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Yara Venkata Hareen, EE06B043.

Yashashvi Takallapalli, EE06B047.

Dhiraj Reddy NY, EE06B066.
` Disinvestment:-The withdrawal of capital from a country
or corporation
` Disinvestment 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.
` 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
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
•To promote import substitutions, save and earn foreign exchange for
the economy;
• To earn return on investment and thus generate resources for
• 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
` 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
` 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
` 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
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
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
7. Minerals specified in the schedule to Atomic Energy
(Control of production and use) Order, 1953.
8. Railway Transport.

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
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.
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.

Sino Mode of No. of PSEs

1 Strategic Sale 29
2 Trade Sale 8
3 Offer of Shares 5
4 No 1
5 Disinvestment 11
6 Closure/Sale of 4
Total : 58
The highlights of the Policies during this phase are as follows:

` To emphasize increasingly on strategic sales of identified PS

` 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, b
y 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 Government
may 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 slow

2. According to the balance sheet of the government, at the
end of March 2000, the investments totaled
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.

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 Sale
of profit making Central Public Sector Undertakings (CPSUs). Examples
Manganese Ore Limited, Shipping Corporation of India, National Aluminium
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.
` 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
` 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
` 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.
` 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
` 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 aluminium
major, Bharat Aluminium Co Ltd (Balco) to Sterlite
Industries Ltd. (SIL), for Rs. 551.5 crores
` Balco 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
` 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
` 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 legal
hassles and creating a negative image regarding DISINVESTMENT
` There’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.