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Disinvestment of public sector enterprises.


Disinvestment has emerged as one of the most revolutionary innovations in economic policy of almost all countries of the world. As a reaction to the inefficient working of the state owned enterprises, the wave of privatization spread all over the world. The global trend towards privatization began in the 1980s. The United Kingdom adopted privatization successfully. Unified Germany, the erstwhile USSR, Western Europe, Canada and Japan replicated the pattern. The developed nations attained a high of success followed by the developing and least developed nations in the order. For almost four decades India was pursuing the path of development in which public sector was expected to be the engine of growth. However, the public sector had overgrown itself and their shortcomings started manifesting in the shape of low capacity utilization and low efficiency due to over manning and poor work ethics, over capitalization due to substantial time and cost overruns, inability to innovate, delayed decisions, large interference in decision making process etc. The serious budgeting and fiscal deficits of the Government and severe pressure on the country's balance of payment created the necessity to open the window of foreign direct investment and liberalization of the trading practices and procedures. The Government realized that there was an opportunity to unlock the huge investments chained in public sector units.

The Government started to deregulate the areas of its operation and subsequently the disinvestment in public sector enterprises was announced. The process of deregulation was aimed at enlarging competition and allowing new firms to enter the markets. The market was thus opened up to domestic enterprises/ industrialists, and norms for entry of foreign capital were liberalized.

Prior to 1991, 17 industries were reserved for the public sector in India. In July 1991, the industries for Public Sector Undertakings (PSUs) were reduced to eight areas from the previous list of seventeen. The industries reserved for PSUs were further reduced to three in December 2002 and included the following:

1. Atomic Energy

2. Minerals specified in schedule to atomic energy (control of production and use)

3. Railway Transport

As of now there are only two industries which are exclusively reserved for the public sector. These are the atomic energy and railway transport.

Disinvestment Defined

In simple words disinvestment means conversion of the Government equity or money claims into cash. In broad sense, disinvestment means to sell part of the Government equity of selected profit and loss making PSUs to the mutual funds, financial institutions, general public and workers to raise resources and encourage wider participation in the ownership of PSUs. In short, disinvestment in public sector undertakings means transfer of ownership and management of an enterprise from the public sector to the private sector. It also means the withdrawal of the State from an industry or sector, partially or fully.

Primary Objectives of Disinvestment in the PSEs

The primary objectives for privatizing the PSEs are as follows:

* Releasing the large amount of public resources locked up in non-strategic public sector enterprises (PSEs) for redeployment in areas the much higher on the social priority such as health, family welfare, primary education and social and economic infrastructure;

* Reducing the public debt that is threatening to assume unmanageable proportions;

* Transferring the commercial risk to the private sector wherever the private sector is willing and able to step in;

* Releasing other tangible and intangible resources, such as large manpower currently locked up in managing PSEs, and their time and energy for redeployment in high priority social sectors that are short of such resources.

Disinvestment would have a beneficial effect on the capital market; the increase in floating stock would give the market more depth and liquidity, give investors easier exist option, help in establishing more accurate benchmarks for valuation and pricing, and facilitate raising of funds by the privatized companies for their projects or expansion, in future. Opening up the public sector to appropriate private investment would increase economic activity and have an overall beneficial effect on the economy, employment and tax revenues in the medium to long term.

In many areas, e.g. the telecom and civil aviation sector, the end of public sector monopoly and privatization has brought to consumers greater satisfaction by way of more choices, as well as cheaper and better quality of products and services. With the quantities restrictions removed and tariff levels revised owing to opening of world markets / WTO agreements, domestic industry has to compete with cheaper imported goods. In the bargain, the common man now has access to a whole range of cheap and quality goods. This would require Indian industries to become more competitive and such restructuring would be easier in a privatized environment.

Different Approaches to Disinvestments

There are primarily three different approaches to disinvestments (from the sellers' i.e. Government's perspective):

Minority Disinvestment

A minority disinvestment is one such that, at the end of it, the government retains a majority stake in the company, typically greater than 51 percent, thus ensuring management control.

Historically, minority stakes have been either auctioned off to institutions (financial) or offloaded to the public by way of an Offer for Sale. The present government has made a policy statement that all disinvestments would only be minority disinvestments via Public Offers.

Examples of minority sales via auctioning to institutions go back into the early and mid 90s. Some of them were Andrew Yule and Co. Ltd., CMC Ltd. etc. Examples of minority sales via Offer for Sale include recent issues of Power Grid Corp. of India Ltd., Rural Electrification Corp. Ltd., NTPC Ltd., NHPC Ltd. etc.

Majority Disinvestment

A majority disinvestment is one in which the government, post disinvestment, retains a minority stake in the company i.e. it sells off a majority stake

Historically, majority disinvestments have been typically made to strategic partners. These partners could be other Central PSEs themselves, a few examples being BRPL to IOC, MRL to IOC, and KRL to BPCL. Alternatively, these can be private entities, like the sale of Modern Foods to Hindustan Lever, BALCO to Sterlite, CMC to TCS etc.

Again, like in the case of minority disinvestment, the stake can also be offloaded by way of an Offer for Sale, separately or in conjunction with a sale to a strategic partner.

Complete Privatization

Complete privatization is a form of majority disinvestment wherein 100 percent control of the company is passed on to a buyer. Examples of this include 18 hotel properties of ITDC and 3 hotel properties of HCI.

Disinvestment and Privatization are often loosely used interchangeably. There is, however, a vital difference between the two. Disinvestment may or may not result in Privatization. When the Government retains 26 percent of the shares carrying voting powers while selling the remaining to a strategic buyer, it would have disinvested, but would not have 'privatized', because with 26 percent, it can still stall vital decisions for which generally a special resolution (three-fourths majority) is required.

Reasons for Disinvestment

There are basically two reasons in support of disinvestment:

To provide fiscal support: It emphasizes that the resources raised through disinvestment must be utilized for returning past debts and thereby bringing down the interest burden of the Government. The demands on the Government, both at the centre and State are increasing. There is compelling need to expand the activities of the State in areas such as education, health and medicine. It is, therefore, legitimate that a part of the additional resources needed for supporting these activities comes out of the sale of shares built up earlier by the Government out of its resources.

To improve efficiency: The second important argument in favor of disinvestment is the contribution that it can make to improve the efficiency of the working of the enterprise. Leaving aside the extreme case of disinvestment where the dilution is of a lesser order and where the Government control is still retained, the induction of public ownership can have a salutary effect on the functioning of an enterprise. It increases the accountability of those in charge of the enterprise. The shareholders would require to be compensated and earn more profits. The induction of public into the ownership structure can also create conditions in which there could be greater autonomy for the functioning of the public sector enterprise. Disinvestment can, therefore, be regarded as a tool for enhancing economic efficiency.

The Disinvestment Process

The disinvestment process is related to the procedure adopted by the government. The procedure involves the evaluation of shares and modalities to be adopted for sale of such shares. There are three broad methods which are used for valuation of shares. These are as follows:

Net Asset value method

This will indicate the net assets of the enterprise as shown in the books of accounts. It shows the historical value of the assets. It is cost price less depreciation provided so far on assets.

Profit earning capacity value method

The profit earning capacity is generally based on the profits actually earned or anticipated. It is an accounting profit. It is excess of earning over expenditure, it does not really indicate the intrinsic value of the enterprises.

The discounted cash flow method

The technique is popularly used to evaluate viability of an investment proposal. In this method the future investment cash flows are forecasted and discounted into present value by applying cost of capital rate. This method indicates 'the intrinsic value of an enterprise. This method is far more comprehensive and complicated method of reflecting the expected income flows to the investors. Out of these three methods, the discounted cash flow method has the greatest relevance though it is the most difficult method.

Modalities of Disinvestment

There are three broadly acceptable and transparent modalities for disinvestment. These are:

i) 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.

ii) Sale of equity through auction of shares amongst pre-determined clientele whose number can be as large as necessary or practicable. The reserve price for the PSEs equity can be determined with the assistance of merchant bankers.

iii) Offer for sale determining the fixed price for sale of a public enterprise, inviting open bidders and accepting highest quotation for sale.

Disinvestment Policy

First Phase (1991-1998): The Industrial Policy Statement of 24th July 1991 stated that the government would disinvest part of its holdings in selected PSEs, but the policy placed no cap on the extent of disinvestment in favor of any particular class of investors. The objective for disinvestment was stated to be to provide further market discipline to the performance of public enterprises.

It was decided that in the case of selected enterprises, part of Government holdings in the equity share of these enterprises will be disinvested in order to provide further market discipline to the performance of public enterprises.

Report of the Rangarajan Committee on the Disinvestment of shares in PSEs (April 1993): The Rangarajan Committee recommendations emphasized the need for substantial disinvestment. It stated that the percentage of equity to be disinvested could be up to 49 percent for industries explicitly reserved for the public sector. It recommended that in exceptional cases, such as the enterprises, which had a dominant market share or where separate identity had to be maintained for strategic reasons, the target public ownership level could be kept at 26 percent, i.e. disinvestment could take place to the extent of 74 percent. In other cases, it recommended 100 percent disinvestment of Government stake. Holding of 51 percent or more equity by the Government was recommended only for 6 Scheduled industries, namely: Coal and Lignite; Mineral oils; Arms, Ammunition and Defense equipment; Atomic Energy, Radioactive minerals and Railway transport. However, the Government did not take any decision on the recommendations of the Rangarajan Committee.

The Common Minimum Programme of the United Front Government (1996): The

United Front Government promulgated the policy for disinvestment in Public sector undertaking. The highlights of the policy formulated by the United Front Government were as follows:

* To carefully examine the public sector non-core strategic areas;

* To set up a disinvestment commission for advising on the disinvestment related matters;

* To take and implement decisions to disinvest in transparent manner;

* Job security, opportunities for retraining and redeployment to be assured.

Disinvestment Commission Recommendations (Feb 1997-Oct. 1999): Pursuant to the above policy of the United Front Government, a Disinvestment Commission was set up in 1996. By August 1999, it made recommendations on 58 PSUs. The recommendations indicated a shift from public offerings to strategic/trade sales, with transfer of management in case of 41 referred to it and only in 5 PSUs by public offering route.

Second Phase (1998-99 onwards)

The Government decided to bring down government shareholding in the PSUs to 26 percent in the generality of cases, thus facilitating ownership changes, as was recommended by the Disinvestment Commission. It, however, stated that the government would retain majority holdings in PSUs involving strategic considerations and that the interests of the workers would be protected in all cases.

The Policy for 1999-2000, as enunciated by the Government was to strengthen strategic PSUs, privatize non-strategic PSUs through gradual disinvestment or strategic sale and devise viable rehabilitation strategies for weak units. One highlight of the policy was that the expression 'privatization' was used for the first time.

Strategic and Non strategic Classification

On 16th March 1999, the Government Classified the Public Sector Enterprises (PSEs) into strategic and non-strategic areas for the purpose of disinvestment. It decided that the Strategic Public Sector Enterprises would be those in the areas of:

* Arms and ammunitions and the allied items of defence equipment, defence aircrafts and warships;

* Atomic energy (except in the areas related to the generations of nuclear power and applications of radiation and radio-isotopes to agriculture, medicine and non-strategic industries);

* Railway transport All other Public Sector Enterprises were to be considered non-strategic. For the non-strategic public Sector it was decided that the reduction in the Government stake to 26 percent would not be automatic and the manner and pace of doing so would be worked out on a case-to-case basis. A decision in regard to the percentage of disinvestment i.e. Government stake going down to less than 51 percent or to 26 percent, would be taken on the following considerations;

* Whether the industrial sector requires the presence of the public sector as a countervailing force to prevent concentration of power in private hands; and

* Whether the industrial sector requires a proper regulatory mechanism to protect the consumer interests before Public Sector Enterprises are privatized.

In the year 2000-01, for the first time the Government made the statement that it was prepared to reduce its stake in the non-strategic PSEs even below 26 percent if necessary, that there would be increasing emphasis on strategic sales and that the entire proceeds from disinvestment/privatization would be deployed in social sectors, restructuring of PSEs and retirement of public debt. The main elements of the policy reiterated are as follows:

* To restructure and revive potentially viable PSEs

* To close down PSEs which cannot be revived

* To bring down government equity in all non-strategic PSEs to 26 per cent or lower if necessary.

* To fully protect interests of workers

* To put in place mechanisms to raise resources from the market against the security of PSEs assets for providing an adequate safety-net to workers and employees;

* To establish a systematic policy approach to disinvestment and privatization and to give a fresh impetus to this programme by setting up a new Department of Disinvestment;

* To emphasize increasingly on strategic sales of identified PSEs;

* To use the entire receipt from disinvestment and privatization for meeting expenditure in social sectors, restructuring of PSEs and retiring public debt.

The Budget speech for the year 2001-2002 highlighted that after setting up of the Ministry of Disinvestment, the process of privatization of PSEs has been streamlined. To maximize returns to Government, the approach shifted from disinvestment of small lots of share sale to strategic sale of blocks of share to strategic investors.

It was declared that the proceeds would be used for providing

1. Restructuring assistance to PSEs

2. Safety net to workers

3. Reduction of debt burden

4. Restructuring assistance to PSEs

5. Safety net to workers

6. Reduction of debt burden

In 2003-04 budget, target for disinvestment was kept at Rs.14, 500 crore. The Government was able to raise Rs.1, 300 crore by making public offer in Maruti Udyog Ltd. and Hindustan Zinc Ltd. To achieve the target, the Government decided to make public offer of shares of six PSUs namely CMC (Formerly Computer Maintenance Corporation), IPCI (Indian Petrochemicals Corporation Ltd.) IBP (earlier Indo-Burma Petroleum) now controlled by Indian Oil Corporation, Dredging Corporation of India, the Oil and natural Gas Corporation (ONGC) and GAI (formerly Gas Authority of India). For all PSUs being highly profitable organizations, their shares were oversubscribed and the total realizations of disinvestment during 2003-2004 were of the order of Rs.15, 457 crore. In other words, target of disinvestment of Rs. 14,500 crore was exceeded.

On May 26, 2005, the Finance Minister announced the intention to disinvest 10 percent of government-owned equity in the navranta company BHEL (the residual government owned equity shares exceeded 51 per cent after sale.) However, after protests from the Left parties, this move was dropped. The Minister of Heavy Industries and Public enterprises announced that he had put on hold the decision regarding disinvestment in BHEL and other proposals (for disinvestment) in his ministry. The Finance Minister also ruled out the strategic sale route of disinvestment while keeping open the offer of sale route in 13 profit making PSEs identified by the earlier NDA government. In June 2006, another attempt was made, this time for the sale of 10 percent stake each in two non-navratna profit-making PSEs identified by the earlier NDA government. In June 2006, another attempt was made, this time for the sale of 10 percent stake each in two non-navratna profit making companies--NALCO (National Alumium Company) in Orissa and NLC (Neyveli Lignite Corporation) in Tamil Nadu. However, following indefinite strike by NLC workers, the move was shelved. On July 6, 2006 the Prime Minister decided to keep all disinvestment decisions and proposals on hold pending further review.

National Investment Fund

The proposal for operationalisation of the NIF was approved on 3rd November, 2005. Accordingly, the Department of Disinvestment issued a resolution on 23rd November, 2005 constituting 'NIF' with the following objectives, structure and administrative arrangements, investment strategy and accounting procedure:


* The proceeds from disinvestment of CPSEs will be channelised into NIF, which is to be maintained outside the Consolidated Fund of India.

* The corpus of NIF will be of a permanent nature.

* NIF 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 NIF.

* 75 percent of the annual income of NIF will be used to finance selected social sector schemes, which promote education, health and employment. The residual 25 percent 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.

Structure and Administrative Arrangements

NIF will be operated by the selected Fund Managers under the 'discretionary mode' of the Portfolio Management scheme, which is governed by SEBI guidelines. The entire work of NIF will be supervised by Chief Executive Officer (CEO) of NIF, a senior officer of the Government. A part time Advisory Board consisting of three eminent persons, with the requisite expertise to be appointed by the Government, would advise the CEO on various aspects of the functioning of NIF.

Investment Strategy

The broad investment strategy is to provide sustainable returns without depleting the corpus. The investment strategy for NIF will be formulated by the CEO based on the advice of the Advisory Board so as to ensure that Government has a hands-off relationship in terms of the actual investment to be done by the Fund Managers.

Only broad guidelines are to be provided under the "discretionary mode" to the Fund Managers, within which individual investments would be made independently by the Fund Managers. More detailed guidelines specifying investment instruments and limits for investment in such instruments will be separately specified in the agreements to be entered into between the Fund Managers and CEO of NIF on behalf of the Government.

Other operational details such as allocation of funds to the selected Fund Managers, negotiations of management fee and charges to be paid to the Fund Managers, etc. will be also decided by CEO based on the advice of the Advisory Board. Appropriate mechanisms for regular review and monitoring of the functioning of NIF, emerging market trends and future prospects will be instituted.

Accounting Procedure

The receipts from disinvestment of CPSEs will be deposited in CFI under the designated Head. Thereafter, these amounts would be appropriated from the CFI, with due approval, by the Department of Disinvestment and transferred to the selected Fund Managers through CEO of NIF. Income from NIF similarly be deposited in CFI and would be appropriated from it for specific purposes as per the scheme of appropriation approved from time to time by the Department of Expenditure.

Fund Managers of NIF

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. These fund managers have been appointed for an initial agreement for two years, which is extendable on the basis of their performance.

(i) UTI Asset Management Co. Ltd.; (ii) SBI Funds Management Co. Pvt. Ltd.; (iii) LIC Mutual Fund Asset Management Co. Ltd.


The launching ceremony of National Investment Fund (NIF) took place on 6th October, 2007, and was presided over by the Finance Minister. This consisted of the following two activities:

a) Signing of the Portfolio Management Services Agreement by JS (Disinvestment) and Chief Executive Officer (CEO), NIF (on behalf of the Government) and CEO, of Selected Public Sector Fund Managers viz. UTI Asset Management Co. Pvt. Ltd., SBI Funds Management Pvt. Ltd. and LIC Mutual Fund Asset Management Co. Ltd. Separate Agreements were signed with each Fund Manager.

b) Handing over of cheques to the CEO of the three Asset Management companies.

Restructuring of NIF

In view of the deceleration of GDP growth due to global economic downturn coupled with unprecedented drought last summer, a reduced budgetary resource generation was anticipated by the Government. The Government, thus, approved (on 5th November 2009), a one-time exemption permitting full utilization of disinvestment proceeds deposited in the NIF for meeting the capital expenditure requirements of selected social sector programmes decided by the Planning Commission/Department of Expenditure. The status quo ante was to be restored from April 2012. However, now since India continues to face very difficult economic conditions due to continued financial/economic problems in Europe impacting the economic growth in India, higher subsidy burden relating to petroleum, food and fertilizers, high interest rate impacting the manufacturing sector, affecting excise collection and falling revenue collection, the exemption cited above has been extended up to March 2013.

Disinvestment in the recent years

However, in recent times, interest in disinvestment has again been revived. During 200910 the shares in many PSEs like Oil India Ltd. NHPC, NTPC and REC (Rural Electrification Corporation), NMDC etc., were sold. In the Budget for 2010-11 the Finance Minister kept a target of Rs. 40,000 crore for disinvestment. As against, this, the government realized Rs. 22,76,296 crore by selling shares in SJVN, EIL, Coal India Ltd., Power Grid Corporation of India Ltd., MOIL and SCI (Shipping Corporation of India Ltd.) The target for the year 2011-12 was also kept at Rs. 40,000 crore. As against this, the government could realize only Rs. 13,911.10 crore by selling shares of PFC (Rs. 1,144.55 crore) and ONGC (Rs. 12,766.55 crore). In fact, the government's sale of about 5 percent of its shareholding in ONGC in the last week of February 2012 through an open auction on the trading platforms of the two stock exchanges was full of chaos and confusion. Until 10 minutes before the close of the auction, only around three percent of the offer was subscribed. This forced LIC to step in add save the day for the government. However, a bulk purchase of ONGC shares by LIC is not a proper disinvestment but merely amounts to a transfer of ownership of an asset from the government to another state owned entity. Target for disinvestment for the years 2012-13 was kept at Rs. 30,000 crore

Actual realization from disinvestment over the period 1991-92 to 2012-2013 was Rs. 1, 34,518.54 crore. As is clear from Table actual realization from disinvestment was substantially less than the target in most of the years.

The government on March 15, 2013 raised about Rs 630 crore by divesting its holding in aluminum manufacturer National Aluminum Company (Nalco), taking it close to the downward revised disinvestment target of Rs 24,000-crore for 2012-13.

After the auction, the government holding in Nalco will come down from 87.15 per cent to 81 per cent. Axis Capital, IDFC Securities and SBICAP Securities were managing the auction.

Nalco is the country's third-largest producer of aluminium. The company operates an alumina refinery, smelter plant and bauxite mines in Odisha. It has annual bauxite mining capacity of 6.8 million tonnes and aluminia refining capacity of 2.28 mt.

Nalco share auction was part of the disinvestment programme to rein in the 2012-13 fiscal deficit to 5.2 per cent. Recently the government had conducted share sale in Rashtriya Chemicals and Fertilizers and had divested in NTPC and Oil India last month.

So far, the government has raised about Rs 22,430 crore by divesting in seven companies. The government in February had scaled down the disinvestment target from Rs 30,000 to Rs 24,000 crore. The government is likely to take a decision on share sales of SAIL and MMTC shortly.

State-owned Life Insurance Corporation (LIC) has played a key role in helping the government achieve its disinvestment target (revised downwards, mid-year) of Rs 24,000 crore for 2012-13. LIC, which has over 80 per cent share of the life insurance business in the country, has invested about Rs 3,800 crore in six of the seven companies where the government sold stake this year. The divestment total surpassed the previous record of Rs 23,553 crore in 2009-10. This wouldn't have been possible without LIC playing the role of a white knight. LIC participated in an Offer For Sale (OFS) in six government companies during 2012-13, buying from five to 71 per cent of what was put for auction, putting in Rs 3,814 crore. LIC had invested Rs 1,069 crore (nearly 71 per cent) of the Rs 1,500 crore share auction of Steel Authority of India (SAIL) recently. A stock exchange filing shows LIC's holding in SAIL after the sale had gone up from 5.02 per cent to 9.13 per cent. The insurer had purchased a little over 169 million shares. Earlier, LIC had taken about a third of the shares in the National Aluminum Company (Nalco) disinvestment before SAIL. It also invested a maximum of Rs 1,760 crore in the disinvestment of NTPC, where the government raised Rs 11,500 crore.

During 2011-12, the insurance major had invested Rs 11,270 crore in the share auction of Oil and Natural Gas Corporation.

A Critique of Disinvestment

The policy of privatization and disinvestment has been criticized on the following grounds:

Undervaluation of Assets

A study of the data presented in Table shows that the performance on the disinvestment front has been dismal. Only in four years--1991-92, 1994-95, 1998-99, and 2003-04, the targets for disinvestment were exceeded. According to C.P. Chandrasekhar and Jayati Ghosh, the succession 1991-92 was due to the decision to accept extremely low bids for share 'bundles' which included equity from PSUs which would have otherwise commanded a handsome premium. The average price at which more than 87 crore shares were sold in this year was only Rs. 34.83 as compared with the average price realization of Rs. 109.61 since then. In 1994-95, success was due to the offloading of a significant chunk of shares in very attractive and profitable PSUs like BHEL, Bharat Petroleum, Container Corporation of India, Engineers India, GAIL, MTNL etc. And in 1998-99 the success was due to the reason that cash-rich PSUs like ONGC, GAAI and IOC were forced to buy shares of other PSUs. "This amounted to forcing PSUs, that needed further investment themselves so as to be restricted, to face up to the more liberal and competitive environment, to hand over their investible surpluses to finance the fiscal deficit of the government. The success in 2003-04 was primarily due to sale of 142.60 million shares in ONGC which fetched as much as Rs. 10,595 crore.

In all other years, realizations from disinvestment were much less than the targets. The main reasons for this poor performance were as follows:


The government carried out the whole exercise of disinvestment in a hasty, unplanned and hesitant way. Thus, it failed to realize not only the best value but also the other objectives of the disinvestment programme.

Lack of linkage between the Public Enterprises and capital markets: The government launched the disinvestment programme without creating the required conditions for its takeoff. This would be clear from the fact that it did not try to list the shares of the public sector enterprises on the stock exchanges. Thus, adequate efforts were not made to build up the much needed linkage between the public enterprises on the one hand and the capital market on the other.

Lack of suitable methods: The government did not adopt suitable methods to oversee the disinvestment of the public sector shareholdings.

Less realization: The Department of Public Enterprise and the Finance Minister adopted techniques and methods which resulted in far lower realization than justified.

On account of all these reasons, there was considerable "underpricing" of public enterprises shares resulting in considerable loss to the government. This is clear from the three reports of CAG (Comptroller and Auditor General of India) that have appeared so far. In his first report (1993), the CAG pointed out that the extent of loss to the government in percentage term varied from 127 percent in the case of HPCL (its share having been sold for Rs. 243 against the market price of Rs. 550) to as high as 616 percent in the case of NLC (its share having been sold for Rs. 11 against the market price of Rs. 82). The average loss consequent upon the under pricing comes to about 256 percent. If we apply this percentage to the divestiture proceeds for 1991-92 and 1992-93 we find that the potential proceeds would have been Rs. 1,544 crore as against the actual realization of only Rs. 4,951 crore. The second report of CAG (2005) which covered the sale of two hotels, the Hotel Corporation of India's (HCLs) Juhu Centaur and Airport Centaur, pointed out that the sale was finalized on the basis of a single bid and the methodology adopted for valuation had the effect of lowering the reserve price. The CAGs third report (2006) focuses on nine PSUs where majority shareholding was passed on to private parties through the strategic sale route. The main findings of CAG are as follows:

Valuation: In several cases where valuation was done under the asset valuation methodology, core assets like leasehold, housing, township and plant and machinery and certain other properties were either not valued or ignored. This resulted in an undervaluation of PSUs consequently fixing of lower reserve prices.

Insufficient Competition: Competition was not generated to secure best price as at the final stage, financial bids were submitted by only one party in case of MFIL, CMC, PPL and two parties in case of BALCO, HTL, VSNL, HZL while in case of IPCL, expression of interest by three international bidders was rejected without assigning any reason.

The Shareholder's Agreement: It was entered on terms adverse to government, as the strategic partner has been given to purchase balance equity of privatized PSUs, in what is known as, call and put option. In case of HZL, the strategic partner used this option to purchase 79.9 million shares at Rs. 40.51 per share when the market price was hovering around Rs. 119.10 giving it a windfall profit. Another company, BALCO has exercised its call option and remitted a sum of Rs. 1,098 crore by cheque to the government, based on some kind of ad hoc valuation of shares. The market value of the shares is several times higher.

Post-clearing Adjustment Clause: In the sale of four unlisted companies, MFIL, BALCO, HTL and PPL, an open-minded agreement has been entered, under which the government is required to pay the strategic partner any claims resulting from depletion of current assets of the company, between the date of the last audited balance sheet and the date of purchase of the shares. All the four companies have filed heavy claims against the government and in case of MFIL, the government has already paid Rs. 12.64 crore to the new management. In the case of PPL, while the government realized Rs. 151.70 crore through the sale, the buyers have lodged a claim of Rs. 151.55 crore under this clause.

Undervaluation of assets implies substantial losses for the government and therefore for the tax-paying citizens of the country.

Some other drawbacks are as follows:

Utilization of Money from Disinvestment

The government so far has been putting the proceeds of disinvestment into a black hole known as the Consolidated Fund of India from which it met the budget deficit. A basic criticism of the disinvestment policy, therefore, was that funds raised by selling family silver were used to meet the short term monetary requirements. As such, it was a case of meeting budget deficit by selling PSUs. In this connection, the advice of the late Dr. Mahbu-ul-Haq, UNDP expert was: "Do not use sale proceeds to finance budget deficits--retire national debts". But all along, the Government has been ignoring this advice.

When the programme of disinvestment was initiated in 1991-92, the Finance Minister had stated that a part of the proceeds would be used for providing resources in the NRF (National Renewal Fund) which can be used for various schemes of assistance to workers of the unorganized sector. Moreover, these "non-inflationary resources would also be used to fund. Special employment creating schemes in backward areas". In 1997, the first report of the Disinvestment Commission headed G.V. Ramkrishna stated that the proceeds of disinvestment should not be used to bridge the budget deficit, but instead should be placed in a separate fund to be used for four purposes; (i) retiring public debt; (ii) restructuring PSUs; (iii) developing the social infrastructure and (iv) voluntary retirement schemes. Similar sentiments were expressed in various Budget Speeches of the Finance Ministers in various years. For the year 2001-02, the Finance Minister had set the target for disinvestment at Rs. 12,000 crore of which Rs. 7,000 crore was to be used to provide "restructuring assistance to PSUs, a safety net to workers and reduction of (the public) debt burden" while the remaining Rs. 5,000 crore was to be used to provide "additional budgetary support to the Plan primarily in the social and infrastructure sectors". The list of objectives of disinvestment given earlier also expressed such lofty ideals. However, the actual experience with the utilization and disinvestment proceeds during the last decade belies all these declarations. The government has used the entire proceeds from disinvestment to offset the shortfalls in revenue receipts and thus reduce the fiscal deficit which it was required to do as part of the IMF stabilization programme. The experience suggests that fiscal convenience was the prime mover of such disinvestments. Having internalized the IMF prescription that reducing or doing away with fiscal deficits is the prime indicator of good macro-economic management, the government found privatization proceeds of PSUs, to be a useful source of revenue to window-dress budgets". Thus, the resources generated from the disinvestment of PSUs have been used to meet current consumption needs. This amounts of frittering away of valuable public assets. It is like selling family silver to support a profligate lifestyle.

Methodology for Disinvestment

The government did not seem to have a clear policy on the methodology of disinvestment. The Government followed the policy of open auction sale and allowed NRIs and other persons legally permitted to hold equity to participate. This method gave excellent results in 1995-95 and as against the target of Rs. 4,000 crores, the realization jumped to Rs. 4,842 crores. But later in 1999-00, the Government shifted to strategic sale. It was argued by the Disinvestment Ministry that the public offer method is dilatory and thus would take very long to complete the process of disinvestment of all PSUs. In this context, it may be pointed out that in case, public offering could succeed in the UK, Germany, France, Malaysia, China, South Africa, and Spain, what prevents its adoption in India. This method is transparent and thus liable to much less abuse. It was also successful in India during 1994-95. Thus when national and international experience gave support to a transparent methodology of privatization, there is no reason why it should not be accepted as the method in future. But it is really intriguing that in the case of HPCL and BPCL both oil giants, the Government adopted two approaches--In case of BPCL it adopted the public offering methodology and in case of HPCL to a strategic investor.

Creation of Private Monopoly in place of Public Monopoly

By accepting Tatas as strategic partners in VSNL and Reliance in IPCL, the Government substituted State Monopolies with Private Monopolies. Monopoly, whether in the public sector or in the private sector is undesirable, but a public sector monopoly is relatively less harmful than a private sector monopoly, the reason being that a public sector monopoly is accountable to the Parliament, but a private sector monopoly is not accountable and can exploit the consumer to a much greater extent.

Conclusion and Policy Suggestions

Disinvestment is the process of dilution of Government ownership by selling parts of the equity of public sector undertakings to financial institutions or institutional bidders or private enterprises. In India for almost four decades the country was following the path of development in which public sector was expected to be the engine of growth. But the poor performance of PSUs started to be reflected in low projects and in some cases mounting losses year after year. The public sector overgrew itself and its shortcomings started manifesting in the shape of low rate of return on investment, declining contribution to national saving, poor capacity utilization, over-staffing and bureaucratization leading to excessive delays and wastage of scarce resources. The government started to deregulate the areas of its operation and subsequently, the disinvestment in PSUs was announced. The process of deregulation was aimed at enlarging competition and allowing new firms to enter the market. The market thus opened domestic entrepreneurs and industrialization and norms for entry of foreign capital were liberalized.

However, the process of disinvestment has been loaded with challenges and controversies. The disinvestment process needs to be taken up more seriously by the government. The Government should try to come out with a time bound programme to conduct the process with transparency in all the activities. The disinvestment in India though slow, has helped considerably the government to unlock value of central public sector enterprises. Progressively, the government should move away from commercial activity and leave it best to the private players who are driven more by markets. If the disinvestment policy is to be in wider public interest, it is necessary to examine systematically issues such as correct valuation of shares and appropriate use of the proceeds. This, therefore, calls for utmost care and meticulous planning. Above all, some consensus is very essential. It is only then that the true benefits can be reaped.

Helpful References

Administrative Reforms Commission (ARC) Report of the Study on Public Sector Undertakings.

Chaudhary, Ranbir Ray, (2002): "Disinvestment and the FDI Debate", Business Line, Oct. 7.

Elliot Berg, (1987): "Privatization Development Pragmatic Approach", Economic Impact.

Government of India, Economic Survey 2004-05, The Hindu, August 17, 2005.

Sanyek Paul, (1985): Privatization and the Public Sector, Finance and Development.

The Hindu, December 12, 2006

The Economic Times, September 28, 2010.

The Financial Express September 7

The Tribune August 26, 2006
Table 1: Disinvestment in PSUs 1991-92 to 2011-12

 Budgeted Total
 receipt receipts
Year (Rs. crore) (Rs. crore) Transactions

1991-92 2,500.00 3,037.74 Minority shares sold in Dec,
 1991 and Feb, 1992 by
 auction method in bundles of
 "very good", "good" and
 "average" companies

1992-93 2,500.00 1,912.51 Shares sold separately for
 each company by auction

1993-94 3,500.00 -- Equity of 6 companies sold
 by auction method but
 proceeds received in 94-95.

1994-95 4,000.00 4,843.10 Shares sold by auction

1995-96 7,000.00 168.48 Shares sold by auction

1996-97 5,000.00 379.67 GDR-VSNL

1997-98 4,800.00 910.00 GDR-MTNL

1998-99 5,000.00 5,371.11 GDR-VSNL; Domestic offerings
 of CONCOR and GAIL; Cross
 purchase by 3 Oil sector
 companies i.e. GAIL, ONGC
 and IOC.

1999-00 10,000.00 1,860.14 GDR-GAIL; Domestic offering
 of VSNL; capital reduction
 and dividend from BALCO;
 Strategic sale of MFIL.

2000-01 10,000.00 1,871.26 Sale of KRL, CPCL and BRPL
 to CPSEs; Strategic sale of

2001-02 12,000.00 5,657.69 Strategic sale of CMC, HTL,
 VSNL, IBP, PPL, hotel
 properties of ITDC and HCI,
 slump sale of Hotel Centaur
 Juhu Beach, Mumbai and
 leasing of Ashok Bangalore;
 Special dividend from VSNL,
 STC and MMTC; sale of shares
 to VSNL employees.

2002-03 12,000.00 3,347.98 Strategic sale of HZL, IPCL,
 hotel properties of ITDC,
 slump sale of Centaur Hotel
 Mumbai Airport, Mumbai;
 Premium for renunciation of
 rights issue in favour of
 SMC ; Put Option of MFIL;
 Sale of shares to employees
 of HZL and CMC.

2003-04 14,500.00 15,547.41 Strategic sale of JCL; Call
 Option of HZL; Offer for
 Sale of MUL, IBP, IPCL, CMC,
 DCI, GAIL and ONGC; Sale of
 shares of ICI Ltd.

2004-05 4,000.00 2,764.87 Offer for Sale of NTPC and
 spill over of ONGC; sale of
 shares to IPCL employees.

2005-06 No target fixed 1,569.68 Sale of MUL shares to Indian
 public sector financial
 institutions and banks and

2006-07 No target fixed --

2007-08 No target fixed 4,181.39 Sale of MUL (Rs.2366.94 cr)
 shares to public sector
 financial institutions,
 public sector banks and
 Indian mutual funds and sale
 of PGCIL (Rs.994.82 cr) and
 REC (Rs.819.63 cr) shares
 through Offer for Sale.

2008-09 No target fixed --

2009-10 No target fixed 23,552.93 (Rs.2012.85--NHPC,
 Rs.2247.05--OIL and
 NTPC--8480.098, REC
 Rs.882.52, Rs.9330.42

2010-11 40,000.00 22,144.21 Rs.1062.74 SJVN, EIL 959.65,
 COAL INDIA 15199.44 CR;
 PGCIL 3721.17; MOIL 618.75
 #; SCI 582.45

2011-12 40,000.00 13,894.05 Rs.1144.55 PFC, Rs. 12749.5

2012-13 30,000.00 21,504.32 Rs. 124.97 NBCC, Rs. 807.03
 HCL, Rs. 5973.27 NMDC,
 Rs.3141 OIL, Rs. 11457.54

Grand 1,34,518.54

Source: Government of India, Department of Disinvestment


in [??] cr size invested

SAIL 1,517 1,069
Nalco 630 210
RCF 315 142
NTPC 11A 50 1,759
Oil India 3,100 Nil
NMDC 6,000 282
Hindustan Copper 808 352
Total 22,430 3,814

Source: NSE, BSE

In 2012-13, govt has divested in the following companies

Amount raised ([less than or equal to] cr)

Total 22,430
NTPC 11,450
NMDC 6,000
Oil India 3,100
Hindustan Copper 808
Nalco 630
RCF 315
NBCC 127

Source: NSE, BSE
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Author:Sharma, Neeraj
Publication:Political Economy Journal of India
Date:Jan 1, 2013
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