Disinvestment Policy Of India
Disinvestment
Policy of India is the policy by the “Government of India” where in the
government would liquidate the asset of the Public Sector partially or fully.
The
decision of disinvestment were:-
1. To reduce fiscal burden
2. Bridge the revenue shortfall of the
government
The key engine in achieving growth in India during post-independence was played by the Public Sector Enterprises. Disinvestment policies are commonly followed by the government to allocate resources efficiently. For example:- Government announced the disinvestment in BPCL a government oil and gas subsidiary.
Background
All of the
records are based on the year 1951-2001
The dominance of public
sector would lead to reduce in inequality of income and wealth and advance the
general prosperity of the nation.
v Main objectives for setting up PSE according to the
planner:-
1. To help in the rapid growth of the economy.
2. To earn return on investment thus generate resources
for development.
3. To promote re-distribution of income and wealth.
4. To create employment opportunities.
5. To promote balanced regional development.
In tune with the widespread belief at
that time, the 2nd Five year plan stated very clearly that ‘the
adoption of socialist pattern of society as the national objective as well as
need for planned and rapid development, require that all industries of basic
and strategic importance or in the nature of public utility service should be
in the public sector. Other industries which are essential and require
investment on a scale which only the state in the present circumstances could
provide have also to be in public sector. The state has therefore to assume
direct responsibility for the future development of industry over a wider area.’
The Second Plan also emphasized on the “public sector has to expand rapidly.” It has not to only to initiate developments which the private sector either unwilling or unable to undertake it has to play the dominant role in shaping the entire pattern of investment in the economy whether it makes the investment directly or indirectly or are made by the private sector. The private sector has to play a significant role in disinvestment.
Growth of Investment
The investment in the public
sector has thus grown from Rs.29 crore on 1.5.1951 to Rs.2,74,114 crore on
31.3.2001. The growth of investment in the in the central public sector
enterprises including those enterprises that are under construction over the
years is given.
" While the case for
economic reforms may take good note of the diagnosis that India has too much
government interference in some fields, it ignores the fact that India also has
insufficient and ineffective government activity in many other fields,
including basic education, health care, social security, land reforms and the
promotion of social change. This inertia, too, contributes to the persistence
of widespread deprivation, economic stagnation and social inequality."
-Amartya Sen & Jean Dreze
In India for almost four
decades the country was pursuing a 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 staffing and poor work
ethics, over capitalization due to substantial time and cost overruns,
inability to innovate, take quick and timely decisions, large interference in
decision making process etc.
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 entrepreneurs / industrialists and norms
for entry of foreign capital were liberalized.
v Prior to 1991,
a large number of industries were reserved for the public sector:
- Arms and Ammunition / items of defence equipment
- Atomic Energy
- Iron & Steel
- Heavy casting and forging of iron and steel
- Heavy plant and machinery for iron and steel
production
- Heavy electric production
- Coal and lignite
- Mineral oils
- Mining of iron ores, chrome ore, sulphur, gold etc
- Mining and processing copper, lead, zinc, tin etc
- Minerals used in Atomic research
- Aircraft
- Air transport
- Rail Transport
- Ship Building
- Telephones and
telephone cables, telegraphs
- Generation and distribution of electricity
Through the notification
of 477(E) dated 25/7/1991 the industry reserved for PSU’s were reduced to
eight or nine from the previous list.
v Industry reserved for PSU after 1991 reforms
were:
- Arms and Ammunition / items of defence equipment
- Atomic Energy
- Coal and lignite
- Mineral oils
- Mining of iron ores, chrome ore, sulphur, gold etc
- Mining and processing copper, lead, zinc, tin etc
- Minerals used in Atomic research
- Rail Transport
v Industry reserved for PSU after December 2002
were:
- Atomic Energy
- Minerals used in Atomic research
- Rail Transport
Because of the current
revenue expenditure on items such as interest payments, wages and salaries of
Government employees and subsidies, the Government is left with hardly any
surplus for capital expenditure on social and physical infrastructure. While
the Government would like to spend on basic education, primary health and
family welfare, substantial number of resources are blocked in several
non-strategic sectors such as hotels, trading companies, consultancy companies,
textile companies, chemical and pharmaceuticals companies, consumer goods
companies etc. Not only this - the continued existence of the PSEs is forcing
the Government to commit further resources for the sustenance of many
non-viable PSEs. The Government continues to expose the taxpayers' money to
risk, which it can readily avoid. To top it all, there is a huge amount of debt
overhang, which needs to be serviced and reduced before money is available to
invest in infrastructure. All this makes disinvestment of the Government stake
in the PSEs absolutely imperative.
v Primary Objectives for privatizing the PSE’s:
- Releasing substantial number of public resources
locked up in non-strategic PSEs, for redeployment in areas that are much higher
on the social priority, such as, basic health, family welfare, primary
education and social and essential infrastructure
- Stemming further outflow of scarce public resources
for sustaining the unviable nonstrategic PSEs.
- Reducing the public debt that is· threatening to
assume unmanageable proportions.
- Transferring the commercial risk, to which the
taxpayers' money locked up in the public sector is exposed, to the private
sector wherever the private sector is willing and able to step in the money
that is deployed in the PSEs is really the public money and is exposed to an
entirely avoidable and needless risk, in most cases.
- Releasing other tangible and intangible resources,
such as, large workforce currently locked up in managing the PSEs, and their
time and energy, for redeployment in high priority social sectors that are
short of such resources.
v Other benefits expected from disinvestment:
- Disinvestment would expose the privatized companies to
market discipline, thereby forcing them to become more efficient and survive or
cease on their own financial and economic strength. They would be able to
respond to the market forces much faster and cater to their business needs in a
more professional manner. It would also facilitate in freeing such companies
from Government control and introduce corporate governance in the privatized
companies.
- Disinvestment should result in wider distribution of
wealth through offering of shares of privatized companies to small investors
and employees.
- 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 exit options, 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 quantitative restrictions removed and tariff
levels revised owing to opening of world markets/WHO agreements, domestic
industry has to compete with cheaper imported goods. In the bargain, the
average person now has access to a complete 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.
Disinvestment Policy
The policy of the Government
on disinvestment has evolved over a period and it can be briefly stated in the
form of following policy statements made in chronological order:
v Interim Budget 1991-92 (Chandrashekhar Government)
- The policy, as enunciated by the Government, under the
Prime Minister Shri Chandrashekhar was to divest up to 20% of the Government
equity in selected PSEs in favor of public sector institutional investors. The
objective of the policy was stated to be too broad-base equity, improve
management, enhance availability of resources for these PSEs and yield
resources for the national treasury.
v Industrial Policy Statement of 24th July 1991
- The Industrial Policy Statement of 24th 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 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.
v Report of the Committee on the Disinvestment of Shares
in PSEs (Rangarajan Committee): April 1993
- The Rangarajan Committee recommendations emphasized
the need for substantial disinvestment. It stated that the percentage of equity
to be' divested could be up to 49% 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%, that is, disinvestment could take place to the extent of
74%. In all other cases, it recommended 100% divestment of Government stake.
Holding of 51 % or more equity by the Government was recommended only for 6
Schedule industries, namely:
Ø Coal and lignite
Ø Mineral oils
Ø Arms and Ammunition
Ø Atomic Energy
Ø Radioactive Material
Ø Railway Transportation
v However, the Government did not take any decision on the
recommendations of the Rangarajan Committee.
v The Common Minimum Program of the United Front
Government: 1996
- 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 a
transparent manner;
- Job security, opportunities for retraining and
redeployment to be assured
v 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 PSEs. The recommendations indicated a shift from
public offerings to strategic/ trade sales, with transfer of management.
The Ministry of Finance had
prepared for consideration of the Cabinet Committee on Disinvestment a
paper on the feasibility and modalities of setting up an Asset Management
Company to hold, manage and dispose the residual holding of the Government in
the companies in which Government equity has been disinvested to a strategic
partner.
On 27th December 2002, the CCD decided that Multi
State Cooperative Societies under the Dept. Of Fertilizers be allowed to
participate in the disinvestment of fertilizer PSUs including National
Fertilizers Ltd. (NFL).
Key issues in
Disinvestment
v Performance
If one examines the
performance of the PSUs by the yardstick (a measure used for comparison) of
objectives they were expected to achieve one would observe that many of these
objectives have at best met with limited success. The return of the investment
in the PSUs was quite poor since the last two decade and they were not able to
generate resources for development. The survey shows that between 1986-87 &
1997-98 the central government owned PSEs as a whole never earned post tax
profits exceeds 5% of total sales or 6% of capital employed. Thus the return
earned by the public sector was significantly lower than the rate of return for
a time deposit of one year in commercial banks. Also the PSEs highest return on
capital employed is at least 3% points below the interest paid by the central
government on its borrowing. Huge relief had to be given to PSEs to cover up
huge losses.
v The revival packages given to PSEs
- Conversion if cash losses to interest free loans or
equity
- Moratorium on payment of all loans
- Interest holidays on outstanding government loans
- Write off of outstanding non-plan loans
- Conversion of loans into equity
- Conversion of outstanding cash credit into capital
term loan
- Concession on existing power tariff
- Release of free loans
- Conversion of loan to equity
Despite
of huge investment shown above the Government has nit been able to achieve
required turn over in any sick companies shown in the table
Of
total operating PSEs as on 31.3.01 which are 234, 111 were making losses and 66
were register with the BIFR (Borad of Industrial and Financial Reconstruction)
The
Public Sector Enterprises Survey 2000-01 shows that out of the equity invested
in the central government PSEs (Rs. 86125 crore) the central government , state
government holding companies and foreign investors held as a much as Rs. 83725
cr. Of the remaining equity Rs. 2427 crore a substantial chunk was held by the
financial institution and banks. This there has been little redistribution of
wealth to small investor / public at large either.
v National Sample Survey Organization Statistics
Employability Statistics
|
Total Workforce in India |
Rural : Urban: Total : |
269 Million 86 Million 355 Million |
|
Total Workforce in Organized Sector |
Government: Private: Total: |
20 Million 7 Million 27 Million |
|
Total Workforce in PSEs |
About: |
2 Million |
|
Investment supporting the workforce |
- |
2,74,114 cr. |
Legal Issues
Since the “Ministry of Disinvestment” came into being in December 1999 there have been substantial number of lawsuit filed against the process for various reasons
Summary of related court cases
As on 31.3.2002
|
Total Number of cases |
40 |
|
ITDC related cases |
23 |
|
Total cases out of 40 dismissed |
21 |
|
Number of pending cases |
19 |
|
Out of pending cases related to ITDC cases
transferred to Supreme Court |
7 |
Disinvestment
Commission
- To draw a comprehensive overall long-term
disinvestment program growth 5-10 years for PSUs referred to its CORE Group.
-
To determine the
extent of disinvestment in each PSUs.
-
To prioritize the
PSUs referred to it by the CORE Group in terms of the overall
disinvestment-program
- To recommend he preferred mode(s) of disinvestments foreach
PSUs. Also suggest an approximate mix of various alternatives considering the
market condition.
- To recommend a mix between the primary and secondary
disinvestment considering Government objectives the relevant PSUs funding
according to their conditions.
- To supervise overall sale process and take decisions
on instruments, pricing, timing etc.
- To select the financial advisors for the specified
PSUs to facilitate the disinvestment
process.
- To ensure that appropriate measures are taken during
the disinvestment process to protect the interest of the affected employees
including encouraging employees’ participation in sales process.
- To monitor the process of disinvestment and take
necessary steps and report periodically to the government.
- To assist the government to create public awareness of
the government disinvestments policies with the view of developing the
societies.
- To give a wide publicity to the disinvestment
proposals so as to ensure the larger public participation in the shareholding
of the enterprise.
- To advise the government on capital restructuring of
the enterprise by marginal investment if required so as to ensure enhance
realization through disinvestment.
The Disinvestment Commission will
be an advisory body and the government will take a final decision on the
companies to be disinvested and mode of disinvestment on the basis of advice given
by the Disinvestment Commission. The PSUs would implement the decision of the government
under the overall supervision of the Disinvestment Commission.
The Commission, while advising the
Government on the above matters, will also take into consideration the
interests of stakeholders, workers, consumers and others having a stake in the
relevant public sector undertakings.
Disinvestment Examples
The Government has already transferred
50 percent of the company’s liabilities and debt to another special purpose
entity and plans to reduce further debt to attract bids for the company. The
total transfer of liabilities and debt currently stands at Rs 30,000 crore,
leaving only about Rs 23,000 crore of debt on the balance sheet.
In addition, the bidder can now decide
how much debt they are willing to take on; it could be zero as well. The debt
level that was pre-fixed earlier has now been unfettered and therefore, EV
(enterprise value) bidding can now take place.
With pandemic in the picture, Air India
has suffered huge operational losses worsening financial health. Keeping this
in mind, the government has already, by the end of the second quarter, provided
Rs 1000 crore to the troubled airline, having incurred a loss of Rs 2750 crore
in the quarter ended June 2020.
The response, after these tweaks, has
been enthusiastic, with the government receiving several expressions of
interest (EoI) for the troubled airline. The foremost bidder has been the Tata
Group, which has a sentimental value attached to the airline since Air India
emerged out of Tata Airlines in 1946.
The other bidder is a consortium of Air
India employees and Interups Inc. The bid propounds to provide a 51 percent
stake to the employee association that include 219 staffers and the remaining,
49 percent stake, goes to Interups Inc.
Life Insurance Corporation of India: The Government announced the
disinvestment in the largest insurer of the country this year. LIC holds
approximately 69 percent of the market share. LIC disinvestment is a unique
case as disinvestment in the state-owned insurer will demand amendments to the
LIC Act. LIC Act governs several operations of the company, such as the
transfer of surpluses, government guarantee on policies, etc.
Sources close to the matter say that the
Government may be looking to sell a 25 percent stake in the company. However,
the 25 percent sale will be achieved in stages with the first stage only
offering a 5 percent sale. The expectation from the 5 percent sale is to raise
over Rs 50,000 crores. The Government has appointed Deloitte and SBI Capital
markets as their transaction advisors, which is the first step of the
disinvestment process.
Sources:-
- https://tavaga.com/blog/what-is-disinvestment-types-examples/#past-disinvestment-activity-of-psus
- https://www.slideshare.net/madydey/ppt-on-disinvestment-7660700
- https://www.business-standard.com/topic/disinvestment
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