Current disinvestment policy of

government of India
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:

<!--[if !supportLists]-->1. <!--[endif]-->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.

<!--[if !supportLists]-->2. <!--[endif]-->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.

<!--[if !supportLists]-->3. <!--[endif]-->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.

<!--[if !supportLists]-->4. <!--[endif]-->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 government’s 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 country’s
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 India’s 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 by withdrawal of the government from ownership and management of public
sector companies
o By outright sale of public sector companies. In th
o 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 PSU’s 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 FII’s, employees and OCB’s.
 In April, 1993, Rangrajan committee recommended to divest upto 49% of PSE’s
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 PSE’s into strategic and non strategic areas.  It was decided
that Strategic PSE’s would be those in areas of:

<!--[if !supportLists]-->a) <!--[endif]-->Arms and ammunition and the allied items of

defence equipment,

Defence aircrafts and warships;

<!--[if !supportLists]-->b) <!--[endif]-->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.

<!--[if !supportLists]-->c) <!--[endif]-->All other PSE’s 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
won’t be privatized ‘Navratna’ companies can raise resources from the capital market. 
Efforts will be made to modernize and restructure sick Public sector companies.

<!--[if !supportLists]-->a) <!--[endif]-->It favoured sale of small proportions of Government

equity through IPO/FPO without changing the character of PSE’s.  In regard to this, it
approved listing of unlisted profitable CPSE’s subject to residual equity of the Government
remaining atleast 51% and Government retaining the control of management.
<!--[if !supportLists]-->b) <!--[endif]-->It also constituted the formation of ‘National
Investment Fund’.  The proceeds from disinvestment of CPSE’s 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 CPSE’s.

On 27th January, 2005 the Government, approved in principle:

<!--[if !supportLists]-->· <!--[endif]--> 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;

<!--[if !supportLists]-->· <!--[endif]-->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

<!--[if !supportLists]-->· <!--[endif]-->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 President’s 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 FM’s 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 people’s 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 PSU’s, probable
environmental concerns.