Disinvestment in India

Disinvestment Trends since 1991

The disinvestment programme towards greater privatisation of the

economy was launched in the year 1991-92 with the announcement

of the new industrial policy in august 1991 and is an on going
process even today.
It has generated a lot of debate and attracted much criticism on

various grounds.
Under the programme, the government has been setting

disinvestment targets from year-to-year and has been resorting to

different methods and strategies to attract private investors.

The government of India adopted two methods of

disinvestment:
Selling of shares in selected PSU and
Strategic sale of a PSU to a private sector company

The former method was used over the period of 1991-92 to 1998-99, the
government experimented with various variants of this method.
From 1999-2000 to 2003-04, the emphasis shifted to the later method
which involved strategic sale of a PSU to a private Sector company
through a process of competition bidding.
After 2004-05, disinvestments realizations have been through sale of small
portions of equity.
In addition to strategic sales, the other route to disinvestments has been Initial
Public Offering (IPO) and Rights Offer renunciation and Control Premium.

The beginning of the Disinvestment Process

Phase I 1991-92 to
1997-October 1999.
Culmination
of
Phase I was in the
form of the report
of
the
disinvestment
commission set up
in 1996.

The disinvestment policy of GoI can be seen to be implemented broadly in 2 phases

The recommendations of the disinvestment commission set up in 1996, which formed

the backbone of the Phase I of disinvestment, can be summed up as :

Number of
PSEs

Mode of disinvestment recommended

A. Involving change in ownership / management
1. Strategic sale

29

2. Trade sale

B. Involving no change in ownership / management

Offer of shares

C. No change
1. Disinvestment deferred

11

2. No disinvestment

D. Closure / sale of assets

4
Grand Total

58

The Disinvestment Policy revisited

Main Features of
the current
Disinvestment
Policy were laid out
in the 2000-01
budget speech.
Emphasis on
maximizing value
realised from sale.
Bold initiative to
close unviable
PSUs which cannot
be revived,
outlined.

Phase II October 1999 onwards. The main feature of the policy can be culled out from the

2000-2001 budget speech as follows :

To restructure and revive potentially viable PSEs
To close down PSEs which cannot be revived
To bring down Government equity in all non-strategic PSEs to 26% or lower, if necessary
To fully protect the interest of workers
To put in place mechanisms to raise resources from the market against the security of
PSEs' assets for providing an adequate safety-net to workers and employees
To establish a systematic policy approach to disinvestment and privatisation and to give
a fresh impetus to this programme, by setting up a new Ministry of Disinvestment
To emphasise increasingly on strategic sales of identified PSEs
To use the entire receipt from disinvestment and privatisation for meeting expenditure in
social sectors, restructuring of PSEs and retiring public debt

Main Constituents
Cabinet Committee on Disinvestment (CCD)
Core Group of Secretaries on Disinvestment

The Core Group of Secretaries is headed by the Cabinet Secretary and comprises of
Secretaries from Ministries of Finance, Industry, Department of Disinvestment, Planning
Commission and Administrative Ministry and any other Department as may be required
The Cabinet Committee on
Disinvestment is the apex
decision making body in the
disinvestment process
The Ministry of Disinvestment
is the key constituent and
manages the routine
functioning of the
disinvestment process.
MODI is helped by the relevant
ministry and various other
Government departments and
ministries during the process.

The Core Group directly supervises the implementation of the decisions of all strategic sales
The Core Group monitors the progress of implementation of the Cabinet decisions
The Core Group makes recommendations to the CCD on disinvestment policy matters
Inter-Ministerial Group

The Inter-Ministerial Group is chaired by the Secretary, Ministry of Disinvestment and

comprises of officers of Ministry of Finance, Department of Public enterprises Administrative
Ministry and the CMD of the Public Sector Enterprise concerned
The Inter-Ministerial Group is responsible for day-to-day implementation of the disinvestment
decision
Department of Disinvestment

Cabinet Committee for

Disinvestment (CCD)

The Department of Disinvestment (later, Ministry of Disinvestment)was set up vide Notification

No. CD.551/99 dated the 10th of December 1999,
Business allocated to Ministry of Disinvestment

Core Group of
Secretaries (CGS)

Inter Ministerial Group

(IMG)

Working Group

All matters related to disinvestment of Central Government equity from Central Public Sector
Undertakings
Decisions on the recommendations of the Disinvestment Commission on the modalities of
disinvestment, including restructuring
Implementation of disinvestment decision, including appointment of advisors pricing of shares
and other terms and conditions of disinvestment
All matters relating to the Disinvestment Commission

Disinvestment till date

Target receipt for
the year (Rs. in
crores)

Actual
receipts (Rs.
in crores)

1991-92 47 (31 in one tranche and

16 in other)

2,500

3,038

Minority shares sold by auction method in bundles of "very

good", "good" and "average" companies

1992-93

2,500

1,913

Bundling of shares abandoned. Shares sold separately for each

company by auction method

3,500

Nil

Year

The
financial
year 2002-03
has started
off well with
the closure
of the Maruti
and IPCL
divestments

No. of PSEs in which

equity sold

35 (in 3 tranches)

1993-94
1994-95

13

4,000

4,843

1995-96

7,000

362

1996-97
1997-98
1998-99

1
1
5

5,000
4,800
5,000

380
902
5,371

1999-00

10,000

1,829

2000-01
2001-02

4
12

10,000
12,000

1,870
6,230

Total

47*

66,300

26,738

Methodology

Equity of 7 companies sold by open auction but proceeds

received in 1994-95
Sale through auctionmethod, in wchih NRIs and other persons
legally permitted to buy, hold or sell equity, allowed to
participate
Equities of 4 companies auctioned and Government piggybacked in the IDBI fixed price offering for the fifth company
GDR (VSNL) in international market
GDR (MTNL) in international market
GDR (VSNL) / Domestic offerings with the participation of FIIs
(CONCOR, GAIL). Cross purchases by 3 oil sector companies
i.e. GAIL, ONGC & IOC
GDR (Gail) in international market & MFIL's strategic sale.
VSNL domestic issue
BALCO, KRL (CRL) & MRL through strategic sale / acquisition
Strategic sale IBP, HTL, VSNL, ITDC, CMC, PPL, JESSOP,
HZL, MFIL, HCI
12

Pace of Disinvestment
S.No

Month

PSU/Asset Sold

Total

1.

Jan., 2000

Modern Food Industries (India) Limited

2.

Jul., 2000

Lagan Jute Machinery Limited

3.

Mar., 2001

Bharat Aluminium Company Limited

4.

Oct., 2001

HTL ; CMC

5.

Nov., 2001

Hotel Ashok, Bangalore; Hotel Bodhgaya Ashok; Hotel Hasan Ashok

6.

Jan., 2002

Hotel Ashok, Madurai

7.

Feb., 2002

IBP ; Videsh Sanchar Nigam Limited ; Paradip Phosphates Limited ;

15

Hotel TBABR Mamallapuram; Hotel Agra Ashok; Luxmi Bilas Hotel Udiapur
8.

Mar., 2002

Qutab Hotel, New Delhi; Lodi Hotel, New Delhi ; Centaur Hotel, Juhu Beach,
Mumbai; Centaur Rajgir

19

9.

Apr., 2002

Hindustan Zinc Limited ; Centaur Hotel Airport, Mumbai

21

10.

May, 2002

Maruti Udyog Limited

22

11.

Jun., 2002

Indian Petrochemicals Corporation Limited

23

12.

Jul., 2002

Hotel Airport Ashok Kolkata ; Kovalam Ashok Beach Resort ;Hotel Manali Ashok

26

13.

Aug., 2002

Hotel Khajuraho Ashok; Hotel Varanasi Ashok

28

The Government
has fared well in
most instances
and has got a
substantial
premium over the
suggested
reserve price.
In the case of the
Paradeep
Phosphate (PPL)
divestment it
displayed its
flexibility by
selling at a price
lower than the
suggested
reserve price.

Name of PSU

Reserve Price (Rs

mn)

Reserve Price
(Rs/Share)

Bid Price (Rs

mn)

Bid Price
(Rs/Share)

Sale P/E

Lagan

20.5 - 23.9

3240 - 3790

25

4,000

Loss making

MFIL

786

8,559

1,055

11,490

Loss making

Balco

5144

46

5,515

490

19

CMC

1089

141

1,520

1,967

12

HTL

388

350

550

4,955

37

VSNL

12184

171

14,393

202

19

IBP

3770

507

11,537

1,551

63

PPL

1761

550

1,517

474

Loss making

HZL

3532

32

4,450

41

26

JESSOP

120

182

Loss making

IPCL

8450

131

14,908

231

57

Disinvestment13022002

Disinvestment Scorecard

The government has performed exceptionally well on the divestments undertaken till date

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Present Disinvestment policy

One of the major criticism against the disinvestment programme has

been that the government does not have a clear-cut and transparent
policy in this regard.
The programme has been often been considered as erratic, adhoc

and without any meaningful perception.

The government adopted multiple and varying criteria for the

selection of PSU for disinvestment and its extent was also arbitrarily
determined.
Dogged by fierce controversy and criticism, the government came

out with a Disinvestment policy on Dec 9, 2002.

10

The contents and the direction of the privatisation policy

are broadly indicated in its following aims:
Modernisation and upgradation of PSE;
Creation of new assets;
Generation of employment;
Ensuring that disinvestment does not lead to the alienation of

national assets;
Setting up of Disinvestment Proceeds Funds (DPF);
Formulation of guidelines for disinvestment of national asset

companies; and
Preparation of a paper on the feasibility and modalities of setting up

an Asset Management Company to hold, manage and dispose the

residual holding of government in the companies in which
government equity has been disinvestment to a strategic partner.
11

 The policy statement which came at end of the year 2002, after a

temporary suspension of the programme,

was partly aimed at cooling down the controversy which reached a
vortex in august 2002 and also an attempt to make a public revelation
of the basic objectives and purposes of the programme.

The objectives, however, are in general and board terms and the

policy is not specified in concrete form.

12

Basic issues concerning the disinvestment

programme
Valuation of PSU:

One of the major points of criticism against the programme is that the
PSU stocks are undervalued and sold at below the market or current
price.
Method of Disinvestment:

The government has been applying different methods of disinvestment of

different PSU.
Disinvestment till date since 1999-2000, there has been a greater stress
on Strategic Sale involves an effective transfer of control and
management from government to a private entity with the expectation that
the surrender of management control would fetch a better price from the
private party in a matching proportion.
The private party is called the strategic partner which generally has
experience in relate lines of business.
But at world this method of disinvestment is not popular as in this method
the probability o undervaluation and corruption is large.
13

 The Extent of Disinvestment:

Though the government has been setting annual targets for disinvestment, there is no target as such
for the overall or total disinvestment programme.
There is, infact, no declared terminal year of the programme nor is there any policy in this regard.
Where will the govt stop?

-- There is no clear-cut answer.

Further, no policy exists with regard to the close of a PSU for disinvestment.
The govt has so far been picking both loss- making and profit-making PSE for the disinvestment
purpose.

Utilization of Disinvestment proceeds:

PSU are built with public resources and there is a widespread opinion that the disinvestment
proceeds must not be used up in government consumption or meeting the fiscal deficits.
Again, the govt has no declared policy in this regard.
There is a widely held opinion that he disinvestment proceeds must be utilized in making new investment which
serves the widest interest of the public.
But, it is often alleged that the government has been using the disinvestment proceeds in meeting fiscal deficits.

The money can be well utilized if it is spent for any one or more of the following ways in the presentday context:

Retiring huge Public debt which would reduce the interest burden of the govt in the subsequent years.
Increasing social welfare through such expenditure as on Public health, education, or N generation.
Building social and economic overheads, and Increasing capital formation in agriculture
Retraining of workers affected in the process of privatisation and
Building safety net for the workers adversely affected by public sector restructuring.
14

 Issues concerning Labour:

Though the new PS policy provides for the protection of workers interest adversely
affected by privatisation or PSU restructuring, still labour concerns are still debated.
The policy provides such schemes as liberal voluntary retirement scheme, insertion
labour protection clauses in privatisation agreements and workers safety nets.
The level of Employment in PSU has been steadily falling and new N generation is
significant.
There is hardly any facility for retraining of workers for suitable N in private sector
organisations.
In the process of economic reforms, the govt is yet to come out with a clear labour
policy.
Till such time, labour concerns will continue to dog the privatisation programme.
Conclusion:

It is important for the govt to develop a comprehensive, well-defined and

transparent privatisation programme.
Simultaneously, national level efforts are required to enhance the public
acceptability of the programme.
Which would also help the govt in obtaining a better price for the PSU.
If the MOU-based system of PSE management is strengthened, the need of PSU
sell-off can be reduced or atleast postponed and the public enterprises will emerge
as a strength rather than weakness of the economy.
15