Project ON Disinvestment in India A Failure Story

PROJECT
ON
DISINVESTMENT IN INDIA
A FAILURE STORY
Submitted To Submitted By
MR.G.S.KHERA JUBIN ANAND (FM-B-06)
NAVEEN RAMNANI (FM-B-06)
Acknowledgement
Intuition and concepts constitute ...the elements

of all our knowledge, so that neither concepts
without an intuition in some way corresponding to
them, nor intuition without concepts, can yield
knowledge. In a similar way the credit of developing
this project goes to many others who helped us in
building both our concepts and intuitions.
We are indebted to our project guide Mr.G.S.Khera

for providing us with a challenging & interesting
project. We owe the credit of developing this project
to him. Without his guidance realization of this
project would not have been possible.
We would also like to thank our batch mates for the

discussions that we had with them. All these have
resulted in the enrichment of our knowledge and
their inputs have helped us to incorporate relevant
issues into our project.
Regards
NAVEEN RAMNANI (FM-B-06)
JUBIN ANAND (FM-B-07)
Executive Summary
Privatization, a key component of economic liberalization remained
dormant for the nearly the entire first decade of significant
economic reforms in India. The usual explanations have been that
weak governments could not overcome the many vested interests or
that there has been ideological resistance to economic reforms
among India’s elites.
Indian privatization came out of the shadows, however, when the

former Indian President Dr. A.P.J.Abdul Kalam stated, “It is
evident that disinvestment in public sector enterprises is
no longer a matter of choice but an imperative … The
prolonged fiscal haemorrhage from the majority of these
enterprises cannot be sustained any longer,"in his opening
address to Parliament in the 2002 budget session.
How does one explain both the gradualism during the 1990s and
the recent episodic acceleration of privatization in India and what
does it reveal both about state capabilities and the strength of
societal actors?
This report argues that it was not “vested interests” alone, but
institutional structures, in particular those embedded in the
judiciary, parliament and India’s financial institutions, that account
for the lag between the onset of economic liberalization and
privatization and its episodic nature. Changes in the perceived costs
of the status quo of state-owned enterprises also played a role in the
timing of reforms. Just as the external debt crisis forced the initial
round of economic reforms, the growing internal debt problem and
the fiscal crisis of the Indian state has increased the
opportunity cost of state-owned enterprises (SOEs). The
passage of time has also resulted in significant changes in Indian
policymakers and citizens’ attitudes regarding the relative
effectiveness of state and markets in commercial activities, as well
as their assumptions about the Indian state being a “guardian of the
public interest.”
TABLE OF CONTENT
Chapter 1 – A background
Objective
Relevance of study
Methodology
Literature review
Public sector performance since 1950 by R Nagaraj
Disinvestment in India” by Sudhir Nair
Disinvestment in India, I loose and you gain by P. Baijal
Brief Introduction
Chapter 2 – Public Sector in India

Evolution of Public sector
Objective of formation of PSU’s
Problem of Public sector undertakings
Growth in Public sector
Chapter 3 – Disinvestment-Definition, Methods and

Processes
Definition
Indian scenario
Types of disinvestment
Objectives
Disinvestment process
Methods adopted in India
Legal issues
Chapter 4 - Disinvestment in India-Policies, procedure and

proceeds
Background
Timeline
Phase 1 (1991 – 92 to 1995 – 96)
Industrial reforms
Rangarajan committee,1993Yearwise
disinvestment
Phase 2 (1996 – 97 to 1997 – 98)
Disinvestment commission, 1996
Review of recommendations given by
Disinvestment commission
Year wise disinvestment
Phase 3 (1998 – 99 to 2007 – 08)
National investment fund
Phase 4 (2008 – 09 to present)
The line up for disinvestment
National Investment Fund, 2005
Summary of disinvestment
Chapter 5- Case studies

Modern food industries (India) Ltd
BALCO
VSNL
Chapter 6 – Critical Analysis

Review of Disinvestment in Privatisation
Performance of PSUs after Privatisation
Problems of Corporate governance
Disinvestment – Not a great piece of reform
Comparative experience
Chapter 7 – Suggestions
Bibliography
Background
OBJECTIVE:
1. To Analyze the Disinvestment process in Indian Public

Sector.
2. To study the disinvestment done was a Success or a Failure

for the Indian Economy.
RELEVANCE OF STUDY:
The report aims to study the evolution of disinvestment in India

from the scratch and in thorough detail so as to, not only
understand the need and the procedure of the same, but also to be
able to critically evaluate the strategy and its several
implementations till date.
The project enables us to discover and highlight several instances

and facts and conclude that the disinvestment was not efficiently
conducted. We also conclude that the objectives behind
disinvestment, stated by the government way back in 1991have
failed miserably.
After such an insightful analysis, we are in a position to say that

though disinvestment in India had several bounding objectives, it
has been a failure story and much has to be done to realize the
benefits. The group could even come up with some solutions and
alterations that can be implemented to help the citizens of India
reap the benefits of the strategy of disinvestment to a greater
extent.
METHODOLOGY:
The report tries to study and analyze the disinvestment in India

from its very scratch. We begin studying the post independence
era, understanding the strategy of Public Sector Units used by the
government for common good, then pin-pointing the loop holes
and the consequent shortcomings of this strategy, thus identifying
an emergent need for disinvestment.
We further study the objectives of disinvestment and the process

followed for the same. A detail study over a timeline of eighteen
years is done, dividing this entire span into three phases. This
study has helped us to cortically evaluate the disinvestment in
several sectors and comment on the current situation i.e. 2008
onwards.
Several legendary cases of disinvestment like the MFIL, BALCO,

VSNL, Maruti Udyog Ltd., Lagan Jute Mill etc have been
developed to sheer details. This has enabled us to study the
situation then and comment upon their worthiness. We have gone
one step ahead to state several in depth facts and conclude that
neither, the disinvestment was not carried out the way it must have
been nor have the funds realized been used for the purposes
intended.
LITERATURE REVIEW
1. PUBLIC SECTOR PERFORMANCE SINCE 1950, A

FRESH LOOK -BY: R. NAGARAJ
The paper elicits that since the mid-1980s, the public sector’s share
in domestic investment has been nearly halved, but its output share
has remained roughly constant at about a quarter of GDP,
suggesting a sustained rise in productivity over nearly two decades.
The paper defines three major evidences for the improvement in
performance.
• a rise in physical efficiency in electricity generation

• a fall in public sector employment growth
• an increase in central public sector enterprises’ profitability
(even after excluding the petroleum sector)
The author then goes ahead to question why then the public sector
finances remained adverse. In electricity, passenger road transport
and railways the revenue-cost ratio is less than one, and has
declined since the early 1990s. Moreover, over the last 40 years,
the public sector price deflator declined by 17 percentage points,
relative to the GDP deflator. Hence, the author concludes that
correct pricing and collecting user charges are probably key to
setting public sector finances right.
2. DISINVESTMENT IN INDIA BY: SUDHIR NAIB
The liberalization of the Indian economy remains an ideological

and operational battleground. There is mainstream national
consensus on the need and irreversibility of reforms, but
widespread disagreement about its pace and the sharing of its
benefits. A basic aspect of the withdrawal of the state from the
economic sphere has been the divestment to private parties of the
shares (and in some cases control) of public sector enterprises
(PSUs) or state-owned enterprises (SOEs)]. This has affected
thousands of Indians, and triggered fierce political debates.
3. DISINVESTMENT IN INDIA, I LOSE AND YOU GAIN-
BY: PRADIP BAIJAL
The process of disinvestment in India has been fraught with

challenges and controversies. Disinvestment in India: I lose and
You Gain, written by one who has been at the centre of all
privatization debates and controversies, brings to light the facts
that surround the disinvestment story. It underlines the most
compelling rationales behind privatization: relief to the taxpayer
and the simultaneous need for funds for infrastructure development
and Social-sector investment. It discusses the impact of
privatization and disinvestment on companies, economies and
other stakeholders, and serves to initiate a healthy and well
informed debate on the basis of facts.
INTRODUCTION
In macroeconomics, especially after the Latin American debt and

inflationary crisis in the 1980s, privatization was widely advocated
as a quick and sure means of restoring budgetary balance, to revive
growth on a sustainable basis.
At the micro level, the change in ownership is often advocated to

increase domestic competition, hence efficiency; and encourage
public participation in domestic stock market – all of which is
believed to promote ‘popular’ capitalism that rewards risk taking
and private initiative, that is expected to yield superior economic
outcomes.
Employing about 19 million persons, Public Sector currently

contributes about a quarter of India’s measured domestic output.
Administrative departments (including defence) account for about
2/5th of it, the rest comes from a few departmental enterprises (like
railways and postal services), and a large number of varied non-
departmental enterprises producing a range of goods and services.
These include, close to 250 public sector enterprises (PSEs) owned
and managed by the central government, mostly in industry and
services (excluding the commercial banks and financial
institutions). The contribution of varied publicly owned and
managed entities to national development is widely acknowledged,
their poor financial return has been a matter of enduring concern –
especially since the mid-1980s when, for the first time, the central
government’s revenue account turned negative – an imbalance that
has persisted ever since.
In 1991, a small fraction of the equity in selected central PSEs was

sold to raise resources to bridge the fiscal deficit. Though
quantitatively modest (as will be seen later), the ‘disinvestment’
signaled a major departure in India’s economic policy. While there
have been instances of sale of publicly owned enterprises as
running concerns on pragmatic considerations, it is only in the last
decade that such sales (and sale of limited equity) acquired the
status of public policy.
PUBLIC SECTOR IN INDIA
EVOLUTION OF PUBLIC SECTOR:

Prior to Independence, there were few ‘Public Sector’ Enterprises
in the country. These included the Railways, the Posts and
Telegraphs, the Port Trusts, the Ordinance Factories, All India
Radio, few enterprises like the Government Salt Factories, Quinine
Factories, etc. which were departmentally managed. India at that
time was predominantly an agrarian economy with a weak
industrial base, low level of savings, inadequate investments and
infrastructure facilities. In view of this type of socio-economic set
up, our visionary leaders drew up a roadmap for the development
of Public Sector as an instrument for self-reliant economic growth.
In early years of independence, capital was scarce and the base of

entrepreneurship was also not strong enough. Hence, the 1956
Industrial Policy Resolution gave primacy to the role of the State
which was directly responsible for industrial development.
Consequently the planning process (5 year Plans) was initiated
taking into account the needs of the country.
The new strategies for the public sector were later outlined in the
policy statements in the years 1973, 1977, 1980 and 1991. The
year 1991 can be termed as the watershed year, heralding
liberalization of the Indian economy.
The public sector provided the required thrust to the economy and
developed and nurtured the human resources, the vital ingredient
for success of any enterprise; public or private.
OBJECTIVES FOR THE FORMATION OF PSUS
The main objectives for setting up the Public Sector Enterprises as

stated in the Industrial Policy Resolution of 1956 were:
• To help in the rapid economic growth and industrialization

of the country and create the necessary infrastructure for
economic development
• To earn return on investment and thus generate resources
for development
• To promote redistribution of income and wealth
• To create employment opportunities;
• To promote balanced regional development
• To assist the development of small-scale and ancillary
industries
• To promote import substitutions, save and earn foreign
exchange for the economy.
PROBLEMS OF PUBLIC SECTOR

UNDERTAKINGS
The most important criticism levied against public sector

undertakings has been that in relation to the capital employed, the
level of profits has been too low. Even the government has
criticised the public sector undertakings on this count. Of the
various factors responsible for low profits in the public sector
undertakings, the following are particularly important: -
1. Price policy of the Public Sector undertakings.
2. Underutilization of capacity.
3. Problem related to planning and construction of projects
4. Problems of labour, personnel and management
5. Lack of autonomy
DISINVESTMENT: DEFINITION,
METHODS
DEFINITION:
Disinvestment refers to the action of an organization or the

government in selling or liquidating an asset or subsidiary. In
simple words, disinvestment is the withdrawal of capital from a
country or corporation.
Some of the salient features of disinvestment are:
• Disinvestment involves sale of only part of equity holdings
held by the government to private investors.
• Disinvestment process leads only to dilution of ownership
and not transfer of full ownership. While, privatization refers
to the transfer of ownership from government to private
investors.
• Disinvestment is called as ‘Partial Privatization’.
TYPES OF DISINVESTMENT
There are various types of disinvestment. Some of them are as

follows:
1. OFFER FOR SALE TO PUBLIC AT FIXED PRICE:
In this type of disinvestment, the government holds the sale of the

equity shares to the public at large at a pre determined price.
Examples:-MFIL, BALCO, CMC, HTL, IBP, HZL, PPL, and
IPCL.
2. STRATEGIC SALE:
In this type, significant management rights are transferred to the

investor i.e. majority of equity holdings is divested. Examples:
-Offer of 1 million shares of VSNL, listing of ONGC IPO.
3. INTERNATIONAL OFFERING:
This is essentially targeted at the FII (foreign institutional

investors). Ex:-GDR of VSNL, MTNL etc.
4. ASSET SALE AND WINDING UP:
This is normally resorted to in companies that are either sick or

facing closure. This is done by the process of auction or tender.
Ex:-Auction of sick PSU’s.
OBJECTIVES OF DISINVESTMENT:
Privatization intended to achieve the following:
• Releasing large amount of public resources

• Reducing the public debt
• Transfer of Commercial Risk
• Releasing other tangible and intangible resources
• Expose the privatised companies to market discipline
• Wider distribution of wealth
• Effect on the Capital Market
• Increase in Economic Activity.
METHODS ADOPTED IN INDIA:
There are three broad methods involved, which are used in

valuation of shares.
1. NET ASSET 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
the cost price less depreciation provided so far on assets. It does
not reflect the true position of profitability of the firm as it
overlooks the value of intangibles such as goodwill, brands,
distribution network and customer relationships which are
important to determine the intrinsic value of the enterprise. This
model is more suitable in case of liquidation than in case of
disinvestment.
2. PROFIT EARNING CAPACITY VALUE METHOD:
The profit earning capacity is generally based on the profits

actually earned or anticipated. It values a company on the basis of
the underlying assets. This method does not consider or project the
future cash flow.
3. DISCOUNTED CASH FLOW METHOD:
In this method the future incremental cash flows are forecasted and
discounted into present value by applying cost of capital rate. The
method indicates the intrinsic value of the firm and this method is
considered as superior than other methods as it projects future cash
flows and the earning potential of the firm, takes into account
intangibles such as brand equity, marketing & distribution
network, the level of competition likely to be faced in future, risk
factors to which enterprises are exposed as well as value of its core
assets.
LEGAL ISSUES IN THE DISINVESTMENT

PROCESS:
Legality of the disinvestment process has been challenged on a

variety of grounds that slowed the sale of public assets. However,
there were two significant judicial rulings that broadly set the
boundaries of the D-P process. These are:
1. Privatisation is a policy decision, prerogative of the executive

branch of the state; courts would not interfere in it.
2. Privatisation of the PSE created by an act of parliament would

have to get the parliamentary approval.
While the first ruling gave impetus for strategic sale of many
enterprises like Hindustan Zinc, Maruti, and VSNL etc. since
2000, the second ruling stalled the privatisation of the petroleum
companies, as government was unsure of getting the laws amended
in the parliament.
DISINVESTMENT IN INDIA –
POLICY, PROCEDURE AND
PROCEEDS
The basic objective of starting Public Sector in India was to build

infrastructure and rapid economic growth. However, a number of
problems such as low productivity, over-manning and other
economic compulsions like deterioration of balance of payment
position and increasing fiscal deficit led to the adoption of new
approach toward the public sector in 1991.
BACKGROUND:
1. LOW PRODUCTIVITY OF INVESTMENT
From 1950-51 to 1980-81, India’s growth rate was roughly

constant but savings and investment rate more than doubled. From
the table it can be seen that it was because of low productivity that
India’s growth was slow.
Year 1950-51 1960-61 1970-71 1980-81 1989-90
Investment
(Current Prices,% GDP) 10.2 15.7 16.6 22.7 24.1
Investment
(Constant 1980-81 prices,
%GDP) 14.7 18.1 18.7 22.7 21.8
Domestic Savings
(Current Prices, %GDP) 10.4 12.7 15.7 21.2 21.7
2. FISCAL DEFICIT OF THE CENTRAL GOVERNMENT
The fiscal deficit of the central govt rose consistently from 4% in

mid – 1970’s to 8% of GDP in 1985-86.
Fiscal Deficit of Government 1975-76 to 1990-91
Fiscal Budget Primary Revenue Monetised

Year Deficit Deficit Deficit Deficit Deficit
1975-76 4.1 0.5 2.5 1.1 0
1980-81 6.2 1.8 4.3 1.5 2.6
1981-82 5.4 0.9 3.4 0.2 2
1982-83 6 0.9 3.8 0.7 1.9
1983-84 6.3 0.7 4 1.2 1.9
1984-85 7.5 1.6 5 1.8 2.6
1985-86 8.3 2 5.5 2.2 2.4
1986-87 9 2.8 5.8 2.7 2.4
1987-88 8.1 1.7 4.7 2.7 2
1988-89 7.8 1.4 4.2 2.7 1.6
1989-90 7.8 2.3 3.9 2.6 3.1
1990-91 8.4 2.1 4.4 3.5 2.8
• A significant factor was government’s non-plan expenditure

and an inefficient interest payment system.
• Again the gulf war of 1990 brought the nation to the brink of
international debt.
• There were huge net outflows of NRI deposits from October

1990 and continued till mid 1991.
• Foreign Exchange Reserves were reduces $ 1 Billion which

could support only two weeks imports.
• Inflation was staring at 14%
• On July6, 1991 47 tons of gold were transferred from RBI to

Bank of England, London. Already 20 tons of gold were sold
in International market through State Bank of India.
TIMELINE:
The disinvestment announcement was made on 4March, 1991

during the interim budget session for 1991-92 under the
Chandrashekhar government. The Policy of disinvestment has
evolved over the years. This period can be broadly divided into 4
phases.
• The first phase being 1991-92 to 1995-96 where partial

disinvestment was taken in piecemeal manner.
• Second Phase 1996-97 to 1997-98, an effort to

institutionalize the disinvestment process was undertaken on
a firm footing by constituting the Disinvestment
Commission.
• The third Phase 198-98-99 to 2007-08 where Department of

Disinvestment (Now a Ministry) and National investment
fund was formed to look after the disinvestment process and
the funds generated from it.
• Fourth phase, the Current one where government is

planning to sell its stake in NTPCL, SJVNL, RECL and
NMDCL.
PHASE 1 (1991-92 TO 1995-96):
Phase one Started when Chandrashekhar government, while
presenting the interim budget for the year 1991-92 declared
disinvestment up to 20%.The objective was to broad-base equity,
improve management, enhance availability of resources for these
PSEs and yield resources for exchequer.
INDUSTRIES RESERVED FOR PUBLIC SECTOR PRIOR

TO 1991
1. Arms and Ammunition and allied items of defence equipment.

2. Atomic energy.
3. Iron and steel.
4. Heavy castings and forgings of iron and steel.
5. Heavy plant and machinery required for iron and steel
production, for mining.
6. Heavy electrical plants.
7. Coal and lignite.
8. Minerals oils.
9. Mining of iron ore, manganese ore, chrome ore, gypsum.
10. Mining and processing copper, lead, zinc, tin.
11. Minerals specified in the Schedule to the Atomic Energy.
12. Aircraft.
13. Air transport.
14. Rail transport.
15. Ship building.
16. Telephones, Telephone cables, Telegraph and Wireless
apparatus (excluding radio receiving sets).
INDUSTRIES RESERVED FOR PUBLIC SECTOR
AFTER JULY, 1991
1. Arms and Ammunition and allied items of defence equipment,

aircraft and warship.
2. Atomic Energy.
3. Coal and Lignite.
4. Mineral Oils.
5. Mining of iron ore, manganese ore, chrome ore, gypsum,
sulphur, gold and diamond.
6. Mining of copper, lead, zinc, tin, molybdenum and wolfram.
7. Minerals specified in the schedule to Atomic Energy Order,
1953.
8. Railway Transport.
RANGARAJAN COMMITTEE 1992-1993
The committee included Dr. C. Rangarajan, the then Member

Planning commission as chairman and Dr. Y. Venugopal Reddy as
Member Secretary. The committee gave its report on April, 1993.
The Highlights of the committee report are as follows:
1. 49% of equity could be divested for industries explicitly

reserved for the public sector
2. In exceptional cases the public ownership level could be kept

at26%.
3. Holding 51% or more equity by the Government was

recommended only for six Schedule industries, namely:
• Coal and lignite
• Mineral oils
• Arms, ammunition and defence equipment
• Atomic energy
• Radioactive minerals
• Railway transport
DISINVESTMENT IN 1991-92:
A) FIRST TRANCHE OF DISINVESTMENT (DECEMBER,

1991):
Out of 244 public enterprises 41 were selected, but 10 were

dropped on the grounds of being consultancy firms, negative asset
value or they incurred losses in previous financial year.
Bids were invited from 10 financial institutions/ mutual funds
which consisted of 825 bundles each consisting of 9 PSEs. A total
of 710 bids for 533 bundles were received from 9 mutual funds/
institutions and 406 bundles for a total value of Rs14.2billion were
sold. Unit Trust of India was the major purchaser accounting for
Rs. 7.75 billion of the sale.
B) SECOND TRANCHE OF DISINVESTMENT

(FEBRUARY, 1992):
In second tranche, the reserve price fixed per bundle was Rs10.08
crore. Bids were invited from 36 institutions and banks. A total of
Rs.1611 crore were realised with Unit Trust of India again being
the major purchaser. The Shares of Metal Scrap Trading
Corporation remained unsold.
Details of the PSEs Divested in 1991-92
No. Of
Shares(in % of
Name of the Enterprise crore) Disinvestment
Andrew Yule (AY) 0.1015 9.6
Bharat Earth Movers Ltd. (BEML) 0.6 20
Bharat Electronic Limited (BEL) 1.6 20
Bharat Heavy Electricals Limited (BHEL) 4.8952 20
Bharat Petroleum Corporation Limited (BPCL) 1 20
Bongaigaon Refinery and Petrochemicals Ltd. (BRPL) 3.9961 20
Cochin Refineries Ltd. (CRL) 0.4219 10.01
Computer Maintenance Corporation (CMC) 0.2528 16.69
Dredging Corporation of India Ltd. (DCI) 0.0402 1.44
Fertilizers and Chemicals Ltd. (FACT) 0.5232 1.54
Hindustan Machine Tools Ltd. (HMT) 0.4268 5.43
Hindustan Organic Chemicals Ltd. (HOCL) 0.987 20
Hindustan Petroleum Corp. Ltd. (HPCL) 1.2768 20
Hindustan Photo Films Mfg. Co. Ltd. (HPF) 1.919 16.05
Hindustan Zinc Ltd. (HZL) 8.0746 20
Hindustan Cables Ltd. (HCL) 0.1669 3.64
Indian Petrochemical Corp. Ltd. (IPCL) 3.72 20
Indian Railway Construction, Co. Ltd. (IRCON) 3.72 20
Indian Telephone Industries Ltd. (ITI) 0.0013 0.27
Madras Refineries Ltd. (MRL) 1.7538 20
Mahanagar Telephone Nigam Ltd. (MTNL) 1.9316 20
Minerals & Metals Trading Corp. (MMTC) 12 20
National Aluminium co. Ltd. (NALCO) 0.0334 0.67
National Fertilizers Ltd. 3.51 2.72

Neyveli Lignite Corp. Ltd. (NLC) 1.1163 2.28
Rashtriya Chemicals and Fertilizers Ltd. (RCFL) 7.1791 5
Shipping Corp. Of India Ltd. (SCI) 3.1136 5.64
State Trading Corp. Of India Ltd. (STC) 5.2246 20
Steel Authority of India Ltd. (SAIL) 0.2393 7.98
Videsh Sanchar Nigam Ltd. (VSNL) 19.9075 5
As per the budget of 1992-93 Rs. 3500 crore were to be raised by

disinvestment during the year. Out of this Rs. 1000 crore was
meant for National Renewal Fund (NRF) which was set up in
February, 1992 to protect the interest of workers and provide a
social safety net for labour.
A) FIRST TRANCHE OF DISINVESTMENT (OCTOBER,

1992):
In this phase auctioning of shares on individual PSE basis was

done. Tenders were invited for a total of 8 PSEs. The minimum bid
limit was set at Rs. 2.5 crore. A total of 12.87 crore shares were
sold for a value of Rs 681.95 crore with 286 bids being received
Details of the PSEs Divested in October, 1992

% of Total
number of Amount of
No. Of Shares shares of the Sale(in Rs
Name of the Enterprise Sold(in crore) PSE Crore)
Bharat Petroleum Corporation Limited (BPCL) 0.25 5 169.53
Hindustan Petroleum Corp. Ltd. (HPCL) 0.3192 5 178.1
Hindustan Zinc Ltd. (HZL) 1.0416 2.58 44.33
Hindustan Machine Tools Ltd. (HMT) 0.3928 5 21.98
National Aluminium co. Ltd. (NALCO) 6.4431 5 124.13
Neyveli Lignite Corp. Ltd. (NLC) 1.4969 1.04 35.03
Rashtriya Chemicals & Fertilizers Ltd. (RCFL) 0.8685 1.57 26.36
Steel Authority of India Ltd. (SAIL) 2.0567 0.52 26.36
TOTAL 12.8688 681.95

(DECEMBER, 1992):
In November, 1992 the government invited bids for the purchase

of 46.27crore shares of 14 PSEs. The minimum bid limit was
reduced to Rs1crore from Rs2.5 crore. The criterion was kept same
as in first tranche. A total of 225 bids were received and 31.06
crore shares of 12 PSEs were sold at a total amount of Rs 1183.83
crore.
Details of the PSEs Divested in October, 1992

% of Total
number of Amount of
Bharat Petroleum Corporation Limited (BPCL) 0.25 5 161.65
Bongaigaon Refinery & Petrochemicals Ltd. (BRPL) 1 5 42.18
Fertilizers and Chemicals Ltd. (FACT) 0.05 0.15 1.3
Hindustan Petroleum Corp. Ltd. (HPCL) 0.32 5 153.75
Indian Telephone Industries Ltd. (ITI) 0.1 1.14 10.78
National Aluminium co. Ltd. (NALCO) 6.44 5 118.19
National Fertilizers Ltd. 0.03 0.06 0.72
Rashtriya Chemicals & Fertilizers Ltd. (RCFL) 0.15 0.28 4
State Trading Corp. Of India Ltd. (STC) 0.03 0.1 2.25
Steel Authority of India Ltd. (SAIL) 19.93 5 617.6
TOATAL 31.06 1183.83
B) THIRD TRANCHE OF DISINVESTMENT
(MARCH, 1993):
Shares of 15 PSEs were offered for sale thorough auction. Out of

192 bids which were received, 57 bids emerged successful on the
basis of the reserve prices fixed by the core group based on the
recommendations of the merchant bankers. A total amount of
Rs46.73crore was realised through sale of 1.0096crore shares of 9
PSEs.
PSE Disinvested in March, 1993

% of Total
number of Amount of
Bharat Petroleum Corporation Limited (BPCL) 0.1117 0.45 8.21
Bongaigaon Refinery & Petrochemicals Ltd. (BRPL) 0.08 0.4 3.22
Hindustan Copper Ltd 0.3411 1.12 8.07
Hindustan Machine Tools Ltd 0.03 0.34 1.41
Indian Telephone Industries Ltd. (ITI) 0.07 0.79 4.85
National Aluminium co. Ltd. (NALCO) 0.1023 0.08 1.88
National Mineral Development Corp. Ltd 0.214 1.59 17.88
TOATAL 1.0096 46.73
Thus a total of 1912.51crore was realised during 1992-93 against

the target of Rs2500crore.
DISINVESTMENT IN 1993-94: DISINVESTMENT IN
1993-94:
The target during this fiscal year was kept at Rs 3500 crore but the
government could not go
in for further sale of shares due to unfavourable stock market
conditions through 1993-94.
Actual realisation of funds took place from this round of

Disinvestment took place in 1994-95.
Changes effected in the procedure to encourage divestment are:
• Bidding amount was lowered from Rs 1,00,000 to Rs 25,000
or value of 100 shares(whichever higher)
• Registered FII’s were permitted for auction of PSE shares.
A). FIRST TRANCHE OF DISINVESTMENT (MARCH –

APRIL 1994):
PSE Divested in March/April, 1994

% of Total
number of Amount of
Bharat Electronics Limited 0.331 4.14 47.17
Bharat Earth Movers Ltd 0.15 4.07 48.27
Bharat Heavy Electricals Ltd 2.692 11.74 301.34
Hindustan Petroleum Corp Ltd 0.447 7 563.11
Mahanagar Telephone Nigam Ltd 7.694 12.82 1322.17
National Aluminium co. Ltd. (NALCO) 0.003 0.04 0.096
TOTAL 11.317 2282.156
Out of these 7 PSE, only 1 PSE was not sold as no bid had been
received.
(OCTOBER 1994):
Non-Resident Indians (NRIs) and Overseas Corporate Bodies

(OCBs) were permitted to bid for the shares for the first time.
PSE Divested in October, 1994

% of Total
number of Amount of
Container Corporation of India 1.299 20 99.71
Indian Oil Corporation 1.443 3.77 1028.11
National Fertilizers Ltd. 0.007 0.01 0.28
Oil and Natural Gas Co Ltd 0.686 2 1051.52
Steel Authority of India 0.372 0.41 22.66
Shipping Corporation of India Ltd. 0.387 1.37 28.08
TOTAL 4.194 2230.36
C) THIRD TRANCHE OF DISINVESTMENT

(JANUARY 1995):
In January 1995 shares of 6 PSEs were offered for sale. Out of 556
bids received, 209 were accepted in respect to 5 companies and
government decided not to sell shares in VSNL.
PSE Divested in January, 1995
% of Total
number of Amount of
Engineers India Ltd 0.108 5.99 67.526
Gas Authority of India Ltd 2.853 194.12
ITDC 0.675 51.985
Indian Oil Corporation Limited 0.008 5.538
Kudremukh Iron Ore Company Ltd 0.616 11.399
TOTAL 4.26 330.568
DISINVESTMENT IN 1995 – 1996:
Against the target of Rs 7000 crore, the government decided to

disinvest from only 4 PSEs – MTNL, SAIL, CONCOR and ONGC
in October 1995. Details are:
PSE Divested in October, 1995
No of shares sold Amount realised

Name of the enterprise (In crore) (in crore)
Mahanagar Telephone Nigam Ltd (MTNL) 0.87 135.9
Steel Authority of India Ltd (SAIL) 0.44 13.3
Container Corp of India Ltd (CONCOR) 0.2 14.12
Oil & Natural Gas Corporation Ltd (ONGC) 0.02 5.16
TOTAL 1.53 168.48

PHASE II (1996-97 TO 1997-98):
The government constituted Public Sector Disinvestment

Commission under G. V. Ramakrishna on 23 August, 1996 for a
period of 3 years with the objective of preparing an over-all long
term disinvestment programme for public sector undertakings.
The main terms of reference were:
• A comprehensive overall long-term disinvestment

programme (extent of disinvestment, mode of disinvestment
etc.) within 5-10 years for the PSUs referred to it by the Core
Group
• To select the financial advisors for specified PSUs to
facilitate the disinvestment process.
• The “core” group industries-telecommunications, power,
petroleum etc that are capital-intensive and where the market
structure could be an oligopoly
The commission also showed concern about slow progress in

implementation of its recommendations and it was particularly
critical of government’s going ahead with strategic sales leading to
joint ventures in some PSEs not referred to the commission.
DISINVESTMENT IN 1996-97
In 1996-97 a target of Rs. 5000 crore was fixed for mobilization of

resources through disinvestment of PSE shares. In order to do this,
companies from petroleum and communication sectors were
chosen namely IOC and VSNL. But due to unfavorable market
conditions the GDR of only VSNL could be issued. In the GDR,
39lakh shares of VSNL were disinvested resulting in an amount of
Rs 380crore.
DISINVESTMENT IN 1997-98
The budget for 1997-98 had taken a credit for an amount of Rs

4800 crore to be realised from disinvestment of government held
equity in PSEs. This was supposed to be achieved by the
disinvestment of MTNL, GAIL, CONCOR and IOC.
A GDR of 40 million shares held by the government in MTNL was
offered in international market in November, 1997. A total of Rs.
902 crore was collected but due to highly unfavourable market
conditions the GDR issue of GAIL, CONCOR, and IOC was
deferred.
PHASE III (1998-99 TO 2007-2008)
First in the 1998 – 99 budgets BJP government

decided to bring down the government
shareholding in the PSEs to 26 %to facilitate
ownership changes which were recommended
by Disinvestment Commission. In 1999 – 2000
government state that its policy would be to
strengthen strategic PSEs privatise non-
strategic PSEs through disinvestment and for
the first time the term ‘privatisation’ were used
instead of disinvestment. The government later
formed the
Department of Disinvestment on 10 December
1999.
The following criteria were observed for

prioritization for disinvestment:
• Where disinvestments in PSEs would lead
to large revenues to the government
• Where disinvestment can be implemented
with minimum impediments and in
relatively shorter time span; and
• Where continued bleeding of government
resources can be stopped earlier.
DIVESTMENT IN 1998 – 99:
The government decided to disinvest through offer of shares in

GAIL, VSNL, CONCOR, IOC and ONGC. The budget for 1998 –
99 had taken a credit for Rs 5,000crore to be realised through
disinvestment.
DISINVESTMENT IN 1999 -2000:
The budget for 1999 – 2000 had taken a credit for Rs 10,000 crore
to be realised through disinvestment. The government disinvested
from Modern Foods India Ltd and did a strategic sale to their
strategic partner – HLL for Rs 105, 45 crore for a 74 % equity
stake. This was the first time government had sold more than 50 %
holding.
DISINVESTMENT IN 2000 -2001:
Against a target of 10,000 crore, the government realised Rs

1868.73 crore. The details are:
Disinvestment in 2000 – 2001
Name of the enterprise Mode of Disinvestment Receipts (in crore)
BALCO Strategic sale of 51% 551.5
BRPL and Chennai Refineries Taken over by IOC 658.13
Kochi Refinery Taken over by BPCL 659.1
TOTAL 1868.73
Against a target of 12,000 crore, the government realised Rs

3130.94 crore during the year. The highlight of this disinvestment
was that strategic sales were affected in CMC, HTL, IBP, VSNL
and PPL. The details are:
Disinvestment in 2001 – 2002

Name of the enterprise Mode of Disinvestment Receipts (in crore)
CMC Strategic sale of 51 % 152
HTL Strategic sale of 74% 55
IBP Strategic sale of 33.58% 1153.68
VSNL Strategic sale of 25% 1439
PPL Strategic sale of 74% 151.7
ITDC Sale of 8 hotels and long term lease of one hotel 179.56
TOTAL 3130.94
Target of the government for disinvestment in the year was Rs

12,000crore. The major highlight was the two-stage sell off in
Maruti Udyog Ltd with a Rs 400 crore right issue at a price of Rs
3280 per share of Rs 100 each in which the government renounced
whole of its rights share (6,06,585) to Suzuki, for a control
premium of Rs 1000 crore. Relative share holding of Suzuki and
government after completion of the rights issue was 54.20 % and
45.54 % respectively. The second stage government offloaded its
holding in two tranches – first where government sold 27.5 % of
its equity through IPO in June 2003. The issue was oversubscribed
by over 10 times. Later keeping in view the overwhelming
response from sale of Maruti, government sold its remaining shares
in the privatised companies of VSNL, CMC, IPCL, BALCO and
IBP to public through IPO’s.
Strategic sale of IPCL was also finalised in May 2002. The

decision to disinvest IPCL was although taken in December 1998,
it took three and half years to finalise the deal. Reliance
Petroindustries Ltd (Reliance group) was finally inducted as a
strategic partner with a 26 % sale in IPCL.
DISINVESTMENT FROM 2003 – 2004 TO 2007 - 08:
The government had fixed a high target for the year 2003 – 04 as
14,500crore. The strategic sale of JCL, and offer sales of many
PSEs like MUL, IBP, IPCL, CMC, DCI, GAIL and
ONGC has exceeded the target fixed by the government to a total
receipt of Rs15,547.41crore . Out of this Rs12, 741.62crore
receipts through sale of minority shareholding in CPSEs. In 2004 –
05 the target was reduced to Rs 4,000 crore and share sales of
NTPC, ONGC spillovers and IPCL shares to employees pushed the
total receipts to Rs 2,764.87
crore. In the other 3 years of this phase – from 2005 – 06 till 2007
– 2008 the government fixed no targets and the total receipts were
very less to with the year 2006 – 07 yielding no receipts at all.
NATIONAL INVESTMENT FUND
On 27 January 2005, the Government had decided to constitute a

“National Investment Fund” (NIF) into which the realization from
sale of minority shareholding of the Government
In profitable CPSEs would be channelised. The Fund would be
maintained outside the Consolidated Fund of India. The income
from the Fund would be used for the following
Broad investment objectives: -
(a) Investment in social sector projects which promote education,

health care and employment.
(b) Capital investment in selected profitable and revivable Public

Sector Enterprises that yield adequate returns in order to
enlarge their capital base to finance expansion/
Diversification.
SALIENT FEATURES OF THE N.I.F
(i) The proceeds from disinvestment of Central Public Sector

Enterprises will be channelised into the National Investment Fund
which is to be maintained outside the Consolidated Fund of India.
(ii) The corpus of the National Investment Fund will be of a

permanent nature.
(iii) The Fund will be professionally managed to provide

sustainable returns to the Government, without depleting the
corpus. Selected Public Sector Mutual Funds will be entrusted with
the management of the corpus of the Fund.
(iv) 75 per cent of the annual income of the Fund will be used to
finance selected social sector schemes, which promote education,
health and employment. The residual 25 per cent of the annual
income of the Fund will be used to meet the capital investment
requirements of profitable and revivable CPSEs that yield adequate
returns, in order to enlarge their capital base to finance
expansion/diversification.
FUND MANAGERS OF THE N.I.F
The following Public Sector Mutual Funds have been appointed

initially as Fund Managers to manage the funds of NIF under the
‘discretionary mode’ of the Portfolio Management Scheme which
is governed by SEBI guidelines.
i) UTI Assets Management Company Ltd.
ii) SBI Funds Management Company (Pvt.) Ltd.
iii) Jeevan Bima Sahayog, Asset Management Company Ltd.
CORPUS OF NIF:
The corpus of The Fund is Rs.1814.45crore being the proceeds

from the disinvestment in Power Grid Corporation and Rural
Electrification Corporation.
The pay out on NIF was Rs.84.81crores in the first year.
The payout received in the second year was Rs.209.24crores.
Average income of first year was 8.47%.
Average income of second year was 10.02%.
Thus, the average income was 9.245% against the hurdle rate of
9.25%.
RESTRUCTURING OF THE N.I.F
In view of the deceleration of GDP growth due to global economic

downturn coupled with unprecedented drought this summer, we are
facing a reduced budgetary resource generation possibility. To
ensure that this does not negatively impact the growth of
economy;
Government has approved (on 5TH November 2009) one-time
exemption permitting full utilization of disinvestment proceeds
deposited in the National Investment Fund, over this and the next
two Financial Years, in meeting the capital expenditure
requirements of selected social sector programs decided by the
Planning Commission/Department of Expenditure.
The status quo ante will be restored from April 2012.
PHASE IV (Current Scenario)
THE LINE UP FOR DISINVESTMENT
It is quite clear that the Government does have divestment of

its stakes in PSUs high on its agenda for the near future. Which
companies are likely candidates? Here’s a line-up:
The IPOs that may flag off the divestment process may well be
NHPC, RITES and Oil India, which have already filed their
respective draft prospectuses with SEBI over the past two
years.
NHPC: NHPC is the country’s largest hydro power generator,

engaged in planning, development and implementation of hydro-
electric projects. Based on the offer document, the government
stake will come down to 86.3 per cent post-issue. The earnings per
share (EPS) for the FY09 is Rs 1.01.
RITES: RITES, under the Ministry of Railways, provides transport

infrastructure consultancy, engineering and project management
services. The PSU plans a fresh issue, bundled with an offer for
sale that may bring down the Government’s stake to 72 per cent.
The book value/share and EPS for the year ended FY07 were Rs
133 and Rs 30 respectively.
OIL India: Oil India is engaged in the exploration, development,

production and transportation of crude oil and natural gas onshore.
The company comes under Ministry of Petroleum and Natural Gas.
The Center’s stake will fall to 89 per cent post-issue. The offer
document mentions an EPS of Rs 73.6 for the last financial year.
Long on the stake sale shortlist, the following PSUs are possible
candidates which may seek listing through an IPO/offer for sale
route.
Coal India is among the largest coal-producing companies in the

world and is the only un-listed navaratna PSU (except for
HAL, which comes under strategic area). CIL had a turnover
of Rs38631crore in 2007-08. It is expected to hit the IPO market in
near future.
Telecom major, BSNL and steel maker, RINL (Vizag

steel), Cochin Shipyard, Telecommunications Consultants India
and Manganese Ore are the other likely candidates that may tap the
market. These entities have been on the divestment shortlist for
quite a while.
Stake dilution is also possible in listed PSUs with a high

proportion of government holdings. A 5-10 per cent stake sale in
these companies will bring huge gains for the government, even
without losing the management control. NMDC, BHEL, NTPC,
SAIL, Neyveli Lignite, MMTC, RCF are likely follow-on offer
candidates.
At current market prices, a 5 per cent stake sale in NTPC would

fetch the government around Rs 8,864crore. In case of Neyveli
Lignite, SAIL, BHEL, MMTC and NMDC, the receipts would be
around Rs 1,168crore, Rs 3,570crore, Rs 5,321crore, Rs6, 800crore
and Rs8, 900crore respectively.
CASE STUDY
MODERN FOOD INDIA:
Modern Food Industries was incorporated as Modern Bakeries

(India) Ltd. in 1965. It had 2042 employees as on31 January, 2000.
It went through minor restructuring when its Ujjain plant was
closed, the Silchar project was abandoned and the production of
Rasika drink was curtailed. The company was referred to
Disinvestment Commission in 1996. In February 1997, the
Commission recommended 100% sale of the company, treating it
in the non-core sector. As per the Disinvestment Commission
the major problems at MFIL were under-utilization of the
production facilities, large work force, low productivity
and limited flexibility in decision-making.
PRE DISINVESTMENT SCENARIO:
MFIL: Pre-Disinvestment Performance
DETAILS 1995-96 1996-97 1997-98 1998-99 1999-00
SALES - BREAD 95 104 103.5 89 78
ENERGY FOOD/ NON-BAKERY 45.2 62.8 78 71 71
OPERATIONS
TOTAL 140.2 166.8 181.5 160 149
NET PROFIT/LOSS 11.52 16.45 7.65 (7) (48)

During 1995-96 to 1997-98 MFIL recorded profits as wheat was
provided to it at a subsidised rate but once that was withdrawn it
started making losses as the increased costs could not be passed on
the consumers. Also the high overhead cost of Rs 1.90 per loaf
against the industry norm of Rs.0.90 per loaf added to the problem.
In September, 1997 the government approved 50% disinvestment

of MFIL to strategic partner through competitive global bidding. In
October 1998, ANZ investment Bank was appointed as the global
advisor for assisting in disinvestment. In January, 1999
the government decided to raise the disinvestment level to 74 %
and an advertisement inviting expression of interest from
perspective strategic partners was issued in April, 1999.
DISINVESTMENT PROCESS:-
In a response to the advertisement 10 parties submitted Expressions

of Interest. Out of these, 4 conducted the due diligence of the
company, which included visits to Data Room, interaction with the
management of the MFIL, and site visits. In October, 1999 post due
diligence, 2 parties remained in the field, and on the last day for
submission of the financial bid (15.10.99), the only bid received
was that from Hindustan Lever Limited (HLL). Finally in January,
2000, the Government approved the selection of HLL as the
strategic partner in and the deal was closed on 31.1.2000.
VALUATION OF MFIL
The 100% value of MFIL by different methodologies is give

below:
VALUTION ASSUMPTION VALUE (IN RS. CR.)

Sales Multiple
Transaction Multiple 78.55
Balance Sheet 28.51
Net Worth
Asset Valuation 68.18
Liquidation
Market Value of Land & Unrestricted use 109
Buildings
Discounted Growth 32.11
cash flow in market share
Sales realization for 74% equity was Rs.105.45crore. This

corresponds to Rs.142.50crore for sale of 100% equity. The
agreement with HLL provided for post-closing adjustments –
difference between net working capital as on 31st March 1999 and
net working capital on closing date 31st January 1999 and increase
in debt amount on closing date 31st January 1999. Due to reduced
working capital and increase in debt amount, the government paid
back Rs.10.94crore. The net realisation was Rs.94.51 crore for 74%
equity.
POST DISINVESTMENT PROCESS
MFIL: Post Disinvestment Performance
Details Pre- Disinvestment Post-Disinvestment

YEAR 1988-1989 1999-2000 2000-2001
SALES - BREAD 89 78 102
ENERGY FOOD 71 71 66
TOTAL 160 149 168

Source: Ministry of Disinvestment, Government of India
• The decline in the sales of Modern Bread, which continued

till the beginning of 2000, was arrested. Weekly sales in
December 2000 were around 44lakh SL, which is a 100%
increase over the figure of April 2000.
• As on 31.12.2000, HLL has extended secured corporate loans

to MFIL to the extent of Rs.16.5crore for meeting the
requirement of funds for working capital and capital
expenditure.HLL has provided a corporate guarantee to
MFIL’s banker, viz., Punjab National Bank, which has helped
the Company in getting the interest rate reduced considerably
to the extent of 3-4% of its earlier borrowing cost.
Steps were taken to improve the quality of bread, its packaging and
marketing with trade-promotion activities, and to train the
manpower in quality control systems. In November, 2002 wages
have increased by an average of Rs.1800 per employee. Rs.30crore
was spent for VRS. Again Rs. 7 crore were infused for safety &
hygiene purposes at various manufacturing locations.
The Government was also entitled to ‘Put’ its share of
remaining equity of 26 % at Fair Market Value for 2 years
from 31 January 01 to 30 January 03. The Government
exercised this option and thereby received Rs.44.07crore on
28th November 02.
THE FAILURE:-
Despite HUL’s best efforts MFIL continued to make losses, HUL
had invested 157 crore in MFIL’s equity. In 2005, its losses were
Rs 15 crore and accumulated losses were Rs 79 crore. At the
operating profit level, before interest and depreciation, it did make
a profit though of Rs22crore compared to a loss of Rs 7 crore in the
previous year.
Bread sales grew by about 7%. The company suffered as it lost

some lucrative government contracts and changed its operational
structure. Hence overall sales declined by 35% to Rs95crore.
However, HUL did enjoy tax benefits as MFIL was a sick
industrial unit. The company put MFIL on the block in 2006 but
failed to clinch a deal.
However, HUL still was unsuccessful in turning around the

business and due to high employment costs and low margins. As
per the company, the culture of MFIL was a complete misfit with
its own. The company has committed a mistake while conducting
the due diligence process.
Bharat Aluminium Company
Limited
Company profile
Bharat Aluminium Company Limited, set up in 1965 at
Korba in Madhya Pradesh to manufacture aluminium rods and
semi-fabricated products, is today the third largest player in the
Indian aluminium industry.
BALCO has its corporate office in New Delhi. Its main plant and
facilities are situated in Korba(Chhattisgarh), which includes
bauxite mines, an alumina refinery, a smelter and a fabrication
unit, besides a 270 MW power plant which meets a substantial part
of the unit's power requirements. It also has another fabrication
unit in Bidhanbagh (West Bengal). The refining capacity of
BALCO is 2,00,000 tonnes per year and its smelting capacity is
1,00,000 tonnes per year.
THE DISINVESTMENT DECISION
The Government of India had 100% stake in BALCO Prior to

disinvestment. In 1997, the Disinvestment Commission classified
BALCO as non-core for the purpose of disinvestment and
recommended immediate divestment of 40% of the
Government stake to a strategic partner, and reduction of the
Government stake to 26% within 2 years through a domestic
public offering It further recommended divestment of the entire
remaining stake at an appropriate time thereafter. The Cabinet
accepted the recommendation of the Disinvestment Commission
for divestment of 40% stake through a strategic sale and further
divestment through the capital market.
Later, in 1998 the Disinvestment Commission revised its
recommendation and advised the Government to consider 51%
divestment in favour of a strategic buyer along with transfer of
Management, which was accepted by the Cabinet. The Government
thereupon appointed M/s Jardine Fleming as Advisor to assist in
the sale of its 51% stake in BALCO to a strategic buyer.
This was followed by BALCO's equity being reduced by 50%

thereby reducing the subscribed share capital to Rs.244 crore from
Rs.488 crore. As a result, the Government received Rs. 244 crore
from the capital restructuring of BALCO and another Rs. 31 crore
as tax on this amount, prior to disinvestment. The strategic sale
process for BALCO started in late 1997, after the first decision of
the Government, and finally came to end in 2nd March 2001. The
51% stake was sold to Sterlite Industries, the highest bidder, and
fetched the Government Rs. 551.50 crore. The government thus
recovered Rs 827.50 crore from this privatization.
PRE DISINVESTMENT PERFORMENCE
DETAILS 1997-98 1998-99 1999-2000
Sales 848.51 870.90 896.64

Other income 48.10 68.84 70.08
Total 896.61 939.80 966.72
income(1+2)
Total 714.08 758.24 806.28
expenditure
PBDIT(profit 182.53 181.56 160.44
before interest
depreciation
and taxes)
PBIT(profit 141.53 140.64 122.01
before interest
and tax)
PBT(profit 134.87 134.34 116.19
before tax)
PAT(profit 79.84 76.32 55.89
after tax)
Dividend 20.00 23.00 18.00
VALUATION OF 51% STAKE:
There were three bidders viz the US-based Alcoa and Indian
market leader Hindalco and Sterlite. Sterlite’s financial bid was the
highest among the bidders, according to an official release by the
government. The company was valued by three different methods:
Discounted cash flow

Comparative valuation
Balance sheet and asset valuation
VALUATION METHOD VALUE (IN RS. CR.)
DISCOUNTED CASH FLOW 651.2 TO 994.7
COMPARABLES 587.0 TO 909.0
BALANCE SHEET 597.0 TO 681.9
ASSET VALUATION 1054.9 TO 1072.2
The valuation was applied by the official valuer J P Morgan. The

reserve price of Rs 514.40 crore was reached by marking up the
valuation, arrived at by using the discounted cash flow(DCF)
technique, by 25 per cent, used as the control premium.
POST SALE SCENARIO
Post sale, a number of doubts have been raised by various quarters

on the disinvestment of
BALCO, especially with regard to
· Transparency
· Valuation
· Protection of employees’ interests
No sooner was the BALCO deal announced than it created a furor

within and outside Parliament. The opposition raised eyebrows.
There was distrust from state government and the workers of
BALCO went on a 67 days strike. It seemed as if the Sterlite
management had to sweat a lot before it actually got the right over
the catch it craved for. This finally came to an end when the new
management stroke a deal with the employees. Several new steps
were Undertaken, some of which are:
· The new management had introduced VRS i.e. Voluntary

Retirement Scheme from 31.07.01 to 16.08.01.
981 applications (151 executives and 830 workers) were
received. 694 old VRS applications were pending. A total of 956
applications were accepted mostly where units were lying closed.
· In spite of losses of Rs. 200 crore due to the strike, an exgratia

payment of Rs. 5000 was made to all employees.
· Workmen get a guaranteed benefit @ 20% of basic pay.
· An Increase in allowances was also announced:

○ Night shift allowance: Rs.10 to Rs.20 per shift.
○ Canteen allowance: Rs.400 p.m. (instead of subsidised canteen

facilities)
○ Education allowance: Rs. 50 to Rs. 75 per month
○ Hostel allowance: Rs.150 to Rs.200 per month
○ Scholarship amount to meritorious children doubled.
○ Leave Travel Assistance of around Rs. 6000 as cash every year.
○ Conveyance allowance: Scooter users Rs. 400 to Rs. 500 pm,

Moped users Rs.240 to Rs. 350 pm
· Several new practices introduced. Few were:

○ Job rotation
○ Appraisal system
The new management is proposing an investment of Rs. 6000

crore which will increase production 4 times.
THE REAL PICTURE:
The disinvestment of 51% stake in BALCO by the government of

India towards a strategic partner was backed by two justifications:
· From a market share of around 17 per cent in 1995-96 in the
primary aluminum Business, BALCO’s share had dropped to 14
per cent in 1998-99. Several reasons were mentioned that were
responsible for hindering its growth. They were:
○ Lack of economies of scale
○ Old age technology
○ Overstaffing
○ Operational bottlenecks
○ Lack of managerial autonomy
Thus, a complete review and restructuring was urgent to enable the

company to stand a better chance to stake its claim in the globally
competitive Indian aluminium Industry.
· Although there were three bidders, Sterlite’s financial bid was the
highest among the bidders, according to an official release by the
government. Intact, government claimed that it was getting a price
greater than expected.
However, there are certain facts from the other angle that demand
attention. The following tries to uncover some of them:
Government had no modernisation and expansion under

consideration for the aluminium giant:
To quote the Disinvestment Commission: "BALCO as a PSU

has suffered from procedural bottlenecks and lack of
managerial autonomy. The CRM project at Korba Has been
cleared after eight years with near-doubling of the capital
outlay.
The company was not able to get clearance from the
government for setting up 100% captive power generation. As
a result, the company had to depend on high cost power from
the State Electricity Board which resulted in avoidable cost
increases. The delays and the lack of autonomy have certainly
affected its operating profits which would have been much
higher had it been able to implement these projects earlier."
Thus even the Disinvestment Commission's recommendation that

the government should resort to a strategic sale of 40 per cent of
BALCO equity can be seen as misplaced.
What was required instead was a reorganisation aimed at allowing
BALCO the freedom to use its own capacity to mobilise resources
to modernise, expand its captive power facility and raise its
profitability. In practice, as a prelude to the privatisation process,
in March 2000 the subscribed share capital of BALCO was
brought down to Rs.244 crore from Rs.488 crore, by appropriating
part of the Rs.437 crores into the government's account. This was a
clear indication that modernisation and expansion was not even
under consideration.
• BALCO, a profit making PSU, was valued at what is

considered a throwaway price:
Cash flows determined by undermining profitability:
This also implies that BALCO's profitability has been undermined

by the government's own role in stalling modernization and
expansion at Korba. Hence, the then profit performance of the unit
cannot be the basis on which the future profile of profits could be
estimated. However, the tendency for Arun Shourie, the
Minister for Disinvestment, to emphasize repeatedly that profits
earned by BALCO had fallen from Rs.163 crore in 1996-97 to
Rs.25 crore in 2000-01 suggests that this stream of profits has
entered into assessments of the future profile of profits that have
been discounted to value the worth of the company.
This amounts to squeezing the profits of a public sector unit and

then using that to undervalue the firm, consciously or otherwise.
○ BALCO’s assets were undervalued:
It is still being argued that a direct valuation of BALCO’s assets
was worth around 10 times the value paid by Sterlite. In fact,
officials from the power sector have Argued that the captive power
plant alone would cost more than the sum being paid by Sterlite.
According to reports, a senior official held that if Sterlite were to
invest in a captive power plant of the kind owned by BALCO, it
could cost Rs.1, 215 crore and this figure matters, for the value of
the plant at Korba (set up in 1988-89) is still substantial, since a
thermal power plant has a lifespan of around 35 years.
• BALCO was self-sufficient to fund its projects:
Since BALCO was a profitable and cash-rich public sector

corporation with an extremely low debt to equity ratio, it would
have been possible for it to finance its proposed modernisation
plan (estimated to cost Rs.1, 000 crore) without recourse to
budgetary funds. The project was to include the setting up of a cold
rolling mill, the expansion of captive power generation and
modernisation of existing facilities. This would have allowed the
corporation to improve its profitability and increase the dividend it
pays to the exchequer.
• No transparency in the deal:
The valuation procedure that yielded the undeclared reserve price

below which the government was not willing to sell has neither
been transparent nor undertaken by qualified valuers capable of
valuing the plant and machinery of the company and the
bauxite mines that it has on lease. The whole procedure had been
gone through in haste. Even though the bids had been invited some
time back, the valuation of the firm, the setting of the reserve price
and the acceptance of Sterlite's bid were all allegedly done within
the span of a month. Leaked evidence of undue haste has
accumulated and this further puts a question mark over the
government's claims of transparency in the execution of the deal.
CONCLUSION:-
A combination of inappropriate procedure, undue haste and

unwarranted secrecy had created a veritable mess.This was
followed by a roar and strike amongst the company workers.
There was an opposition from the state government to the extent of
throwing an offer to buy the Centre’s 51 % stake at Rs 5.52 bn.
The claims on the lack of transparency are being
continued till date. As stated by The Times of India, December 28,
2009, in response to an RTI query filed by advocate Arjun
Harkauli, the Central Information Commission (CIC) observed that
the tender documents and minutes pertaining to the Rs 551.5-crore
divestment of Bharat Aluminium Company (BALCO) in
Chhattisgarh’s Korba district eight years ago could not be traced
by the ministries concerned.
BALCO marks the first ever disinvestment deal in the history of
India and is stained with several question marks and pointing
fingers. The deal certainly did not occur the way it was meant to,
did not bring the profits to the extent possible, nor was it intended
towards any social cause. Corruption and lack of accountability
still remain the two worms eating away the Indian economy.
VIDESH SANCHAR NIGAM LTD.
ABOUT VSNL
In 1947, the Overseas Communication Service (OCS)
was established in the Department of Telecommunications (DoT).
Videsh Sanchar Nigam Ltd (VSNL) was created from the OCS as
a government owned corporate in 1986. The government felt that
corporatization would enable it to raise financial resources, an
activity that would not have been possible under the government
framework. It was envisaged that this would also enable greater
freedom to managers to plan, operate, develop and accelerate
the international telecommunication services. In the initial years,
VSNL offered voice telephone, telex, telegraph, television,
bureaufax etc. Efforts had started to increase India’s connectivity
through investments in projects like submarine cables. Compared
with 2.69 billion telephone minutes in 2000-1, in 1986-7 the
figure was 0.13 billion minutes. Table 1 gives some comparative
figures of VSNL’s performance over the years.
YEAR VSNL WORLD
1994 0.742 54.6

1995 0.972 61.6
1996 1.147 71.7
1997 1.384 82.5
1998 1.684 93
1999 1.935 108.9
2000 2.245 132.7
The ratio of inbound to outbound calls had been 4:1 in 2001. One
important reason for this is the discriminatory pricing by VSNL.
Another factor is that India is a much poorer than the typical
countries to which it connects (U.S., Europe and Gulf), so that
inbound calls are bound to be more than outbound calls.
For the year 2000-1, the total revenue for VSNL was Rs 6,430.7
crore.
The profit after tax stood at Rs 1,778.8 crore. This resulted in
earnings per share of Rs 62.41 out of which Rs 50.00 was declared
as the dividend per share. VSNL had no debt. Its P/E ratio of each
VSNL share was 4.68.
It is seen that a large part of the costs is the network and
transmission charge.
Much of this was charges paid out to the DOT as traffic costs. In
this fixed revenue agreement, VSNL paid Rs 2,734 crore to DOT
and Rs 1,386 crore to foreign operators during 2000-1 [VSNL
Annual Report, 2000-1].
DISINVESTMENT IN VIDESH SANCHAR NIGAM

LIMITED
1. Government had approved sale of 25% equity share holding out

of a total government share holding of 52.97% in Videsh Sanchar
Nigam Limited (VSNL) on 5.02.2002. The total paid-up capital of
VSNL is Rs.285 crore, the Govt. holding being Rs.151crore.
Rs.71.25crore of this equity is being sold to M/s Panatone (Tata
Group) at a price of Rs. 1439 crore.
2. Government had decided to disinvest in VSNL in January 2001
and the advertisement for inviting Expression of Interest was
issued in February 2001. Several interested parties had submitted
their Expression of Interest. After the process of due diligence was
completed and the transaction documents frozen, financial bids
were invited from the bidders on 1.2.2002. Two bids were
received.
3. SBI Capital Markets Ltd. and CSFB were appointed as the

advisors at a fee of 0.19% of the transaction value. M/s Crawford
Bayley & Co. is the legal advisor and the asset valuer is Price
Waterhouse Coopers Ltd. After considering the Advisor's report,
the Evaluation Committee/IMG/CGD submitted their
recommendations regarding acceptance of the higher bid to the
CCD.
4. The Government has in the process of disinvestment in VSNL

received approximately Rs.3689 crore, Rs. 1439 crore as the bid
price, Rs. 1887 crore as dividend and Rs. 363 crore as dividend tax
(table attached). Thus, the Government has sold its shares at a
price of Rs. 202 per share, taken additional amount as dividend,
special dividend and dividend tax. Besides the Government has
also taken measures to take out surplus, yet very valuable land
(value Rs.778 crore) from VSNL, and also restrict use/sale of land
through provisions in transaction documents.
5. The market price of VSNL shares as on 1.2.2002 was Rs.158/-.

The Government had earned Rs.10.4 crore per year on 25% of its
equity in the last eight years. This year the Government has earned
Rs. 3689 crore from sale of VSNL and if this money is kept in the
bank it would earn an interest of 368.9 crore, i.e. the Government
would gain more than Rs. 350 crore every year.
6. The strategic partner has been provided a call option for the 5th
year subject to the condition that the Government would be
retaining at least one share and hence one vote position to enforce
its affirmative vote on assets. In addition, 1.97% share were given
to employees, at confessional rates.
After partial disinvestments through sale of shares, Videsh Sanchar

Nigam Limited (VSNL) underwent a strategic sale to the Tata
Group in April 2002. Subsequent to the sale, the government
holding became 26% and the Tata Group's 45%. The sale was
followed by VSNL's decision (taken by its new owners the Tata’s)
to invest Rs 1,200 crore in Tata Teleservices Limited (TTL), a
wholly owned subsidiary of the Tata group. This led to concerns
regarding the appropriateness of the decision, since it involved a
cash outflow of Rs 1200 crore to a fledging private company in the
telecom sector.
REASONS FOR DISINVESTMENT

The Ministry of Disinvestment cited the non availability of funds
for critical areas like education, health and social infrastructure
because of fiscal burden in the flow of government funds into
PSUs, as a strong argument for the disinvestment. There was also a
need to stem further outflow of resources into unviable, non-
strategic PSUs. The divestment was also expected to reduce the
unmanageable public debt.
PRIOR TO DIVESTMENT:
When the privatization process of VSNL began in 1991-2, there
was no blueprint for the same. In retrospect, there have been three
phases.
The offloading of shares to domestic investors;
The offloading of shares in the international market;
Strategic sale.
In 1991-2, VSNL disinvested equity of the face value of Rs. 12

crore in favour of various financial institutions, mutual funds and
banks. As of March 1993, out of a paid up equity capital of Rs 80
crore, the Government of India (GoI) held 85% and financial
institutions, banks and the public held another 15%. The shares
were listed in the stock exchanges of Mumbai, Kolkata, Delhi and
Chennai. As of 1995, the share of the GOI had come down to
82.02%. This accompanied the transfer of shares from the GOI as a
bonus offer. The Indian investor’s share holding remained around
16.5% in 1999-0 which came down to 9.97% (including the 1.96%
held by employees) as on March 31, 2001.
GDR ISSUES
The Global Depository Receipt (GDR) issue for VSNL was the
first of its kind by the GOI. It helped VSNL to raise a substantial
surplus that was earmarked for investments for its growth. The first
GDR issue (listed on the London Stock Exchange) was offered in
1996-97. It fetched US$ 526.6 million in the market. At that time,
it was the largest GDR issue from India. The offer was
oversubscribed, drawing 662 investors from 28 countries. The
second GDR issue was completed in February 1999. It involved a
divestment of 10 million shares by the government of India to
international investors. Priced at US$ 9.25 it was at a 15%
premium on the last closing domestic price of Rs. 682 and a 10%
discount to the ten-day average GDR price of US$ 10.275. The
government realized US$ 185 million from the sale of 20 million
GDRs with each GDR being equivalent to half a share. The
organizational problems in VSNL around the time of the second
GDR issue could have been one of the factors that led to lower
valuations. During the process of the second GDR issue, the VSNL
staff had threatened a walkout owing to the pending issue of
allotting shares to employees. Due to delays in the government
processes, VSNL did not have a chief executive and many other
crucial director level posts were vacant. The first GDR’s
Investment promises were not fulfilled and a promised domestic
offering had not been made.
THE VALUATION
The government had fixed a reserve price of Rs 1,218.375 crore
for its 25% stake in VSNL. In an effort to bolster the VSNL
valuation, the GOI intended to compensate the loss of monopoly
through special concessions. The government owned MTNL and
BSNL would have to use VSNL as their ILD carrier for two years
on the condition that it would offer the most competitive terms in
the market. VSNL would also get a free license to provide NLD,
and a nationwide ISP license. In addition, VSNL possessed prime
real estate in Mumbai and Delhi and also cable capacities to
facilitate international traffic. One of the major assets was the cash
stockpile of Rs 5,182 crore which was considerable even after
disbursement of the special dividends. Among the concerns were
the loss of monopoly and the uncertainty of the loyalty of BSNL
and MTNL to continue to use VSNL for their international traffic,
the dipping share prices of VSNL and the falling accounting rates
that could lead to lower revenues. One of the major issues involved
during the valuation process included the management of real
estate owned by VSNL. The disinvestment process stipulated that
at least four VSNL surplus properties valued at Rs 778 crore would
not be available and were to be disassociated from VSNL after the
disinvestment. Even so, real estate value that would accompany
VSNL was around Rs 1,200 crore
CONCLUSION:
The privatisation of VSNL is seen as leading to public expenditure
accountability through a realisation of higher return on the
government’s asset formation. It also leads to an appreciation of
the remaining shares that are held by the government. To the
citizen, the process is a step towards the provision of better quality
communication services at the most competitive prices. Public
flotation of stock might have led to better values for VSNL's stock,
had the company been correctly `prepared' for privatisation. Thus,
disinvestment of VSNL was clouded with controversies and
speculations and this fact further indicates the failure of the
disinvestment policy adopted in the case of VSNL, and also
highlights the wrong reasons for which the disinvestment of VSNL
took place and its ultimate failure to match the required
expectation of such a step. This case on VSNL further corroborates
to the fact, that the disinvestment policies adopted in India have
been a failure so far.
CRITICAL ANALYSIS
REVIEW OF DISINVESTMENT AND PRIVATIZATION
Disinvestment was initiated by selling undisclosed bundles of

equity shares of selected central PSEs to public investment
institutions (like the UTI), which were free to dispose of these
shares in the booming secondary stock market. The process
however came to an abrupt halt when the market collapsed in the
aftermath of Harshad Mehta led scam, as the asking prices
plummeted below the reserve prices. Since the stock market
remained subdued for much of the 1990s, the disinvestment targets
remained largely unmet. The change of government at the Centre
in 1996 led to some rethinking about the policy, but not a reversal.
A Disinvestment Commission was constituted to advise the
government on whether to disinvest in a particular enterprise, its
modalities and the utilization of the proceeds. The commission,
among other things, recommended (Disinvestment Commission,
1997):
• Restructuring and reorganization of PSEs before disinvestment,

• Strengthening of the well-functioning enterprises, and
• To utilize the disinvestment proceeds to create a fund for
restructuring of PSEs.
The new government that came to power in 1998 preferred to sell

large chunks of equity in selected enterprises to “strategic”
partners – a euphemism for transfer of managerial control to
private enterprises. A separate ministry was created to speed up the
process, as it was widely believed that the operating ministries are
often reluctant to part with PSEs for disinvestments as it means
loss of power for the concerned ministers and civil servants.
The sales were organized through auctions or by inviting bids, by
passing the stock market (which continued to be sluggish), justified
on the grounds of better price realization. Not withstanding the
serious discussion on the utilization of disinvestment proceeds,
they continued to be used only to bridge the fiscal deficit.
Strategic sale in many countries have been controversial as it is
said to give rise to a lot of corruption, discrediting the policy
process. Aware of such pitfalls, efforts were made to be
transparent in all the stages of the process: selection of consultants
to advice on the sale, invitation of bids, opening of tenders and so
on. Between 1999 and 2003, much greater quantum of public
assets were sold in this manner, compared to the earlier process,
though the realized amounts were consistently less than the targets
– except in 2003.
There are series of allegations of corruption and malpractice in

many of these deals that have been widely discussed in the press
and the parliament. Instances of under pricing of assets, favoring
preferred buyers, non-compliance of agreement with respect to
Employment and retrenchment, and many incomplete contracts
with respect to sale of land, and assets have been widely reported.
PERFORMANCE OF PSES AFTER

DISINVESTMENT & PRIVATIZATION:
In principle, disinvestment is unlikely to affect economic
performance since the state continues to be the dominant
shareholder, whose conduct is unlikely to be influenced by share
prices movements (or return on equity). Privatization can be
expected to influence economic outcome provided the firm
operates in a competitive environment; if not, it would be difficult
to attribute changes performance sole or mainly to the change in
ownership.
PROBLEM OF CORPORATE GOVERNANCE:
In the evolution of modern capitalism, with separation of

ownership from control as firms grow in size and complexity,
agency problem arises: how to ensure that the managers
(“promoter” in Indian parlance) work to maximize return on
shareholders’ capital. Given the information asymmetry, managers
could pursue their private goal disregarding the shareholders’
interests. This is at the heart of the problem of modern literature on
corporate governance. Various institutional and contractual
mechanisms have evolved in the last century to grapple with this
Problem. In the context of efficiency of resource use in a socialist
economy, to solve the problem of how to ensure that managers of
public firms maximized efficiency consistent with the goals set by
the central planners. However, looking at the microeconomics of
firms in a socialist economy, it has been argued that they were
unlikely to be efficient because of the soft budget constraint: that
is, firms do not go bankrupt or managers do not lose their jobs for
their poor performance. Firms can always renegotiate their
contracts with the planners to hide their inefficiency.
In India public sector firms are often face with multiple objectives,
and multiple owners or monitors – central government, state
governments, legislators, public auditors and so on. Managers may
not necessarily maximise profits as they could always highlight a
particular achievement to suit their convenience. Managers may be
risk averse as they face constitutionally mandated procedural audit
by the CAG if an enterprise is majority government owned.
Managers’ efficiency objectives may come in conflict with
dysfunctional political interference in operational matters (at the
expense of policy issues) to meet narrow political goals. However,
at the same time, poor performance by managers does not involve
any punishment as they can re-negotiate the output prices,
budgetary support, or have access to soft and/or government
guaranteed loans; in other wards they do not face a hard budget
Constraint. Thus, the agency problem is endemic to all economic
systems. Moreover, problem of soft budget constraint is not
restricted to socialist economies but evident in market economies
as well when the firm is question is large and considered of
strategic importance for the economy, though perhaps too much
lesser extent. Rescue of Chrysler Corporation – the third largest
automotive firm in the US – in the late 1970s and United Airlines
after “9/11” in the US are clear instances of state support for
failing companies. Such support is more common in financial
sector, where failure of firms can have significant systemic risk.
DISINVESTMENT IS NOT A GREAT PIECE OF REFORM
Disinvestment is considered desirable for two sets of reasons. One

has to do with the money that flows into the government’s coffers
as a result of the stake sale, augmenting the government’s non-
borrowed receipts and, thereby, reducing the fiscal deficit. The
other set of arguments of disinvestment has to do with efficiency.
Disinvestment would bring in shareholders who would, it is hoped,
question arbitrary decisions by the government that harm the
finances of these public enterprises. Both benefits are exaggerated.
Look at the reduction in the government’s fiscal deficit brought
about by disinvestment. The effect of selling shares to the public is
not materially different from the effect of selling government
bonds, as far as the quantity of the public’s savings mopped up by
the government is concerned. In the year in which the
disinvestment takes place, the private sector would feel squeezed
for funds exactly as it would if the government were to raise the
same amount by issuing bonds. The public ends up holding shares,
in one case, and bonds, in the other. In either case, the public’s
savings stand transferred to the government, rather than to the
private sector looking for funds to invest. That said, the future
effect of selling shares would prove superior, from a budgetary
point of view, to the future effect of issuing bonds. By issuing
bonds, the government takes on the obligation to pay interest, year
after year. By selling shares, the government forgoes dividend
receipts on the shares sold. Both widen the fiscal deficit in the
subsequent years. However, the interest payment obligation taken
on to get one rupee from selling bonds would be significantly
higher than the dividend forgone per rupee received from selling
shares in public enterprises. This is because these shares would be
valued significantly higher, in terms of asset price per rupee of
income accruing from that asset, than the bonds sold to fill the
Fiscal gap. What about the efficiency gains at the enterprise level
by inducting non-government shareholders into the ownership
structure, and possibly onto the board of directors? There is
likely to be some additional benefits, given the political culture
that treats public enterprises as sources of revenue for the minister
(and officials) in charge of the controlling ministry. However, the
overall reform project entails improving corporate governance
across the board to a level where the running of any company
seeks to maximise the returns to shareholders regardless of who the
shareholders are, whether the state or private shareholders. If this
goal is realised, efficiency arguments for disinvestment would
lose steam.
More germane is to what end the government keeps some

enterprises under its ownership and control. If it wants to own
nuclear power companies because of the risks involved, or if it
wants to own the Food Corporation of India to ensure food
security, the companies in question sub serve public goals outside
the calculus of commercial profit and loss. It does not make sense
to privatize such public enterprises. Many other public enterprises
were set up at a time when the private sector was too weak to
create production capacity in areas considered vital for the
economy’s long-term dynamism. Steel, or machine tools, for
example. Now, every Punj, Mittal and Jindal makes steel, of the
highest quality and lots of it. Is there any strategic goal being
served by retaining steel production in the public sector, anymore
than is served by keeping hotels and banquet halls in the public
sector? Satellite, aero plane and rocket manufacture, in contrast,
are still beyond the Indian private sector’s capacity. It might
arguably make sense for the government to own enterprises in
these sectors. What are strategic sectors would change, with time.
The government should ideally exit from areas that are no longer
strategic, and use the re-sources to build new strategic capability.
However, we don’t live in an ideal world. Even if the government
continues to own some companies in non-strategic sectors, but
these companies are professionally run as commercial enterprises,
there would be little efficiency loss to the economy as a whole.
Therefore, disinvestment is not any key reform.

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Project ON Disinvestment in India A Failure Story

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PROJECT

Intuition and concepts constitute ...the elements

We are indebted to our project guide Mr.G.S.Khera

We would also like to thank our batch mates for the

Indian privatization came out of the shadows, however, when the

Chapter 2 – Public Sector in India

Chapter 3 – Disinvestment-Definition, Methods and

Chapter 4 - Disinvestment in India-Policies, procedure and

Chapter 5- Case studies

Chapter 6 – Critical Analysis

1. To Analyze the Disinvestment process in Indian Public

2. To study the disinvestment done was a Success or a Failure

The report aims to study the evolution of disinvestment in India

The project enables us to discover and highlight several instances

After such an insightful analysis, we are in a position to say that

The report tries to study and analyze the disinvestment in India

We further study the objectives of disinvestment and the process

Several legendary cases of disinvestment like the MFIL, BALCO,

1. PUBLIC SECTOR PERFORMANCE SINCE 1950, A

• a rise in physical efficiency in electricity generation

2. DISINVESTMENT IN INDIA BY: SUDHIR NAIB

The liberalization of the Indian economy remains an ideological

The process of disinvestment in India has been fraught with

In macroeconomics, especially after the Latin American debt and

At the micro level, the change in ownership is often advocated to

Employing about 19 million persons, Public Sector currently

In 1991, a small fraction of the equity in selected central PSEs was

EVOLUTION OF PUBLIC SECTOR:

In early years of independence, capital was scarce and the base of

The main objectives for setting up the Public Sector Enterprises as

• To help in the rapid economic growth and industrialization

PROBLEMS OF PUBLIC SECTOR

The most important criticism levied against public sector

Disinvestment refers to the action of an organization or the

There are various types of disinvestment. Some of them are as

1. OFFER FOR SALE TO PUBLIC AT FIXED PRICE:

In this type of disinvestment, the government holds the sale of the

In this type, significant management rights are transferred to the

This is essentially targeted at the FII (foreign institutional

4. ASSET SALE AND WINDING UP:

This is normally resorted to in companies that are either sick or

Privatization intended to achieve the following:

• Releasing large amount of public resources

There are three broad methods involved, which are used in

1. NET ASSET METHOD:

2. PROFIT EARNING CAPACITY VALUE METHOD:

The profit earning capacity is generally based on the profits

3. DISCOUNTED CASH FLOW METHOD:

LEGAL ISSUES IN THE DISINVESTMENT

Legality of the disinvestment process has been challenged on a

1. Privatisation is a policy decision, prerogative of the executive

2. Privatisation of the PSE created by an act of parliament would

The basic objective of starting Public Sector in India was to build

1. LOW PRODUCTIVITY OF INVESTMENT

From 1950-51 to 1980-81, India’s growth rate was roughly

Year 1950-51 1960-61 1970-71 1980-81 1989-90

The fiscal deficit of the central govt rose consistently from 4% in

Fiscal Deficit of Government 1975-76 to 1990-91

Fiscal Budget Primary Revenue Monetised

• A significant factor was government’s non-plan expenditure

• There were huge net outflows of NRI deposits from October

• Foreign Exchange Reserves were reduces $ 1 Billion which