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14.7.2011
PRIVATIZATION AND DIVESTMENT
Economic liberalization :
1985 by Rajiv Gandhi’s New economic policy-improvement in
productivity, absorption of modern technology and full utilization of
capacity
Mid 1991Dr Manmohan Singh enumerated the objectives :

 To increase the efficiency and international competitiveness of


industrial production
 To utilize foreign investment and technology to much greater
extent
 Improve performance and rationalize the scope of the public
sector
 To reform and modernize the financial sector so that it can
more efficiently serve the needs of the economy
Stabilization measures :
 Fiscal policy reforms-reduce public sector deficit from 12.5% to
4% of GDP by mid-nineties by controlling expenditure and raising
revenues-possible through realistic price structure, reduction in
subsidies and a better fiscal discipline.
 Financial sector reforms-measures as recommended by the
Narasimhan committee(1991 and 1998)-restructuring of controls
of RBI and SEBI, norms of capital adequacy, insistence of credit
rating, standards of NPAs, scaling down of interest rates and
more autonomy to the financial institutions
 Social sector policy-poverty alleviation and spread of education,
employment guarantee initiatives, safe drinking water, housing
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programmes, immunization and other health measures , women


welfare and attention to underprivileged sections of society
 Industrial policy-through deregulation. Industrial licensing was
abolished except for defence, defence production, atomic energy
and environment and internal security.MRTP Act amended so
that large houses expand and set up new undertakings. Public
sector areas were opened to the private sector.
 Foreign capital-Direct foreign investment upto 51% was
permitted in export oriented industrial units, also trading
companies involved in exports.For foreign collaboration
automatic permission was granted st a ceiling on royalty payment
of 5% of domestic trade, 8% of export trade or lumpsum of Rs 1
crore
 Trade policy-WEF April 2001 import and export duties were
adjusted as per WTO norms. All quantitative restrictions on
imports were removed and price based system of duties were
substituted.
 Public sector-to be self reliant
The measures taken included :
o 17 to 8 the industries reserved for public sector
o Rehabilitation of sick units through BIFR
o Close monitoring to ensure profitability
o A policy of disinvestment
o VRS plus training programmes to protect employees

In the first decade global linkages were formed but otherwise not
impressive except for giving new direction
II The process of disinvestment-need and methods
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Disinvestment is a part of privatization.Expansion of PSUs can be


left to private sector.
A Need for investment
By selling stocks the public sector could encash part of its
investment and hence the term disinvestment
The need for disinvestment could arise due to following reasons :
1. Phased privatization-the ownership is in phases transferred to
private sector
2. Professionalism-PSUs headed by administrative experts rather
than management experts
3. Reducing deficit-sell stocks and raise funds to reduce deficit to
4%
4. Reallocation of resources-improves the productive efficiency of
the public sector
5. Capital support to plans-non plan expenditure increasing due
to eg DA increase, wage bill, inflation and defence and defence
production. So capital support could not be given.
6. Substitiute for taxation-sustitute for greater tax effort and
curtailment of subsidies
B Methods of disinvestment :
 Partial transfer of ownership-by selling of shares so joint
sector gets formed. This is possible in one of three ways
1. 25% share transfer to the private sector-govt
control with private partnership
2. 49% to private sector. Voting rights with
government
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3. 74% transferred. Veto sometimes still with


government
 Total denationalization-sellout of a PSU
1. Initially nationalized and after achieving the
objective can be de-nationalised
2. Sick and turned around and then transferred back
3. PSU incurring loss
 Liquidation-as per MOU or as per procedure laid down in
constitution
 Management buy out-sold to employees of project
 Disinvestment without privatization-the stock may be
bought by LIC, GIC, IDBI, UTI
III methods of privatization :
1. Sale of stocks and allotment-maybe at a premium
2. Negotiating joint ownership-fairly reasonable price to be
negotioated and must be transparent
3. Open auction-highest equivalent offer will be accepted
4. Informal approach-basically through contacts
5. Pre planned transfer-price fixed along with RBI
6. Systematic denationalization-through a phased out
programme
7. Liquidation-receives payment in installments
IV the Indian experience
Allwyn went to Mahindra
Mangalore fertilizers to UB Group