Content

Public Sector Undertakings (PSUs)

Disinvestment
Disinvestment -A Historical Perspective

Recent Disinvestments

Criticisms and Suggestions

Conclusion and References

Public Sector Undertakings (PSUs)

The public sector is the part of economic and administrative life that deals with the delivery of goods and services by and for the government. After independence and with the advent of planning, India opted for a public sector oriented planning. It was believed that a dominant public sector would reduce the inequality of income and wealth, and advance the general prosperity of the nation, 'trickle down' of growth.

Objectives of PSUs
To help in the rapid economic growth and Industrialization of the country and create necessary infrastructure for economic development. To earn return on investment and utilize generated resources for development.

To promote redistribution of income and wealth.

To create employment opportunities. To promote balanced regional development. To promote import substitutions, save and earn foreign exchanges for the economy.

Problems faced by PSUs

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. Factors responsible for the low level of profits are :

Low Productivity Low capacity utilization and low efficiency Low rate of return on capital Large number of loss making firms Poor work ethics and quality of services Over capitalization due to substantial time and cost overruns Bureaucratic controls Most of the PSUs were monopolies in their industries due to tight governmental controls, and hence they were not very efficient

Disinvestment
Disinvestment : It is a process in which the public undertaking
reduces its portion in equity by disposing its shareholding. Disinvestment as per SEBI guideline, means the sale by the central government/state government, of its shares or voting rights and control, in PSUs. The disinvestment reduces government participation in the company. A company or a government organisation will typically disinvest an asset either as a strategic move for the company, or for raising resources to meet general or specific needs. Disinvestment is called as Partial Privatisation.

Objectives of Disinvestment
The following are the main objectives of the disinvestment policy of the government :
To reduce financial burden on the government To encourage wider share of ownership To introduce competition and market discipline To help public enterprise upgrade their technology to become competitive To rationalize and retain their workforce To improve efficiency and productivity in public enterprise through new industrial policies.

Different Approaches to Disinvestment

There are primarily three different approaches to disinvestments (from the sellers i.e. Governments perspective) 1. Minority Disinvestment 2. Majority Disinvestment 3. Complete Privatization

Privatization and Disinvestment

Privatisation : It implies a change in ownership, resulting in a change in management. The privatization of public sector enterprises will occur only when govt. sells more than 51% of its ownership to private entrepreneurs. Disinvestment : It could either involve dilution of govt. stake to a level that result in a transfer of management or could also be limited to such a level as would permit govt. to retain control over the organization. Disinvestment beyond 50% involves transfer of management, where as disinvestment below 50% would result in the govt. continuing to have a major say in the undertaking.

Types of Disinvestment
In order to achieve the various objectives and goals of disinvestment many methods have been formulated and implemented. These includes: 1. Public Offer : Offering shares of public sector enterprises at a fixed price through a general prospectus, the offer is made to the general public through the medium of recognized market intermediaries. 2. Cross Holding : In the case of cross holding, the govt. would simply sell part of its share of one PSU to one or more PSUs. 3. Golden Share : In this model, the govt. retains a 26 percent share in the PSU. This 26 percent share will continue to give the govt. the status of majority share holder.

Types of Disinvestment
4. Warehousing : Under this model, the govt. owned financial institutions were expected to buy the govt.s share in selected PSUs and holding them until third buyer emerged. 5. Strategic Sale : Under this model, govt. sells a major portion (51% and above) of its stake to the strategic buyer and also gives over the management control. 6. FPO : An issuing of shares to investors by a public company that is already listed on an exchange. Retail participation is mostly high.

Types of Disinvestment
7. Offer For Sale : The size of the offer shall be atleast 1% of the paid-up capital of the company, subject to a minimum of Rs 25 crores Seller(s) may declare a floor price in the announcement/notice. The duration of the offer for sale shall not exceed one trading day. A separate window for the purpose of offer for sale of shares shall be created by stock exchanges. 8. Institutional Placement Programme Issuance of fresh shares and offer for sale of shares in a listed issuer for the purpose of achieving minimum public shareholding No partly paid-up securities shall be offered. Allottee cannot sell the allocation /allotment before the period of one year.

Criteria for Disinvestment

There are certain arguments which are favoring for the disinvestment of public sector undertakings.

Poor Performance of the Public Sector Units. The government must not enter into those areas where the private sector can perform better. Government resources locked in commercial activities should be released for their deployment in social activities. There is a huge amount of debt overhang, which needs to be serviced and reduced before money is available to invest in infrastructure.

Criteria for Disinvestment

Whether there is decrease in number of beneficiaries . Whether serving the national interest will be affected because of disinvestment . Whether private sector can efficiently operate and manage the undertaking. Whether the original rate of return targeted could not be possible to achieve.

Disinvestment A Historical Perspective

Period from 1991-92 to 2000-01 i. The change process in India began in the year 1991-92, with 31 selected PSUs disinvested for Rs.3,038 crore. In August 1996, the Disinvestment Commission, chaired by G V Ramakrishna was set up to advice, supervise, monitor and publicize gradual disinvestment of Indian PSUs

ii.

The Department of Disinvestment was set up as a separate department in December, 1999 and was later renamed as Ministry of Disinvestment from September, 2001. From May, 2004, the Department of Disinvestment became one of the Departments under the Ministry of Finance.
Against an aggregate target of Rs. 54,300 crore to be raised from PSU disinvestment from 1991-92 to 2000-01, the Government managed to raise just Rs. 20,078.62 crore

iii.

Disinvestment A Historical Perspective

Period from 2001-02 to 2003-04
This was the period when maximum number of disinvestments took place. These took the shape of either strategic sales or an offer for sale to the public, with the government still retaining control of the management. Some of the companies which witnessed a strategic sale included:
I. II. III. IV. V. VI. BHARAT ALUMINIUM CO.LTD. CMC LTD. HINDUSTAN ZINC LTD. HOTEL CORP.OF INDIA LTD. HTL LTD. IBP CO.LTD. INDIA TOURISM DEVELOPMENT CORP.LTD.(18 HOTEL PROPERTIES)

During this period, against an aggregate target of Rs. 38,500 crore to be

raised from PSU disinvestment, the Government managed to raise Rs. 21,163.68 crore.

Disinvestment A Historical Perspective

Period from 2004-05 to 2008-09 The issue of PSU disinvestment remained a contentious issue through this period. As a result, the disinvestment agenda stagnated during this period. In the 5 years from 2003-04 to 2008-09, the total receipts from disinvestments were only Rs. 8515.93 crore.

Disinvestment A Historical Perspective

2009-10 onwards The Government started the process by selling minority stakes in listed and unlisted (profit-making) PSUs. This period saw disinvestments in companies such as NHPC Ltd., Oil India Ltd., REC, NMDC, SJVN, EIL, CIL, MOIL, etc. through public offers. However, from 2011 onwards, disinvestment activity has slowed down considerably. For the financial year 2012-13, there would be a target of Rs. 30,000 crore and the Government was able to raise only Rs. 23,956 crore.

Disinvestment A Historical Perspective

Budgeted Disinvestment vs Actual Disinvestment
45,000.00 40,000.00 35,000.00 30,000.00 25,000.00 20,000.00 15,000.00 10,000.00 5,000.00 0.00

Rs. (in crore)

Budgeted Receipt Actual Receipt

Year

Disinvestment A Historical Perspective

Chart below shows various disinvestments done by GOI during FY 13 and FY 14
Amount Realized
14000 12000 10000 8000 6000 4000 2000 Amount Realized NBCC SAIL RCF NHPC ITDC

0 NLC
STC EIL NALCO MMTC NMDC PGCIL NTPC BHEL HCL HCL NFL OIL

2012-2013

2013-2014

Recent Disinvestments
Metals and Minerals Trading Corporation of India (MMTC) :
At the floor price of Rs. 60 apiece, a 9.33 per cent stake sale in MMTC has garnered Rs. 571 crore to the exchequer. The 9.33 crore shares, or 9.33 per cent, stake sale of the trading giant through the Offer For Sale (OFS) route. MMTC disinvestment would be the first stake sale of the government in the current fiscal. The government aims to raise Rs. 40,000 crore from PSU stake sale in 2013-14.

Recent Disinvestments
Hindustan Copper Limited (HCL) :

At the floor price of Rs. 70 apiece, a 4.00 per cent stake sale in HCL has garnered Rs. 260 crore to the exchequer.
Stake sale of HCL could be done through the Offer For Sale(OFS) route. This mechanism is just like an auction, where every investor bids on the floor price or above that. HCL is the second public sector divestment in the current fiscal.

Why Low Disinvestment ?

Unfavorable market conditions

Offers made by the government were not attractive for private sector investors
Lot of opposition on the valuation process No clear-cut policy on disinvestment Strong opposition from employee and trade unions Lack of transparency in the process Lack of political will

Criticisms of Disinvestments
The equity in PSUs essentially belongs to the people. Thus, in the absence of wider national consensus, a mere government decision to disinvest is not totally justifiable. It is not clear if the rationale for divestment process is wellfounded. The assumption of higher efficiency, better management practices and better monitoring by the private shareholders may not always be true. Governments have used disinvestment merely as a tool to raise resources to satisfy interim needs rather than with along vision to restructure Indian industry.

Criticisms of Disinvestments
Disinvestment has always been a very politically sensitive issue, with different parties taking different views in different positions. Mainly to fill fiscal deficits of the government. Generated capital has not been utilized for the benefit of the disinvested PSU. Targets Unachieved :
o o Some of the years the Govt. has failed to raise even 20% of the budgetary disinvestment targets. The Government has measurably failed to attract various parties for buying the PSU's.

Criticisms of Disinvestments
Improper Implementation :
o Inadequate information about PSUs has resulted in lack of free, competitive and efficient bidding of shares, and a free trading of those shares. o PSUs do not benefit much monetarily from disinvestment and hence they have been reluctant to prepare and distribute prospectuses. o This has prevented the disinvestment process from being completely open and transparent.

Sale to foreign companies increase the dependence of Indian economy on the international fluctuations.

Criticisms of Disinvestments
Strategic Mistakes :
o Monopolies created by privatization(?). o E.g.: Selling of IPCL to reliance despite the fact that it held 60% of market share already. o Possibility of concentration of shares in few hands. o E.g.: ONGC disinvestment, Claim by left party activist that large number of shares were being bought over by Canadian firm.

Suggestions
The more market-friendly a country's policy framework the less difficulty it will have in privatising on State Owned Enterprises (SOE). SOEs functioning in competitive markets are prime candidates for privatisation. Their sale is simple compared with that of public monopolies, and they require little or no regulation. An appropriate regulatory framework must be in place before monopolies are privatised. Failure to regulate properly can hurt consumers and reduce public support for privatisation. In all privatisations, in all countries, the transaction must be transparent.

Suggestions
The primary objective of disinvestment should be to increase efficiency, not to maximize revenue. Avoid large new investments in privatisation candidates, the risks usually outweigh the rewards. Rather prepare for sale by carrying out legal, managerial and organisational changes. Experience shows that labour does not lose in privatisation, if governments pay attention to easing the social cost of unemployment through adequate pay, unemployment benefits, retraining and job search assistance.

Conclusion
Disinvestment in India has never been an attractive idea simply because successive governments have treated disinvestment merely as a tool to raise resources rather than as one designed to restructure the massive public sector. Government should stop setting up of the targets in every year annual budget and should have a long-term plan. The privatization policy that the government adopted was closely related to efficient channelization and utilization of resources, but process was not that satisfactory.

Conclusion
Finally the concept of Disinvestment that had reflection over the needs of economy for the both productive and non productive entities, but unfortunately the proceeds from disinvestment were used in an objectionable manner. Thus the belief of Disinvestment, as a lead to better performance has become questionable ? Hence, the government should learn from the view of global world and try to improve the efficiency of inefficient units and create competitive market in the present environment to enable the PSUs to work efficiently for having good economy and in turn the nation.

References
Dr. Ajay Verma : DISINVESTMENT PROCESS IN INDIA, Shodh, Samiksha aur Mulyankan (International Research Journal), Vol. 2, Issue-6 Dr. M. K. Rastogi, Sharad Kr. Shukla : Challenges and Impact of Disinvestment on Indian Economy, IJMBS Vo l . 3, Issue 4, Oct-Dec 2013

URL :
o o o o o http://www.bsepsu.com/ http://www.thehindubusinessline.com/markets/hind-copper-divestmenttoday-at-base-price-of-rs-70share/article4873314.ece http://www.thehindubusinessline.com/economy/govt-to-sell-764-stake-innational-fertilizers-to-meet-norms/article4859688.ece http://www.thehindu.com/business/Economy/govt-clears-disinvestmentof-stc-itdc/article4904904.ece http://www.hindustantimes.com/business-news/nhpc-share-buyback-toadd-rs-2-200-cr-to-divestment-kitty/article1-1153325.aspx