The present disinvestment policy has been articulated in the recent President

8/7/2019 The present disinvestment policy has been articulated in the recent President

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The present disinvestment policy has been articulated in the recent Presidents addresses to Joint Sessions of Parliament and the Finance Ministers recent Parliament Budget Speeches.

The salient features of the Policy are:

(i) Citizens have every right to own part of the shares of Public Sector Undertakings

(ii) Public Sector Undertakings are the wealth of the Nation and this wealth should rest in the hands of

the people(iii) While pursuing disinvestment, Government has to retain majority shareholding, i.e. at least 51% and

management control of the Public Sector Undertakings

Approach for Disinvestment On 5th November 2009, Government approved the following action plan for disinvestment in profit making government companies:

(i) Already listed profitable CPSEs (not meeting mandatory shareholding of 10%) are to be madecompliant by µOffer for Sale¶ by Government or by the CPSEs through issue of fresh shares or acombination of both

(ii) Unlisted CPSEs with no accumulated losses and having earned net profit in three precedingconsecutive years are to be listed

(iii) Follow-on public offers would be considered taking into consideration the needs for capital

investment of CPSE, on a case by case basis, and Government could simultaneously or independently offer a portion of its equity shareholding

(iv) In all cases of disinvestment, the Government would retain at least 51% equity and the managementcontrol

(v) All cases of disinvestment are to be decided on a case by case basis

(vi) The Department of Disinvestment is to identify CPSEs in consultation with respectiveadministrative Ministries and submit proposal to Government in cases requiring Offer for Sale of Government equity

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Since independence, India followed the mixed economy framework by combining

the advantages of the market economic system with those of the planned economic

system. In 1991, India met with an economic crisis relating to its external debt the

government was not able to make repayments on its borrowings from abroad. The

origin of the financial crisis can be traced from the inefficient management of the

Indian economy in the 1980s. For implementing various policies and its general

administration, the government generates funds from various sources such as

taxation, running of public sector enterprises etc. When expenditure is more than

income, the government borrows to finance the deficit from banks and also from

people within the country and from international financial institutions. When goods

were imported like petroleum, payment was made in dollars which were earned

from exports. Development policies required that even though the revenues were

very low, the government had to overshoot its revenue to meet problems like

unemployment, poverty and population explosion. The continued spending on



development programmes of the government did not generate additional revenue.

Moreover, the government was not able to generate sufficiently from internal

sources such as taxation. When the government was spending a large share of its

income on areas which do not provide immediate returns such as the social sector

and defense, there was a need to utilize the rest of its revenue in a highly efficient

manner. The income from public sector undertakings was also not very high to

meet the growing expenditure. At times, our foreign exchange, borrowed from

other countries and international financial institutions, was spent on meeting

consumption needs. Neither was an attempt made to reduce such profligate

spending nor sufficient attention was given to boost exports to pay for the growing

imports

In the late 1980s, government expenditure began to exceed its revenue by such

large margins that it became unsustainable. Prices of many essential goods rose

sharply. Imports grew at a very high rate without matching growth of exports.

Foreign exchange reserves declined to a level that was not adequate to finance

imports for more than two weeks. There was also not sufficient foreign exchange to

pay the interest that needs to be paid to international lenders. So India approached

the International Bank for Reconstruction and Development (IBRD), popularly

known as World Bank and the International Monetary Fund (IMF), and received $7

billion as loan to manage the crisis. For availing the loan, these international

agencies expected India to liberalize and open up the economy by removing

restrictions on the private sector, reduce the role of the government in many areas

and remove trade restrictions. India agreed to the conditionality of World Bank and

IMF and announced the New Economic Policy (NEP).

The NEP consisted of wide ranging economic reforms. The thrust of the policies

was towards creating a more competitive environment in the economy and

removing the barriers to entry and growth of firms. This set of policies can broadly

be classified into two groups:

The stabilization measures - are short term measures, intended to correct some of

the weaknesses that have developed in the balance of payments and to bring

inflation under control. There was a need to maintain sufficient foreign exchange

reserves and keep the rising prices under control.

The structural reform measures - are long-term measures, aimed at improving the



efficiency of the economy and increasing its international competitiveness by

removing the rigidities in various segments of the Indian economy. Disinvestment

means selling government equity in public sector units (PSUs) to private parties.

Thus Disinvestment refers to the sale or liquidation of an asset or subsidiary of an

organization or government. It is also known as divestiture or divestment. In India

the process of disinvestment began since 1991-92. The need for disinvestment

arises from the fact of poor performance of PSUs.

The major thrust for Disinvestment Policy in India came through the Industrial

Policy Statement 1991.The policy stated that the government would disinvest part

of their equities in selected PSEs. However it did not stake any cap or limit on the

extent of disinvestment. It also did not restrict disinvestment to any class of

investors. The main objective was to improve overall performance of the PSEs.

OBJECTIVE OF DISINVESTMENT:

1. To improve performance of units

The main argument in favor of disinvestment is the poor performance of PSUs. For

instance the average return on investment was hardly 2% during the 1980s and

1990s.

2. To reduce budgetary deficits

One of the factors of budgetary deficits is the allocation of huge amount of funds to

PSUs. Due to lack of improvement of performance in such units, these deficits lead

to rising prices which in turn affected the economy.

3. To overcome the problem of political involvement in PSUs

There was too much political interference with respect to location of the project,

selection and promotion of top personnel, awarding important contracts etc. This

has lead to poor performance of the PSUs.

4. Enable the government to concentrate on Social development

It is of the belief that by transferring PSUs to private players, it would enable the

government to concentrate on the government¶s main job i.e. social development in

areas such as primary health, primary education, law and order, family welfare andso on.

OTHER OBJECTIVES WOULD INCLUDE

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BACKGROUND

Historically, public sector undertakings (PSUs) have played an important part in the

development of the Indian industry. At the time of independence it was felt that the

political independence without economic self-reliance would be detrimental to the

country¶s sovereignty and autonomy in policy making.

Hence, the basic objectives of starting the public sector were:

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Public sector enterprises (PSEs) or Public Sector Units (PSUs), which were given a

special role in India¶s planned economy, grew both in terms of numbers and

investment for over four decades from the early 1950s. At the commencement of

the First Five Year Plan there were five PSEs with a total investment of Rs. 29

crores. At the end of the Seventh Plan in 1990, there were 244 PSEs and the

investment in them had gone up to Rs. 99, 329 crores. Although disinvestments had

started from the early 1990s, at the end of the Eighth Plan in 1997, investment had

soared to Rs. 2, 13,610 crores. At the end of the fiscal year 2000-01, PSEs had a

total investment of Rs. 2, 74, 114 crores. The PSEs made a significant contribution

to industrial production, 100 per cent in lignite, over 80 per cent in coal, crude oil

and zinc, almost 50 per cent in aluminum and over 30 per cent in finished steel.

In terms of profitability, the PSEs showed diverse patterns. In 2000-01, 122

enterprises made a profit with the top 10 among them - giants such as the Oil andNatural Gas Corporation (ONGC), the National Thermal Power Corporation

(NTPC), the Indian Oil Corporation (IOC) and the Videsh Sanchar Nigam Limited

(VSNL) - accounting for close to 70 per cent of the total net profit of Rs. 19, 604

crores. Sector-wise, petroleum, power and communications contributed to 60 per

cent of the profits. During that year, there were 111 loss-making enterprises with a



total loss of Rs. 12, 839 crores. The major contributors to the losses were Hindustan

Fertilizer, the Fertilizer Corporation of India (FCI), Bharat Coking Coal, and some

other enterprises dealing with coal. The return on investment of all PSEs taken

together remained low - post-tax profitability being only about 5 per cent on capital

employed. Thus, according to some economists, the public sector in India, which

was perceived to be the vehicle of speedy economic development, has run into

rough waters. It not only failed to produce surpluses which it was expected to

generate for future growth, but the return on investment remained poor. Thus the

question that is examined is whether disinvestment and privatization can lead to

better results.

PRIVATISATION

Privatization implies shedding of the ownership or management of a government

owned enterprise. Privatization of the public sector undertakings by selling off part

of the equity of PSUs to the public is known as disinvestment. The purpose of sale

was mainly to improve financial discipline and facilitate modernization. It was also

envisaged that private capital and managerial capabilities could be effectively

utilized to improve the performance of the PSUs. The government envisaged that

privatization could provide strong impetus to the inflow of FDI. The government

has also made attempts to improve the efficiency of PSUs by giving them

autonomy in taking managerial decisions. Government companies can be converted

into private companies in two ways

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Many of these profitable PSUs were originally formed during the 1950s and 1960s

when self-reliance was an important element of public policy. They were set up

with the intention of providing infrastructure and direct employment to the public

so that quality end-product reaches the masses at a nominal cost and the companies

themselves were made accountable to all stakeholders. The granting of navaratna

status resulted in better performance of these companies. The government partly

privatized them through disinvestment

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The policy of disinvestment has largely evolved through the policy statements of

Finance Ministers in their Budget Speeches. The policy as evolved is enumerated

below:-

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a) Arms and ammunition and the allied items of defence equipment,

Defence aircrafts and warships;

b) Atomic energy (except in the areas related to the generation of nuclear power

and applications of radiation and radio-isotopes to agriculture, medicine and non-

strategic industries); Railway transport.

c) All other PSE¶s were to be considered non strategic.

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In May, 2004, Government adopted National Common Minimum Programme,

which outlines the policy of Government with respect to Public sector.

³The UPA Government pledged to devolve full managerial control and commercial

autonomy to successful, profit-making companies operating in competitive

environment; they won¶t be privatized µNavratna¶ companies can raise resources

from the capital market. Efforts will be made to modernize and restructure sick

Public sector companies.

a) It favoured sale of small proportions of Government equity through IPO/FPOwithout changing the character of PSE¶s. In regard to this, it approved listing of

unlisted profitable CPSE¶s subject to residual equity of the Government remaining

atleast 51% and Government retaining the control of management.

b) It also constituted the formation of µNational Investment Fund¶. The proceeds

from disinvestment of CPSE¶s will be channelized into NIF. 75% of annual



income of NIF will be used to finance selected social sector schemes- education,

health, employment and the rest 25% to meet the capital investment requirements

of profitable and revivable CPSE¶s.

On 27th January, 2005 the Government, approved in principle:

· listing of currently unlisted profitable CPSEs each with a Net Worth in excess of

Rs.200 crore, through an Initial Public Offering (IPO), either in conjunction with a

fresh equity issue by the CPSE concerned or independently by the Government, on

a case by case basis, subject to the residual equity of the Government remaining at

least 51 per cent and the Government retaining management control of the CPSE;

· the sale of minority shareholding of the Government in listed, profitable CPSEs

either in conjunction with a Public Issue of fresh equity by the CPSE concerned or

independently by the Government subject to the residual equity of the Government

remaining at least 51 per cent and the Government retaining management control of

the CPSE; and

· Constitution of a ³National Investment Fund´.

On 25th

November, 2005, Government decided, in principle, to list large, profitable

CPSEs on domestic stock exchanges and to selectively sell small portions of equity

in listed, profitable CPSEs (other than the navratnas).

CURRENT POLICY ON DISINVESTMENT

The policy on disinvestment has been articulated in paragraph 34 of President¶s

Address to Joint Session of Parliament on 4th June, 2009 and reads as under:

Our fellow citizens have every right to own part of the shares of public sector

companies while the Government retains majority shareholding and control. My

Government will develop a roadmap for listing and people-ownership of public

sector undertakings while ensuring that Government equity does not fall below 51

%.

The above policy was reaffirmed by the Finance Minister in paragraph 37 of his

Budget Speech on 6th July, 2009. Paragraph 37 of FM¶s Budget Speech reads as:

The Public Sector Undertakings are the wealth of the nation, and part of thiswealth should rest in the hands of the people. While retaining at least 51 per cent

Government equity in our enterprises, I propose to encourage people¶s

articipation in our disinvestment programme. Here, I must state clearly that

ublic sector enterprises such as banks and insurance companies will remain in the

ublic sector and will be given all support, including capital infusion, to grow and



remain competitive.

The Government, on 5th November 2009 has approved the following action plan for

disinvesting Government equity in profit making CPSUs:

i) Already listed profitable CPSUs, not meeting the mandatory public shareholding

of 10%, are to be made compliant;

ii) All CPSUs having positive net worth, no accumulated losses and having earned

net profit for the three preceding consecutive years are to be listed through Public

Offerings, out of Government shareholding or issue of Fresh Equity by the

company or a combination of both; and

iii) The proceeds from disinvestment would be channelized into National

Investment Fund and during April, 2009 to March, 2012 would be available in full

for meeting the capital expenditure requirements of selected social sector

programmes decided by the Planning Commission / Department of Expenditure.

The status quo ante will be restored from April, 2012.

ADVANTAGES OF DISINVESTMENT POLICY

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As pointed out by experts, if the government sells the asset that provides income or

profit equal to or more than the prevailing interest on government securities, then

the government would lose future income by selling it. On the other hand, from the

private sectors point of view,it makes no sense to purchase an asset unless it

provides at least a rate of return equal to the rate of interest on government

securities, because that is where the private investor could otherwise put the money.

This means that for such sales to occur, either

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According to experts, whatever be the technique, to think that sale of PSU shares isthe only method of reform, reflects a closed mind. Treating process of

disinvestment as revenue in budgets creates pressure in selling, apart from being

fiscal imprudence; the capital proceeds could be used to consolidate and revitalise

Navratnas. Critics point out that, the whole disinvestments programme has been

carried out by the government in a hasty, unplanned and hesitant way. As a result,



the public sector equity has been sold for a fraction of what it could actually fetch.

However this is only one part of the story.

The entire manner in which the proceeds from the disinvestments have been used is

also being debated. The government has used these proceeds to offset the shortfalls

in revenue receipts and thus reduce the fiscal deficit which it was required to do as

a part of the IMF stabilization programme. The disinvestments of governments

proceeds in profitable public sector enterprises and using the proceeds for current

consumption needs amounts to frittering away of valuable public assets.

The correct policy would have been to allow the public sector themselves to use the

resources they generate via this programme. This would have helped them to

revitalize and expand their activities .The present policy has deprived the

government of future yield from these enterprises.

DIS ADVANTAGES OF DISINVESTMENT POLICY

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CONCLUSION

The debate and the case study indicates that there are many complicated economic,

political and legal issues such as Debate on the Sale Profitable vs. Unprofitable

Enterprises, debate on the sale of Large or Small Firms, Investment decisions

before Disinvestment and Investment requirement from the private participants postdisinvestment, management of Public Enterprises Debt, categorizing the Social

Assets and economic assets of the PSU¶s, probable environmental concern

The present disinvestment policy has been articulated in the recent President

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