ICAI Notes 7.2 - Liberalisation, Privatisation and Disinvestment CA Foundation Notes | EduRev

Economics for CA CPT

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CA Foundation : ICAI Notes 7.2 - Liberalisation, Privatisation and Disinvestment CA Foundation Notes | EduRev

The document ICAI Notes 7.2 - Liberalisation, Privatisation and Disinvestment CA Foundation Notes | EduRev is a part of the CA Foundation Course Economics for CA CPT.
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Learning Objectives

  • understand the meaning of liberalisation, privatisation and disinvestment.
  • trace the progress of privatisation and disinvestment in India.
  • know about the methods of disinvestment followed in India.

2.0 MEANING OF LIBERALISATION, PRIVATISATION AND DISINVESTMENT

Due to the inability of the Indian public sector enterprises in generating adequate resources for sustaining the growth process and due to other weaknesses, there had been an increasing demand for their liberalisation, privatisation and disinvestment. We shall explain the meaning of these terms in the following paragraphs:

Liberalisation: In general, liberalisation refers to relaxation of previous government restrictions usually in areas of social and economic policies. Thus, when government liberalises trade it means it has removed the tariff, subsidies and other restrictions on the flow of goods and services between countries. (Economic reforms discussed in the previous unit pertain to liberalisation measures in India).

Privatisation: Privatisation, in general, refers to the transfer of assets or service functions from public to private ownership or control and the opening of hitherto closed areas to private sector entry. Privatisation can be achieved in many ways-franchising, leasing, contracting and divesture. Of the many forms privatisation could take, divesture through equity sale is the most significant, since ownership is transferred to public/corporate entities. Certain preconditions should exist for privatisation to prove successful.

– Liberalisation and de-regulation of the economy is an essential pre-requisite if privatisation is to take off and help realise higher productivity and profits.

– Capital markets should be sufficiently developed to be able to absorb the disinvested public sector shares. 

Arguments in favour of privatisation: Privatisation is favoured on the following grounds:

(i) Privatisation will help reducing the burden on exchequer which results from the public subsidising of chronically loss making public sector units.
(ii) It will help the profit making public sector units to modernise and diversify their business.
(iii) It will help in making public sector units more competitive.
(iv) It will help in improving the quality of decision-making of managers because their decisions will be made without any political interference.
(v) Privatisation may help in reviving sick units which have become a liability on the public sector.
(vi) Without government financial backing, capital market and international market will force public sector to be efficient.

Arguments against Privatisation: Privatisation is opposed on the following grounds:

(i) Privatisation will encourage growth of monopoly power in the hands of big business houses. It will result in greater disparities in income and wealth.

(ii) Private enterprises may not show any interest in buying shares of loss-making and sick enterprises.

(iii) Privatisation may result in lop-sided development of industries in the country. Private entrepreneurs will not be interested in long-gestation projects, infrastructure investments and risky projects. It may retard growth of capital good industries and other industries where the profit margin is less.

(iv) The limited resources of the private individuals cannot meet some of the vital tasks which alter the very character of the economy. Private individuals prefer to invest money in trade, real estate and other services areas which allow small investments and where capital obtains quick returns. But for changing the very structure of the economy, the investment should go to strategic sectors of economy.

(v) The private sector may not uphold the principles of social justice and public welfare. They may look for maximising their short run profits ignoring the needs of the economy.

(vi) Given its commitments to W.T.O., the government of India cannot avoid foreign competition nor can it favour particular firms in the private sector. Under such circumstances, some of our public sector giants are best bets for becoming globally competitive firms.

(vii) It is contended that liberalisation and deregulation are very important if any firm is to deliver higher profits. Since public sector enterprises exist in a regulatory framework, they are not able to deliver higher productivity and profits. Had they been given unbridled freedom to decide prices, product-mix etc. they would have behaved like private sector and showed higher efficiency and higher returns. It is not the ownership which is important but the competitive environment. Thus, the belief that privatisation per se leads to better results itself is questionable.

Privatisation offers both opportunities and threats to the economy. We have to privatise in such a manner that we make the maximum of opportunities while at the same time minimising the threats to the economy.

Disinvestment: Disinvestment means disposal of public sector’s unit’s equity in the market or in other words selling of a public investment to a private entrepreneur.

2.1 PRIVATISATION AND DISINVESTMENT IN INDIA

Privatisation in India generally is in the form of disinvestment of equity. In general, here privatisation has not led to 100 per cent transfer of control from public sector to private sector unit. Only in exceptional cases, 100 per cent privatisation has taken place (e.g. Centaur Hotel). Following are some of the cases of privatisation in India.:

1. Lagan Jute Machinery Company Limited (LJMC).

2. Modern Food Industries Limited (MFIL).

3. Bharat Aluminicum Company Limited (BALCO).

4. CMC Limited (CMC).

5. HTL Ltd. (HTL).

6. IBP Company (IBP).

7. Videsh Sanchar Nigam Limited (VSNL).

8. India Tourism Development Corporation (ITDC).

9. Hotel Corporation of India Limited. (HCI).

10. Paradeep Phosphates Limited (PPL).

11. Jessop and Company Limited (JCL).

12. Hindustan Zinc Limited (HZL).

13. Maruti Udyog Limited (MUL).

14. Indian Petrochemical Corporation (IPCC).

15. National Thermal Power Corporation (NTPC)

2.2 METHODS OF DISINVESTMENT

In order to achieve the various objectives of disinvestment many methods of disinvestment have been formulated and implemented. Initially, equity was offered to retail investors through domestic public issues. This was followed by issuance of the Global Depository Receipts (GDRs) to tap the overseas markets. Other methods included cross-holding (the government simply selling part of its shares in one PSU to other PSUs), warehousing (government’s own financial institutions buying government’s stake in select PSUs and holding them until any third buyer emerged) and retaining golden share (retaining government’s stake up to 26 per cent in the PSU to protect its interest). Of late, the government was pursuing the Strategic Sale method. Under this method, the government sells a major portion of its stake to a strategic buyer and also gives over the management control. Under the strategic sales method, disinvestment price would be market based and not prefixed, PSUs shares’ sale would be under the Department of Disinvestment and disinvestments would be delinked from the Union Budget exercise.

Later the government decided to call off the divestment of stake through strategic sale in 13 profit-making central public sector enterprises. It is considering the public offer route to sell minority stakes in these enterprises. Disinvestment was put on hold for some times for some political reasons. The last public sector undertaking to tap the stock market was Rural Electrification Corporation in February 2008. The government’s divestment programme is all set to take off again. To begin with, National Hydroelectric Power Corporation (NHPC) would tap the capital market with their initial public offering (IPOs) [sale of 5 per cent government equity along with issuance of fresh shares totalling 10 per cent]. State-owned Oil India Ltd, Coal India and Bharat Heavy Electricals Ltd, Rail India Technical and Economic Services, Cochin Shipyard Limited, Telecommunications Consultants India Limited, Manganese Core India Limited, Rashtriya Ispat Nigam and Satluj Jal Vidyut Nigam are also in the disinvestment queue.

It is to be noted that the government, while supporting disinvestment in loss-making PSUs, plans to retain the existing navratna companies in the public sector.

2.3 PROGRESS OF DISINVESTMENT

The disinvestment programme was started in 1991-92 but the disinvestment carried out so far has been half-hearted. By the year end 2007-08, the Government could auction off very small portion of its investment in the public sector, raising Rs. 51,608 crore in the process. It has been too insignificant to affect either the structure of management or the working environment of the PSUs. In fact, it has been pointed out that the government carried out the whole exercise of disinvestment in a hasty, unplanned and hesitant way. It launched the programmes without creating the conditions for its take off. It did not get public enterprises listed on the stock exchange. Adequate efforts were not made to build up the much needed linkage between the public enterprises and the capital market.

The procedures adopted for disinvestment have suffered from ad hocism in the absence of a long-term policy of disinvestment. It narrowly focused only on disinvestment of shareholdings without taking into consideration other important issues such as the initial price offers, involvement of strategic partners, setting up of a trust, employees stock ownership and participation, handing over the enterprises to workers’ unions/cooperatives and management buy-outs etc.

It has been pointed out by many economists that the government has been undertaking disinvestment of enterprises which have been earning profits – mostly they are those which belong to the category of Navratnas or Mini-ratnas. A close perusal of the 39 PSUs which had been chosen for disinvestment/privatisation during 1991-98 revealed that out of them only 3 PSUs viz. Hindustan Cables Ltd., Hindustan Copper Ltd. and Hindustan Photo Films Manufacturing Co. Ltd. posted losses in 1997-98 but in all other 36 cases (e.g. BPCL, EIL, GAIL, HMT, BEL, etc.) the divested PSUs had been earning profits. The process of disinvestment has been referred privatisation of the profits of the profit-making enterprises and the nationalisation of losses of the loss-making enterprises.

In most of the years, the government has failed to raise the budgeted disinvestment in the capital market. Many reasons may be ascribed for this failure, but the most important is the non-acceptability of the shares of PSUs in the capital market. The token privatisation to the extent of 8-10 per cent of the share of PSUs did not enthuse the investors to buy these shares because they could hardly exercise any control on PSUs.

Thus, during the entire disinvestment programme, the public equity has been under-priced and thus has been sold for a fraction of what it could actually fetch. This is true for not only enterprises which were loss-making but also the high profile companies such as Oil and Natural Gas Corporation, Steel Authority of India, Indian Maruti Udyog Limited, VSNL and IPCL and Oil Corporation and Shipping Corporation of India etc.

As a result, the total realisation of the government from various rounds of disinvestment has been much below the target most of the times. This would be clear from the table given below:

Table : Disinvestment of Equity in Public Sector Enterprises (Rs. crores)

YearTargetRealisation
1991-922,5003,038
1992-932,5001,913
1993-943,5000
1994-954,0004,843
1995-967,000362
1996-975,000380
1997-984,800902
1998-995,0005,371
1999-0010,0001,892
2000-0110,0001,869
2001-0212,0005,632
2002-0312,0003,342
2003-0414,50015,547
2004-054,0002,765
2005-06Not Fixed1,567
2006-07Not Fixed-
2007-08Not Fixed2,367


SUMMARY

Liberalisation, privatisation and disinvestment are the outcomes of the modern economic world. Liberalisation refers to relaxation of government’s restrictions in the arena of economic and social policies. Privatisation refers to partial or full transfer of ownership and control of PSUs to the private sector. Disinvestment is one of the methods of privatisation. It means selling of government share in one PSU to other PSUs or private sector or banks.In India, disinvestment has progressed slowly. It has been carried out in a hasty, unplanned and hesitant manner. As a result, the progress has been quite poor.

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