

Rao Government in 1991. A short list

of Hotels had been finalised but it has

taken a decade for the disinvestment

to be actually implemented. The CCD

also examined the progress in

disinvestment for 13 PSU's which had

been identified for action in the cur-

rent fiscal. The time table for

disinvestment was being adhered tomost cases. This would not affect over-

all time table which was not scheduled.

The Department of Disinvestment

has approached the SEBI for relaxa-

tion of take-over norms in regard to

listed PSU's being disinvested. The

Ministry for Disinvestment has written

to the SEBI for change of the open

offer guidelines in regard to the com-

petitive bidding in strategic sales.

Progress of disinvestment

The Government in July 1991 ini-tiated the disinvestment process in In-

dia, while launching The New Eco-

nomic Policy (NEP). The Government

has appointed The Krishnamurthy

Committee in 1991 and Rangarajan

Committee in 1992. Both the Commit-

tees have recommended disinvestments

to fulfill objectives of modernisation of

the public sector through strengthening

R & D, initiating diversification / ex-

pansion programmes, retraining and

reemployment of employees, fundinggenuine needs of expansion, widening

the capital market basis and mitigating

fiscal deficit of the Government. These

committees distinguished between the

short-term and long-term goals of

disinvestment and advised the Govern-

ment not to sacrifice the long-term

goals for the sake of fulfilling the short-

term objectives. The Government has

announced in its NEP that mitigating

the fiscal deficits is the only objective

of disinvestment.

The crucial shift in the Government

policy for disinvestment of PSU's was

mainly attributable to poor perfonnance

of these enterprises and burden of fi-

nancing their requirements through

budget allocations. In 1991 there were

236 operating public sector undertak-

ings, of which only123 was profit mak-

ing. The top 20 profit making PSU's

accounted for 80% of the profits, im-

plying that less than 10% of the PSU's

were responsible for 80% of profits.

The return on public sector investment

for the year 1990-91 was a just over

2%.The basic charges against the pub-

lic sector for its poor performance are

as follows:

(i) Low rate of ROI

(ii) Declining contribution to national

savings

(iii) Poor capacity utilization

(iv) Over staffing, bureaucratization

leading to excessive delays and

wastage of scarce resources.

Further, it was also identified thatthe goals of privatisation is to ensure a

better and more effective use of capital

and greater investment in the social

sector on the one hand and to enhance

the efficiency of public enterprises and

help them integrate into a competitive

environment of the other.

As per the economic survey 2001,

the Government was set out the

following policies towards PSUs:

(i) Bring down Govt. equity in all

non-strategic PSU's to 26 per centor lower, if necessary .

(ii) Re-structure and revive potential

viable PSU's.

(iii) Close down PSUS that can not be

revived, and

(iv) Fully protect the interest of

workers.

In this context now, we wish to ana-

lyse the progress of disinvestment in

the Central Government undertakings

from 1991-2001.The table-II presentsthe data relating to target and

disinvestment proceeds.

It is clearly evident from the data

of the table that the cumulative pro-

ceeds of total disinvestments from

1991-92 to 2000-2001 was stood at

Rs. 23, 520 crores against a hefty tar-

get of 57,500 crores. The proceeds re-

alised against the target set were only

40.9 per cent. The investment made by

Central Government as on March 31,

1991 was of the order of Rs. 2, 30,140

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crores. The total proceeds from

disinvestment worked out to be a mere

10.22 per cent of the total investment"

8

.The disinvestment proceeds were

encouraging and exceeded than the tar-

get set in 3 out of 10 years, while it

was far lower than the target in the rest

of the 7 years. In the year 1991-92 the

total proceeds realised were Rs.3, 308

crores against a target of 2,500 crores,

accounting for 121.52 per cent. Simi-

larly in 1994-95 the proceeds realised

were Rs.5, 078 crores against a target

of Rs.4, 000 crores forming 126.95 per

cent. Another attractive year for

disinvestment proceeds realization was

1998-99 with Rs.5, 371 crores for a

target of Rs.5, 000 crores, accounting

for 107.42 per cent.

In the rest of the years the proceeds

from the disinvestments were abnor-

mally low at 5.1 per cent in 1995-96,

9.1 per cent in 1996-97, 18.04 per cent

in 1997-98, 18.92 per cent in 1999-

2000 of the target mount. More than

50 per cent of the target amount was

realised through disinvestment in 1992-

93 at 56.03 per cent and 1993-94 at53.31 per cent.

The reasons for such low propor-

tion of disinvestment proceeds as

against the target set were identified

and presented below:

(i) The unfavourable market condi-

tions are the main reason respon-

sible for this down ward trend of

disinvestment.

(ii) The proceeds realised through

disinvestment were not paid to the

enterprise concerned for its ex-

pansion and improving efficiency

but the Government has been us-

ing such disinvestment proceeds

to bridge the budget deficit.

(iii) The offers made by the Govern-

ment for disinvestment of PSUs

are not attractive and stringent bu-

reaucratic procedures causing for

discouraging the private sector

investors.

(iv) The valuation process, procedures

Table-II

Disinvestment during 1991-2001

(Rs.in Crores)

PSE's Target Amount Cumulative Disinvestment

Year Offered Realised amount amount realised

No. realised as % of Target

1991-92 46 2500 3038 3038 121.52

1992-93 29 3500 1961 499 56.03

1993-94 3500 1866 6865 53.31

1994-95 17 4000 5078 11943 126.95

1995-96 04 7000 357 12300 5.10

1996-97 5000 455 12755 9.10

1997-98 5000 902 13657 18.04

1998-99 5000 5371 19028 107.42

1999-2000 10000 1892 20920 18.92

2000-2001 12000 2600 23520 21.67

Total 57500 23520

Average 575.0 (40.9%)

Source: Annual Report 1999-2000, RBI Bulletin, September 2000

utilized for retiring past debts, it would

result in the reduction of the interestburden of the Government. However,

all efforts at public sector

disinvestments are aimed at reducing

the budget deficit and not improving

the efficiency of these under takings or

reinvesting the funds so realised in the

social sector.

In the light of this, it is proposed to

examine the proceeds from disinvest-

ment vis-a-vis deficit financing and

capital receipts from 1991-2001, with

a view to know the share of disinvest-ment proceeds in the total deficits and

capital receipts, there by to bring out

the relative importance of the

disinvestment. Table -III presents the

relevant data.

The data relating to fiscal deficit,

disinvestment and capital receipts

along with their relative ratios indicate

that the disinvestment proceeds are

very meager in relation to both of them.

The proceeds of disinvestments were

also fluctuated widely showing greater

and surplus employees are other

major attributes. It was estimatedthat there were 2.2 million em-

ployees in the public sector and

nearly 25% of them are surplus.

(v) The Government does not have a

comprehensive policy on

disinvestment of its PSU's.

(vi) The Government is not transpar-

ent about its approach towards

sequencing the restructuring and

the methods of privatisation of

PSE's.

Deficit Vis-A-Vis Disinvestment

One of the objectives of disinvest-

ment / privatisation is to mitigating fis-

cal deficit of the Government. There-

fore, much of the Government earnings

through disinvestment were used to

bringe the budget deficit. Of the Rs.12,

300 crores earned between 1991-96

through disinvestment, more than Rs.

7, 300 crores was used to bridge the

deficit. It is also argued that if resources

raised through disinvestments were

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inconsistency in proceeds realised as

against an increased rate of growth in

fiscal deficit and capital receipts.The average growth of fiscal defi-

cit as percentage of GDP in the current

decade of 1991-92 to 2000-2001 stood

at 5.7 per cent of GDP, whereas, the

disinvestment proceeds as a percentage

of fiscal deficit on an average was at

3.16 per cent. This forms a very meager

proportion of total deficit during the

decade, and also suggests that the aim

of the Government to mitigate the defi-

cit financing was not materialised

through disinvestment process.

The average capital receipts of the

Government and proceeds from

disinvestment for the current decade

stood at Rs.80, 670.4 crores and 2,352

crores respectively. The proceeds from

disinvestment formed 3.4 per cent of

the capital receipts. When we compare

the capital receipts vis-a-vis proceeds

from disinvestments, we observe that

the former is very meager with wide

fluctuations. The proceeds formed a

highest of 7.89 per cent in 1991-92 andlowest of 0.91 per cent in 1997-98 of

capital receipts. Therefore, it is ob-

served that the disinvestment proceeds

were totally negligible and insignificant

in relation to both the capital receipts

and fiscal deficit during the decade of

1991-2001. This also indicates that the

Government has not met the

disinvestment proceeds against targets

set. In this context it is promptly said

that," A decade of economic reforms

saw very little activity on the

disinvestment front. Tall promises were

seldom put into action ." 9

Prospects of disinvestments

The disinvestment process of the

Government in the current decade has

not really successful both in terms of

realisation of proceeds from

disinvestments and achieving the tar-

gets for that purpose. The Government

has measurably failed to attract vari-

ous parties for buying the PSU's. Thedisinvestment process is still in

progress and we have exhibited the

same in Table-IV.

According to the study conducted

by Business India in September, 200110

relating to disinvestment of 23 listed

PSU's shows that the Governrnent can

easily mop up Rs.7982.02 crores by

selling 10 per cent of the equity and

15,964.04 crores by rolling 20 per cent

of equity as per the price quoted inBombay Stock Exchange as on 30th

August, 2001.

In order to bring out the value of23 PSU's which are on the agenda ofdisinvestment in relation to current

market price, we have revised the Busi-

ness India's prospective proceeds by

taking prices on 13th November, 2001,

and presented in the following table

with revised 10 per cent and 20 per centprospective proceeds along with

Governrnent's holding.

Table-III

Deficit Financing and Disinvestment ProceedsRs. in Crores

1991- 1992- 1993- 1994- 1995- 1996- 1997- 1998- 1999- 2000- x

Particulars 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

1. Target of 2500 3500 3500 4000 7000 5000 5000 5000 10000 12000 575.0

Disinvestment

2. Amount realised 3038 1961 1866 5078 357 455 902 5371 1892 2600 2352

from Disinvestment

3. Amount realised as 121.52 56.03 53.31 126.95 5.10 9.101 8.04 107.42 18.92 21.67 53.81

percent of Target

4. Fiscal Deficit 36325 40173 60257 57703 60243 66733 83937 113349 108898 1 11275 7 4389.3

5. Fiscal Deficit as 5.9 5.7 7.0 5.7 5.1 4.9 5.9 6.4 5.6 5.1 5.7

percent of GDP

6. Disinvestment as

percent of Fiscal 8.36 4.88 3.1 8.8 0.6 0.7 1.0 4.7 1.7 2.3 3.61

Deficit

7. Capital Receipts 385 28 36 178 5 5440 68695 5833 8 615 44 99 077 1 2985 6 12 4234 1 34 814 8 0670.4

8. Disinvestment as% 7.89 5.42 3.37 7.39 0.55 0.74 0.91 4.14 1.62 2.01 3.4

of Capital Receipts

Source: Annual Report -1999-2000, Supplementary to RBI Bulletin September 2000.

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Cover Feature

Table - IV : The Progress of PSUs Disinvestment

(Rs. In Crores)

S. Name of the PSU Date Percentage Amount Private Sector Company PurchasedNo. of Equity Realised the PSUs

Disinvested

1. Bharat Aluminium 23rd Feb., 51 555.5 Sterilite Industries Ltd.

Company Ltd., (BALCO) 2001 (Reserveprice

Rs. 359

2. Juhu Centaur Hotel HCI 10th Nov., Out right 153.00 Mr. Ajit Karkar, Tulip Hospitals

2001 sale (Reserve Ltd., Mumbai

Price

Rs. 101.6)

3. Rajgir Hotel-HCI 10th Nov., Out right 6.51 Impact Travels Ltd.,

2001 sale (Reserveprice of

Rs. 3.86

4. Hindustan Zinc Ltd., 26 The bid of Sterilite Industries was

(HZL) rejected by the CCD due to lower

bid price than the reserve price

5. Indian Petrochemical 7th Nov., Out right The Group of Ministers (GOM) on

Corporation Ltd., (IPCL) 2001 Sale disinvestment decided for out right

sale

6. Two Hotels of HCI- 10th Nov., Out right Re-bids will be invited, because the

Airport Centaur Hotels 2001 Sale bids were below the reserve price

in Delhi and Mumbai

7. BHEL, HMT, HEC 10th Oct., Majority The Govt. has decided to sell the(Heavy Engineering 2001 State majority state- The reserve price

Corporation) will be worked out

8. CMC 14th Oct., Majority 152 Tata Consultancy Services Ltd.2001 State 51

9. HTL (Hindustan 14th Oct., Majority 55 Himachal Futurist Communications

Teleprinters Ltd.,) 2001 State 74 Ltd.

10. Six Hotels of Indian 23rd Oct., Out right The Transaction Documents were

Tourism Development 2001 sale cleared by the CCD and there were

Corporation (ITDC) and 97 bidders for these Hotels takeover

11. Two Five Star Ashoka 23rd Oct., Will be The Transaction Documents were

Hotels at Delhi & 2001 offered on cleared by CCD and bids will be

Bangalore a 30 year invitedlease

12. Modern Food Industries 14th March, Out right 105 FMCG Major Hindustan Level Ltd.,

(MFIL) 1997 sale

13. Indo-Burma Petrolium 18th Nov., Disinvestment process in on progress,

(IBP) 2001 Administrative ministers alongwith

the Dept., of Disinvestment were

working towards the schedule. The

financial bids will be invited as per

the schedule

14. Videsh Sanchar Nigam 18th Nov., The financial bids will be invited

Ltd., (VSNL) 2001 either in the last week of December

or in the first week of January 2002.


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Cover Feature

Hindustan To disinvest 51% of the company's equity capital through A. F. FergusonInsecticides stategic sale with transfer of management.

IBP To disinvest 33.58% shareholding of IBP to a strategic partner HSBC Securities.with transfer of management control.

Indian Airlines To reduce the GOl's equity to 49% through sale of 26% stake IDBI, ANZto a strategic partner within the parameters of the domestic air Investment Bank,transport policy followed by sale of 25% equity to domestic Speedwing.financial institutions, employees and other investors. Foreignholding to be limited to a maximum of 40% of the bidder'sequity.

Indian Petrochemi- To offer 25% equity to a strategic buyer along with transfer of Warburg Dilloncal Corporation. management control. Read.

Indian Tourism On 16.9.97, to appoint an advisor to examine all alternatives Lazard India.Development and options for disinvestment, including the ones recommen-Corporation ded by the disinvestment commission, On 6.7.99, the

Government reviewed its earlier decision and decided to acceptand implement the disinvestment commission recommendations.

Instrumentation To convert the Pal ghat, Kota & Jaipur units into wholly owned IDBI.subsidiaries and thereafter disinvest 51% of the equity of thesubsidiaries in favour of strategic partners.

Jessop & Company To disinvest 72% of the equity to a strategic partner with A. F. Ferguson.transfer of management control.

Madras Fertilizers To disinvest 32, 74% of the equity in favour of a strategic ICICI Securities.partner, with transfer of management control to the strategicinvestors,

Maruti Udyog MUL to offer shares on a rights basis to the existingshareholders with renunciation option for the Government.

Minerals and Metal To reduce the Government share holding to 26% throughTrading strategic sale. Out of 26% equity remaining with theCorporation of Government, 10% equity to be used for issue of employeesIndia stock option ESOPs

MSTC In principle disinvestment of the Government stake in MSTCcleared.

National Fertilizers To disinvest 51% of the NFL's equity to a strategic buyer along Rabo Finance.with transfer of management control.

NEPA To disinvest 51% -98% of the equity of NEPA in favour of a SBI Capitalstrategic partner. Markets.

Paradeep To disinvest 74% of the shareholding in PPL to a strategic Deloitte TouchePhosphates buyer through strategic sale. Tohmatsu.

Praga Tools To disinvest up to 74% of the equity in favour of a joint

venture partner.Scooters India To give in principle approval for disinvestment of 74% of PricewaterhouseCo

equity in Scooter India Ltd., opers.

Sponge Iron India To disinvest the entire share holding in the company through a A. F. Fergusontrade sale to a strategic Ltd.,

State Trading To reduce the Government shareholding to 26% throughCorporation strategic sale. Of the 26% equity remaining with the

Government, the balance 10% to be used for issue ofemployees stock option. ESOPS

Tungbhadra steel To disinvest 74% of the company's equity in favour of a IDBI.Product strategic partner, along with management control.

Videsh Sanchar To disinvest of 25% of equity of VSNL to a strategic partner SBI CapitalNigam and 1.97% to employees. Markets

Disinvestment 6

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