Difficulties faced in disinvestment
PSEs, being one of the largest employers in the country, their disinvestment have met with staunch opposition from trade unions and the political parties that claim to represent them. Also PSEs have always been treated as extended arms of government, and serve as sources of patronage to politicians and bureaucrats in power. They also practice methods of interference in the daily running of the enterprises, leaving the managers little or no autonomy. This is one of the reasons why India’s more than decade-long privatization program has made painfully slow progress until now.
Let’s take a look at how the process of disinvestment has been slowed down from the following examples:
Although all political parties opposed privatization, they took more varied stands by the end of the 1990s. Although both the BJP and Congress backed privatization in 2002, each qualified its support in different ways. The left-of-center political parties opposed it as well, but their opposition was less vociferous than in the past. Right-of-center groups like the Swadeshi Jagaran Manch opposed privatization because of their antipathy to foreign capital and fears that foreigners might gain more from privatization than nationals. Parties with a following among Dalits or Other Backward Castes opposed privatization because of its possible effects on jobs for their constituencies, but these fears were allayed as privatization agreements typically safeguarded the short-term interests of workers.
The formation of coalition governments at the centre has created a lot of hurdles for the process of disinvestment. Some parties like the Left oppose disinvestment at the center while pursuing the policy of privatization in the states ruled by them. To appease all parties, it has now been decided to follow disinvestment in only loss-making PSUs and the Navratnas are completely excluded from this. What needs to be understood is that though the certain PSEs may seem to be making profits, it could be because the industry as a whole is doing well. In such a case it is better to sell of when the going is good. There are too many steps involved in disinvesting a unit and there are high chances of the process getting stuck in one of the stages of the bureaucratic mire.
Conflicting objective between economic growth and equity
Employing about 19 million persons, public sector currently contributes about a quarter of India’s measured domestic output. It is also a major employer of the backward castes of the Indian society. Hence, as such, PSEs, other than the objective of contribution to economic growth, have also had larger interests such as social justice as their objective.
Disinvestment has led to loss of jobs for these people and retrenchment has become an issue as was seen in the case of sale of Modern Foods. Disinvestment, though a handsome option to reduce fiscal deficits, is not without its social costs. There are some sectors like primary education, defense etc where private sector involvement will not meet the basic objective or may harm national interests. Thus the government has to be involved in areas
where social interests cannot be fully served by private participation. Even if rate of economic growth has to be foregone, the social benefits of such a move have to be considered as the government is not a profit making body but is an instrument for overall well being of all citizens across sections of society.
Transparency: An important fact that needs to be remembered in the context of divestment is that the equity in PSUs essentially belongs to the people. Thus, several independent commentators have maintained that in the absence of wider national consensus, a mere government decision to disinvest is not enough to carry out the sale of people’s assets. Inadequate information about PSUs has impeded free, competitive and efficient bidding of shares, and a free trading of those shares. Also, since the PSUs do not benefit monetarily from disinvestment, they have been reluctant to prepare and distribute prospectuses. This has in turn prevented the disinvestment process from being completely open and transparent.
Trading concerns: The number of bidders for equity has been small not only in the case of financially weak PSUs, but also in that of better-performing PSUs. Besides, the government has often compelled financial institutions, UTI and other mutual funds to purchase the equity which was being unloaded through disinvestment. These organizations have not been very enthusiastic in listing and trading of shares purchased by them as it would reduce their control over PSUs. Instances of insider trading of shares by them have also come to light. All this has led to low valuation or under pricing of equity.
Crowding out: Further, in many cases, disinvestment has not really changed the ownership of PSUs, as the government has retained a majority stake in them. There has been some apprehension that disinvestment of PSUs might result in the “crowding out” of private corporates (through lowered subscription to their shares) from the primary capital market
Lastly, to the extent that the sale of government equity in PSUs is to the Indian private sector, there is no decline in national wealth. But the sale of such equity to foreign companies has far more serious implications relating to national wealth, control and power, particularly if the equity is sold below the correct price.
THE ROAD AHEAD
Disinvestment, though not a panacea, represents one aspect of a transformation in the place of the Government in our lives. The Government, at the moment, is a massive concentration of power that promiscuously intervenes as and when it please, frames rules to maximize its own rents and powers of patronage, uses taxes inefficiently and spends vast energies on things that are peripheral to bettering our existence.
The present disinvestment policy has been articulated in the recent President’s addresses to Joint Sessions of Parliament and the Finance Minister’s recent Parliament Budget Speeches.
The salient features of the Policy are:
(i) Citizens have every right to own part of the shares of Public Sector Undertakings
Approach for Disinvestment
On 5th November 2009, Government approved the following action plan for disinvestment in profit making government companies:
National Investment Fund
On 27 January 2005, the Government had decided to constitute a 'National Investment Fund' (NIF) into which the realization from sale of minority shareholding of the Government in profitable CPSEs would be channelised. The Fund would be maintained outside the Consolidated Fund of India. The income from the Fund would be used for the following broad investment objectives:-
Salient features of NIF:
(ii) The corpus of the National Investment Fund will be of a permanent nature
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.
i) UTI Asset Management Company Ltd.
ii) SBI Funds Management Company (Pvt.) Ltd.
iii) LIC Mutual Fund Asset Management Company Ltd.
Corpus of NIF
The corpus of the Fund is Rs.1814.45 crore being the proceeds from the disinvestment in
Power Grid Corporation and Rural Electrification Corporation. The pay out on NIF was Rs.84.81 crore in the year 2008-09, Rs.248.98 crore in the year 2009-10, Rs.107.32 crore in
2010-11 and Rs. 163.19 crores in 2011-12.
Use of Disinvestment Proceeds
The income from the Fund is to be used for the following broad investment objectives:
However, in view of the difficult economic situation caused by the global slowdown of 2008-09 and a severe drought that was likely to adversely affect the 11th Plan growth performance, the Government, in November 2009, decided to give a one-time exemption to utilization of proceeds from disinvestment of CPSEs for a period of three years – from April 2009 to March 2012 – i.e. disinvestment proceeds during this period would be available in full for meeting the capital expenditure requirements of selected social sector programmes decided by the Planning Commission/Department of Expenditure. Now as the Country is facing 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, falling revenue collection, the exemption cited above has been extended upto March 2013.
Accordingly, from April 2009, the disinvestment proceeds are being routed through NIF to be used in full for funding capital expenditure under the social sector programmes of the Government, namely:-
What is the definition of MSME?
A.1. The Government of India has enacted the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 in terms of which the definition of micro, small and medium enterprises is as under:
(a) Enterprises engaged in the manufacture or production, processing or preservation of goods as specified below:
is more than Rs.5 crore but does not exceed Rs.10 crore.
In case of the above enterprises, investment in plant and machinery is the original cost excluding land and building and the items specified by the Ministry of Small Scale Industries vide its notification No.S.O.1722(E) dated October 5, 2006 (Annex I).
(b) Enterprises engaged in providing or rendering of services and whose investment in equipment (original cost excluding land and building and furniture, fittings and other items not directly related to the service rendered or as may be notified under the MSMED Act, 2006 are specified below.
SMALL SCALE INDUSTRIES IN INDIA
GOVERNMENTAL ORGANISATIONS IN THE MSME SECTOR
National Small Industries Corporation (NSIC)
Khadi and Village Industries Commission (KVIC)
Small Industries Development Bank of India (SIDBI)
EDUCATIONAL INSTITUTES FOR THE MSME SECTOR
The Government has established three national level Entrepreneurship Development Institutes. These institutes develop training modules, undertake research and provide consultancy services for the MSME sector. All these institutes function under the Ministry of MSME
National Institute for Micro, Small and Medium Enterprises
National Institute of Entrepreneurship and Small Business
Indian Institute of Entrepreneurship (IIE)
PROGRAMMES FOR THE MSME SECTOR
Some of the important programmes are highlighted in this section. For a complete list of schemes and programmes see here and here
Cluster Development Initiative (CDI)
National Manufacturing Competitiveness Programme (NMCP)
Scheme of Fund for Regeneration of Traditional Industries (SFURTI)
Rajiv Gandhi Udyami Mitra Yojana (RGUMY)