DISINVESTMENT

Boon or a Bane

PETROCHEMICAL INDUSTRY

Submitted To: Prof. Rajan

Submitted By: Shervin Mashregi (09) Shyam Palan (82) Neha Sawant (95) Chetan Talan (107) Pummi Tiwari (111) MMS-I, Div-B, BGIMS

INTRODUCTION
Indias situation during 1991 1980s onwards, the countrys fiscal deficit started to increase to dismal levels. While fiscal deficit was 5.4% of the GDP in 1979-80, it went up to as high as 10% by the end of the decade (1989-90). An escalation in the governments current expenditure was mooted as the reason for this discouraging situation. Interest payment ate up a large share of government expenditure in the absence of returns on productive capital expenditure and investment financed by debt, which in an efficient system, would have eased the crisis. A souring fiscal deficit and the Gulf War of 1990 inaugurated a chain of macro-economic problems. NRI deposits started flowing out and the Balance of Payment condition deteriorated. The government took huge loans from the IMF (US$2.4 billion in January 1991). The foreign exchange reserves sharply went down so much so that in July 1991, it was a mere US$ 1 billion, sufficient to finance imports not even for a fortnight. It was in this atmosphere of crisis that the newly elected government in 1991 brought in a bagful of reforms, primarily aimed at macro economic stabilization and reconstituting the industrial sector. Initiation of the Disinvestment Process The government at this juncture considered the possibilities of raising revenue by disinvesting minority share-holdings in public sector. The Sick Industrial Companies Act was passed in the year 1985 with the objective of determining sickness in the industry and expedite the revival of potentially viable units or closure of unviable units. It was expected that by revival, idle investments in sick units will become productive and by closure, the locked up investments in unviable units would get released for productive use elsewhere. The Department of Economic Affairs, in February 1991, submitted a paper to the Cabinet Committee of Political Affairs, on the approval of which, the first announcement regarding investment was made. It was decided to disinvest 20% of the shares in selected public sector units. In the initial phase (1991-1996), partial disinvestment was undertaken. In the next stage (1996-98), disinvestment was done in a headstrong manner with the constitution of the Disinvestment Commission. In 1999, the Department of Disinvestment was formed giving the process a whole new direction. DISINVESTMENT Disinvestment involves the sale of equity and bond capital invested by the government in PSUs through securitization. Securitization is a structured financial process which involves pooling and repackaging of cash flow producing assets into securities that are then sold to investors. The government and not the PSUs receive money from disinvestment.

Objective of the disinvestment Primary objectives : To improve performance of units To reduce budgetary deficits To overcome the problem of political involvement in PSUs Enable the government to concentrate on Social development To reduce the financial burden on Government. To improve public finances. To introduce, competition and market discipline. To find growth. To encourage wider share of ownership.

To depoliticize essential services.

Advantages of disinvestment policy 1. 2. 3. Most of the public sector companies are loss-making and are a burden on public funds. Since the government is corrupt, the public sector companies are also corruptly managed. In the hands of the private sector, the public sector companies would be run more efficiently. 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 a. b. The private sector must believe that it is capable of generating more profits than the public sector. The asset must be undervalued so that the actual rate of return for the private buyer turns out to be higher, which really means that the State exchequer has lost the money. According to experts, whatever be the technique, to think that sale of PSU shares is the 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. In an ever growing economy, investment by the government alone would not suffice. It is of absolute necessity that even private capital is entertained at the maximum level. The most economically successful country has the highest amount inflow of private capital. After 1991, the private inflow of capital has been high. And the phenomena of disinvestment have constantly supported this inflow of private money. The money received from the process of disinvestment can be utilized to compensate the deficit finance. The market thrives if there is sufficient amount of competition. If new firms enter into the market, then the competition increases which in turn makes the companies more competitive an advantage for the consumers as they may experience choice. The PSUs which have undergone this disinvestment were (prior to the disinvestment) low productivity companies. Thus when the decision making capacity was given to private players, there has been a huge turn over with respect to optimum utilization of resources, capacity to invest, and profit. This is because the focus has been shifted to the PSUs as a profit making company. Disadvantages of disinvestment policy Poor performance of disinvestment in India Poor Management Lack of environment creation Delay tactics Selfish interests Some PSUs were not worth (Bharat Leather Corporation, Scooters India Ltd) Unproductive use of disinvestment proceeds Disinvestment and Unemployment Profit hungry private sector

Lower value of realization Privatization leads to concentration of wealth

PETROCHEMICALS Petrochemicals are chemical products derived from petroleum. Some chemical compounds made from petroleum are also obtained from other fossil fuels such ascoal or natural gas, or renewable sources such as corn or sugar cane. Indian Petrochemicals Corporation Limited (IPCL) is a petrochemicals company in India. It was established on March 22, 1969, with a view to promote and encourage the use of plastics in India. Its business consists of polymers, synthetic fibre, fibre intermediaries, solvents, surfactants, industrial chemicals, catalysts, adsorbents and polyesters. Disinvestment of IPCL After the usual examination of the recommendations of the disinvestment commission and appointment of advisors etc. and the calling of bids the company was finally disinvested in favour of highest bidder, Reliance, and the management was passed over to them in june 2002. The government realized 1491 cr from this deal after selling 64.5 million shares of face value of rs. 10 the government used to get an average dividend (over 8 yrs) of Rs. 16 cr on these shares. The shares were sold to reliance at the rate of Rs. 231 per share at PE ratio of 58.

The business integration has led to cultural change at IPCL from bureaucratic to entrepreneurial work style which has led to several improvements Net turnover has increased from 4739 cr, in 2001-2002 to 8199 cr in 2004-2005. Profit has increased from 107 to 786 cr, and the dividend has risen from Rs. 50 cr, to RS. 11 crore during the same period. Similarly there has been marked improvement in labour productivity and wages As IPCL and in particular Baroda complex suffered from excess workforce VRS was put into operation The VRS scheme offered much better terms to the employees than the government approved PSUscheme and as a result 1745 and 699 employees, respectively, exited in the 1st and 2nd yr from the IPCL on their own. The reduction in employee strength by over 2400 did not have any adverse effect on the morale of the employee, workplace or productivity.

The government tax revenue from IPCL have shown buoyancy. Excise duty has considerably have gone up inspite of the fact that the rate of excise duty on polymer has come down from 24 percent to 16 percent. Through higher production now after privatization, these assets provide much higher returns to the economy

Positive Impact Impact in Results for financial year ended march 2003 Net profit increased by 90.7% (Rs. 204cr) Turnover increased by 4.9% (Rs. 5798cr) Earning per share value Rs. 8.23 Exports increased by 130% (Rs. 424cr) Dividend increased by 22.5% Production growth of 18% (4.4 million tonne) Government tax revenue Reduction in excise duty from 24% to 16% Generate corporate tax

Higher returns to the economy Negative Impact Monopoly with 75% of market Hiked rates by 25 to 35 per cent VRS to 2400 employees: The VRS scheme offered much better terms to the employees than the government approved PSUscheme and as a result 1745 and 699 employees, respectively, exited in the 1st and 2nd yr from the IPCL on their own. The reduction in employee strength by over 2400 did not have any adverse effect on the morale of the employee, workplace or productivity. Monopoly The erstwhile Disinvestment Commission had been apprehensive about a Reliance monopoly in the petrochemical industry, if it were to acquire the Indian Petrochemical Corporation Ltd (IPCL) through the disinvestment process. Its recommendation to keep Reliance out of the bidding was ignored, but its fears seem to be coming true. Under the pretext of a sharp rise in international petrochemical prices, Reliance has hiked its rates for polymers,

polypropylenes, PVC and polyethylene by as much as 25 to 35 per cent. In some cases, prices have risen three to four times in a month. Reliance now controls nearly 75 per cent of the petrochemical market, with loss-making Haldia Petrochemicals as its only major competitor. When the monopoly issue was discussed before the IPCL disinvestment, Reliance had argued that a domestic monopoly was meaningless in a global market facing a glut in petrochemical products. But the import duty on key petrochemicals products that Reliance manufactures remains at a high 30 per centand is among the highest in the world. CONCLUSION India is slowly shifting its base from a welfare and socialistic state to a capitalistic economy. Government companies or even PSUs are the heart of any socialistic state, the interest of the public is protected through these organizations. Unlike private companies who thrive for profits and strive to infringe the rights of people, PSUs were started for the people. Considering the advantages and disadvantages of disinvestment in a weighing machine, it can be construed that this is a necessary evil. There have been many instances where fundamental rights have been violated because of privatization (for example, the closure of mills in Mumbai), but it has caught like wildfire in India.