DISINVESTMENT IN INDIA What Does Disinvestment Mean? 1. The action of an organization or government selling or liquidating an asset or subsidiary.

Also known as "divestiture". 2. A reduction in capital expenditure, or the decision of a company not to replenish depleted capital goods. Investopedia explains Disinvestment 1. A company or government organization will divest an asset or subsidiary as a strategic move for the company, planning to put the proceeds from the divestiture to better use that garners a higher return on investment. 2. A company will likely not replace capital goods or continue to invest in certain assets unless it feels it is receiving a return that justifies the investment. If there is a better place to invest, they may deplete certain capital goods and invest in other more profitable assets. Alternatively a company may have to divest unwillingly if it needs cash to sustain operations. Read more: http://www.investopedia.com/terms/d/disinvestment.asp#ixzz1VHskd9TM

In finance and economics, divestment or divestiture is the reduction of some kind of asset for either financial or ethical objectives or sale of an existing business by a firm. A divestment is the opposite of an investment.

Motives
Firms may have several motives for divestitures. First, a firm may divest (sell) businesses that are not part of its core operations so that it can focus on what it does best. For example, Eastman Kodak, Ford Motor Company, and many other firms have sold various businesses that were not closely related to their core businesses. A second motive for divestitures is to obtain funds. Divestitures generate funds for the firm because it is selling one of its businesses in exchange for cash. For example, CSX Corporation made divestitures to focus on its core railroad business and also to obtain funds so that it could pay off some of its existing debt. A third motive for divesting is that a firm's "break-up" value is sometimes believed to be greater than the value of the firm as a whole. In other words, the sum of a firm's individual asset liquidation values exceeds the market value of the firm's combined assets. This encourages firms to sell off what would be worth more when liquidated than when retained. A fourth motive to divest a part of a firm may be to create stability. Philips, for example, divested its chip division called NXP because the chip market was so volatile and unpredictable that NXP was responsible for the majority of Philips's stock fluctuations while it represented only a very small part of Philips NV.

A fifth motive for firms to divest a part of the company is that a division is under-performing or even failing. A sixth reason to divest could be forced on to the firm by the regulatory authorities, for example in order to create competition.

[edit] Divestment for financial goals

Often the term is used as a means to grow financially in which a company sells off a business unit in order to focus their resources on a market it judges to be more profitable, or promising. Sometimes, such an action can be a spin-off. (For the United States); Divestment of certain parts of a company can occur when required by the Federal Trade Commission before a merger with another firm is approved. A company can divest assets to wholly owned subsidiaries. The largest, and likely most famous, corporate divestiture in history was the 1984 U.S. Department of Justice-mandated breakup of the Bell System into AT&T and the seven Baby Bells.

[edit] Method of divestment

Some firms are using technology to facilitate the process of divesting some divisions. They post the information about any division that they wish to sell on their website so that it is available to any firm that may be interested in buying the division. For example, Alcoa has established an online showroom of the divisions that are for sale. By communicating the information online, Alcoa has reduced its hotel, travel, and meeting expenses. With Economic liberalization of the Indian economy, Ministry of Finance of India had set up a separate Department of Disinvestments.

The role of the State vs. Market has been one of the major issues in development economics and policy. In a mixed economy such as India, historically the public sector had been assigned an important role. However, in the year 1991 the national economic policy underwent a radical transformation. The new policy of liberalization, privatization and globalization de-emphasized the role of the public sector in the nations economy. The faculty at IIT-Bombay has been studying various aspects of the New Economic Policy such as financial sector reforms, fiscal implications of reforms, and of globalization. To date several arguments have been proffered by the apologists of market-oriented economic structures: the government must not enter into those areas where the private sector can perform better market-driven economies are more efficient than the state-planned economies the role of the state should be as a regulator and not as the producer government resources locked in commercial activities should be released for their deployment in social activities.

It is also contended that the functioning of many public sector units (PSUs) has been characterized by low productivity, unsatisfactory quality of goods, excessive manpower utilization, inadequate human resource development and low rate of return on capital. For instance, between 1980 and 2002, the average rate of return on capital employed by PSUs was about 3.4% as against the average cost of borrowing, which was 8.66%. Disinvestment (or divestment) of the PSUs has therefore been offered as one of the solutions in this context. Disinvestment involves the sale of equity and bond capital invested by the government in PSUs. It also implies the sale of governments 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...... Disinvestment is generally expected to achieve a greater inflow of private capital and the use of private management practices in PSUs, as well as enable more effective monitoring of management discipline by the private shareholders. Such changes would lead to an increase in the operational efficiency and the market value of the PSUs. This in turn would enable the much needed revenue generation by the government and help reduce deficit financing. However, to date the market experience has been otherwise. The large national budgetary deficit on revenue account has been increasing. The government has not used the disinvestment proceeds to finance expenditure on capital account; i.e. the disinvestment policy has resulted in capital consumption rather than generation. Administrative costs of the disinvestment process have also been unduly high. The actual receipts through disinvestment have often fallen far short of their target (see figure). During the period 1991-92 to 2002-2003, the government had targeted the mobilization of about Rs. 78,300 crores through disinvestment, but it could actually mobilize only Rs. 30,917 crores. Problems associated with Disinvestment A number of problems and issues have bedevilled the disinvestment process. 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. 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......more on next page 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 peoples 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. It is not clear if the rationale for divestment process is well-founded. The assumption of higher efficiency, better / ethical management practices and better monitoring by the private shareholders in the case of the private sector all of which supposedly underlie the disinvestment rationale is not always borne out by business trends and facts. Total disinvestment of PSUs would naturally concentrate economic and political power in the hands of the private corporate sector. The US economist Kenneth Galbraith had visualized a role of countervailing power for the PSUs. While the creation of PSUs originally had economic, social welfare and political objectives, their current restructuring through disinvestment is being undertaken primarily out of need of government finances and economic efficiency. 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! If the disinvestment policy is to be in wider public interests, it is necessary to examine systematically, issues such as - the correct valuation of shares, the crowding out possibility, the appropriate use of disinvestment proceeds and the institutional and other prerequisites.
Disinvestment, sometimes referred to as divestment, refers to the use of a concerted economic boycott, with specific emphasis on liquidating stock, to pressure a government, industry, or company towards a change in policy, or in the case of governments, even regime change. The term was first used in the 1980s, most commonly in the United States, to refer to the use of a concerted economic boycott designed to pressure the government of South Africa into abolishing its policy of apartheid. The term has also been applied to actions targeting Iran, Sudan, Northern Ireland, Myanmar, and Israel.

Criticism
Some hold that divestment campaigns are based on a fundamental misunderstanding of how equity markets work. John Silber, former president of Boston University, observed that while boycotting a company's products would actually affect their business, "once a stock issue has been made, the corporation doesn't care whether you sell it, burn it, or anything else, because they've already got all the money they're ever going to get from that stock. So they don't care." [2] Regarding the more specific case of South Africa, John Silber recalled: ...when the students were protesting the South African situation, I met with them, and they said BU must divest in General Motors and IBM. And I said, "Why should we do that? Is it immoral to own that stock?" Absolutely immoral to own it. And I said, "So then, we're supposed to sell it to somebody? We can't divest unless we sell it to somebody. And if we burn the stock, that just helps General Motors, because it reduces the amount of stock outstanding, so that can't be right. If we sell it to somebody, we have just gotten rid of our guilt in order to impose guilt on somebody else." [2]

The common perception about the effectiveness of divestment lies in the belief that institutional selling of a certain stock lowers its market value. Therefore, the company's networth becomes devalued and the owners of the company may lose substantial paper assets. In addition, institutional divestment may encourage other investors to sell their stocks for fear of lower prices, which in turn lowers prices even further. Finally, lower stock prices limits a corporation's ability to sell a portion of their stocks in order to raise funds to expand the business.
The founding fathers of our republic used the public sector as an essential and vibrant element in the building-up of Indias economy. One of the basic objectives of starting the public sector in India was to build infrastructure for economic development and rapid economic growth. Since their inception, public enterprises have played an important role in achieving the objective of economic growth with social justice. However economic compulsions, viz., deterioration of balance of payment position and increasing fiscal deficit led to adoption of a new approach towards the public sector in 1991. Disinvestment of public sector undertakings (USUs) is one of the policy measures adopted by the government of India for providing financial discipline and improve the performance of this sector in tune with the new economic policy of Liberalisation, Privatisation and Globalisation, Privatisation and Globalisation (LPG) through the 1991 Industrial Policy Statement. The aims of disinvestments policy are: (i) raising of resources to meet fiscal deficit; (ii) encouraging wider public participation including that of workers; (iii) penetrating market discipline within public enterprises; and (iv) improving performance. This book deals with the origin, role, performance and problems of public sector enterprises and the policy adopted for the development of these enterprises since 1991. At the same time, the book also gives an account of Privatisation/Disinvestment policy, procedure, proceeds and performance of disinvested public sector enterprises in India. The Book will be useful to policy makers, pioneers, academicians, researchers, investors, post-graduate students and persons having interest in the study of privatization/disinvestments of public sector enterprise. Contents : Preface / Genesis and Need of Public Sector Enterprises in India / Development and role of Public Sector Enterprises in India / Efficiency, Profitability and Performance Appraisal of Public Sector Enterprises After Economic Reforms / Rationale and Methods of Privatisation / Disinvestment of Public Sector enterprises in India / A Critical Evaluation of Privatisation and Disinvestment / Appendices / Bibliography.

Current disinvestment policy of government of India

by Vaibhav on October 29, 2010
Since independence, India followed the mixed economy framework by combining the advantages of the market economic system with those of the planned economic system. In 1991, India met with an economic crisis relating to its external debt the government was not able to make repayments on its borrowings from abroad. The origin of the financial crisis can be traced from the inefficient management of the Indian economy in the 1980s. For implementing various policies and its general administration, the government generates funds from various sources such as taxation, running of public sector enterprises etc. When expenditure is more than income, the government borrows to finance the deficit from banks and also from people within the country and from international financial institutions. When goods were imported like petroleum, payment was made in dollars

which were earned from exports. Development policies required that even though the revenues were very low, the government had to overshoot its revenue to meet problems like unemployment, poverty and population explosion. The continued spending on development programmes of the government did not generate additional revenue. Moreover, the government was not able to generate sufficiently from internal sources such as taxation. When the government was spending a large share of its income on areas which do not provide immediate returns such as the social sector and defense, there was a need to utilize the rest of its revenue in a highly efficient manner. The income from public sector undertakings was also not very high to meet the growing expenditure. At times, our foreign exchange, borrowed from other countries and international financial institutions, was spent on meeting consumption needs. Neither was an attempt made to reduce such profligate spending nor sufficient attention was given to boost exports to pay for the growing imports In the late 1980s, government expenditure began to exceed its revenue by such large margins that it became unsustainable. Prices of many essential goods rose sharply. Imports grew at a very high rate without matching growth of exports. Foreign exchange reserves declined to a level that was not adequate to finance imports for more than two weeks. There was also not sufficient foreign exchange to pay the interest that needs to be paid to international lenders. So India approached the International Bank for Reconstruction and Development (IBRD), popularly known as World Bank and the International Monetary Fund (IMF), and received $7 billion as loan to manage the crisis. For availing the loan, these international agencies expected India to liberalize and open up the economy by removing restrictions on the private sector, reduce the role of the government in many areas and remove trade restrictions. India agreed to the conditionality of World Bank and IMF and announced the New Economic Policy (NEP). The NEP consisted of wide ranging economic reforms. The thrust of the policies was towards creating a more competitive environment in the economy and removing the barriers to entry and growth of firms. This set of policies can broadly be classified into two groups:

The stabilization measures - are short term measures, intended to correct some of the weaknesses that have developed in the balance of payments and to bring inflation under control. There was a need to maintain sufficient foreign exchange reserves and keep the rising prices under control. The structural reform measures - are long-term measures, aimed at improving the efficiency of the economy and increasing its international competitiveness by removing the rigidities in various segments of the Indian economy. Disinvestment means selling government equity in public sector units (PSUs) to private parties. Thus Disinvestment refers to the sale or liquidation of an asset or subsidiary of an organization or government. It is also known as divestiture or divestment. In India the process of disinvestment began since 1991-92. The need for disinvestment arises from the fact of poor performance of PSUs. The major thrust for Disinvestment Policy in India came through the Industrial Policy Statement 1991.The policy stated that the government would disinvest part of their equities in selected PSEs. However it did not stake any cap or limit on the extent of disinvestment. It also did not restrict disinvestment to any class of investors. The main objective was to improve overall performance of the PSEs.

OBJECTIVE OF DISINVESTMENT: 1. To improve performance of units The main argument in favor of disinvestment is the poor performance of PSUs. For instance the average return on investment was hardly 2% during the 1980s and 1990s. 2. To reduce budgetary deficits One of the factors of budgetary deficits is the allocation of huge amount of funds to PSUs. Due to lack of improvement of performance in such units, these deficits lead to rising prices which in turn affected the economy. 3. To overcome the problem of political involvement in PSUs There was too much political interference with respect to location of the project, selection and promotion of top personnel, awarding important contracts etc. This has lead to poor performance of the PSUs. 4. Enable the government to concentrate on Social development It is of the belief that by transferring PSUs to private players, it would enable the government to concentrate on the governments main job i.e. social development in areas such as primary health, primary education, law and order, family welfare and so on. OTHER OBJECTIVES WOULD INCLUDE

To provide better service to customers To ensure proper planning and execution To overcome the problem of corruption To fix the responsibility on management To make efficient use of disinvestment proceeds.

BACKGROUND Historically, public sector undertakings (PSUs) have played an important part in the development of the Indian industry. At the time of independence it was felt that the political independence without economic self-reliance would be detrimental to the countrys sovereignty and autonomy in policy making. Hence, the basic objectives of starting the public sector were:

To take India to commanding heights of glory. To build infrastructure for economic development and promote rapid economic growth and industrialization of the country. To create employment opportunities and promote balanced regional development.

To create a self-reliant economy through the development of local industries for import substitution and by encouraging and promoting exports. To generate invisible resources for development by earning suitable returns To prevent / reduce concentration of private economic power.

Public sector enterprises (PSEs) or Public Sector Units (PSUs), which were given a special role in Indias planned economy, grew both in terms of numbers and investment for over four decades from the early 1950s. At the commencement of the First Five Year Plan there were five PSEs with a total investment of Rs. 29 crores. At the end of the Seventh Plan in 1990, there were 244 PSEs and the investment in them had gone up to Rs. 99, 329 crores. Although disinvestments had started from the early 1990s, at the end of the Eighth Plan in 1997, investment had soared to Rs. 2, 13,610 crores. At the end of the fiscal year 2000-01, PSEs had a total investment of Rs. 2, 74, 114 crores. The PSEs made a significant contribution to industrial production, 100 per cent in lignite, over 80 per cent in coal, crude oil and zinc, almost 50 per cent in aluminum and over 30 per cent in finished steel. In terms of profitability, the PSEs showed diverse patterns. In 2000-01, 122 enterprises made a profit with the top 10 among them - giants such as the Oil and Natural Gas Corporation (ONGC), the National Thermal Power Corporation (NTPC), the Indian Oil Corporation (IOC) and the Videsh Sanchar Nigam Limited (VSNL) - accounting for close to 70 per cent of the total net profit of Rs. 19, 604 crores. Sector-wise, petroleum, power and communications contributed to 60 per cent of the profits. During that year, there were 111 loss-making enterprises with a total loss of Rs. 12, 839 crores. The major contributors to the losses were Hindustan Fertilizer, the Fertilizer Corporation of India (FCI), Bharat Coking Coal, and some other enterprises dealing with coal. The return on investment of all PSEs taken together remained low - post-tax profitability being only about 5 per cent on capital employed. Thus, according to some economists, the public sector in India, which was perceived to be the vehicle of speedy economic development, has run into rough waters. It not only failed to produce surpluses which it was expected to generate for future growth, but the return on investment remained poor. Thus the question that is examined is whether disinvestment and privatization can lead to better results. PRIVATISATION Privatization implies shedding of the ownership or management of a government owned enterprise. Privatization of the public sector undertakings by selling off part of the equity of PSUs to the public is known as disinvestment. The purpose of sale was mainly to improve financial discipline and facilitate modernization. It was also envisaged that private capital and managerial capabilities could be effectively utilized to improve the performance of the PSUs. The government envisaged that privatization could provide strong impetus to the inflow of FDI. The government has also made attempts to improve the efficiency of PSUs by giving them autonomy in taking managerial decisions. Government companies can be converted into private companies in two ways 1.
o o o

by withdrawal of the government from ownership and management of public sector companies By outright sale of public sector companies. In th For instance, some PSUs have been granted special status as navaratnas and mini ratnas. In 1996, in order to improve efficiency of PSU, infuse professionalism and enable them to compete more effectively in the liberalized global environment, the

government chose nine PSUs and declared them as navaratnas. They were given greater managerial and operational autonomy, in taking various decisions to run the company efficiently and thus increase their profits. Greater operational, financial and managerial autonomy had also been granted to 97 other profit-making enterprises referred to as mini ratnas. The first set of navaratna companies included: Indian Oil Corporation Ltd (IOC), Bharat Petroleum Corporation Ltd (BPCL), Hindustan Petroleum Corporation Ltd (HPCL), Oil and Natural Gas Corporation Ltd(ONGC), Steel Authority of India Ltd (SAIL), Indian Petrochemicals Corporation Ltd (IPCL), Bharat Heavy Electricals Ltd (BHEL), National Thermal Power Corporation (NTPC), Videsh Sanchar Nigam Ltd (VSNL), Gas Authority of India Limited (GAIL), Mahanagar Telephone Nigam Ltd (MTNL) Many of these profitable PSUs were originally formed during the 1950s and 1960s when self-reliance was an important element of public policy. They were set up with the intention of providing infrastructure and direct employment to the public so that quality end-product reaches the masses at a nominal cost and the companies themselves were made accountable to all stakeholders. The granting of navaratna status resulted in better performance of these companies. The government partly privatized them through disinvestment

EVOLUTION OF DISINVESTMENT POLICY IN INDIA:

The policy of disinvestment has largely evolved through the policy statements of Finance Ministers in their Budget Speeches. The policy as evolved is enumerated below:

In the Interim budget 1991-92, it was announced that Government would divest upto 20% of its equity in selected PSUs in favour of mutual funds, financial and institutional investors in public sector. In the budget speech of 1992-93, the cap of 20% was reinstated and the list of eligible investor was enlarged to include FIIs, employees and OCBs. In April, 1993, Rangrajan committee recommended to divest upto 49% of PSEs equity for industries explicitly reserved for the public sector and over 74% in other industries. But Government did not take any decision on recommendations. In 1996, as per the Common Minimum Programme, the Budget Speech 1996-97 announced the setting up of Disinvestment Commission for 3 years. CMP also emphasized to add more transparency to disinvestment process and examine the non core areas of public sector. In the Budget Speech of 1998-99, it was announced that Government shareholding in CPSEs should be brought down to 26% on case to case basis, excluding strategic CPSEs where Government would retain majority shareholding. The interest of workers is to be protected in all cases. For this purpose on 16th March, 1999, the Government classified the PSEs into strategic and non strategic areas. It was decided that Strategic PSEs would be those in areas of:

a) Arms and ammunition and the allied items of defence equipment, Defence aircrafts and warships; b) Atomic energy (except in the areas related to the generation of nuclear power and applications of radiation and radio-isotopes to agriculture, medicine and non-strategic industries); Railway transport.

c) All other PSEs were to be considered non strategic.

In 1999-2000 Budget Speech it was announced that Government will continue to strengthen the strategic units and privatizing the non-strategic ones through gradual disinvestment or strategic sale and devise viable rehabilitation strategies for weak units. The 2000-01 Budget Speech focused on restructure and revival of viable CPSEs; close down PSEs which cannot be revived; bring down Government shareholdings in non-strategic CPSEs to 26% or lower, if necessary; and protection of the interest of workers. The receipts from disinvestment will be used for social sectors, restructuring of CPSEs and for retirement of public debt. The suo-motu statement 2002, specific aim was given to the disinvestment policy: modernization and up gradation of PSEs, creation of new assets, generation of employment and retiring of public debt. In the Budget Speech for 2003-04, Government announced details regarding the setting up of Disinvestment Fund and Asset Management Company to hold, manage and dispose the residual holdings of Government. In 2004 with the change in the Government, there was a change in the outlook of Disinvestment policy.

In May, 2004, Government adopted National Common Minimum Programme, which outlines the policy of Government with respect to Public sector. The UPA Government pledged to devolve full managerial control and commercial autonomy to successful, profit-making companies operating in competitive environment; they wont be privatized Navratna companies can raise resources from the capital market. Efforts will be made to modernize and restructure sick Public sector companies. a) It favoured sale of small proportions of Government equity through IPO/FPO without changing the character of PSEs. In regard to this, it approved listing of unlisted profitable CPSEs subject to residual equity of the Government remaining atleast 51% and Government retaining the control of management. b) It also constituted the formation of National Investment Fund. The proceeds from disinvestment of CPSEs will be channelized into NIF. 75% of annual income of NIF will be used to finance selected social sector schemes- education, health, employment and the rest 25% to meet the capital investment requirements of profitable and revivable CPSEs. On 27th January, 2005 the Government, approved in principle: listing of currently unlisted profitable CPSEs each with a Net Worth in excess of Rs.200 crore, through an Initial Public Offering (IPO), either in conjunction with a fresh equity issue by the CPSE concerned or independently by the Government, on a case by case basis, subject to the residual equity of the Government remaining at least 51 per cent and the Government retaining management control of the CPSE; the sale of minority shareholding of the Government in listed, profitable CPSEs either in conjunction with a Public Issue of fresh equity by the CPSE concerned or independently by the

Government subject to the residual equity of the Government remaining at least 51 per cent and the Government retaining management control of the CPSE; and Constitution of a National Investment Fund. On 25th November, 2005, Government decided, in principle, to list large, profitable CPSEs on domestic stock exchanges and to selectively sell small portions of equity in listed, profitable CPSEs (other than the navratnas). CURRENT POLICY ON DISINVESTMENT The policy on disinvestment has been articulated in paragraph 34 of Presidents Address to Joint Session of Parliament on 4th June, 2009 and reads as under: Our fellow citizens have every right to own part of the shares of public sector companies while the Government retains majority shareholding and control. My Government will develop a roadmap for listing and people-ownership of public sector undertakings while ensuring that Government equity does not fall below 51 %. The above policy was reaffirmed by the Finance Minister in paragraph 37 of his Budget Speech on 6th July, 2009. Paragraph 37 of FMs Budget Speech reads as: The Public Sector Undertakings are the wealth of the nation, and part of this wealth should rest in the hands of the people. While retaining at least 51 per cent Government equity in our enterprises, I propose to encourage peoples participation in our disinvestment programme. Here, I must state clearly that public sector enterprises such as banks and insurance companies will remain in the public sector and will be given all support, including capital infusion, to grow and remain competitive. The Government, on 5th November 2009 has approved the following action plan for disinvesting Government equity in profit making CPSUs: i) Already listed profitable CPSUs, not meeting the mandatory public shareholding of 10%, are to be made compliant; ii) All CPSUs having positive net worth, no accumulated losses and having earned net profit for the three preceding consecutive years are to be listed through Public Offerings, out of Government shareholding or issue of Fresh Equity by the company or a combination of both; and iii) The proceeds from disinvestment would be channelized into National Investment Fund and during April, 2009 to March, 2012 would be available in full for meeting the capital expenditure requirements of selected social sector programmes decided by the Planning Commission / Department of Expenditure. The status quo ante will be restored from April, 2012. ADVANTAGES OF DISINVESTMENT POLICY

1. Most of the public sector companies are loss-making and are a burden on public funds. 2. Since the government is corrupt, the public sector companies are also corruptly managed. 3. In the hands of the private sector, the public sector companies would be run more efficiently. As pointed out by experts, if the government sells the asset that provides income or profit equal to or more than the prevailing interest on government securities, then the government would lose future income by selling it. On the other hand, from the private sectors point of view,it makes no sense to purchase an asset unless it provides at least a rate of return equal to the rate of interest on government securities, because that is where the private investor could otherwise put the money. This means that for such sales to occur, either a. The private sector must believe that it is capable of generating more profits than the public sector. b. The asset must be undervalued so that the actual rate of return for the private buyer turns out to be higher, which really means that the State exchequer has lost the money. According to experts, whatever be the technique, to think that sale of PSU shares is the only method of reform, reflects a closed mind. Treating process of disinvestment as revenue in budgets creates pressure in selling, apart from being fiscal imprudence; the capital proceeds could be used to consolidate and revitalise Navratnas. Critics point out that, the whole disinvestments programme has been carried out by the government in a hasty, unplanned and hesitant way. As a result, the public sector equity has been sold for a fraction of what it could actually fetch. However this is only one part of the story. The entire manner in which the proceeds from the disinvestments have been used is also being debated. The government has used these proceeds to offset the shortfalls in revenue receipts and thus reduce the fiscal deficit which it was required to do as a part of the IMF stabilization programme. The disinvestments of governments proceeds in profitable public sector enterprises and using the proceeds for current consumption needs amounts to frittering away of valuable public assets. The correct policy would have been to allow the public sector themselves to use the resources they generate via this programme. This would have helped them to revitalize and expand their activities .The present policy has deprived the government of future yield from these enterprises. DIS ADVANTAGES OF DISINVESTMENT POLICY

Poor performance of disinvestment in India Poor Management Lack of environment creation Delay tactics Selfish interests Some PSUs were not worth (Bharat Leather Corporation, Scooters India Ltd) Unproductive use of disinvestment proceeds Disinvestment and Unemployment Profit hungry private sector Lower value of realization

Privatization leads to concentration of wealth

CONCLUSION The debate and the case study indicates that there are many complicated economic, political and legal issues such as Debate on the Sale Profitable vs. Unprofitable Enterprises, debate on the sale of Large or Small Firms, Investment decisions before Disinvestment and Investment requirement from the private participants post disinvestment, management of Public Enterprises Debt, categorizing the Social Assets and economic assets of the PSUs, probable environmental concerns.

Introduction

Public sector undertakings were established in India as a part of mixed economy. The coexistence of pri economy balanced and independent. After independence public sector undertakings played a vital role in country. Generation of employment, balanced regional development and economic development of the c the time of their establishment. The government has contributed either wholly or partially in the equities need and requirement of the projects. During mid 1991 onwards the economic scenario of the country h fiberalisation and Globalisation measures. The goal of service rendering was slowly substituted with pro government departments. Disinvestment

Disinvestment is a process where Government sells its equity holding to private sectors. In other ways it parties are given shareholding in Government undertakings either wholly or partially. The Rangarajan c of disinvestments in 1991-92. The disinvestments commission was established under the chairmanship o given the task of long term planning of disinvestment To speed up the disinvestment process, the Gover Department of disinvestment The amount realized from disivestments will be used for meeting expendit PSE's and for retiring public debt. An attempt has been made in this paper to study the progress and pro

According to Anjila Saxena (2001) bureaucratic, trade union and valuation of PSU's disinvestments. Fai disinvestments process are equally important to make this exercise free from criticism and better public S.V. Ramana Rao (2001) found that disinvestment process through liberalization and privatization leads operational efficiency.

Improvement of management and operating performance is a precondition for successful privation. The sector and strong growth potential are essential for attaining higher degree of national output. Status of Public Sector Enterprises In India

The quantitative information on the present status of PSE's in India is explained in the table. Large num either owned by state or central Government. The number has increased from 163 in 80-81 to 236 in 90years. This indicates that the government promoted P.S.E's till 1990-91 and the process came to a halt w of gross profit to capital employed and gross profit to sales is low indicating the declining performance employed and sales is also poor. Thus, it can be concluded that even though the performance of all PSE' many loss-making units and very few units are making profit. Table: 1 Status Analysis of PSE's in India for the period from 1980- 81 TO 1998-99

Particulars No of PSE's (nos) Total Capital (Rs in Crs) Sales (Rs. In crs) Gross profit (Rs. in Crs) Net Profit (Rs in Crs.) Net Profit to capital employed (%) Net Profit to capital employed (%) Gross Profit to sales (%)

1980-81 163 18207 28630 1148 203 7.8 5 .70

1990-91 236 102084 118676 11102 2272 10.9 9.4 1.91

1997-98 236 233661 275996 37212 13720 14.7 13.5 4.97

1998-99 235 273697 309994 59266 13235 14.5 12.8 3.94

Table: 2 Targeted Disinvestment and Amount Realised Analysis for the period from 1991-2002-20 Years 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-2001 2001-2002 MM-203 Tomet 2500 2500 3500 4000 7000 5000 4800 5000 10000 10000 12000 12000 Realized Fund 3038 1913 0 4843 362 380 902 5371 1829 2125 5000

The methods used for disinvestments were offering equity, issuing depositary receipt and strategic sale. 1990-91 to 1999-2000, altogether 39 companies' share were sold and 36 companies were offered strateg through sale of shares was 19573 crores and through strategic sale was 11344 crores. From 1990-91 till meet the target fixed at the time of the budge except for two years i.e. 94 95 and 98-99. The realised val One of the reasons for this poor response is that to get a buyer for loss making unit is difficult where as profit making unit. On the contrary the Government is interested to dispose off loss making unit and not both state and central government oppose the disinvestments process as it is noticed in the case of IPCL that the government will lose the dividend over the years for the equity invested in PSE's. At the same ti outside the Government has to pay minimum interest for 10 percent. The table 3 shows the equity sold, interest paid on borrowed fund. It is observed that interest on borrowed funds comes to larger amount th annually. Thus it indicates that even profit making PSE's are worth for disinvestments provided it is valu maintained. Hence it is required to disinvest not only the lose making units but also the profit making un

Table: 3 Equity sold, fund realized Int. on borrowed fund and dividend received Analysis Of selec

Sr. no

Particulars

Equity Sold

Realiased Funds

1 2 3 4 5 6 7 8 9 10 11 12

BALCO ITDC HOTELS HCI HOTELS IBP VSNL STC MMTC PPL JESSOP HLL MUL IPCL Total

112.52 34.29 14.67 7.44 71.5

320.16 68.13 109.85 66 64.5 894.23

826.5 615.45 242.51 1153.68 3689 40 60 151.7 18.18 445 2424 1490.84 11344.03

Government Dividend Borrows @ received by 10% int Government on equity sold 82.65 5.69 71.66 Nil 25.91 115.36 1.84 368.9 10.4 4 Nil 6 15.17 -71 1.82 -5.5 44.5 3.5 242.4 13 149 16.24 1142.79 -73.59

Sources : Website- department of disinvestements. Government should be a regulator then a producer

The Government played an Important role as producer for several years. The government has manufactu including steel and oil and rendered variety of services such as hotels industry, telecommunication etc. A government has changed from a producer to a regulator. Now Government should act as a regulator then will create a certain degree of monopoly in the market and it is important that the Government should pl Protect the Consumers from market exploitation.. In Present competitive world the market requires stron suited for that. Workers Issue

The major apprehension about disinvestment is that workers interest will not be protected. Local politici disinvestment will lead to insecurity of jobs. But in reality the protection of employees is an integral par information available, the companies that have Privatized have no retrenched even a single worker. the V at scales, which are normally higher or equal to the VRS given by the Government to central public sect workforce of PSE's is a continuous process as during the last 10 years the workforce has come down fro without Privatisation or strategic sale. One of The disinvested companies, BALCO in spite of the losses gratia payment of Its 500 per employees. Workers are given more benefit compared to earlier Even in M average of Its 1600 per employee and VRS benefit is higher than Government. in PPL also the new strat disinvestments. Conclusion The following conclusion is drawn from the analysis

a) The profitability ratio such as profit net profit to sales and capital employed is poor in PSE's This sho

declining rapidly.

b) The targeted amount and actual realized disinvestments amount showed that Government has not fulf in 1994-95 and 1998-99. The realized value is much lower than the targeted amount.

c) If the government borrows amount equivalent to the money realized from disinvestments, the interest dividend received from the equities sold. Suggestion

The disinvestments process should cover not only for loss making PSE's but also the profit making units References

1) Anjila Saxena (200 1), 'Trend, problems and prospects of restructuring public enterprises in India', Th N o 4, Oct-Dec 2001

2) Mohanty A.K and P.K Sahu (2001), 'Reforms in Indian public sector: Tasks ahead', The Indian journ Decm.2001

3) Rao, Prakasha B.K.S. and S.V Ramana Rao (2001), Disinvestment An Indian perspective, The Indian Decm.2001 4) Disinvestment derailed, Fortune India, Sept 30,2002 5) Disinvestment discord, frontline ,January 17,2003 6) Oil PSU sell-off: major set back for Fernandes,economic times, 6 decm,2002

7) Goswami Omkar, Dipankar Mukherjee, Ashis Guha,' has the disinvestments ball been set rolling agai Dec, 2002.

Strategies of Disinvestment
The basic idea behind disinvestment is to sell the shares of the government in the public sector enterprises to external players. As mentioned earlier, the earliest shares were sold to financial institutions coming under the government itself. An interesting example is that of the Bonagigaon, Kochi and Madras refineries, wherein the shares were sold to another Central Public Sector Unit, the Indian Oil Corporation. The most common method adopted is, however, strategic sale. A strategic partner is identified by the government under this strategy and management control is transferred to this partner along with a bundle of shares. A bundle of shares will contain shares of both performing as well as non-performing enterprises; the idea was adopted waking up to the situation where no private player came up to buy the shares of sick enterprises.

A typical tactic adopted towards privatization is the incremental method where shares are sold in steps. On the other hand token privatization is adopted in circumstances of acute budget deficit wherein a lump of shares is sold off. Following the path of the Central Government, the state government have also set up their own disinvestment commissions and identified public sector units for disinvestment or complete closure.

Rationale behind Disinvestment

The Governments current revenue expenditure (wages and salaries of government employee and various other expenses) is so high that the government is left with hardly any surplus for capital expenditure on social and physical infrastructure. Hotels, trading companies, consultancy companies, textile companies, chemical and pharmaceuticals companies, consumer goods companies etc took up chunk of expenditures. Modern Foods India Limited (MFIL), Corporation of India Ltd(CONCOR), VSNL( Videsh Sanchar Nigam Limited) and MNTL (Mahanagar Telephones Nigam Limited), , Container ,Indian Drugs and Pharmaceuticals Limited, Hindustan Antibiotics Limited, Gas Authority of India Limited were also making huge financial losses. The Government wanted to increase the efficiency of utilization of the resources employed by the PSUs. .For this the best option possible was to have profit motive, which can be done through privatization and disinvestment. If the Government frees itself of the managerial, operational and financial burdens on this account, it will be able to do greater justice to its legitimate domain: Poverty elimination, social and physical infrastructural development, reaching basic amenities and services to people, and looking after security and law and order. One of the other main objectives was to cover the fiscal deficit of the Central Government. For this purpose even healthy and highly profitable PSUs were offered for disinvestment.

Drawbacks of Disinvestment
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 Navratnas. The Government in the initial stages followed the scheme of bundling of shares-each bundle combining equity from poor and good performers. This scheme of bundling fetched very low price for the sale of Government equity. For instance the average price the Government offered more than 87 crore shares in 1991-92 at Rs34.83 crores was deemed to be extremely low because a price of Rs109.61 was realised later. This scheme therefore was sharply criticised .Even the CAG castigated the Government for this. The Government after this disastrous experience of the scheme of bundling shares abandoned it and soon started talking in terms of privatization of PSUs as opposed to disinvestment though in a sense the Government has been offloading its profit making enterprises in favour of the private sector. This has been widely criticized as privatisation of the profits of the profit making enterprises and the nationalisation of losses of the loss making enterprises. The Government approach has been illogical.

The Government has devised its scheme of Strategic Investor who will be permitted to exercise majority control even when the concerned investor does not hold a majority of shares. The Government rejected the offer of IOC to buy the shares of IPCL , and ended up choosing between DOW Chemicals, Mitsubishi and Reliance as partner. There is no need for privatisation of the Navratnas which is a pioneer in a frontier technology industry. Initially, this company was to be handed over to the strategic partner for merely purchasing 25% of holdings. Since all three companies are competitors of IPCL would they promote or demote IPCL interests? .IOCs interest lies in IPCLs expansion so that its own Naphtha market expands (Since IOC is the seller of Naptha to IPCL) yet IOC bid was rejected. The Government also practised a dubious process of cross holding the shareholdings of National Hydro Electric Power Corporation (which survived on budgetary support of Rupees 450 crores every year) to National Thermal Power Corporation . Subsequently NTPC hived off a few of its units into a new subsidiary and in the process 51% of NTPC s holdings were offloaded to the private sector. Through the process of cross-holdings, the government intended to privatise the Navratnas to meet its budgetary deficit. The inflow of FDIs through disinvestment was not as huge as expected. In the Latin and South American countries, FDIs got through disinvestment was huge. In India this could be due to the slow nature of the disinvestment process itself. For example, in 2001, the process of disinvestment in VSNL began. But it took more than a year to complete the process. Not only is the disinvestment process slow, it is also plagued by bureaucracy and red tapism. It was felt that the continued existence of the PSEs was forcing the Government to commit further resources for the sustenance of many non-viable PSEs.

Evaluation of the Disinvestment Strategy

The public enterprises survey had divided the industries into 21 segments. But only 17 of these, 10 in manufacturing and 7 in services, were referred to by the Disinvestment Commission throwing up an attitude of gross neglect towards some sectors of the economy. Only fertilizers, mineral and metal enterprises focused on. Several inefficient and loss making ones, e.g. textiles and financial services, were ignored. In the engineering sector, only five enterprises were considered (out of 38), chemicals and pharma-6 out of 21, consumer goods- 7 out of 18. Thus distributional objective was not met. UKs experience It would be worthwhile to take a look at the example of UK which has been seen as a pioneer in disinvestment. The UK government adopted two methods to work out selling of shares. The first one was offer to sale, inviting applications from the general public for shares at a set price. In the second method, the strategy was to sell shares by inviting bids above a given min tender price. If the shares were over-subscribed, i.e if a large number of bidders turned up, the shares were sold to highest bidder. On the other hand, if the shares were under-subscribed, the bidders conditions were met and the shares were sold at the tender price itself.

The Case of BALCO In 2000, 51% of the government shares in Bharat Aluminium Company Ltd. BALCO were sold to M/s Sterlite Industry, in an effort to upgrade its performance. BALCO saw many changes since then. The average salaries doubled, skill upgradation programmes were conducted, new products and markets were explored and exports rose. But the initiative also received a lot of flak from diverse sections of the economy, particularly the opposition parties. The trade unions operating in the BALCO plant demanded a complete reversal of the sale as they refused to recognize Sterlite as the new owner. The incident shows the double faced nature of disinvestment- the decision making in this arena could be so fuzzy that the judgement of correctness often becomes difficult.

Conclusion
If disinvestment policy is to be in wider public interests, it is necessity to examine systematically issues such as correct valuation of shares and appropriate use of disinvestment proceeds. The disinvestment of public sector units which is, in fact, the publics money is done without even due amount of debate in the parliament. This, therefore, calls for utmost care and meticulous planning.

Reference:

Disinvestment, LM Bhole, DoHSS, IITB, www.ircc.iitb.ac.in http://en.wikipedia.org/wiki/Maruti_Suzuki www.hinduonnet.com Dept of Disinvestment, govt of India, (http://www.divest.nic.in/performance.htm

One non-tax revenue source that Union Finance Minister Pranab Mukherjee is expected to bank upon while providing for social sector projects in the coming Budget is disinvestment. The change in the utilisation norms for the National Investment Fund (NIF) ensure capital expenditure in this regard will directly benefit from stake sale through public issues of government-owned companies. As against a target of Rs 1,120 crore in the 2009-10 Budget, the government has managed till date to raise Rs 12,560 crore, including the Rs 8,300 crore expected to have come from the NTPC issue. This is despite the uncertain market conditions the public sector offers had to face. With at least two more issues of Rural Electrification Corporation and NMDC slated before this financial year ends, the government disinvestment kitty is expected to grow by another Rs 20,000 crore, giving it Rs 32,560 crore this year. Click here to visit SME Buzz Also Read Related Stories

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More The next financial year could see similar fund raising through disinvestment, with issues of public sector companies expected to hit the market every third week. The government, though, is likely to keep its revenue target from disinvestment in 2010-11 to a conservative Rs 30,000 crore.

RESOLUTION AGAINST DISINVESTMENT POLICY OF THE GOVERNMENT OF INDIA PASSED BY THE NATIONAL EXECUTIVE OF THE BHARATIYA MAZDOOR SANGH IN THE MEETING HELD FROM 17th TO 19th AUGUST 2009 AT KOLKATTA **

The Government of India is contemplating disinvestment in Central Public Sector Undertakings and declared the same on the floor of the Parliament during the presentation of the Union Budget for the year 2009-10. This is against national interest.

In the budget speech the Union Finance Minister appreciated the performance of the Central Public Sector Enterprises (CPSEs) and intimated that this year Government received an amount of Rs.1,65,000 crores on account of dividend, corporate tax and duties etc. from the CPSEs recording an increase of 86% as compared to 2003-04. The turn over went up from Rs.5,87,000 crores in 2003-04 to Rs.10,81,000 crores in 2007-08. The net profit increased by 72% from 53,000

crores to Rs.91,000 crores during this period. The number of profitable companies has also increased from 143 to 158 and loss making units decreased from 73 to 55.

In the backdrop of economic recession the CPSEs are providing formidable base to the industrial growth and economic prosperity of the country by extending excellent support to revenue generation. Obviously, the Government should have taken steps for further improvement of the sector by offering relief packages to bail out the sick units such as HMT, Hindustan Cables, NEPA, Scooter India, ITI, Tungabhadra Steel etc. Contrarily the Government is contemplating to disinvest profitable CPSUs. The Government proposed to generate an amount of Rs.20,000 crores by way of disinvesting 10% of its stake in CPSEs like, BHEL, NMDC, NALCO, NLC etc. in the first round. The second round may cover NTPC, BSNL, MTNL, GAIL and ONGC etc., The Government is on its way to sell Coal Blocks, introducing more and more private airlines in aviation sector by allotting them profitable routes and destinations and allowing FDI in financial sectors like Insurance etc.

It may be recalled that the CPSUs were created in the year 1951 by the Government with 5 undertakings with an investment of Rs.29 crore only. The number of CPSUs today has gone upto 245 with an investment of more than Rupess 5 lakh crore. On the other hand number of employees has been reduced to 14.5 lakhs in 2004-05 from 22 lakhs in 1991-92 and the number of contract workers has increased manifold.

One thing is clear and the Government has announced openly that profitable CPSUs shall be disinvested to generate revenue to meet expenditure on infrastructure and developmental programmes. Although the Prime Minister has said that CPSEs are an engine of growth and top wealth creator in the country, the Finance Minister has a lot of praise for the sector, but still the disinvestment proposals are on the cards. Contd.2.. -2-

The existence of CPSUs and its smooth functioning is in the interest of the country and industry as well. Naturally, the interest of the works also is safe guarded. Therefore, Bharatiya Mazdoor Sangh from day one has opposed the dis-investment of CPSEs and will continue its protest till the dis-vestment programme is completely dismantled. Hence BMS opposes the contemplated dis-investment in CPSUs. The BMS held national level demonstrations during the years 1993, 1996, 2001, 2003 and 2005 and concentrated on disinvestments and opposed it

In the present context the BMS, in its National Executive meeting which is held Kolkatta from 17th to 19th August 2009, resolves unanimously to oppose with all its mite any move of the

Government to disinvest profitable CPSEs. As a first step, workers from unions of BMS working in CPSEs such as Coal-Non Coal, Telecom, Aviation, Oil, Gas, Power, Heavy Industry, Engineering, Shipping, and financial sectors will assemble in Delhi and demonstrate before the Parliament against proposed disinvestments during ensuing winter session (November 2009) of the Parliament. To make it a joint programme and show of solidarity, we invite all other Central Trade Unions also to join the above programme. Prior to that all BMS unions in the public sector will observe anti-disinvestment fortnight in the second fortnight of October 2009 to highlight and propagate disadvantages of disinvestment.

Disinvestments in IndiaA Boon or Bane

chillibreeze writer Baghavath Krishnan Most public sector undertakings (PSUs) were set up in India in a complex situation where there was a dearth of industrial participation in the Indian economy. These companies had been the pillars of the great Indian economy, but at the wake of economic policies in 1991, they had a negative rate of return on capital employed. This was not a good sign of a thriving economy coupled with the policy of globalization. The government had to get rid of these companies or at least handover a part of holding to private persons. Thus came about the birth of disinvestment policies in India. In general terms, disinvestment is simply selling the equity (share) invested by the government in PSUs which are either owned completely by the government or whose shares are maximum owned by the government (51% or above). Examples include BHEL and ONGC. There are two main reasons in support of disinvestment. One is to provide fiscal support and the other is to improve the efficiency of the enterprise. The argument for fiscal support emphasizes that the resources raised through disinvestment must be utilized for retiring past debts and there by bringing down the interest burden of the government. The second argument in support to improve the efficiency of public enterprises through disinvestment is the contribution that it can make to improve the efficiency of the working of them. I propose to deal with the methods of disinvestment and conceptualize the advantages and disadvantages of this phenomenon. Methods of disinvestments: 1. Purchasing the stake or acquiring the company by opening the membership for all 2. To sell shares through a. fixed price b. book building c. auction where the highest bidder would be accepted

Now that an overview of disinvestments has been established, we must concern ourselves with the advantages and disadvantages of disinvestments. Advantages of disinvestments In an ever growing economy, investment by the government alone would not suffice. It is of absolute necessity that even private capital is entertained at the maximum level. The most economically successful country has the highest amount inflow of private capital. After 1991, the private inflow of capital has been high. And the phenomena of disinvestment have constantly supported this inflow of private money. The money received from the process of disinvestment can be utilized to compensate the deficit finance. The market thrives if there is sufficient amount of competition. If new firms enter into the market, then the competition increases which in turn makes the companies more competitive an advantage for the consumers as they may experience choice. The PSUs which have undergone this disinvestment were (prior to the disinvestment) low productivity companies. Thus when the decision making capacity was given to private players, there has been a huge turn over with respect to optimum utilization of resources, capacity to invest, and profit. This is because the focus has been shifted to the PSUs as a profit making company. Disadvantages of disinvestments India is slowly shifting its base from a welfare and socialistic state to a capitalistic economy. Government companies or even PSUs are the heart of any socialistic state, the interest of the public is protected through these organizations. Unlike private companies who thrive for profits and strive to infringe the rights of people, PSUs were started for the people. Thus disinvestments are certainly against the interest of the people but it is a necessary evil. Foreign direct investments in these companies would mean more foreign control. This would mean that the sovereignty would be hampered. Selling equities to foreign companies result in serious consequences shifting the nation's wealth, power and control to outsiders.If a company is privatized, the job security would not be same as that of a PSU. Thus the risk of being unemployed if not proven to be useful to the company is high. Considering the advantages and disadvantages of disinvestment in a weighing machine, it can be construed that this is a necessary evil. There have been many instances where fundamental rights have been violated because of privatization (for example, the closure of mills in Mumbai), but it has caught like wildfire in India. References 1. Disinvestments in Public sector enterprises, V. Gangadhar, Dr. M. Yadhagiri 2. Government report as on 2006