Disinvestment or privatization

Disinvestment Policy in PSU

The concept of Disinvestment of Public Sector Units have not been fabricated or formulated over a night. For the clear cut Understanding of Disinvestment of Public Sector one has to peep into history of evolution of this concept. For that one has to study this concept in chronological order of its evolution which is given below:

v Initial Phase:

The divestment policy, as enunciated by the Chandrashekhar Government in the Interim Budget 1991-92, was to divest up to 20% of the Government equity in selected PSEs in favour of public sector institutional investors. The objective of the policy was stated to be to broad-base equity, improve management, enhance availability of resources for these PSEs and yield resources for the exchequer.

The Industrial Policy Statement of 24^th July 1991 stated that the government would divest part of its holdings in selected PSEs, but did not place any cap on the extent of disinvestment. Nor did it restrict disinvestment in favour of any particular class of investors. The objective for disinvestment was stated to be to provide further market discipline to the performance of public enterprise. However, Budget speech 1991-92, reinstated the cap of 20% for disinvestments and eligible investors’ universe was again modified to consist of mutual funds and investment institutions in the public sector and the workers in these firms. The objectives too were modified, the modified objectives being: “to raise resources, encourage wider publics participation and promote greater accountability.”

In 1993Government of India set up a Committee of Disinvestment in Public Sector Enterprise under the chairmanship of C. Rangarajan.

The Common Minimum Programme of the United Front Government: 1996, sought to carefully examine the pubic sector non-core strategic areas and to set up a Disinvestment Commission for advising on the disinvestment related matters; to take and implement decision to disinvest in a transparent manner; and to ensure job security, opportunities for retraining and redeployment. No disinvestment objectives was, however, mentioned in the policy statement.

Pursuant to the above policy of the United Front Government, a Disinvestment Commission was formed in 1996. It made recommendation of 58 PSEs. The recommendations indicated a shift from publics offerings to strategic/ trade sales, with transfer of management, as the following table shows:

Mode of disinvestment recommended	Number of PSEs
A. Involving change in ownership/management
1. Strategic sale	29
2. Trade sale	08
B. Involving no change in ownership/
Management Offer of shares	05
C. No change
1. Disinvestment deferred	11
2. No disinvestment	01
D. Closure/ sale of assets	04
GRAND TOTAL	58

v The Second Phase:

In its first budgetary pronouncement (1998-99), the new Government decided to bring down Government shareholding in the PSUs to 26% in the generality of cases, (thus facilitating ownership changes, as was recommended by the Disinvestment Commission). It however, stated that Government would retain majority holdings in PSEs 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 in Budget Speech, was to strengthen strategic PSUs, privatize non-strategic PSUs through gradual disinvestment or strategic sale and devise viable rehabilitation strategies for weak units. A highlight of the policy was that the expression ‘privatisation’ was used for the first time.

Strategic & Non-strategic Classification:

On 16^th March 1999, the Government classified the Public Sector Enterprises into strategic and non-strategic areas for the purpose of disinvestment.

It was decided that the Strategic Public Sector Enterprises would be those in the areas of arms and ammunitions and the allied items of defense equipment, defense air-crafts and warships; atomic energy (except in the areas related to the generation of nuclear power and application of radiation and radio-isotopes to agriculture medicine and non-strategic industries); and railway transport.

All other Public Sector Enterprises were to be considered non-strategic. For the non-strategic Publics Sector Enterprise, it was decided that the reduction of Government stake to 26 per cent 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 per cent or to 26 per cent, would be taken on the following considerations: Whether the industrial sector requires the presence of the public sector as countervailing force to prevent concentration of power in private hands, and whether the industrial sector requires a proper regulatory mechanism to protect the consumer interest before public sector enterprises are privatized.

The highlights of the policy for the year 2000-01 were that 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% if necessary, that there would be increasing emphasis on strategic sales and that the entire proceeds from disinvestment/ privatization would be deployed in social sector, restructuring of PSEs and retirement of public debt.

According to a policy state laid in both the Houses of Parliament on December 9, 2002, the main objective of disinvestment is to put national resources and assets to optimal use and in particular to unleash the productive potential inherent in our public sector enterprises.

v DISINVESTMENT COMMISSION

In pursuance of the common Minimum Programme of the United Front, Government of India constituted a Public Sector Disinvestment Commission on 23^rd August, 1996, with the following broad terms of reference:

1. To draw a comprehensive overall long term disinvestment programme within 5-10 years for the PSUs referred to it by the Core Group.

2. To determine the extent of disinvestment (total/partial indicating percentage) in each of the PSU.

3. To prioritize the PSU referred to it by the Core Group in terms of the overall disinvestment programme.

4. To recommend the preferred mode(s) of disinvestment (domestic capital markets/ international capital markets/auction/private safe to identified investors/any other) for each of the identified PSUs. Also to suggest an appropriate mix of the various alternatives taking into account the market conditions.

5. To recommend a mix between primary and secondary disinvestment taking into account Government’s objective, the relevant PSU’s funding requirement and the market conditions

6. To supervise the overall sale process and take decisions on the instrument, pricing, timing, etc. as appropriate.

7. To select the financial advisers for the specified PSUs to facilitate the disinvestment process.

8. To ensure that appropriate measures are taken during the disinvestment process to protect the interest of the affected employees including encouraging employees’ participation in the sale process.

9. To monitor the progress of disinvestment process and take necessary measures and report periodically to the Government on such progress.

10. To assist the Government to create public awareness of the Government’s disinvestment policies and programmes with a view to developing a commitment by the people

11. To give wide publicity to the disinvestment proposals so as to ensure larger public participation in shareholding of the enterprises; and

12. To advise the Government on possible capital restructuring of the enterprises by marginal investments, if required, so as to ensure enhanced realization through disinvestment.

The Disinvestment Commission is an advisory body and its role and function would be to advise the Government on Disinvestment in those public sector units that are referred to it by the Government. The Commission shall also advise the Government, and also carry out any other activities relating to disinvestment as may be assigned to it by the Government. In making its recommendations, the Commission is also required to take into consideration the interest of workers, employees and other stake holders, in the public sector units(s). the final decision on the recommendations of the Disinvestment Commission vests with the Government.

The Commission has recommended disinvestment at varying levels for a number of PSUs (E.g: MFIL, GAIL, MTNL, CONCOR, PHL, ET&T, HVOC, HCIL, RICL, R-Ashok and U-Ashok and NALCO).

Strategic sales in various proportions have been recommended for many enterprises, like BALCO, ITI, HTL, KIOCL, ITDC, BRPL, MFL, HCL, SCI, EIL, EPIL, HPL, IBP, NEPA, H/L, PPCL, FACT, HLL, IPCL, NFL and SAIL

For several enterprises, namely, ONGC, MOIL, OIL, RITES, PGCL, NTPCK, NCL and NHPC, the commission has advocated no disinvestment for the present.

v PROGRESS:

The privatization process began in India 1991-92 with sale of minority stakes in some PSUs. From 1999-2000 onwards, the focus shifted to strategic sales. Privatization is an integral part of disinvestment so one has to think about it so we should start it with its definition so as we can get the further insight in it.

Privatization means transfer of ownership and/ or management of an enterprise form the public sector to the private sector. It also means the withdrawal of the State from an industry or sector, partially or fully. Another dimension of privatization is opening up of an industry that has been reversed for the public sector to the private sector.

· Expansion of Public Sector and Its Defects

Regardless of whether socialist or market-oriented, a large number of countries in the 1960s and 1970s saw an expansion of the public sector, and in particular an expansion of state-owned enterprises, across a broad front. In the 1960s, there was a trend towards nationalization in Britain. But, since the late 1970s, the trend was towards privatization by selling State-owned enterprises (SOEs). It indeed became a universal trend.

The performance of SOEs in many countries was, by and large, been far from satisfactory. They often put large burdens on public budgets and external debt.

The heavy financial burden imposed by the SOEs and the growing public discontent against them due to their inefficiency, indifferent, irresponsible and sometimes even arrogant attitude and lack of concern for the customer needs; and corruption, nepotism ad squander associated with their organizations and management led to the growing interest in privatization. As Professor Samuel Paul points out, in country after country, unbridled state expansion has led to:

1. Economic inefficiency in the production activities of the public sector, with high costs of production, inability to innovate, and costly delays in delivery of goods produced;

2. In effectiveness in the provision of goods and services, such as failure to meet intended objectives, diversion of benefits to elite groups, and political interferences in the management of enterprises; and

3. Rapid expansion of the bureaucracy, severely straining the public budget, causin problems in labour relations within the public sector, inefficiency in government, and adverse effects on the whole economy.

Theses problems have led many governments to undertake programmes of public sector reforms, and pushed by a need to curb public expenditure, to reevaluate the possibilities for shifting publicly managed activities into the private sector.

· Benefits of Privatization

Privatization benefits the society in several ways. The fact that privatization is an important strategy of economic rejuvenation of even the ‘communist’ nations is a testimony to the economic role of privatization.

Countries like the U.K. have shown how it could help solve the fiscal crisis of the State and to usher in a new industrial democracy. The benefits of privatization may be listed down as follows.

1. It reduces the fiscal burden of state by relieving it of the losses of the SOEs and reducing the size of the bureaucracy.

2. Privatization of SOEs enables the government to mop up funds. Government of India’s Budget for 2000-2001 proposed to raise Rs. 10,000 crore during the year through privatization. (The achievement, however, was dismal as the privatization plan could not be carried out in real earnest due to various reasons).

3. Privatization helps the State to trim the size of the administrative machinery.

4. It enables the government to concentrate more on the essential State functions.

5. Privatization helps accelerate the pace of economic development as it attracts more resources form the private sector for development.

6. It may result in better management of the enterprises.

7. Privatization may also encourage entrepreneurship

8. Privatization may increase the number of workers and common man who are shareholders. This could make the enterprises subject to more public vigilance.

UPA GOVERNMENT’S POLICY

The communist parties, with whose support the United Progressive Alliance Government was formed in May 2004, have tried to control the progress of privatization. The statement of the Common Minimum Programme (CMP) made by the Government has proposed a case-by-case approach towards privatization. It has been stated the Government is ‘generally’ against privatization of profit making public sector undertakings. It was also decided to windup the ministry of Disinvestment.

The policy reforms, however, has set the stage for privatization. For instance, evenif the government will shy away from privatization of the baking sector, it is likely to take place by rapid growth of existing private sector banks, establishment of new private sector banks and expansion of business of the foreign banks.

DISINVESTMENT IN PUBLIC ENTERPRISES

Year	Target (Rs. Crore)	Achievements (Rs. Crore)
1991-92	2500	3038
1992-93	2500	1913
1993-94	3500	-
1994-95	4000	4483
1995-96	7000	362
1996-97	5000	380
1997-98	4800	902
1998-99	5000	5371
1999-00	10000	1829
2000-01	10000	1869
2001-02	12000	5632
2002-03	12000	3348
2003-04	14500	15547