Disinvestment is a procedure whereby some parts of public sector enterprises (PSEs) are
sold to private organizations or individuals. There are two ways to go
This has been the procedure adopted in the majority of cases. In this case, a decision has to be made as to who would be eligible to acquire the shares – other enterprises, employees or the public at large – and the manner in which the shares are to be off-loaded.
Disinvestment involves the sale of equity and bond capital invested by the government in PSUs. It also implies the sale of government’s loan capital in PSUs through securitization. However, it is the government and not the PSUs who receive money from disinvestment.
The fixation of share/bond price is an important aspect of disinvestment. Now, the Disinvestment Commission determines the share/bond price. Disinvested shares are listed, quoted and traded on the stock market. Indian and foreign financial institutions, banks, mutual funds, companies as well as individuals can buy disinvested shares / bonds
THE ROAD TO DISINVESMENT
The cornerstone of the case for privatization is the concept that private ownership leads to better use of resources and their more efficient allocation. Throughout the world, the preference for market economy received a boost after it was realized that the State could no longer meet the growing demands of the economy and the State shareholding inevitably had to come down. The ‘State in business’ argument thus lost out and also the presumption that direct and comprehensive control over the economic life of citizens from the Central government can deliver results better than those of a more liberal system that directly responds according to the market driven forces.
Another reason for adoption of privatization policies around the globe has been the inability of the Governments to raise high taxes, pursue deficit / inflationary financing and the development of money markets and private entrepreneurship.
The rationale behind of market-oriented economic structures can be summarized as:
The objectives of the disinvestment programme vary from improving efficiency of the Public Sector Enterprises to transformation of the society.
Because of the current revenue expenditure on items such as interest payments, wages and salaries of Government employee and subsidiaries, the Government was left with hardly any surplus for capital expenditure on social and physical infrastructure. Whereas the Government should be spending on basic education, primary health and family welfare, huge amounts of resources were blocked in several non-strategic sectors such as hotels, trading companies, consultancy companies, textile companies, chemical and pharmaceuticals companies, consumer goods companies etc.
Thus, the primary objectives for privatizing the PSEs are as follows :
Benefits from Disinvestment
The benefits expected to be derived from privatization are: -
THE DISINVESMENT PROCESS
Phases of disinvestment
As per the Department of Disinvestment, the process of disinvestment in India can be
divided into 2 distinct phases:
Phase – I
This phase of the evolution of public sector reform began with the balance of payments crisis of 1991. It was also a necessary condition for obtaining IMF support, which was essential to manage the crisis and to restore confidence. One of the measures which could help to reduce the fiscal deficit was the sale of equity in public sector enterprises.
Forty seven profit making public sector enterprises were included in the first disinvestment program. Although direct sale of shares to institutions with possible resale to individuals meant that the new private shareholders would acquire voting rights (unlike the case with the earlier proposal) the government repeatedly emphasized that there would be no effective reduction in government control since the dilution of the government’s stake was limited to 20%.
In a report submitted to Parliament in 1993 the Controller and Auditor General (CAG) criticized the first year’s disinvestment program on the grounds that the bundles had been
sold at bid prices which were lower than the reserve price which the government had originally fixed for each bundle based on reserve price valuations of individual shares. Since the stock market softened considerably after 1993 it became difficult to achieve any sale without running the risk of criticism of undervaluation.
In order to explore alternative modalities for disinvestment, the government initially appointed a Committee on Disinvestment of Shares in Public Sector Enterprises under the chairmanship of Dr V. Krishnamurty, Member, Planning Commission and later reconstituted it under the Chairmanship of Dr. C. Rangarajan, Governor of the Reserve Bank to advise on the matter. The report was submitted in April 1993 and made important recommendations as follows which pointed the way forward for 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 the chronological order:
A. Interim Budget 1991-92 (Chandrasekhar Government)
Policy: To divest up to 20% of the Government equity in selected PSEs in favour of public sector institutional investors.
Objective: To broad-base equity, improve management, enhance availability of resources for these PSEs and yield resources for the exchequer.
B. Industrial Policy Statement of 24th July, 1991
Policy: To divest part Government holdings in selected PSUs
Objective: “to provide further market discipline to the performance of public enterprises”
C. Budget Speech :1991-92 (Congress Government)
Policy: To offer up to 20% of Govt. equity in selected PSUs to mutual funds and investment institutions in the public sector, as also to workers in these firms.
Objectives: “to raise resources, encourage wider public participation and promote greater accountability”.
D. Report of the Committee on the Disinvestment of Shares in PSEs (Rangarajan Committee): April 1993 emphasized the need for substantial disinvestment, and stated that
while the percentage of equity to be divested should be no more than 49% for industries explicitly reserved for the public sector, it should be either 74% or 100% for others.”
E. The Common Minimum Programme of the United Front Govt.: 1996
F. Disinvestment Commission Recommendations: Feb.1997- Oct. 1999
The following table gives the details:
Mode of disinvestment recommended
No. of Companies
A. Involving change in ownership /management
Strategic sale 29
Trade sale 8
Employee buy out /strategic sale
B. Involving no change in ownership /management offer of shares
C. No change (Disinvestment deferred)
D. Closure/sale of assets
Phase – II
This phase has often been referred to as the phase of genuine privatization. In this phase government explicitly recognized that it should withdraw from managing public sector enterprises and hand over management to private sector owners.
A. Budget Speech: 1998-99
B. Budget speech: 1999-2000
Approval of Clear Guidelines for Strategic / Non strategic Classification by the Cabinet on
the 16th March 1999
Strategic & Non-strategic Classification: Cabinet classified the PSUs into strategic and
Policy for Non-strategic Public Sector Enterprises:
Reduction of Government stake to 26% to be worked out on a case to case basis, on the following considerations:
C. Budget speech: 2000 – 2001
Policy: The main elements:
D. Budget Speech: 2001 – 2002
To use the proceeds for providing –
Magnitude of Disinvestment in India
The following table indicates the actual disinvestment from 1991-92 till date, the methodologies adopted for such disinvestment and the extent of disinvestment in different CPSUs :
(Rs. in Crore)
Minority shares sold in Dec 1991
and Feb 1992 by auction method
in bundles of “very good”,
Shares sold separately for each
company by auction method.
Equity of 6 companies sold by
received in 94-95.
Sale through auction method, in
which NRIs and other persons
legally permitted to buy, hold or
of FIIs (CONCOR, GAIL). Cross
purchase by 3 Oil sector
companies i.e. GAIL, ONGC &
MFIL’s strategic sale and others
Strategic sale of BALCO, LJMC;
Takeover – KRL (CRL), CPCL
Strategic sale of CMC – 51%,
HTL –74%, VSNL – 25%, IBP –
33.58%, PPL– 74%, and sale of
hotel properties of ITDC & HCI;
reserves from STC and MMTC
Strategic sale: HZL (26%), IPCL
(25%), HCI, ITDC, Maruti: control
rights issue, Put Option – MFIL
(26%), Shares to employees in
HZL, CMC and VSNL.
Jessop & Co. Ltd.(72% Strategic
Sale), HZL (18.92% Call Option),
through Public Offer-Maruti
(26.25%), DCI (20%), GAIL (10.%)
and ONGC (9.96%)
NTPC (5.25% Offer for Sale),
IPCL (5% to Employees) and
By sale of shares to Public
‘Differential Pricing Method’
# Figures (inclusive of control premium,dividend/dividend tax,restructuring and transfer of surplus cash reserves prior to disinvestment).
Sector wise Analysis of Disinvestment
The following data show the sector wise break up of disinvestment program in India
Manufacturing & Services