Disinvestment & Related Issues - General Knowledge Today

Disinvestment & Related Issues

Understanding Disinvestment and Privatization

  • Disinvestment and Privatization are two different terms in technical sense, though both involve the sale of Government's share in the Public Sector Undertakings.
  • The term privatization is used for a stake sell in which there is a transfer of 51% or more equity to the private players. In disinvestment, the government sells only a part of the equity which is essentially less than 51% so that ownership and management rights can be hold by the Government itself.

Rationale behind Disinvestment

The rationale behind the disinvestment and privatization are as follows:

  • It is believed that the private ownership leads to better use of resources and their more efficient allocation.
  • The proliferation of market based economy resulted in the fact that State could no longer meet the growing demands of the economy. It was believed that the government can deliver better results when it responds according to the market driven forces.
  • Globalization and WTO commitments need quick restructuring of the Public Sector Undertakings. If they are not able to adapt to this, they would not be able to survive. Public enterprises, because of the nature of their ownership, can restructure slowly and hence the logic of privatization gets stronger. Besides, techniques are now available to control public monopolies by regulation/competition, and investment of public money to ensure protection of consumer interests is no longer a convincing argument.

Objective of Disinvestment

The Industrial Policy Statement of 1991 had envisaged the disinvestment of a part of Government holdings in select Private sector companies. This became necessary because of the withdrawal of the budgetary support of 60 percent by the government to the loss making units in those times. The disinvestment policy in July 1991 had outlined the following objectives:

  • To meet the budgetary needs
  • To improve overall economic efficiency
  • To reduce fiscal deficit
  • To diversify the ownership of PSU for enhancing efficiency of individual enterprise
  • To raise funds for technological upgradation, modernization and expansion of PSUs
  • To raise funds for golden handshake (VRS)

The Rangarajan Committee on disinvestment 1993

The Rangarajan Committee of 1993 was constituted by the government for making recommendations in context with the disinvestment. The committee said that

  • The units to be disinvested should be identified and disinvestment could be made upto any level, except in defence and atomic energy where the government should retain the majority holding in equity.
  • Disinvestment should be a transparent process duly protecting the right of the workers.
  • An autonomous body for the smooth functioning and monitoring of the disinvestment programme should be established. This recommendation led to the Disinvestment Commission in 1996 as an advisory body having a full time chairman and four part-time members. The Commission was required to advise the government on the extent, made, timing and princing of disinvestment.
  • It suggested four modes of disinvestment viz. Trade sale, Strategic Sale, Offer of shares and Closure or sale of Assets.

In its budget speech of 2000-01, the government emphasized that more emphasis would now be paid on the strategic sale of public sector enterprises.

Strategic Sale : Major Route for disinvestment in India

In Strategic sale, the disinvestment / privatization take place by auctioning a state-owned enterprise to the highest bidder. It is in contrast with the minority sale where shares in an enterprise are sold as public offers. The emphasis on strategic sale in Indian privatisation is relatively recent in origin. From 1991 until 2000, the general policy was to sell minority shares in public sector companies. In March 2000, the the finance minister's budget speech spoke of a "fresh impetus to privatization programme that will emphasise increasingly on strategic sales of identified PSUs." The first important strategic sale in India was of Modern Foods to the multinational subsidiary, Hindustan Lever during times of NDA Government. The strategic sale invited lesser criticism from political parties mainly because the process is aimed at maximizing revenues to the government. Today, strategic sale is the most important route of disinvestment of Indian PSUs.

 

Later Developments

Up to November 1999, the Disinvestment commission had submitted 12 reports to the government covering 58 public sector enterprises. On 30th November 1999, the term of the Commission expired. However, it was reconstituted in July 2001. Initially the Department of Disinvestment was constituted which was later on upgraded as the ministry of disinvestment in order to streamline and speed up the process of disinvestment including restructuring.

  • The Disinvestment Commission also recommended creation of separate disinvestment fund in which the disinvestment proceeds would be placed to be used for the purpose of financial restructuring of the concerned unit before disinvestment and for carrying out voluntary retirement schemes. It also suggested merger of National Renewal Fund with the disinvestment fund.

Current Issues

As we read above, post 2000, the focus of the disinvestment has shifted to strategic sale of the identified public sector units. For the period 1991-2012, the progress of disinvestment has been a normal and Government could seldom collect more than what it had targeted. The pace of disinvestment has been largely restricted due to political opposition.

Does we disinvest only loss making companies?

The policy at privatization pursued by the NDA regime was disinvestment of the profit making CPSUs. However, later UPA Government declared that no profit making PEs will be disinvested. However, currently, it is not a policy of the Government to disinvest or privatize only profit making or only loss making companies.

What is the Philosophy of the Government?

The Government says that as long as the it retains control over the PE, and its public sector character is not affected, the government may dilute its equity and raise resources to meet the social needs at the people. Thus, the government takes the Disinvestment and privatization as useful economic tools and wishes to use them selectively.

Examples of companies in which disinvestment has taken place:

  • Shipping Credit and Investment Corporation of India
  • Container Corporation of India Ltd.
  • Videsh Sanchar Nigam Ltd. (VSNL)
  • Oil and Natural Gas Corporation (ONGC)
  • Gas Authority of India Ltd. (GAIL)
  • Steel Authority of India Ltd. (SAIL)
  • Mahanagar Telephone Nigam Ltd. (MTNL)
  • Indian Petrochemicals Corporation Ltd. (IPCL)
  • Power Grid Corporation
  • Shipping Corporation of India
  • National Aluminum Company (NALCO)
  • National Fertilisers Ltd. (NFL)
  • Indian Airlines
  • Dredging Corporation
  • LNG Petro Net
  • Madras Refineries Ltd.
  • Hindustan Zinc Ltd.
  • Maruti Udyog Ltd.
  • Modern Food Industries (India) Ltd.
  • Indian Tourism Development Corporation (10 Hotels)
  • Hotel Corporation of India etc

Challenges before disinvestment

  • Process of disinvestment is not favoured socially as it is against the interest of socially disadvantageous people.
  • Political pressure from left and opposition
  • Loss making units don't attract investment so easily.
  • Lack of well defined investment policy

The disinvestment process needs to be taken up more seriously by the government. The Government should try to come out with a time bound programme to conduct the process with transparency in all the activities need to reach. Some consensus is very essential. Only then the real benefits can be reaped

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Last Updated: November 22, 2013