Yara Venkata Hareen, EE06B043.Yashashvi Takallapalli, EE06B047.

Dhiraj Reddy NY, EE06B066.

Disinvestment:-The withdrawal of capital from a country or corporationDisinvestment involves sale of only part of equity holdings held by the government to private investors.Disinvestment process leads only to dilution of ownership and not transfer of full ownership.Privatization refers to the transfer of ownership from government to private investors. Disinvestment is called “partial privatization”.

Offer for sale to Public at fixed price : The government holds the sale of the equity shares to the public at large at a pre determined price.Examples:- MFIL, BALCO, CMC, HTL,IBP, HZL, PPL, IPCL. Strategic sale:In this type significant management rights are transferred to the investor i.e. majority of equity holdings are divested.Examples: - Offer of 1 million shares of VSNL, listing of ONGC IPO. International offering:This is essentially targeted at the FII (foreign institutional investors).Ex:- GDR of VSNL,MTNL etc.Asset Sale and Winding up:

This is normally resorted to in companies that are either sick or facing closure. This is done by the process of auction or tender.Ex:- Auction of sick PSU’s.

The public sector is the part of economic and administrative life that deals with the delivery of goods and services by and for the government.After independence and with the advent of planning, India opted for a public sector oriented planning.It was believed that a dominant public sector would reduce the inequality of income and wealth, and advance the general prosperity of the nation, ‘trickle down’ of growth.Nehru look towards PSU’ s as the building blocks of India’s Industrial Growth. To a certain extent they can be seen the basis of present economic growth seen by India.

The main objectives for setting up the Public Sector Enterprises as stated in the Industrial Policy Resolution of 1956 were:

• To help in the rapid economic growth and industrialization of the country and create the necessary infrastructure for economic development;

•To promote import substitutions, save and earn foreign exchange for the economy;

• To earn return on investment and thus generate resources for development;

• To promote redistribution of income and wealth; • To create employment opportunities; • To promote balanced regional development; • To assist in the development of small-scale and ancillary industries;

Low Productivity. Low capacity utilization and low efficiency.Low rate of return on capital. Large number of loss making firms. Poor work ethics and quality of services.Over capitalization due to substantial time and cost overruns. Bureaucratic controls.Most of the PSU’s were monopolies in their industries due to tight governmental controls, and hence they were not very efficient.

Poor Performance of the Public Sector Units.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. To top it all, there is a huge amount of debt overhang, which needs to be serviced and reduced before money is available to invest in infrastructure. Finally, the collapse of the Soviet Union led people to look towards privatization as a viable option.

Reducing the public debt that is threatening to assume unmanageable proportions Transferring the commercial risk, to which the taxpayers' money locked up in the public sector, is exposed, to the private sector wherever the private sector is willing and able to step in. Raise of funds for government for investment in physical and social structure.Releasing other tangible and intangible resources, such as, large manpower currently locked up in managing the PSEs, and their time and energy, for redeployment in high priority social sectors that are short of such resources.

Disinvestment would expose the privatized companies to market discipline, thereby forcing them to become more efficient and survive or cease on their own financial and economic strength. They would be able to respond to the market forces much faster and cater to their business needs in a more professional manner. Thus improving the quality of services.Disinvestment would result in wider distribution of wealth through offering of shares of privatized companies to small investors and employees. In many areas, e.g., the telecom sector, the end of public sector monopoly would bring relief to consumers by way of more choices,and cheaper and better quality of products and services, as has already started happening.

The Chandrasekar Government in the interim Budget of 1991-92 first enunciated disinvestment as a policy. It was a quick-fix idea to raise money for the then severely cash-strapped government.Disinvestment of a percentage of shares owned by the Government in public undertakings or PSUs emerged as a policy option in the wake of economic liberalization and structural reforms launched in 1991.The disinvestment carried out in India can be divided into 2 phases as per the mode of disinvestment and the methodologies adopted:INITIAL PHASE (1991-92 to 1998-99) SECOND PHASE(1999-00 to 2003-04)

1. Arms and Ammunition and allied items of defense equipment. 2. Atomic energy. 3. Iron and steel. 4. Heavy castings and forgings of iron and steel. 5. Heavy plant and machinery required for iron and steel production, for

mining.6. Heavy electrical plants. 7. Coal and lignite. 8. Minerals oils. 9. Mining of iron ore, manganese ore, chrome ore, gypsum.10. Mining and processing copper, lead, zinc, tin.11. Minerals specified in the Schedule to the Atomic Energy. 12. Aircraft. 13. Air transport. 14. Rail transport. 15. Ship building. 16. Telephones and telephone cables telegraph and wireless apparatus

(excluding radio receiving sets). 17. Generation and distribution of electricity.

The Narasimha Rao Government kick started this phase with small lots of disinvestment of shares in 47 companies, a record.A sum of Rs 3,038 Crores was generated against a target of Rs 2,500 Crores making 1991-92 one of only three years in the last 13 when actual disinvestments receipts exceeded the target.The Industrial Policy Statement of 24th July 1991 stated that the government would divest part of its holdings in selected PSE’s, but did not place any cap on the extent of disinvestment. Nor did it restrict disinvestment in favour of any particular class of investors.

1. Arms and Ammunition and allied items of defense equipment, defense aircraft and warship.

2. Atomic Energy. 3. Coal and Lignite. 4. Mineral Oils. 5. Mining of iron ore, manganese ore, chrome ore,

gypsum, sulphur, gold and diamond. 6. Mining of copper, lead, zinc, tin, molybdenum and

wolfram. 7. Minerals specified in the schedule to Atomic Energy

(Control of production and use) Order, 1953. 8. Railway Transport.

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After the initial round of disinvestment, the process was guided by recommendations made by a Rangarajan Committee Report, 1993.

1. 49% of equity could be divested for industries explicitly reserved for the public sector

2. In exceptional cases the public ownership level could be kept at 26%.3. In all other cases it recommended 100 per cent divestment of Government

stake.4. Holding 51% or more equity by the Government was recommended only for

six Schedule industries, namely:I. Coal and lignite II. Mineral oils III. Arms, ammunition and defense equipment IV. Atomic energy V. Radioactive minerals VI. Railway transport

Evidently the framework was not acceptable then for obtaining, for in 1996, the then United Front Government came into power and the situation changed.

The United Front Government(1996) constituted an independent body, the Disinvestment Commission in 1996. The main terms of reference were:-

1. A comprehensive overall long-term disinvestment programme(extent of disinvestment, mode of disinvestment etc.) within 5-10 years for the PSUs referred to it by the Core Group.

2. To select the financial advisors for specified PSUs to facilitate the disinvestment process.

3. To monitor the progress of disinvestment process and take necessary measures and report periodically to the Government.

4. The “core” group industries- telecommunications, power, petroleum etc that are capital-intensive and where the market structure could be an oligopoly.

By August 1999, it made recommendations on 58 PSEs out of the 72 PSEs referred to it.

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Sino Mode of disinvestment recommended

No. of PSEs

1 Strategic Sale 292 Trade Sale 83 Offer of Shares 54 No

Disinvestment 1

5 Disinvestment deferred

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6 Closure/Sale of Assets

4

Total : 58

Recommendations of Disinvestment Commission

72 Public Sector Enterprises (PSEs) were referred to Disinvestment Commission, out of which 47 were profit making. The Disinvestment Commission gave its report on 58 Public Sector Enterprises, out of which 38 were profit making. In these 58 PSEs, the following methods of sale were recommended.

The highlights of the Policies during this phase are as follows:

To emphasize increasingly on strategic sales of identified PSEs; To close down PSEs which cannot be revived; To fully protect the interests of workers; To restructure and revive potentially viable PSEs;To establish a systematic policy approach to disinvestment and privatization and to give a fresh impetus to this programme, by setting up a new Department of Disinvestment;

For instance, if in a PSU the shareholding of Government is 51% and the balance is dispersed in public holdings, then Governmentmay go in for a 25% strategic sale and pass on management control, though the Government would post-transfer have a larger share holding (26%) than the Strategic Partner (25%).It may be noted here that the number 26% has a special significance in Company Law as to get a special resolution passed, one requires at least ¾ majority in a general meeting. Therefore, the 26% block acts as a check.Special resolutions are required under law in case of certain critical

decisions by the company such as reduction of capital, alteration in Articles of Association and Memorandum of Association, winding up of the company, issue of share with variation of rights of special classes of shareholders etc.

1. The progress of disinvestment in India was very slow2. According to the balance sheet of the government, at the

end of March 2000, the investments totaled Rs.2,52,554cr.

3. Except for three years (1991-92, 1994-95 and 1998-99), the budget targets for disinvestment were not met.

4. Between 1991-92 & 1999-2000, the total realization was Rs. 18,368 cr against the targeted - Rs. 44,300 cr.

5. More than 40 % of government equity had been disinvested in HPCL, VSNL, MTNL, IPCL and Hindustan Organic Chemicals.

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1. The year of 2004 marked the change in governance from the BJP government to the Congress led coalition & hence a transition in the objectives & processes of disinvestment.

2. In conformity with the policy enunciated in NCMP, it was decided in February 2005 to formally call off the process of disinvestment through Strategic Saleof profit making Central Public Sector Undertakings (CPSUs). Examples Manganese Ore Limited, Shipping Corporation of India, National AluminiumCorporation.

3. The National Common Minimum Program of May 2004 stated that Navaratna PSUs were to be retained in the public sector.

4. Every effort was to be made to modernize and restructure sick PSUs and revive sick industry.

5. Chronically loss-making undertakings were to be either sold-off, or closed after all the workers had got their legitimate dues and compensation.

6. The National Investment Fund was established by the UPA government. 7. Government also decided to disinvest/ list some profitable CPSU’s on the

stock market, to invest the money in other projects.

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Navratnas are the nine Public Sector Enterprises or PSE, identified by the Government of India in 1997 as its crown jewels or the most prestigious Public Sector Undertaking (PSU)s, which allowed them greater automony to compete in the global market.Bharat Heavy Electricals Limited (BHEL)National Thermal Power Corporation (NTPC)Oil and Natural Gas Corporation Limited (ONGC)Gas Authority of India Limited (GAIL)Indian Oil Corporation (IOC)Bharat Petroleum (BPCL)Mahanagar Telephone Nigam Ltd. (MTNL)Hindustan Petroleum (HPCL)Steel Authority of India Limited (SAIL)New one is National Mineral Development Corporation Limited

The proceeds from disinvestment of CPSUs will be channelized into NIF.5% of the annual income of NIF will be used to finance selected social sector schemes, which promote education, health and employment. The residual 25% of the annual income of the Fund will be used to meet the capital investment requirements of profitable and revivable CPSUs that yield adequate returns, in order to enlarge their capital base to finance expansion/diversification. An investment strategy was formulated to provide sustainable returns without depleting the corpus.

Summary of disinvestments in the Second Phase

The equity in PSUs essentially belongs to the people. Thus, in the absence of wider national consensus, a mere government decision to disinvest is not totally justifiable. It is not clear if the rationale for divestment process is well-founded. The assumption of higher efficiency, better management practices and better monitoring by the private shareholders may not always be true.

Mainly to fill fiscal deficits of the government. “Like covering one sin with another sin”“Living lavishly by selling your mothers jewelries”Generated capital has not been utilized for the benefit of the disinvested PSU. ( only a part, that too <25% in most cases).Governments have used disinvestment merely as a tool to raise resources to satisfy interim needs rather than with a long vision to restructure Indian industry.Even though NIF was created by the present UPA Govt, till date the money raised through only one disinvestment process has been transferred to its account. E.g.: sale of Government equity in PGCIL

Inadequate information about PSUs has resulted in lack of free, competitive and efficient bidding of shares, and a free trading of those shares.PSUs do not benefit much monetarily from disinvestment and hence they have been reluctant to prepare and distribute prospectuses. This has prevented the disinvestment process from being completely open and transparent. Under-valued shares. E.g.: Centaur Airport Hotel in Mumbai was sold to A L Batra for Rs 830 million against the reserve price of Rs 780 million but A L Batra later sold it to Tulip Star at a much higher price.

Only 3 times has the proposed target has been achieved.Some of the years the Govt. has failed to raise even 20% of the budgetary disinvestment targets.The Government has measurably failed to attract various parties for buying the PSU's.

In the sale of government equity in PSUs 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 actual price.Increase the dependence of Indian economy on the international fluctuations.

Monopolies created by privatization(?).E.g.: Selling of IPCL to reliance despite the fact that it held 60% of market share already.Possibility of concentration of shares in few hands:E.g.: ONGC disinvestment, Claim by left party activist that large number of shares were being bought over by Canadian firm.

Increased wages.Increased efficiency.The employees are still protected by labor laws and hence have job security.Significant increase in workload and stress.Implementation of VRS’s and trace cases of CRS. E.g. Banks.So it is clearly seen that the fears regarding Job cuts are miscounted for and has been tackled effectively through options like governmental controls, labour laws and VRS.

Disinvestment has always been a very politically sensitive issue, with different parties taking different views in different positions.Strategy towards disinvestment has also been subject to Governments and their allies. There has never been a clear stance on disinvestment by any government.The abolishment of the ministry of disinvestment in 2004, after the formation of Congress coalition was mainly to appease Left parties.Another Example of this is the scrapping of recommendations of the Rangarajan Committee and setting up of a new committee by the new United Front Government when it came to power.

-A case study

In February 2001, the Government of India (GoI) approved the sale of its 51% stake in aluminiummajor, Bharat Aluminium Co Ltd (Balco) to SterliteIndustries Ltd. (SIL), for Rs. 551.5 croresBalco was a profit making public sector company.It had a turnover of Rs.898 crores and a profit after tax of Rs. 56 crores

The deal witnessed fierce opposition from the opposition Govt. as well as the state Govt. of Chattisgarh.The employees launched an indefinite strike protesting against the BALCO sell out, which lasted for 62 days.

The then Chattisgarh Chief Minister Ajit Jogi accused the GoI of indulging in 'underhand dealings’ to the tune of Rs 100 Crores.Jogi claimed that the sale of Balco equities would have fetched at least Rs 5,000 crore.Then opposition party congress claimed that the deal would have easily fetched the GoI more that 1200 Crores.BALCO with a cash deposit of Rs 450 Crores and annual profit of Rs 100-150 Crores were being sold for a paltry Rs 551 Crores.To add to this, the bidding process was anything but transparent. Still the GOI is accused of not disclosing the final bid offers, even after the finalization of the bid.

Disinvestment in India has never been an attractive idea simply because successive governments have treated disinvestment merely as a tool to raise resources rather than as one designed to restructure the massive public sector.The fact that only in 3 of the 13 years budgetary targets were met show the ineffective implementation of this process by the government. Red Tapism and administrative loopholes have led to many controversies regarding disinvestment leading to many legalhassles and creating a negative image regarding DISINVESTMENTThere’s never been a clear direction to disinvestment as it has been subjected to the vagaries of politics of power.Its time a proper consensus is arrived through discussions on disinvestment aimed at restructuring Indian industry to make true the lofty visions of Jawaharlal Nehru and to continue growing at the same rate.