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"While the case for economic reforms may

take good note of the diagnosis that India has
too much government interference in some
fields, it ignores the fact that India also has
insufficient and ineffective government
activity in many other fields, including basic
education, health care, social security, land
reforms and the promotion of social change.
This inertia, too, contributes to the
persistence of widespread deprivation, economic stagnation and social
inequality” .......Amartya Sen

Submitted To Submitted By
Dr. K. L. Chawla Gaurav Vijay Shah (91080)
FORE School of Management Harish Mittal (91081)
New Delhi Harsh Lakhotia (91082)
Himani Agarwal (91083)
Jitesh Kejriwal (91084)
Karan Soni (91085)
Disinvestment in India: A Failure Story

Intuition and concepts constitute ... the elements of all our knowledge, so that neither
concepts without an intuition in some way corresponding to them, nor intuition without
concepts, can yield knowledge. In a similar way the credit of developing this project goes to
many others who helped us in building both our concepts and intuitions.

We are indebted to our project guide Dr K. L. Chawla for providing us with a challenging &
interesting project. We owe the credit of developing this project to him. Without his guidance
realization of this project would not have been possible.

We would also like to thank our batch mates for the discussions that we had with them. All
these have resulted in the enrichment of our knowledge and their inputs have helped us to
incorporate relevant issues into our project.

Gaurav Vijay Shah (91079)
Harish Mittal (91081)
Harsh Lakhotia (91082)
Himani Agrawal (91083)
Jitesh Kejriwal (91084)
Karan Soni (91085)

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Executive Summary
Privatization, a key component of economic liberalization remained dormant for the nearly
the entire first decade of significant economic reforms in India. The usual explanations have
been that weak governments could not overcome the many vested interests or that there has
been ideological resistance to economic reforms among India’s elites.

Indian privatization came out of the shadows, however, when the former Indian President
Dr. A.P.J. Abdul Kalam stated, "It is evident that disinvestment in public sector
enterprises is no longer a matter of choice but an imperative … The prolonged fiscal
haemorrhage from the majority of these enterprises cannot be sustained any longer," in
his opening address to Parliament in the 2002 budget session.

How does one explain both the gradualism during the 1990s and the recent episodic
acceleration of privatization in India and what does it reveal both about state capabilities and
the strength of societal actors?

This report argues that it was not “vested interests” alone, but institutional structures, in
particular those embedded in the judiciary, parliament and India’s financial institutions, that
account for the lag between the onset of economic liberalization and privatization and its
episodic nature. Changes in the perceived costs of the status quo of state-owned enterprises
also played a role in the timing of reforms. Just as the external debt crisis forced the initial
round of economic reforms, the growing internal debt problem and the fiscal crisis of the
Indian state has increased the opportunity cost of state-owned enterprises (SOEs). The
passage of time has also resulted in significant changes in Indian policymakers and citizens’
attitudes regarding the relative effectiveness of state and markets in commercial activities, as
well as their assumptions about the Indian state being a “guardian of the public interest.”

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Table of Contents
Chapter 1 – A background
 Objective
 Relevance of study
 Methodology
 Literature review
 Public sector performance since 1950 by R Nagaraj
 “Disinvestment in India” by Sudhir Naib
 Disinvestment in Privatisation in India, Assessments and options by R
 Disinvestment in India, I loose and you gain by Pradeep Baijal
 Brief Introduction

Chapter 2 – Public Sector in India

 Evolution of Public sector
 Objective of formation of PSU’s
 Problem of Public sector undertakings
 Growth in Public sector

Chapter 3 – Disinvestment-Definition, Methods and Processes

 Definition
 Indian scenario
 Types of disinvestment
 Objectives
 Disinvestment process
 Methods adopted in India
 Legal issues

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Chapter 4 - Disinvestment in India-Policies, procedure and proceeds

 Background
 Timeline
 Phase 1 (1991 – 92 to 1995 – 96)
✔ Industrial reforms
✔ Rangarajan committee, 1993
✔ Year wise disinvestment
 Phase 2 (1996 – 97 to 1997 – 98)
✔ Disinvestment commission, 1996
✔ Review of recommendations given by Disinvestment
✔ Year wise disinvestment
 Phase 3 (1998 – 99 to 2007 – 08)
✔ Year wise disinvestment
✔ National investment fund
 Phase 4 ( 2008 – 09 to present)
✔ Year wise disinvestment
✔ The line up for disinvestment
✔ National Investment Fund,2005
 Summary of disinvestment

Chapter 5- Case studies

 Modern food industries (India) Ltd
 Power sector reform in Orissa
 Divestiture in Maruti Udyog compared to other disinvestments
 Lagan Jute Machinery Company Limited

Chapter 6 – Critical Analysis

 Review of Disinvestment in Privatisation
 Performance of PSUs after Privatisation
 Problems of Corporate governance
 Disinvestment – Not a great piece of reform
 Comparative experience
 PSUs are not that bad
 Facts
 Opportunities at present in PSUs
 Performance of PSUs

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Chapter 7 – Suggestions


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1. To Analyze the Disinvestment process in Indian Public Sector.

2. To study the disinvestment done was a Success or a Failure for the Indian


The report aims to study the evolution of disinvestment in India from the scratch and in
thorough detail so as to, not only understand the need and the procedure of the same, but also
to be able to critically evaluate the strategy and its several implementations till date.

The project enables us to discover and highlight several instances and facts and conclude that
the disinvestment was not efficiently conducted. We also conclude that the objectives behind
disinvestment, stated by the government way back in 1991have failed miserably.

After such an insightful analysis, we are in a position to say that though disinvestment in
India had several bounding objectives, it has been a failure story and much has to be done to

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realize the benefits. The group could even come up with some solutions and alterations that
can be implemented to help the citizens of India reap the benefits of the strategy of
disinvestment to a greater extent.

The report tries to study and analyze the disinvestment in India from its very scratch. We
begin studying the post independence era, understanding the strategy of Public Sector Units
used by the government for common good, then pin-pointing the loop holes and the
consequent shortcomings of this strategy, thus identifying an emergent need for

We further study the objectives of disinvestment and the process followed for the same. A
detail study over a timeline of eighteen years is done, dividing this entire span into three
phases. This study has helped us to cortically evaluate the disinvestment in several sectors
and comment on the current situation i.e. 2008 onwards.

Several legendary cases of disinvestment like the MFIL, BALCO, VSNL, Maruti Udyog
Ltd., Lagan Jute Mill etc have been developed to sheer details. This has enabled us to study
the situation then and comment upon their worthiness. We have gone one step ahead to state
several in depth facts and conclude that neither, the disinvestment was not carried out the
way it must have been nor have the funds realized been used for the purposes intended.


The paper elicits that since the mid-1980s, the public sector’s share in domestic investment
has been nearly halved, but its output share has remained roughly constant at about a quarter
of GDP, suggesting a sustained rise in productivity over nearly two decades. The paper
defines three major evidences for the improvement in performance.

• a rise in physical efficiency in electricity generation

• a fall in public sector employment growth

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• an increase in central public sector enterprises’ profitability (even after excluding the
petroleum sector)

The author then goes ahead to question why then the public sector finances remained adverse.
In electricity, passenger road transport and railways the revenue-cost ratio is less than one,
and has declined since the early 1990s. Moreover, over the last 40 years, the public sector
price deflator declined by 17 percentage points, relative to the GDP deflator. Hence, the
author concludes that correct pricing and collecting user charges are probably key to setting
public sector finances right.


Twelve years after it was started, the liberalization of the Indian economy remains an
ideological and operational battleground. There is mainstream national consensus on the need
and irreversibility of reforms, but widespread disagreement about its pace and the sharing of
its benefits. A basic aspect of the withdrawal of the state from the economic sphere has been
the divestment to private parties of the shares (and in some cases control) of public sector
enterprises (PSUs) or state-owned enterprises (SOEs)]. This has affected thousands of
Indians, and triggered fierce political debates.

The book gives a comprehensive roundup of the why and how of SOE privatization. It
provides a perspective on the past, present and future of PSU divestment from someone who
has studied the process up close. Before the commentary on the Indian experience, the book
touches on the historical development of the idea of private enterprise in public works, and
the major theoretical positions on the state versus private ownership debate. It provides a
comprehensive review of the disinvestment process followed by India and analyses the
impact of performance of the disinvested enterprises.



The author studies close to 250 public sector enterprises (PSEs) owned and managed by the
central government, mostly in industry and services (excluding the commercial banks and
financial institutions). The study suggests an alternative institutional arrangement for

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improving PSEs’ financial performance: mutual stock holding among complementary

enterprises tied around a public sector bank to minimise problems of soft budget constraint,
dysfunctional legislative and bureaucratic interference, and to encourage close interaction
between banks and firms to promote long term economic development.


The process of disinvestment in India has been fraught with challenges and controversies.
Disinvestment in India: I lose and You Gain, written by one who has been at the centre of all
privatization debates and controversies, brings to light the facts that surround the
disinvestment story. It underlines the most compelling rationales behind privatization: relief
to the taxpayer and the simultaneous need for funds for infrastructure development and
social-sector investment. This book traces privatization cycles across the globe through a
historical perspective by looking at the privatization models and processes adopted in
different countries. It also includes case studies of companies like BALCO, Maruti,
Hindustan Zinc, VSNL, Jessop and CMC, providing an insight into the different aspects of
disinvestment. This book discusses the impact of privatization and disinvestment on
companies, economies and other stakeholders, and serves to initiate a healthy and well-
informed debate on the basis of facts.

In macroeconomics, especially after the Latin American debt and inflationary crisis in the
1980s, privatization was widely advocated as a quick and sure means of restoring budgetary
balance, to revive growth on a sustainable basis. At the micro level, the change in ownership
is often advocated to increase domestic competition, hence efficiency; and encourage public
participation in domestic stock market – all of which is believed to promote ‘popular’
capitalism that rewards risk taking and private initiative, that is expected to yield superior
economic outcomes.
Employing about 19 million persons, Public Sector currently contributes about a quarter of
India’s measured domestic output. Administrative departments (including defence) account

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for about 2/5th of it, the rest comes from a few departmental enterprises (like railways and
postal services), and a large number of varied non-departmental enterprises producing a range
of goods and services. These include, close to 250 public sector enterprises (PSEs) owned
and managed by the central government, mostly in industry and services (excluding the
commercial banks and financial institutions). At the state level, production and distribution of
electricity and provision of passenger road transport form the principal activities under public
sector, run mostly by autonomous boards and statutory corporations. Though public
investment in irrigation would perhaps rank next only to electricity in most states, it is
generally viewed as public service, hence counted as part of public administration. Besides,
there are about 1,100 state level public enterprises (SLPEs) that are relatively small in size.
While the contribution of all these varied publicly owned and managed entities to national
development is widely acknowledged, their poor financial return has been a matter of
enduring concern – especially since the mid-1980s when, for the first time, the central
government’s revenue account turned negative – an imbalance that has persisted ever since.

In 1991, a small fraction of the equity in selected central PSEs was sold to raise resources to
bridge the fiscal deficit. Though quantitatively modest (as will be seen later), the
‘disinvestment’ signalled a major departure in India’s economic policy. While there have
been instances of sale of publicly owned enterprises as running concerns on pragmatic
considerations, it is only in the last decade that such sales (and sale of limited equity)
acquired the status of public policy.

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Prior to Independence, there were few ‘Public Sector’ Enterprises in the country. These
included the Railways, the Posts and Telegraphs, the Port Trusts, the Ordinance Factories, All
India Radio, few enterprises like the Government Salt Factories, Quinine Factories, etc.
which were departmentally managed.

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Independent India adopted planned economic development policies in a democratic, federal

polity. The country was facing problems like inequalities in income and low levels of
employment, regional imbalances in economic development and lack of trained manpower.
India at that time was predominantly an agrarian economy with a weak industrial base, low
level of savings, inadequate investments and infrastructure facilities. In view of this type of
socio-economic set up, our visionary leaders drew up a roadmap for the development of
Public Sector as an instrument for self-reliant economic growth.

This guiding factor led to the passage of Industrial Policy Resolution of 1948 and followed
by Industrial Policy Resolution of 1956. The 1948 Resolution envisaged development of core
sectors through the public enterprises. Public Sector would correct the regional imbalances
and create employment. Industrial Policy Resolution of 1948 laid emphasis on the expansion
of production, both agricultural and industrial; and in particular on the production of capital
equipment and goods satisfying the basic needs of the people, and of commodities the export
of which would increase earnings of foreign exchange.

In early years of independence, capital was scarce and the base of entrepreneurship was also
not strong enough. Hence, the 1956 Industrial Policy Resolution gave primacy to the role of
the State which was directly responsible for industrial development. Consequently the
planning process (5 year Plans) was initiated taking into account the needs of the country.
The new strategies for the public sector were later outlined in the policy statements in the
years 1973, 1977, 1980 and 1991. The year 1991 can be termed as the watershed year,
heralding liberalisation of the Indian economy.

The public sector provided the required thrust to the economy and developed and nurtured
the human resources, the vital ingredient for success of any enterprise; public or private.


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

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• To help in the rapid economic growth and industrialization of the country and create
the necessary infrastructure for economic development
• 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 the development of small-scale and ancillary industries
• To promote import substitutions, save and earn foreign exchange for the economy


The most important criticism levied against public sector undertakings has been that in
relation to the capital employed, the level of profits has been too low. Even the government
has criticised the public sector undertakings on this count. Of the various factors responsible
for low profits in the public sector undertakings, the following are particularly important: -

1. Price policy of the Public Sector undertakings.

2. Underutilization of capacity.

3. Problem related to planning and construction of projects

4. Problems of labour, personnel and management

5. Lack of autonomy


The investment in public sector enterprises has grown from Rs.29 crore as on 1.4.1951 to
Rs.2, 52,554 crore as on 31.3.2000. The details are summarized in the table below:

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Disinvestment refers to the action of an organization or the government in selling or

liquidating an asset or subsidiary. In simple words, disinvestment is the withdrawal of capital
from a country or corporation. Some of the salient features of disinvestment are:

• 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. While, privatization refers to the transfer of ownership from government
to private investors.
• Disinvestment is called as ‘Partial Privatization’.


A large number of PSUs were set up across sectors, which have played a significant role in
terms of job creation, social welfare, and overall economic growth of the nation; they rose to
occupy commanding heights in the economy. Over the years, however, many of the PSUs
have failed to sustain their growth amidst growing liberalization and globalization of the
Indian economy. Loss of monopoly and a protectionist regime, and rising competition from
private sector competitors have seen many of the government-owned enterprises lose their
market share drastically. In many instances, many of the PSUs have found themselves unable
to match up to the technological prowess and efficiency of private sector rivals, although
many have blamed lack of autonomy and government interventions for their plight.

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Few factors that have prohibited Indian PSUs from performing upto the standards laid down
for them at their incorporation include among others:

• The first order issue is that of competition policy. When the government hinders
competition by blocking entry or FDI, this is deeply damaging. Once competitive
conditions are ensured, there are, indeed, benefits from shifting labour and capital to
more efficient hands through privatisation, but this is a second order issue.
• The difficulties of governments that run businesses are well-known. PSUs face little
"market discipline". There is neither a fear of bankruptcy, nor are there incentives for
efficiency and growth. The government is unable to obtain efficiency in utilising
labour and capital; hence the GDP of the country is lowered to the extent that PSUs
control labour and capital.
• When an industry has large PSUs, which are able to sell at low prices because capital
is free or because losses are reimbursed by periodic bailouts, investment in that entire
industry is contaminated. This was the experience of Japan, where the "zombie firms"
- loss-making firms that were artificially rescued by the government - contaminated
investment in their industries by charging low prices and forcing down the profit rate
of the entire industry.
• Further, in many areas, the government faces conflicts of interest between a
regulatory function and an ownership function. As an example, the Ministry of
Petroleum crafts policies which cater for the needs of government as owner, which
often diverge from what is best for India.
• There is a fundamental loss of credibility when a government regulator faces PSUs in
its sector: there is mistrust in the minds of private investors, who demand very high
rates of return on equity in return for bearing regulatory risk.
• Then the problem of corruption and misappropriations are all well known in India.

Thus, privatization was accepted in Indian context.


There are various types of disinvestment. Some of them are as follows:

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1. OFFER FOR SALE TO PUBLIC AT FIXED PRICE: In this type of disinvestment, the
government holds the sale of the equity shares to the public at large at a pre determined price.

2. 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.

3. INTERNATIONAL OFFERING: This is essentially targeted at the FII (foreign institutional

investors). Ex:-GDR of VSNL, MTNL etc.

4. 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

Privatization intended to achieve the following:
• Releasing large amount of public resources
• Reducing the public debt
• Transfer of Commercial Risk
• Releasing other tangible and intangible resources
• Expose the privatised companies to market discipline
• Wider distribution of wealth
• Effect on the Capital Market
• Increase in Economic Activity


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The following are the three methods adopted by the Government of India for disinvesting the
Public sector undertakings. There are three broad methods involved, which are used in
valuation of shares.


This will indicate the net assets of the enterprise as shown in the books of accounts. It shows
the historical value of the assets. It is the cost price less depreciation provided so far on
assets. It does not reflect the true position of profitability of the firm as it overlooks the value
of intangibles such as goodwill, brands, distribution network and customer relationships
which are important to determine the intrinsic value of the enterprise. This model is more
suitable in case of liquidation than in case of disinvestment.


The profit earning capacity is generally based on the profits actually earned or anticipated. It
values a company on the basis of the underlying assets. This method does not consider or
project the future cash flow.


In this method the future incremental cash flows are forecasted and discounted into present
value by applying cost of capital rate. The method indicates the intrinsic value of the firm and
this method is considered as superior than other methods as it projects future cash flows and
the earning potential of the firm, takes into account intangibles such as brand equity,
marketing & distribution network, the level of competition likely to be faced in future, risk
factors to which enterprises are exposed as well as value of its core assets. Out of these three
methods the discounted cash flow method is used widely though it is the most difficult.


Legality of the disinvestment process has been challenged on a variety of grounds that
slowed the sale of public assets. However, there were two significant judicial rulings that
broadly set the boundaries of the D-P process. These are:

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1. Privatisation is a policy decision, prerogative of the executive branch of the state;

courts would not interfere in it.

2. Privatisation of the PSE created by an act of parliament would have to get the
parliamentary approval.

While the first ruling gave impetus for strategic sale of many enterprises like Hindustan Zinc,
Maruti, and VSNL etc. since 2000, the second ruling stalled the privatisation of the petroleum
companies, as government was unsure of getting the laws amended in the parliament.

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The basic objective of starting Public Sector in India was to build infrastructure and rapid
economic growth. However, a number of problems such as low productivity, over-manning
and other economic compulsions like deterioration of balance of payment position and
increasing fiscal deficit led to the adoption of new approach toward the public sector in 1991.



From 1950-51 to 1980-81, India’s growth rate was roughly constant but savings and
investment rate more than doubled. From the table it can be seen that it was because
of low productivity that India’s growth was slow.
Investment and Savings as a percentage of GDP
Year 1950-51 1960-61 1970-71 1980-81 1989-90
10.2 15.7 16.6 22.7 24.1
(Current Prices,% GDP)
(Constant 1980-81 prices, 14.7 18.1 18.7 22.7 21.8
Domestic Savings 21.7
10.4 12.7 15.7 21.2
(Current Prices, %GDP)
Source: Disinvestment in India, Sudhir Naib


During 1980’s the fiscal situation deteriorated rapidly. This was largely due to an
escalation of current expenditure of the government. The table below gives the
consolidated Central and state government revenue, expenditure and deficit over the
period 1960-61 to 1980-81, divided into five year averages and expressed as
percentage of GDP.
Consolidated finances of Central and state Government, 1960-61 to 1989-90

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Year 1960-61 1965-66 to 1970-71 1975-76 1980-81 1985-86
to1964- 1969-70 to 1974 to 1979- to 1984- to 1989-
65 -75 80 85 90
Revenue 12.7 13.4 14.6 17.8 18.1 20.0
Current Expenditure 11.8 12.9 14.2 16.3 18.6 23.0
Current Revenue 0.9 0.5 0.4 1.5 (0.5) (2.9)
Capital Expenditure 6.6 6.0 5.1 6.9 7.5 7.1
Total Expenditure 18.4 18.9 19.3 23.2 26.1 30.0
Fiscal Deficit 5.7 5.5 4.7 5.4 8.0 10.0
Primary Fiscal 5.3 5.2 4.2 4.7 6.8 7.5
Source: Disinvestment in India, Sudhir Naib


The fiscal deficit of the central govt rose consistently from 4% in mid – 1970’s to 8% of GDP
in 1985-86.

Fiscal Deficit of Government 1975-76 to 1990-91

Fiscal Budget Primary Revenue Monetised

Deficit Deficit Deficit Deficit Deficit
1975-76 4.1 0.5 2.5 1.1 0.0
1980-81 6.2 1.8 4.3 1.5 2.6
1981-82 5.4 0.9 3.4 0.2 2.0
1982-83 6.0 0.9 3.8 0.7 1.9
1983-84 6.3 0.7 4.0 1.2 1.9
1984-85 7.5 1.6 5.0 1.8 2.6
1985-86 8.3 2.0 5.5 2.2 2.4
1986-87 9.0 2.8 5.8 2.7 2.4
1987-88 8.1 1.7 4.7 2.7 2.0
1988-89 7.8 1.4 4.2 2.7 1.6
1989-90 7.8 2.3 3.9 2.6 3.1
1990-91 8.4 2.1 4.4 3.5 2.8
Source: Economic Survey, 1992-93, Government of India

• A significant factor was government’s non-plan expenditure and an inefficient interest

payment system.
• Again the gulf war of 1990 brought the nation to the brink of international debt.
• There were huge net outflows of NRI deposits from October 1990 and continued till
mid 1991.

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• RBI adopted sharp contractionary measures and had taken huge amounts from
International Monetary Fund in July, 1990 and January, 1991 amounting to $2.4
• Foreign Exchange Reserves were reduces $ 1 Billion which could support only two
weeks imports.
• Inflation was staring at 14%
• On July6, 1991 47 tons of gold were transferred from RBI to Bank of England,
London. Already 20 tons of gold were sold in International market through State
Bank of India.

When India turned to IMF and World Bank for further support, they showed concerns over
returns on State owned enterprises and budgetary support provided to them. It was then a
decision was taken in July, 1991 to bring about macroeconomic stabilisation and structural
reforms of industrial and trade policy.

In February, 1991 the Department of Economic Affairs submitted a paper to Cabinet
Committee on Political Affairs (CCPA) to approve the government intentions to disinvest up
to 20% of its equity in selected public sector undertakings.

The disinvestment announcement was made on 4March, 1991 during the interim budget
session for 1991-92 under the Chandrashekhar government. The Policy of disinvestment has
evolved over the years. This period can be broadly divided into 4 phases.

• The first phase being 1991-92 to 1995-96 where partial disinvestment was taken in
piecemeal manner.
• Second Phase 1996-97 to 1997-98, an effort to institutionalize the disinvestment
process was undertaken on a firm footing by constituting the Disinvestment
• The third Phase 198-98-99 to 2007-08 where Department of Disinvestment (Now a
Ministry) and National investment fund was formed to look after the disinvestment
process and the funds generated from it.

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• Fourth phase, the Current one where government is planning to sell its stake in

PHASE 1 (1991-92 TO 1995-96):

Phase one Started when Chandrashekhar government, while presenting the interim budget for
the year 1991-92 declared disinvestment up to 20%.The objective was to broad-base equity,
improve management, enhance availability of resources for these PSEs and yield resources
for exchequer.


1. Arms and Ammunition and allied items of defence 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, Telephone cables, Telegraph and Wireless apparatus (excluding radio
receiving sets).

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17. Generation and distribution of electricity.

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.
During this Phase the sole was to generate revenue without following any objective seriously.


1. Arms and Ammunition and allied items of defence equipment, 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 Order, 1953.
8. Railway Transport.


The government reconstituted the committee which it formed in February 1992 to

institutionalize the disinvestment process. The committee included Dr. C. Rangarajan, the
then Member Planning commission as chairman and Dr. Y. Venugopal Reddy as Member
Secretary. The committee gave its report on April, 1993. The Highlights of the committee
report are as follows:

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 at26%.
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:
• Coal and lignite
• Mineral oils
• Arms, ammunition and defence equipment

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• Atomic energy
• Radioactive minerals
• Railway transport

A steering Committee was formed for selection of PSEs for disinvestments. The Department
of Public Enterprises (DPE) coordinated all activities under the Ministry of Industry.


Out of 244 public enterprises 41 were selected, but 10 were dropped on the grounds of being
consultancy firms, negative asset value or they incurred losses in previous financial year. The
Remaining 31 were grouped into 3 categories “Very Good”, “Good” and “Average” on the
basis of net assets value per share vis-a-vis face value of Rs10 as on March,1991. The total
value of equity in each basket was Rs50 million.

Bids were invited from 10 financial institutions/ mutual funds which consisted of 825
bundles each consisting of 9 PSEs. A total of 710 bids for 533 bundles were received from 9
mutual funds/ institutions and 406 bundles for a total value of Rs14.2billion were sold. Unit
Trust of India was the major purchaser accounting for Rs. 7.75 billion of the sale.


In second tranche DPE asked ICICI to evaluate and advice issue price equity of selected
PSEs. A List of 16 PSE’s was prepared and shares were grouped into 120 bundles as before.

The reserve price fixed per bundle was Rs 10.08 crore. Bids were invited from 36 institutions
and banks. A total of Rs. 1611 crore were realised with Unit Trust of India again being the
major purchaser. The Shares of Metal Scrap Trading Corporation remained unsold.

Details of the PSEs Divested in 1991-92

No. Of Shares(in % of
Name of the Enterprise
crore) Disinvestment
Andrew Yule (AY) 0.1015 9.60
Bharat Earth Movers Ltd. (BEML) 0.6000 20.00

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Bharat Electronic Limited (BEL) 1.6000 20.00

Bharat Heavy Electricals Limited (BHEL) 4.8952 20.00
Bharat Petroleum Corporation Limited (BPCL) 1.0000 20.00
Bongaigaon Refinery and Petrochemicals Ltd. (BRPL) 3.9961 20.00
Cochin Refineries Ltd. (CRL) 0.4219 10.01
Computer Maintenance Corporation (CMC) 0.2528 16.69
Dredging Corporation of India Ltd. (DCI) 0.0402 1.44
Fertilizers and Chemicals Ltd. (FACT) 0.5232 1.54
Hindustan Machine Tools Ltd. (HMT) 0.4268 5.43
Hindustan Organic Chemicals Ltd. (HOCL) 0.9870 20.00
Hindustan Petroleum Corp. Ltd. (HPCL) 1.2768 20.00
Hindustan Photo Films Mfg. Co. Ltd. (HPF) 1.9190 16.05
Hindustan Zinc Ltd. (HZL) 8.0746 20.00
Hindustan Cables Ltd. (HCL) 0.1669 3.64
Indian Petrochemical Corp. Ltd. (IPCL) 3.7200 20.00
Indian Railway Construction, Co. Ltd. (IRCON) 0.0013 0.27
Indian Telephone Industries Ltd. (ITI) 1.7538 20.00
Madras Refineries Ltd. (MRL) 1.9316 20.00
Mahanagar Telephone Nigam Ltd. (MTNL) 12.0000 20.00
Minerals & Metals Trading Corp. (MMTC) 0.0334 0.67
National Aluminium co. Ltd. (NALCO) 3.5100 2.72
National Fertilizers Ltd. 1.1163 2.28
Neyveli Lignite Corp. Ltd. (NLC) 7.1791 5.00
Rashtriya Chemicals and Fertilizers Ltd. (RCFL) 3.1136 5.64
Shipping Corp. Of India Ltd. (SCI) 5.2246 20.00
State Trading Corp. Of India Ltd. (STC) 0.2393 7.98
Steel Authority of India Ltd. (SAIL) 19.9075 5.00
Videsh Sanchar Nigam Ltd. (VSNL) 1.2000 20.00
Total 87.2125

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Source: percentage disinvested from Public Enterprises Survey, 1995-96, VOL- I and number of
shares disinvested is from Public Accounts Committee 1993-94, 75th report, 10th Lok Sabha.

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 Crore was generated against a target of
Rs 2,500 Crore making 1991-92 one of only three years in the last 13 when actual
disinvestments receipts exceeded the target.

As per the budget of 1992-93 Rs. 3500 crore were to be raised by disinvestment during the
year. Out of this Rs. 1000 crore was meant for National Renewal Fund (NRF) which was set
up in February, 1992 to protect the interest of workers and provide a social safety net for


In this phase auctioning of shares on individual PSE basis was done. Tenders were invited for
a total of 8 PSEs. The minimum bid limit was set at Rs. 2.5 crore. The minimum reserve
price was fixed on the basis of recommendations from merchant bankers like ICICI, IDBI
and SBCM (State Bank of Capital Market) The average of their prices was set as the “Upset
Price”. A total of 12.87 crore shares were sold for a value of Rs 681.95 crore with 286 bids
being received.

Details of the PSEs Divested in October, 1992

% of Total Amount of
No. Of Shares number of
Name of the Enterprise
Sold(in crore) shares of the
Sale(in Rs
PSE Crore)
Bharat Petroleum Corporation Limited (BPCL) 0.2500 5.00 169.53
Hindustan Petroleum Corp. Ltd. (HPCL) 0.3192 5.00 178.10

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Hindustan Zinc Ltd. (HZL) 1.0416 2.58 44.33
Hindustan Machine Tools Ltd. (HMT) 0.3928 5.00 21.98
National Aluminium co. Ltd. (NALCO) 6.4431 5.00 124.13
Neyveli Lignite Corp. Ltd. (NLC) 1.4969 1.04 35.03
Rashtriya Chemicals & Fertilizers Ltd. (RCFL) 0.8685 1.57 26.36
Steel Authority of India Ltd. (SAIL) 2.0567 0.52 82.49
Total 12.8688 681.95
Source: Public Enterprise Survey, 1995-96, VOL-I


In November, 1992 the government invited bids for the purchase of 46.27 crore shares of 14
PSEs. The minimum bid limit was reduced to Rs 1 crore from Rs 2.5 crore. The criterion was
kept same as in first tranche. A total of 225 bids were received and 31.06 crore shares of 12
PSEs were sold at a total amount of Rs 1183.83 crore.

Details of the PSEs Divested in October, 1992

No. Of % of Total
Amount of
Shares number of
Name of the Enterprise Sale(in Rs
Sold(in shares of the
crore) PSE Crore)

Bharat Petroleum Corporation Limited (BPCL) 0.2500 5.00 161.65

Bongaigaon Refinery & Petrochemicals Ltd. (BRPL) 1.00 5.00 42.18

Fertilizers and Chemicals Ltd. (FACT) 0.05 0.15 1.30

Hindustan Petroleum Corp. Ltd. (HPCL) 0.32 5.00 153.75
Hindustan Zinc Ltd. (HZL) 1.03 2.54 36.47
Indian Telephone Industries Ltd. (ITI) 0.10 1.14 10.78
National Aluminium co. Ltd. (NALCO) 6.44 5.00 118.19
National Fertilizers Ltd. 0.03 0.06 0.72
Neyveli Lignite Corp. Ltd. (NLC) 1.73 1.20 34.94

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Rashtriya Chemicals & Fertilizers Ltd. (RCFL) 0.15 0.28 4.00
State Trading Corp. Of India Ltd. (STC) 0.03 0.10 2.25
Steel Authority of India Ltd. (SAIL) 19.93 5.00 617.60
Total 31.06 1183.83
Source: Public Enterprise Survey, 1995-96, VOL-I


Shares of 15 PSEs were offered for sale thorough auction. Out of 192 bids which were
received, 57 bids emerged successful on the basis of the reserve prices fixed by the core
group based on the recommendations of the merchant bankers. A total amount of Rs 46.73
crore was realised through sale of 1.0096 crore shares of 9 PSEs.

PSE Disinvested in March, 1993

No of shares % of total no Amount of sale

Name of the enterprise sold of shares of
the PSE (in Rs crore)
(in crore)

Bharat Heavy Electricals Limited 0.1117 0.45 8.21

Bongaigaon Refinery & Petrochemicals Ltd 0.0800 0.40 3.22

Hindustan Copper Ltd 0.3411 1.12 8.07

Hindustan Zinc Ltd 0.0300 0.07 0.75

Hindustan Machine Tools Ltd 0.0300 0.34 1.41

Indian Telephone Industries Ltd 0.0700 0.79 4.85

National Aluminium Company Ltd 0.1023 0.08 1.88

National Mineral Development Corp. Ltd 0.2140 1.59 17.88

Neyveli Lignite Corp Ltd 0.0305 0.02 0.46

Total 1.0096 46.73

Source: Enterprise-wise details regarding number of shares and amount realised obtained by author
from Department of Public Enterprises, Percentages of equity disinvested worked out by author based
on paid up equity.

Amount realised from divestment in 1992 – 93

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No of PSE No of shares sold Amount realised

disinvested (in crore) (in crore)

Oct 92 8 12.87 681.95

Dec 92 12 31.06 1183.83

Mar 93 9 1.01 46.73

Total 16 44.94 1912.51

Thus a total of 1912.51 crore was realised during 1992-93 against the target of Rs 2500 crore.


The target during this fiscal year was kept at Rs 3500 crore but the government could not go
in for further sale of shares due to unfavourable stock market conditions through 1993-94.

No divestment of PSE shares took place during 1993-94 due to adverse market conditions. In
spite of this an advertisement for sale of shares in some PSE’s was released in March 1994.
Actual realisation of funds took place from this round of divestment took place in 1994-95.
Changes effected in the procedure to encourage divestment are:

• Bidding amount was lowered from Rs 1,00,000 to Rs 25,000 or value of 100

shares(whichever higher)
• Registered FII’s were permitted for auction of PSE shares.


Considering the stock market conditions, Government evaluating the recommendations of

two merchant bankers – Industrial Credit and Investment Corporation of India, and Industrial
Development Bank of India fixed the minimum price to off-load shares of 7 PSE in March
1994.Out of these 7 PSE, only 1 PSE was not sold as no bid had been received.

PSE Divested in March/April, 1994

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No. Of shares % of total number

Amount of sale
Name of the enterprise sold of shares of the
(Rs in crore)
(in crore) PSE
Bharat Electronics Limited 0.331 4.14 47.17

Bharat Earth Movers Ltd 0.150 4.07 48.27

Bharat Heavy Electricals Ltd 2.692 11.74 301.34

Hindustan Petroleum Corp Ltd 0.447 7.00 563.11

Mahanagar Telephone Nigam Ltd 7.694 12.82 1322.17

National Aluminium Company Ltd. 0.003 0.04 0.096

Total 11.317 2282.156
Source: Details of total number of shares sold and amount realised as per Public Enterprises Survey,
1995-96, VOL-I Percentage of equity disinvested worked out by author based on paid-up equity.


Notice inviting tenders was issued in October 1994 for sale of shares in seven PSE’s. Shares
were not sold for MTNL as there was no bid. Non-Resident Indians (NRIs) and Overseas
Corporate Bodies (OCBs) were permitted to bid for the shares for the first time.

PSE Divested in October, 1994

No of
% of total no of Amount of sale (in
Name of the Enterprise shares sold
shares of the PSE crore)
(in crore)

Container Corporation of India 1.299 20.00 99.71

Indian Oil Corporation 1.443 3.77 1028.11
National Fertilizers Ltd. 0.007 0.01 0.28
Oil and Natural Gas Co Ltd 0.686 2.00 1051.52
Steel Authority of India 0.372 0.41 22.66
Shipping Corporation of India Ltd. 0.387 1.37 28.08
Total 4.194 2230.36
Source: Details of total number of shares sold and amount realised as per Public Enterprise Survey,
1995-96, VOL-I. Percentage of equity disinvested worked out by author based on paid up equity.


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In January 1995 shares of 6 PSEs were offered for sale. Out of 556 bids received, 209 were
accepted in respect to 5 companies and government decided not to sell shares in VSNL.

PSE Divested in January, 1995

No of shares
% of Total no of Amount of sale
Name of the enterprise sold (in
shares of the PSE (in Rs crore)

Engineers India Ltd 0.108 5.99 67.526

Gas Authority of India Ltd 2.853 3.37 194.120

ITDC 0.675 10.00 51.985

Indian Oil Corporation Limited 0.008 0.03 5.538

Kudremukh Iron Ore Company Ltd 0.616 0.97 11.399

Total 4.260 330.568

Source: Details of number of shares sold and amount realised as per Public Enterprises Survey, 1995-
96, VOL-I. Percentage disinvested worked out by author on the basis of paid-up equity.

No of PSEs No of shares sold Amount realised

Disinvested (in crore) (in crore)

March/April 1994 6 11.317 2282.156

October 1994 6 4.194 2230.360

January 1995 5 4.260 330.568

Total 17 19.771 4843.084


Against the target of Rs 7000 crore, the government decided to disinvest from only 4 PSEs –
MTNL, SAIL, CONCOR and ONGC in October 1995. Details are:

PSE Divested in October, 1995

No of shares sold Amount realised

Name of the enterprise
(In crore) (in crore)

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Mahanagar Telephone Nigam Ltd (MTNL) 0.87 135.90

Steel Authority of India Ltd (SAIL) 0.44 13.30
Container Corp of India Ltd (CONCOR) 0.20 14.12
Oil & Natural Gas Corporation Ltd (ONGC) 0.02 5.16
Total 1.53 168.48
Note: All these PSEs were partially disinvested earlier also.
Source: Public Enterprises Survey, 1995-96, VOL-I.

In addition, shares of Industrial Development Bank of India (IDBI) were disinvested during
the year and an amount of Rs 193 crore was realised. Although Public Enterprises Survey
does not reflect this amount but Ministry of Finance takes this into account. So the total
disinvestment receipts for the year was Rs 362 crore (Rs. 168.48 crore from disinvestment in
4 PSEs plus Rs 193 crore from disinvestment in IDBI).

PHASE II (1996-97 TO 1997-98):

The government constituted Public Sector Disinvestment Commission under G. V.
Ramakrishna on 23 August, 1996 for a period of 3 years with the objective of preparing an
over-all long term disinvestment programme for public sector undertakings. The main terms
of reference were:
• 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.
• To select the financial advisors for specified PSUs to facilitate the disinvestment
• To monitor the progress of disinvestment process and take necessary measures and
report periodically to the Government.
• The “core” group industries-telecommunications, power, petroleum etc that are
capital-intensive and where the market structure could be an oligopoly.

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By December 1997, the commission had given six reports which included recommendations
in 34 enterprises. The commission also showed concern about slow progress in
implementation of its recommendations and it was particularly critical of government’s going
ahead with strategic sales leading to joint ventures in some PSEs not referred to the
However its power was axed later by the government. Out of 72 companies referred to it the
commission gave its recommendations on 58 PSEs and finally the commission lapsed on 30
November, 1999.
The disinvestment Commission did not follow an ideological approach. It examined each
PSE and classified it as strategic and non-strategic.
Strategic units are those engaged in defence and security related production. In such
companies the government holding could be maintained at 100%. The non-strategic were
classified as core or non-core. The classification of PSE into core and non-core was made by
taking into account the structure of the industry, the competitiveness of the market in which it
operates its market share and the public purpose served by it.
The commission opined that the core group is one which is capital intensive and there is
tendency towards oligopolistic market structure. Examples were telecom, power generation
and transmission, petroleum exploration and refining industries. The commission
recommended disinvestment up to 49% in core area.
Non-core areas were those in which private investments had grown considerably and markets
were fully contestable. The commission suggested disinvestment up to 74% in non core
Classification of Enterprises as Core and Non-Core by Disinvestment Commission

Industry (Core) No Public Sector Enterprises

Oil and Natural Gas Corporation Ltd (ONGC)

Petroleum 3 Oil India Ltd (OIL)
Gas Authority of India Ltd (GAIL)

Steel 1 Steel Authority of India Ltd (SAIL)

National Aluminium Company Ltd (NALCO)
Minerals and metals 2
National Mineral Development Corp (NMDC)

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Air India (AI)

Transport services 2
Container Corporation of India Ltd (CONCOR)

Ind. Dev. And Tech. Rail India Technical and Economic Services Ltd. (RITES)
Consultancy services Power Grid Corp of India Ltd (POWERGRID)

Coal and Lignite 1 Neyveli Lignite Corp Ltd (NLC)

National Thermal Power Corp (NTPC)

Power 2
National Hydro Electric Power Corp. (NHPC)

Telecommunication 1 Mahanagar Telephone Nigam Ltd.(MTNL)

Total 14

Industry (Non-Core) No Public Service Enterprises

Bongaigaon Refineries and Petro Chemicals Ltd
Petroleum 2 (BRPL)
Sponge Irol India (SIIL)
Steel 2
Rashtriya Ispat Nigam Ltd (RINL)

Hindustan Zinc Ltd (HZL)

Hindustan Copper Ltd (HCL)
Mineral and Metals 5 Bharat Aluminium Co (BALCO)
Kudremukh Iron Ore Co Ltd (KIOCL)
Manganese Ore India Ltd (MOIL)

Pawan Hans Helicopters Ltd (PHL)

Transportation services 2
Shipping Corporation of India (SCI)

Engineers India Ltd (EIL)

Ind Dev and Tech consultancy Engineering Projects (I) Ltd (EPIL)
services Metallurgical and Engg Consultants (India) Ltd.

Indian Petrochemicals Corp Ltd (IPCL)

Chemicals and pharmaceuticals 3 Hindustan Insecticides (HIL)
Hindustan Organic Chemicals Ltd (HOCL)

Fertilizers and Chemicals (Travancore) Ltd (FACT)

National Fertilizers Ltd (NFL)
Madras Fertilizers Ltd (MFL)
Fertilizer 6
Pyrites, Phosphates and Chemicals Ltd (PPCL)
Rashtriya Chemicals and Fertilizers Ltd (RCFL)
Paradeep Phosphates Ltd (PPL)

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Hindustan Teleprinters (HTL)

Medium and Light Engineering 3 Indian Telephone Industries (ITI)
Central Electronics Ltd. (CEL)
Heavy Engineering 1 Bharat Heavy Electronics Ltd (BHEL)

Indian Tourism Dvp Corp (ITDC)

Hotel Corp of India Ltd (HCIL)
Tourist Services 4
Ranchi Ashok,
Utkal Ashok

Hindustan Latex Ltd (HLL)

Modern Food Industries Ltd (MFIL)
Consumer goods 5 Hindustan Vegetable Oils Ltd (HVOC)
North Eastern Papers (NEPA Ltd)
Rehabilitation Industries Corp Ltd (RICL)

Electronic Trade and Technology Devp Corp (ET&T)

State Trading Corp (STC)
Trading and Marketing
5 Minerals and Metals Trading Corp (MMTC)
Projects and Equipments Corp (PEC)
Metal Scrap Trading Corp (MSTC)

Hindustan Prefab Ltd (HPL)

Contract and construction
3 Hindustan Steel Works Construction (HSCL)
Mineral Exploration Corp Ltd (MECL)
Total (Non-Core) 44
Grand Total 58
Source: Disinvestment Commission Reports

Disinvestment Modalities Recommended by the Disinvestment Commission

Modalities of Disinvestment No of PSEs Name of PSEs

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Involving change in

• Strategic sale
MECON, BHEL, Hindustan Insecticides,

ITDC, MFIL, HCIL, R-Ashok U-Ashok,


• Trade sale

Involving no change in

Offer of shares

No change disinvestment 8 OIL, ONGC, NTPC, NHPC,


Closure/sale of assets 4 EPIL, ET&T, HVOC, RICL

Management employee 1 PEC

buyout/strategic sale/closure

Total 58

Source: Disinvestment Commission Reports (1 to 13)

In 1996-97 a target of Rs. 5000 crore was fixed for mobilization of resources through
disinvestment of PSE shares. In order to do this, companies from petroleum and
communication sectors were chosen namely IOC and VSNL. But due to unfavourable market
conditions the GDR of only VSNL could be issued. In the GDR, 39 lakh shares of VSNL
were disinvested resulting in an amount of Rs 380 crore.

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The budget for 1997-98 had taken a credit for an amount of Rs 4800 crore to be realised from
disinvestment of government held equity in PSEs. This was supposed to be achieved by the
disinvestment of MTNL, GAIL, CONCOR and IOC..
A GDR of 40 million shares held by the government in MTNL was offered in international
market in November, 1997. A total of Rs. 902 crore was collected but due to highly
unfavourable market conditions the GDR issue of GAIL, CONCOR, and IOC was deferred.
PHASE III (1998-99 TO 2007-2008)
This phase marked a paradigm shift in the disinvestment process. First in the 1998 – 99
budgets BJP government decided to bring down the government shareholding in the PSEs to
26 %to facilitate ownership changes which were recommended by Disinvestment
Commission. In 1999 – 2000 government state that its policy would be to strengthen
strategic PSEs privatise non-strategic PSEs through disinvestment and for the first time the
term ‘privatisation’ were used instead of disinvestment. The government later formed the
Department of Disinvestment on 10 December 1999. The following criteria were observed
for prioritisation for disinvestment:

• Where disinvestments in PSEs would lead to large revenues to the government

• Where disinvestment can be implemented with minimum impediments and in
relatively shorter time span; and
• Where continued bleeding of government resources can be stopped earlier.

DIVESTMENT IN 1998 – 99:

The government decided to disinvest through offer of shares in GAIL, VSNL, CONCOR,
IOC and ONGC. The budget for 1998 – 99 had taken a credit for Rs 5,000 crore to be
realised through disinvestment. The details of the various transactions are:

PSEs Disinvested in 1998 - 99

Name of the No of shares Receipts

Mode of Disinvestment
Enterprise sold (in crore) (in crore)

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Domestic issue
CONCOR 0.9000 221.65

3.0610 181.78

 Divested/sold to institutional investors

GAIL  Cross holding by ONGC
 Cross holding by IOC 4.0840 245.04

4.0840 245.04

IOC Cross holding by ONGC 3.1272 1208.96

 Cross holding by IOC 12.5349 2034.96

 Cross holding by GAIL 2.7719 450.00

VSNL GDR issue 1.0000 783.68

Total 31.5630 5371.11

Note: All these PSEs were partially disinvested earlier also

Source: Public Enterprises Survey, 1998 – 99, VOL-I gives total amount realised as Rs 5,371 crore.
Enterprise-wise details are obtained from Ministry of Disinvestment


The budget for 1999 – 2000 had taken a credit for Rs 10,000 crore to be realised through
disinvestment. The government disinvested from Modern Foods India Ltd and did a strategic
sale to their strategic partner – HLL for Rs 105, 45 crore for a 74 % equity stake. This was
the first time government had sold more than 50 % holding. Further government adopted the
following ways to raise money through disinvestment:

Disinvestment in 1999 -2000

No of shares
Name of the Receipts
Mode of disinvestment sold
enterprise (in crore)
(in crore)

GAIL GDR issue 13.5000 945.00

IOC Cross holding by ONGC 0.4212 162.79

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 Cross holding by IOC 1.1718 190.19
ONGC  Cross holding by
GAIL 0.6548 106.29

VSNL Domestic Market 0.1000 75.00

Modern Food
Strategic sale of 74 % equity 0.0920 94.51
Industries Ltd

Total 15.9398 1573.78

Note: Other than MFIL, all other enterprises were partially disinvested earlier also.
Source: Enterprise – wise details obtained from Ministry of Disinvestment.


Against a target of 10,000 crore, the government realised Rs 1868.73 crore. The details are:

Disinvestment in 2000 – 2001

Name of the enterprise Mode of Disinvestment Receipts (in crore)

BALCO Strategic sale of 51% 551.50

BRPL and Chennai Refineries Taken over by IOC 658.13

Kochi Refinery Taken over by BPCL 659.10

Total 1868.73

Note: Other than BALCO, all other enterprises were partially disinvested earlier also.
Source: Ministry of Disinvestment


Against a target of 12,000 crore, the government realised Rs 3130.94 crore during the year.
The highlight of this disinvestment was that strategic sales were affected in CMC, HTL, IBP,
VSNL and PPL. The details are:

Disinvestment in 2001 – 2002

Name of the
Mode of Disinvestment Receipts (in crore)

CMC Strategic sale of 51 % 152.00

HTL Strategic sale of 74 % 55.00

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IBP Strategic sale of 33.58 % 1153.68

VSNL Strategic sale of 25 % 1439.00

PPL Strategic sale of 74 % 151.70

ITDC Sale of 8 hotels and long term lease of one hotel 179.56

Total 3130.94

Note: Out of these six PSEs, three – CMC, VSNL and ITDC were partially disinvested earlier also.
Source: Ministry of Disinvestment website


Target of the government for disinvestment in the year was Rs 12,000 crore. The major
highlight was the two-stage sell off in Maruti Udyog Ltd with a Rs 400 crore right issue at a
price of Rs 3280 per share of Rs 100 each in which the government renounced whole of its
rights share (6,06,585) to Suzuki, for a control premium of Rs 1000 crore. Relative share
holding of Suzuki and government after completion of the rights issue was 54.20 % and
45.54 % respectively. The second stage government offloaded its holding in two tranches –
first where government sold 27.5 % of its equity through IPO in June 2003. The issue was
oversubscribed by over 10 times. Later keeping in view the overwhelming response from
sale of Maruti, government sold its remaining shares in the privatised companies of VSNL,
CMC, IPCL, BALCO and IBP to public through IPO’s.

Strategic sale of IPCL was also finalised in May 2002. The decision to disinvest IPCL was
although taken in December 1998, it took three and half years to finalise the deal. Reliance
Petro industries Ltd (Reliance group) was finally inducted as a strategic partner with a 26 %
sale in IPCL. The details of the disinvestment during 2002 – 2003 are:

Disinvestment in 2002 – 2003

Receipts (in
Name of the Enterprise Mode of Disinvestment

• Strategic sale of 26 % 445.00

• 1.46 % equity disinvested in favour of employees 6.18

Maruti Udyog Ltd Control premium for sell off to Suzuki 1000.00

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IPCL Strategic sale of 26 % 1491.00

ITDC Sale of 10 properties 272.81

MFIL Residual sale of 26 % equity 44.08

CMC 6.06 % equity disinvested in favour of employees 6.07

Total 3265.17

Note: Other than Maruti Udyog Ltd, other PSEs were partially disinvested earlier.
Source: Ministry of Disinvestment reply to Lok Sabha. Unstarred question no. 1351 answered on 26
Feb 2003.

From a summary of the Disinvestment from 1991-92 to 2002-2003 we can know what targets
were set by the government and how much was realised. Also the various companies from
which the government has disinvested are mentioned.

DISINVESTMENT FROM 2003 – 2004 TO 2007 - 08:

The government had fixed a high target for the year 2003 – 04 as 14,500 crore. The strategic
sale of JCL, and offer sales of many PSEs like MUL, IBP, IPCL, CMC, DCI, GAIL and
ONGC has exceeded the target fixed by the government to a total receipt of Rs 15,547.41
crore. Out of this Rs 12,741.62 crore receipts through sale of minority shareholding in
CPSEs. In 2004 – 05 the target was reduced to Rs 4,000 crore and share sales of NTPC,
ONGC spillovers and IPCL shares to employees pushed the total receipts to Rs 2,764.87
crore. In the other 3 years of this phase – from 2005 – 06 till 2007 – 2008 the government
fixed no targets and the total receipts were very less to with the year 2006 – 07 yielding no
receipts at all.


On 27th January 2005, the Government had decided to constitute a “National Investment
Fund” (NIF) into which the realisation from sale of minority shareholding of the Government
in profitable CPSEs would be channelised. The Fund would be maintained outside the
Consolidated Fund of India. The income from the Fund would be used for the following
broad investment objectives: -

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(a) Investment in social sector projects which promote education, health care and

(b) Capital investment in selected profitable and revivable Public Sector Enterprises that
yield adequate returns in order to enlarge their capital base to finance expansion/


(i) The proceeds from disinvestment of Central Public Sector Enterprises will be channelised
into the National Investment Fund which is to be maintained outside the Consolidated Fund
of India.

(ii) The corpus of the National Investment Fund will be of a permanent nature.

(iii) The Fund will be professionally managed to provide sustainable returns to the
Government, without depleting the corpus. Selected Public Sector Mutual Funds will be
entrusted with the management of the corpus of the Fund.

(iv) 75 per cent of the annual income of the Fund will be used to finance selected social
sector schemes, which promote education, health and employment. The residual 25 per cent
of the annual income of the Fund will be used to meet the capital investment requirements of
profitable and revivable CPSEs that yield adequate returns, in order to enlarge their capital
base to finance expansion/diversification.


The following Public Sector Mutual Funds have been appointed initially as Fund Managers
to manage the funds of NIF under the ‘discretionary mode’ of the Portfolio Management
Scheme which is governed by SEBI guidelines.

i) UTI Assets Management Company Ltd.

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ii) SBI Funds Management Company (Pvt.) Ltd.

iii) Jeevan Bima Sahayog, Asset Management Company Ltd.


The corpus of the Fund is Rs.1814.45 crore being the proceeds from the disinvestment in
Power Grid Corporation and Rural Electrification Corporation. The pay out on NIF was
Rs.84.81 crores in the first year. The payout received in the second year was Rs.209.24
crores. Average income of first year was 8.47%. Average income of second year was
10.02%. Thus, the average income was 9.245% against the hurdle rate of 9.25%.


In view of the deceleration of GDP growth due to global economic downturn coupled with
unprecedented drought this summer, we are facing a reduced budgetary resource generation
possibility. To ensure that this does not negatively impact the growth of economy;
Government has approved (on 5th November, 2009) one-time exemption permitting full
utilization of disinvestment proceeds deposited in the National Investment Fund, over this
and the next two Financial Years, in 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.

PHASE IV (Current Scenario)


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It is quite clear that the Government does have divestment of its stakes in PSUs high on
its agenda for the near future. Which companies are likely candidates? Here’s a line-up:

The IPOs that may flag off the divestment process may well be NHPC, RITES and Oil India,
which have already filed their respective draft prospectuses with SEBI over the past two

NHPC: NHPC is the country’s largest hydro power generator, engaged in planning,
development and implementation of hydro-electric projects. Based on the offer document, the
government stake will come down to 86.3 per cent post-issue. The earnings per share (EPS)
for the FY09 is Rs 1.01.

RITES: RITES, under the Ministry of Railways, provides transport infrastructure

consultancy, engineering and project management services. The PSU plans a fresh issue,
bundled with an offer for sale that may bring down the Government’s stake to 72 per cent.
The book value/share and EPS for the year ended FY07 were Rs 133 and Rs 30 respectively.

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OIL India: Oil India is engaged in the exploration, development, production and
transportation of crude oil and natural gas onshore. The company comes under Ministry of
Petroleum and Natural Gas. The Centre’s stake will fall to 89 per cent post-issue. The offer
document mentions an EPS of Rs 73.6 for the last financial year.

Long on the stake sale shortlist, the following PSUs are possible candidates which may seek
listing through an IPO/offer for sale route.

Coal India is among the largest coal-producing companies in the world and is the only un-
listed navaratna PSU (except for HAL, which comes under strategic area). CIL had a
turnover of Rs 38631 crore in 2007-08. It is expected to hit the IPO market in near future.

Telecom major, BSNL and steel maker, RINL (Vizag steel), Cochin Shipyard,
Telecommunications Consultants India and Manganese Ore are the other likely candidates
that may tap the market. These entities have been on the divestment shortlist for quite a

Stake dilution is also possible in listed PSUs with a high proportion of government
holdings. A 5-10 per cent stake sale in these companies will bring huge gains for the
government, even without losing the management control. NMDC, BHEL, NTPC, SAIL,
Neyveli Lignite, MMTC, RCF are likely follow-on offer candidates.

At current market prices, a 5 per cent stake sale in NTPC would fetch the government around
Rs 8,864 crore. In case of Neyveli Lignite, SAIL, BHEL, MMTC and NMDC, the receipts
would be around Rs 1,168 crore, Rs 3,570 crore, Rs 5,321 crore, Rs 6,800 crore and Rs 8,900
crore respectively.

Public sector banks that have a high proportion of government holdings are ripe for a
dilution of stake, given their capital needs. While the stake dilution in PSBs will not help the
government in terms of receipts, as fresh issues may be needed to bolster the banks’ capital
adequacy requirements, it will save the government equity infusion from time to time.

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Central Bank of India (80 per cent), Canara Bank (73 per cent), Indian Bank (80 per
cent) and Bank of Maharashtra (76 per cent) are banks with high government stake. The
unlisted United Bank of India is also considering an IPO in the near future.

Proposal under implementation during 2009-10

i)NTPC Limited:-Government on 19th October 2009, approved disinvestment of 5%

equity of the company out of Government shareholding through Public Offering in the
domestic market.

ii)SJVN Limited (Satluj Jal Vidyut Nigam Limited) -Government on 19th

October 2009 approved disinvestment of 10% equity of the company out of Government
shareholding through Public Offering in the domestic market.

iii) Rural Electrification Corporation Limited (REC) - Government on 29th

October 2009, approved disinvestment of 5% equity of the company out of Government
shareholding in conjunction with the issue of fresh equity of 15% by the company

iv) NMDC Limited - Government on 3rd December 2009,approved disinvestment of

8.38% paid up equity of NMDC Ltd. out of Government shareholding through Public
offering in domestic market.

Summary of Disinvestment till 1992 – 2010

Year Target Amount Enterprises Methodology

amount realised disinvested *
(in crore)
(in crore)

1991 – 92 2,500 3038.00 30 (30) Minority shares sold by auction method

in bundles of ‘very good’, ‘good’, and
‘average’ companies.

1992 – 93 2.500 1912.51 16 (2) Bundling of shares abandoned. Shares

sold separately for each company by
auction method.

1993 – 94 3.500 Equity of 7 companies sold by open

auction but proceeds received in 1994 –

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1994 – 95 4,000 4843.08 16 (7) Sale through auction method, in which

NRIs and other persons legally permitted
to buy, hold or sell equity.

1995 – 96 7,000 362.00 4 (-) Equities of 4 companies auctioned and

government piggy-backed in the IDBI
fixed price offering for the fifth

1996 – 97 5,000 380.00 1 (-) GDR (VSNL) in international market.

1997 – 98 4,800 902.00 1 (-) GDR (MTNL) in international market

1998 – 99 5,000 5371.11 5 (-) GDR (VSNL)/ Domestic offerings with

the participation of FIIs (CONCOR,
GAIL). Cross purchase by 3 oil sector
companies i.e., GAIL, ONGC & IOC.

1999 – 00 10,000 1573.78 5 (1) GDR (GAIL) in international market,

VSNL domestic issue, cross – holding in
IOC and ONGC, and strategic sale of

2000 – 01 10,000 1868.73 3 (1) BALCO, KRL (CRL) & MRL through
strategic sale/acquisition

2001 – 02 12,000 3130.94 6 (3) Strategic sale of CMC, HTL, IBP, VSNL
and PPL. Sale of eight hotels and long
term lease of one hotel of ITDC.

2002 – 03 12,000 3265.14 5 (1) Strategic sale of HZL, IPCL, Maruti

Udyog Ltd. Sale of 10 properties of
ITDC and residual equity of MFIL.

2003 - 04 14,500 15,547 10 Strategic sale of JCL, call option of

HZL, offer for sale of MUL, IBP, IPCL,
CMC, DCI, GAIL, and ONGC; sale of
share of ICI Ltd.

2004 - 05 4,000 2,764.87 3 Offer sale of NTPC and spillover of

ONGC; sale of shares to IPCL

2005 - 06 No target 1,569.68 1 Sale of MUL shares to Indian Public

fixed Sector financial institutions and banks
and employees.

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2006 - 07 No target - - -

2007 - 08 No target 2,366.94 1 Sale of MUL shares to public sector

fixed financial institutions, public sector
banks, and Indian mutual funds.

2008-09 No target - - -

2009-2010 No target 4,259.90 - (Rs.2012.85 - NHPC and Rs.2247.05 -

fixed -- OIL)

Total 37,803.46 (60)

Note: *Enterprises disinvested for the first time given in brackets.

* Out of Rs.5371.11, Rs. 4184 crore constitute receipts from cross purchase of shares of ONGC,
** Out of Rs.1479.27, Rs.459.27 crore constitutes receipts from cross purchase of shares of ONGC,


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Modern Food Industries was incorporated as Modern Bakeries (India) Ltd. in 1965. It had
2042 employees as on31 January, 2000. It went through minor restructuring when its Ujjain
plant was closed, the Silchar project was abandoned and the production of Rasika drink was
curtailed. The company was referred to Disinvestment Commission in 1996. In February
1997, the Commission recommended 100% sale of the company, treating it in the non-core
sector. As per the Disinvestment Commission the major problems at MFIL were under-
utilization of the production facilities, large work force, low productivity and limited
flexibility in decision-making.


MFIL: Pre-Disinvestment Performance

Details 1995-96 1996-97 1997-98 1998-99 1999-2000

Sales- Bread 95.0 104.0 103.5 89.0 78.0
Energy food/ Non-Bakery 45.2 62.8 78.0 71.0 71.0

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Total 140.2 166.8 181.5 160.0 149.0
Net Profit/loss 11.52 16.45 7.65 (7.00) (48.00)
Source: Ministry of Disinvestment, Government of India

During 1995-96 to 1997-98 MFIL recorded profits as wheat was provided to it at a subsidised
rate but once that was withdrawn it started making losses as the increased costs could not be
passed on the consumers. Also the high overhead cost of Rs 1.90 per loaf against the industry
norm of Rs.0.90 per loaf added to the problem.

In September, 1997 the government approved 50% disinvestment of MFIL to strategic

partner through competitive global bidding. In October 1998, ANZ investment Bank was
appointed as the global advisor for assisting in disinvestment. In January, 1999 the
government decided to raise the disinvestment level to 74 % and an advertisement inviting
expression of interest from perspective strategic partners was issued in April, 1999.


In a response to the advertisement 10 parties submitted Expressions of Interest. Out of these,

4 conducted the due diligence of the company, which included visits to Data Room,
interaction with the management of the MFIL, and site visits. In October, 1999 post due
diligence, 2 parties remained in the field, and on the last day for submission of the financial
bid (15.10.99), the only bid received was that from Hindustan Lever Limited (HLL). Finally
in January, 2000, the Government approved the selection of HLL as the strategic partner in
and the deal was closed on 31.1.2000.


The 100% value of MFIL by different methodologies is give below:

MFIL: Valuation under different Methods

Valuation Key Assumption Value (in Rs crore)

Discounted Cash Flow “As is Where is”& Negligible

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Growth in Market Share 32.11

Transaction Multiple Sales Multiple 78.55

Balance Sheet Net Worth 28.51

Asset Valuation Liquidation 68.18

Market Value of Land & Buildings Unrestricted use 109.00

Source: Ministry of Disinvestment, Government of India

Sales realization for 74% equity was Rs. 105.45 crore. This corresponds to Rs. 142.50 crore
for sale of 100% equity. The agreement with HLL provided for post-closing adjustments –
difference between net working capital as on 31st, March, 1999 and net working capital on
closing date 31st January, 1999 and increase in debt amount on closing date 31st, January,
1999. Due to reduced working capital and increase in debt amount, the government paid back
Rs. 10.94 crore. Thu the net realisation was Rs. 94.51 crore for 74% equity.


MFIL: Post Disinvestment Performance

Details Pre- Disinvestment Post-Disinvestment
Year 1998-1999 1999-2000 2000-2001
Sales -Bread 89 78 102
Energy Food 71 71 66
Total 160 149 168
Net Profit / Loss (7) (48) (20)
Source: Ministry of Disinvestment, Government of India

• The decline in the sales of Modern Bread, which continued till the beginning of 2000,
was arrested. Weekly sales in December 2000 were around 44 lakh SL, which is a
100% increase over the figure of April 2000.

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• As on 31.12.2000, HLL has extended secured corporate loans to MFIL to the extent
of Rs. 16.5 crore for meeting the requirement of funds for working capital and capital
expenditure.HLL has provided a corporate guarantee to MFIL's banker, viz., Punjab
National Bank, which has helped the Company in getting the interest rate reduced
considerably to the extent of 3-4% of its earlier borrowing cost.
• Steps were taken to improve the quality of bread, its packaging and marketing with
trade-promotion activities, and to train the manpower in quality control systems. In
November, 2002 wages have increased by an average of Rs.1800 per employee. Rs.
30 crore was spent for VRS. Again Rs. 7 crore were infused for safety & hygiene
purposes at various manufacturing locations
• The Government was also entitled to ‘Put’ its share of remaining equity of 26 %
at Fair Market Value for 2 years from 31st January 01 to 30th January 03. The
Government exercised this option and thereby received Rs. 44.07 crore on 28th
November 02.


Despite HUL’s best efforts MFIL continued to make losses, HUL had invested 157 crore in
MFIL’s equity. In 2005, its losses were Rs 15 crore and accumulated losses were Rs 79 crore.
At the operating profit level, before interest and depreciation, it did make a profit though of
Rs 22 crore compared to a loss of Rs 7 crore in the previous year.

Bread sales grew by about 7%. The company suffered as it lost some lucrative government
contracts and changed its operational structure. Hence overall sales declined by 35% to Rs 95
crore. However, HUL did enjoy tax benefits as MFIL was a sick industrial unit. The company
put MFIL on the block in 2006 but failed to clinch a deal

However, HUL still was unsuccessful in turning around the business and due to high
employment costs and low margins. As per the company, the culture of MFIL was a complete
misfit with its own. The company has committed a mistake while conducting the due
diligence process.

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Bharat Aluminium Company Limited, set up in

1965 at Korba in Madhya Pradesh to manufacture
aluminium rods and semi-fabricated products, is
today the third largest player in the Indian
aluminium industry.

BALCO has its corporate office in New Delhi. Its

main plant and facilities are situated in Korba
(Chhattisgarh), which includes bauxite mines, an alumina refinery, a smelter and a fabrication
unit, besides a 270 MW power plant which meets a substantial part of the unit's power
requirements. It also has another fabrication unit in Bidhanbagh (West Bengal). The refining
capacity of BALCO is 2, 00,000 tonnes per year and its smelting capacity is 1, 00,000 tonnes
per year. BALCO also curtails a fully built township of over 15,000 acres where over 4,000
families live.


The Government of India had 100% stake in BALCO prior to disinvestment. In 1997, the
Disinvestment Commission classified BALCO as non-core for the purpose of disinvestment
and recommended immediate divestment of 40% of the Government stake to a strategic
partner, and reduction of the Government stake to 26% within 2 years through a domestic
public offering. It further recommended divestment of the entire remaining stake at an
appropriate time thereafter. The Cabinet accepted the recommendation of the Disinvestment
Commission for divestment of 40% stake through a strategic sale and further divestment
through the capital market.

Later, in 1998, the Disinvestment Commission revised its recommendation and advised the
Government to consider 51% divestment in favour of a strategic buyer along with transfer of
management, which was accepted by the Cabinet. The Government thereupon appointed M/s

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Jardine Fleming as Advisor to assist in the sale of its 51% stake in BALCO to a strategic

This was followed by BALCO's equity being reduced by 50% thereby reducing the
subscribed share capital to Rs.244 crore from Rs.488 crore. As a result, the Government
received Rs. 244 crore from the capital restructuring of BALCO and another Rs. 31 crore as
tax on this amount, prior to disinvestment. The strategic sale process for BALCO started in
late 1997, after the first decision of the Government, and finally came to end in 2nd March
2001. The 51% stake was sold to Sterlite Industries, the highest bidder, and fetched the
Government Rs. 551.50 crore. The government thus recovered Rs 827.50 crore from this

BALCO: Pre- Disinvestment Performance

1999 –
Details 1997 - 98 1998 - 99
Sales 848.51 870.90 896.64
Other income 48.10 68.84 70.08
Total income (1+2) 896.61 939.80 966.72
Total expenditure 714.08 758.24 806.28
Profit before depreciation, interest & taxes
182.53 181.56 160.44
Profit before interest & taxes (PBIT) 141.53 140.64 122.01
Profit before tax (PBT) 134.87 134.34 116.19
Profit after tax (PAT) 79.84 76.32 55.89
Dividend 20.00 23.00 18.00
Source: Public Enterprises Survey, 1999 – 2000


There were three bidders viz the US-based Alcoa and Indian market leader Hindalco and
Sterlite. Sterlite’s financial bid was the highest among the bidders, according to an official
release by the government. The company was valued by three different methods:

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• Discounted cash flow

• Comparative valuation
• Balance sheet and asset valuation

BALCO: Valuation under Different Methods

Valuation method Value (in Rs crore)

Discounted cash flow (DCF) 651.2 to 994.7

(computers likely earnings in coming years)

Comparables (looks at peer group companies) 587.0 to 909.0

Balance sheet method (looks at net worth from balance sheet) 597.2 to 681.9

Asset valuation (replacement cost/sale value of assets) 1054.9 to 1072.2

• Source: Ministry of Disinvestment, Government of India.

The valuation was applied by the official valuer J P Morgan. The reserve price of Rs 514.40
crore was reached by marking up the valuation, arrived at by using the discounted cash flow
(DCF) technique, by 25 per cent, used as the control premium.


Post sale, a number of doubts have been raised by various quarters on the disinvestment of
BALCO, especially with regard to

• Transparency
• Valuation
• Protection of employees’ interests

No sooner was the BALCO deal announced than it created a furore within and outside
Parliament. The opposition raised eyebrows. There was distrust from state government and
the workers of BALCO went on a 67 days strike. It seemed as if the Sterlite management had
to sweat a lot before it actually got the right over the catch it craved for. This finally came to
an end when the new management stroke a deal with the employees. Several new steps were
undertaken, some of which are:

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• The new management had introduced VRS ie Voluntary Retirement Scheme from
31.07.01 to 16.08.01. 981 applications (151 executives and 830 workers) were
received. 694 old VRS applications were pending. A total of 956 applications were
accepted mostly where units were lying closed.
• In spite of losses of Rs. 200 crore due to the strike, an exgratia payment of Rs. 5000
was made to all employees.
• Long-term wage agreement for a period of 5 years was entered into/
• Workmen get a guaranteed benefit @ 20% of basic pay.
• An Increase in allowances was also announced:
○ Night shift allowance: Rs.10 to Rs.20 per shift.
○ Canteen allowance: Rs.400 p.m. (instead of subsidised canteen facilities)
○ Education allowance: Rs. 50 to Rs. 75 per month
○ Hostel allowance: Rs.150 to Rs.200 per month
○ Scholarship amount to meritorious children doubled.
○ Leave Travel Assistance of around Rs. 6000 as cash every year.
○ Conveyance allowance: Scooter users Rs. 400 to Rs. 500 pm, Moped users Rs.
240 to Rs. 350 pm, others users Rs. 150 to Rs. 260 pm.
• Several new practices introduced. Few were:
○ Job rotation
○ Appraisal system
The new management is proposing an investment of Rs. 6000 crore which will
increase production 4 times.


The disinvestment of 51% stake in BALCO by the government of India towards a strategic partner
was backed by two justifications:

• From a market share of around 17 per cent in 1995-96 in the primary aluminum
business, BALCO’s share had dropped to 14 per cent in 1998-99. Several reasons
were mentioned that were responsible for hindering its growth. They were:
○ Lack of economies of scale

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○ Old age technology

○ Overstaffing
○ Operational bottlenecks
○ Lack of managerial autonomy
Thus, a complete review and restructuring was urgent to enable the company to stand
a better chance to stake its claim in the globally competitive Indian aluminium
• Although there were three bidders, Sterlite’s financial bid was the highest among the
bidders, according to an official release by the government. Intact, government
claimed that it was getting a price greater than expected.

However, there are certain facts from the other angle that demand attention. The following
tries to uncover some of them:

Government had no modernisation and expansion under consideration for the

aluminium giant:

To quote the Disinvestment Commission: "BALCO as a PSU has suffered from

procedural bottlenecks and lack of managerial autonomy. The CRM project at Korba
has been cleared after eight years with near-doubling of the capital outlay. The
company was not able to get clearance from the government for setting up 100%
captive power generation. As a result, the company had to depend on high cost power
from the State Electricity Board which resulted in avoidable cost increases. The delays
and the lack of autonomy have certainly affected its operating profits which would have
been much higher had it been able to implement these projects earlier."

Thus even the Disinvestment Commission's recommendation that the government should
resort to a strategic sale of 40 per cent of BALCO equity can be seen as misplaced. What was
required instead was a reorganisation aimed at allowing BALCO the freedom to use its own
capacity to mobilise resources to modernise, expand its captive power facility and raise its
profitability. In practice, as a prelude to the privatisation process, in March 2000 the
subscribed share capital of BALCO was brought down to Rs.244 crore from Rs.488 crore, by

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appropriating part of the Rs.437 crores into the government's account. This was a clear
indication that modernisation and expansion was not even under consideration.

• BALCO, a profit making PSU, was valued at what is considered a

throwaway price:
○ Cash flows determined by undermining profitability:

This also implies that BALCO's profitability has been undermined by the
government's own role in stalling modernization and expansion at Korba. Hence,
the then profit performance of the unit cannot be the basis on which the future
profile of profits could be estimated. However, the tendency for Arun Shourie, the
Minister for Disinvestment, to emphasize repeatedly that profits earned by
BALCO had fallen from Rs.163 crore in 1996-97 to Rs.25 crore in 2000-01
suggests that this stream of profits has entered into assessments of the future
profile of profits that have been discounted to value the worth of the company.
This amounts to squeezing the profits of a public sector unit and then using that to
undervalue the firm, consciously or otherwise.

○ BALCO’s assets were undervalued:

It is still being argued that a direct valuation of BALCO’s assets was worth around
10 times the value paid by Sterlite. In fact, officials from the power sector have
argued that the captive power plant alone would cost more than the sum being
paid by Sterlite. According to reports, a senior official held that if Sterlite were to
invest in a captive power plant of the kind owned by BALCO, it could cost Rs.1,
215 crore and this figure matters, for the value of the plant at Korba (set up in
1988-89) is still substantial, since a thermal power plant has a lifespan of around
35 years.

• BALCO was self-sufficient to fund its projects:

Since BALCO was a profitable and cash-rich public sector corporation with an
extremely low debt to equity ratio, it would have been possible for it to finance its
proposed modernisation plan (estimated to cost Rs.1, 000 crore) without recourse to

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budgetary funds. The project was to include the setting up of a cold rolling mill, the
expansion of captive power generation and modernisation of existing facilities. This
would have allowed the corporation to improve its profitability and increase the
dividend it pays to the exchequer.

• No transparency in the deal:

The valuation procedure that yielded the undeclared reserve price below which
the government was not willing to sell has neither been transparent nor undertaken by
qualified valuers capable of valuing the plant and machinery of the company and the
bauxite mines that it has on lease.
The whole procedure had been gone through in haste. Even though the bids had been
invited some time back, the valuation of the firm, the setting of the reserve price and
the acceptance of Sterlite's bid were all allegedly done within the span of a month.
Leaked evidence of undue haste has accumulated and this further puts a question
mark over the government's claims of transparency in the execution of the deal.

A combination of inappropriate procedure, undue haste and unwarranted secrecy had created
a veritable mess. This was followed by a roar and strike amongst the company workers.
There was an opposition from the state government to the extent of throwing an offer to buy
the Centre’s 51 % stake at Rs 5.52 bn. The claims on the lack of transparency are being
continued till date.

As stated by The Times of India, December 28, 2009, in response to an RTI query filed by
advocate Arjun Harkauli, the Central Information Commission (CIC) observed that the tender
documents and minutes pertaining to the Rs 551.5-crore divestment of Bharat Aluminium
Company (BALCO) in Chhattisgarh’s Korba district eight years ago could not be traced by
the ministries concerned.

BALCO marks the first ever disinvestment deal in the history of India and is stained with
several question marks and pointing fingers. The deal certainly did not occur the way it was
meant to, did not bring the profits to the extent possible, nor was it intended towards any

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social cause. Corruption and lack of accountability still remain the two worms eating away
the Indian economy.


Orissa was the first State in the country to embark upon

reforms in the power sector. Supported by both the World
Bank and DFID, it went in for the full package: unbundling,
corporatisation, and privatisation. Let us look at the genesis
and the process of the reforms and identify the winners and
losers and highlight the lessons learnt.


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Orissa State Electricity Board (OSEB) was established in 1961 to undertake generation,
transmission, and distribution of electricity in the State. Over the years, OSEB’s financial
health deteriorated due to various factors. It survived due to subsidy from the State
Government; in 1995-96, the State subsidy payable had gone into arrears totaling Rs.369

The gap between peak demand and supply had reached almost 45 per cent by 1993-94.
Though, the consumer strength increased to more than ten lakh, the overall financial
performance deteriorated. Table-13.4 below shows the comparative position of OSEB for

Return on Non Debtors in Customers

Tariff as
Net Fixed Technical Sales PLF per
% of Cost
Assets Losses Months Employee

OSEB -16.4% 27% 7.6 82.8% 34.9% 38

KEB -11.83 6.1 87.8 53.1 153

WBSEB -12.79 7.0 80.3 37.8 53

MSEB 4.74 4.6 99.6 56.5 93

TNEB -0.08 1.6 97.2 48.3 99

RSEB -16.2 7% 4.2 71.6 51.4 80

PSEB -13.3 1.83 74 52.9 60

Source: Annual Reports of the respective SEBs.

Due to OSEB’s overall pathetic performance, the Government of Orissa commenced, in
1993, an extensive reform programme of the electricity sector. The reform programme was
intended at improving the quality of electricity supply and stimulates economic growth in the


• To give the power sector autonomy by keeping it away from governmental


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• To attract large amounts of private finance into the power sector.

• To introduce competition in the power sector.


• To establish a separate act (The Orissa Electricity Reform Act)

• To un-bundle and corporatize OSEB

• To develop an autonomous power sector regulatory body

• To privatise the generation and distribution businesses


The reforms process started with the enactment of The Orissa Electricity Reform Act in 1995.
The Act was designed to address the fundamental issues responsible for the poor performance
of the power sector in the State. The new legislation was aimed at restructuring the electricity
industry, taking measures conducive to increasing the efficiency of generation, transmission,
and distribution of electricity, opening avenues for private participation, and establishing a
Regulatory Commission. The Act allowed for transfer of the assets, liabilities, staff, and
statutory obligations of the OSEB to successor companies. Chart-2 below gives a pictorial
representation of the change in the structure of the industry.

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Nesco (Distr.)
and Distribution

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1st Stage

Source: Annual Reports of the respective SEBs. 2nd Stage

Some of the important steps taken after the enactment of the OER Act are as follows:


Electricity business was divided into three separate activities: Generation, Transmission, and
Distribution. The business of generating of hydel power was transferred to OHPC. The
thermal power stations were transferred to the existing Orissa Power Generation Corporation
(OPGC). The transmission and distribution businesses were transferred to Gridco. Though,
OHPC and Gridco began operation on I April 1996 as government owned entities,
corporatisation agreements were signed with the Orissa Government. Under the agreement,
Government reiterated its commitment to distance itself from their operation and
management and to give them autonomy as commercial organisations. OHPC continues to be
Government Company; Gridco, however, took long strides in the direction of full



To ensure that privatisation leads to efficiency gains, Gridco had to bring changes in the
internal environment variables like management, labour relations, and communication and

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reporting. Towards this end, Gridco initiated a comprehensive programme known as ISP to
address many of its weaker areas. This programme was undertaken by the consultants.

Three important steps taken under ISP were as follows:


OSEB was managed principally by engineers, and it was standard practice for the engineers
to undertake commercial, administration, and other non-engineering jobs. The management,
thus, had a strong technical bias. One of the major organisational changes introduced during
the ISP was therefore to bifurcate the field level activities into Commercial and Engineering.
The commercial function comprised of Revenue Management, Accounting, and Customer
Management. The engineering function comprised of System Operation, Repairs and
Maintenance, and other technical activities. Coupled with the bifurcation, commercial
procedures were implemented. This small intervention improved the business environment at
the division level.


Gridco was divided into Cost Centres and Profit Centres. Transmission divisions were treated
as cost centres and distribution divisions as profit centres. To ensure proper control and
reporting system, the entire distribution business was divided as shown below:


G r id c o

T r a n s m is s io n D is t r ib u t io n

W e s t Z o n e N o r t h E a s t Z o n eS o u t h Z o n e C e n t r a l Z o n e

C ir c le I C ir c le I I C ir c le I I I

4 D iv is io n s D iv is io n s D iv is io n s

3 S u b d iv is io n s

Each distribution division was managed by a divisional manager (Executive Engineer) who
reported to the circle manager (Superintending Engineer). The latter, in turn, reported to the

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Zonal General Manager (Chief Engineer), who reported to the Board of Directors at the
corporate office. Each divisional manager was required to attend the monthly performance
review meeting chaired by the CMD (Chairman-cum-Managing-Director) of Gridco.

During these meetings, a detailed discussion on billing, distribution losses, collection, and
other related matters used to take place and an action plan used to be prepared. This was a
successful intervention during the pre-privatisation period, which helped in the following:

• Stressed the commercial aspect of the utility business,

• Developed interrelationship between technical and finance executives,
• Enabled the divisional managers to understand the financial implications of the
various activities undertaken,
• Involved the field personnel in various managerial decisions, and
• Established an authentic database for important business parameters like billing,
collection, T&D loss, etc. through a well-developed Management Accounting System.


This programme focused on the 60% 54 %

reduction of non-technical losses

40% 28 %
and concomitant improvement on 18 %

the financial position of Gridco.
One of the major contributions of 0%
B ille d No n - T e c h n ic Te
a l c h n ic a l lo s s e s
RIAP was the quantification of the lo s s e s

actual T&D losses. On the basis of

field studies, the magnitude of non-
technical loss and causes of the
different types of losses were
established. The energy lost and energy billed in the year 1996-97

Source: Annual Reports of the respective SEBs.

This finding of high T&D losses against the reported 22 per cent figure in various forums and
published sources was an eye opener to both the shareholders and the management. The
programme established that, though the reduction of technical losses requires huge capital

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investment, the non-technical losses can be reduced without any major investment and capital
outflows. Efforts were made to reduce the non-technical losses by managing the revenue-
cycle efficiently, by understanding each of the following activities and identifying and
addressing problem areas.

Energy Delivery Meter Bill Bill Collection

Reading Distribution Control
In the process, even before the privatisation, Gridco improved its performance in the
following areas: (1) Regularisation of un-authorised connections, (2) Increase in bills based
on actual meter reading, (3) Increase in billing as a percentage of input, (4) Increase in
collection as a percentage of billing, and (5) Improvement in customer relationship.
However, RIAP could not be extended to all the divisions of Gridco. As a result, the financial
and operational performance of most of the divisions could not be improved.


Reform and privatisation changed the way one looked at electricity, from a universally
available product to a commercial one. But, the moot question is, “Who gained and who
lost?” Entities affected by the reform were the Government of Orissa, suppliers of power,
investors, consumers, and the electricity sector as a whole. It would be interesting to check
how each fared under the restructuring exercise.


Government is major winner in this reform, which allowed it to reduce its exposure to this
volatile sector at a time when its financial position was precarious. It realized Rs.159 crore
by divesting 51 per cent of its stake in the distribution companies and around Rs.600 crore by
divesting its stake in OPGC. It also got Rs.356 crore by selling TTPS (Talcher Thermal
Power Station) to NTPC, which was adjusted against erstwhile OSEB’s overdue payments to
NTPC. But, more important, the Government has already saved more than Rs.1200 till now
by stopping subsidy to the electricity sector.

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One of the drivers of the reforms was the intention to reduce the financial burden on
generators. It was expected that, after reforms, Gridco would make timely payments to
OPGC, OHPC, and NTPC. However, it has not happened.


Table below shows the parties who have acquired stakes in the newly formed distribution

New Investor Stake acquired Money paid (Rs. in

Cesco AES 51% 42.00
Wesco BSES 51% 88.19
Nesco BSES 51%
Southco BSES 51% 28.80
Source: Based on the Government of Orissa Gazette.
The balance-sheets of Gridco (which remained as a transmission company) and the four
distribution companies highlight the benefit that has been extended to the investors. Common
size balance sheet of these companies is as follows.

Gridco Cesco Wesco Nesco Southco

Total Funds
Capital and 20% 13 18 13% 13%
Accumulated Profit -26% 0 0 0 0
(- for Loss)
Long Term Loans 69% 48% 50% 50% 57%
Current Liabilities 37% 40% 33% 37% 30%
Total Assets
Fixed Assets 61% 60% 67% 63% 70%
Current Assets 39% 40% 33% 37% 30%
Source: Based on the Government of Orissa Gazette.
It is interesting to note that the entire loss of transmission and distribution business was
retained in the balance-sheet of Gridco, resulting in a negative book net-worth of Gridco; the
distribution companies were not required to share it. Moreover, the capital structure of

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Gridco was also highly leveraged, with long-term loans accounting for 69 per cent of the total

The lop-sided balance sheet created liquidity problems for Gridco, which, in turn, affected its
suppliers. The generous balance-sheets doled out to distribution companies and the handing
over of three companies to one player shows the Government’s obsession with completing
the privatisation process rather than reforming the sector.

Consumers can be divided into three broad categories, namely, LT, HT, and EHT. As the
reforms endeavour to reduce the cross-subsidization there is every possibility of the large
consumers to benefit from the process. Consumers, irrespective of the category, benefit if the
tariff reduces and the service improves. But, the tariff has already been revised four times.
And, what is more important, the increase in tariff has far surpassed the rate of inflation, as
depicted by Figure-4 below. Moreover, though the overall power available has increased
over the years, the quality of service has not improved to the extent it was expected. Since
the distribution companies have decided not to make any capital expenditure, the quality of
the service that was offered by them has been affected. Consumers clearly have, so far, borne
the brunt of the reforms and privatisation.

1. Source: Based on the Government of Orissa Gazette.

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In 1947, the Overseas Communication Service (OCS)

was established in the Department of
Telecommunications (DoT). Videsh Sanchar Nigam
Ltd (VSNL) was created from the OCS as a government owned corporate in 1986. The
government felt that corporatization would enable it to raise financial resources, an activity
that would not have been possible under the government framework. It was envisaged that
this would also enable greater freedom to managers to plan, operate, develop and accelerate
the international telecommunication services.

In the initial years, VSNL offered voice telephone, telex, telegraph, television, bureaufax etc.
Efforts had started to increase India’s connectivity through investments in projects like
submarine cables. Compared with 2.69 billion telephone minutes in 2000-1, in 1986-7 the
figure was 0.13 billion minutes. Table 1 gives some comparative figures of VSNL’s
performance over the years.

Some Aspects of the Performance of VSNL

Sr. Item 1992-3 1996-7 2000-1
1 Telephone Paid Minutes (billions) 0.61 1.38 2.68
2 Internet Access Customers (numbers) 0.0 28,042.0 630,970.0
3 Total Revenue ( Rs crore) 747.6 5,285.3 7,965.0
4 Net Profit (Rs crore) 112.4 504.7 1,778.8
5 Dividends(Rs crore) 24.0 28.0 76.0
6 Network Charges (Rs crore) 307.6 3,604.7 4,562.0
Source: VSNL Annual Reports

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In 2001, the world international telephone traffic was 167 billion minutes [ Voice Data, April
18 2002]. India's was 1.6% of this global traffic. In comparison with VSNL, the two largest
ILD carriers in the world, WorldCom and AT&T carried 16.8 and 14.3 billion minutes
respectively in 2000. When Compared with a worldwide average of 145 outgoing
international minutes per person, the figure for India works out to 18. Corresponding figures
for developing countries and low income countries are 100 and 155 respectively
[]. Table 2 compares VSNL’s international minutes with that of the
world. VSNL during the period averaged a much higher growth rate.

International outgoing calls-VSNL and World (billion minutes)

Year VSNL World
1994 0.742 54.6
1995 0.942 61.6
1996 1.147 71.7
1997 1.384 82.5
1998 1.684 93
1999 1.935 108.9
2000 2.245 132.7
CAGR 1994 to 2000) 20.3% 15.9%

Source: VSNL annual reports

The ratio of inbound to outbound calls had been 4:1 in 2001. One important reason for this is
the discriminatory pricing by VSNL. Another factor is that India is a much poorer than the
typical countries to which it connects (U.S., Europe and Gulf), so that inbound calls are
bound to be more than outbound calls.

For the year 2000-1, the total revenue for VSNL was Rs 6,430.7 crore. The profit after tax
stood at Rs 1,778.8 crore. This resulted in earnings per share of Rs 62.41 out of which Rs
50.00 was declared as the dividend per share. VSNL had no debt. Its P/E ratio of each VSNL
share was 4.68.It is seen that a large part of the costs is the network and transmission charge.
Much of this was charges paid out to the DOT as traffic costs. In this fixed revenue
agreement, VSNL paid Rs 2,734 crore to DOT and Rs 1,386 crore to foreign operators during
2000-1 [VSNL Annual Report, 2000-1].


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1. Government had approved sale of 25% equity share holding out of a total government
share holding of 52.97% in Videsh Sanchar Nigam Limited (VSNL) on 5.02.2002. The total
paid-up capital of VSNL is Rs.285 crore, the Govt. holding being Rs.151crore. Rs.71.25crore
of this equity is being sold to M/s Panatone (Tata Group) at a price of Rs. 1439 crore..

2. Government had decided to disinvest in VSNL in January 2001 and the advertisement for
inviting Expression of Interest was issued in February 2001. Several interested parties had
submitted their Expression of Interest. After the process of due diligence was completed and
the transaction documents frozen, financial bids were invited from the bidders on 1.2.2002.
Two bids were received.

3. SBI Capital Markets Ltd. and CSFB were appointed as the advisors at a fee of 0.19% of
the transaction value. M/s Crawford Bayley & Co. is the legal advisor and the asset valuer is
Price Waterhouse Coopers Ltd. After considering the Advisor's report, the Evaluation
Committee/IMG/CGD submitted their recommendations regarding acceptance of the higher
bid to the CCD.

4. The Government has in the process of disinvestment in VSNL received approximately Rs.
3689 crore, Rs. 1439 crore as the bid price, Rs. 1887 crore as dividend and Rs. 363 crore as
dividend tax (table attached). Thus, the Government has sold its shares at a price of Rs. 202
per share, taken additional amount as dividend, special dividend and dividend tax. Besides
the Government has also taken measures to take out surplus, yet very valuable land (value Rs.
778 crore) from VSNL, and also restrict use/sale of land through provisions in transaction

5. The market price of VSNL shares as on 1.2.2002 was Rs.158/-. The Government had
earned Rs.10.4 crore per year on 25% of its equity in the last eight years. This year the
Government has earned Rs. 3689 crore from sale of VSNL and if this money is kept in the
bank it would earn an interest of 368.9 crore, i.e. the Government would gain more than Rs.
350 crore every year.

6. The strategic partner has been provided a call option for the 5th year subject to the
condition that the Government would be retaining at least one share and hence one vote

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position to enforce its affirmative vote on assets. In addition, 1.97% share were given to
employees, at concessional rates.

After partial disinvestments through sale of shares, Videsh Sanchar Nigam Limited (VSNL)
underwent a strategic sale to the Tata Group in April 2002. Subsequent to the sale, the
government holding became 26% and the Tata Group's 45%. The sale was followed by
VSNL's decision (taken by its new owners the Tata’s) to invest Rs 1,200 crore in Tata
Teleservices Limited (TTL), a wholly owned subsidiary of the Tata group. This led to
concerns regarding the appropriateness of the decision, since it involved a cash outflow of Rs
1200 crore to a fledging private company in the telecom sector.


The Ministry of Disinvestment cited the non availability of funds for critical areas like
education, health and social infrastructure because of fiscal burden in the flow of government
funds into PSUs, as a strong argument for the disinvestment. There was also a need to stem
further outflow of resources into unviable, non-strategic PSUs. The divestment was also
expected to reduce the unmanageable public debt.


When the privatization process of VSNL began in 1991-2, there was no blueprint for the
same. In retrospect, there have been three phases.

• The offloading of shares to domestic investors;

• The offloading of shares in the international market;
• Strategic sale.

In 1991-2, VSNL disinvested equity of the face value of Rs. 12 crore in favour of various
financial institutions, mutual funds and banks. As of March 1993, out of a paid up equity
capital of Rs 80 crore, the Government of India (GoI) held 85% and financial institutions,
banks and the public held another 15%. The shares were listed in the stock exchanges of
Mumbai, Kolkata, Delhi and Chennai. As of 1995, the share of the GOI had come down to

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82.02%. This accompanied the transfer of shares from the GOI as a bonus offer. The Indian
investor’s share holding remained around 16.5% in 1999-0 which came down to 9.97%
(including the 1.96% held by employees) as on March 31, 2001.


The Global Depository Receipt (GDR) issue for VSNL was the first of its kind by the GOI .
It helped VSNL to raise a substantial surplus that was earmarked for investments for its
growth. The first GDR issue (listed on the London Stock Exchange) was offered in 1996-97.
It fetched US$ 526.6 million in the market. At that time, it was the largest GDR issue from
India. The offer was oversubscribed, drawing 662 investors from 28 countries.

The second GDR issue was completed in February 1999. It involved a divestment of 10
million shares by the government of India to international investors. Priced at US$ 9.25 it
was at a 15% premium on the last closing domestic price of Rs. 682 and a 10% discount to
the ten-day average GDR price of US$ 10.275. The government realized US$ 185 million
from the sale of 20 million GDRs with each GDR being equivalent to half a share.

The organizational problems in VSNL around the time of the second GDR issue could have
been one of the factors that led to lower valuations. During the process of the second GDR
issue, the VSNL staff had threatened a walkout owing to the pending issue of allotting shares
to employees. Due to delays in the government processes, VSNL did not have a chief
executive and many other crucial director level posts were vacant. The first GDR’s
investment promises were not fulfilled and a promised domestic offering had not been made.
The sanctions against India also created an environment of high perceived country risk,
which lowered VSNL's valuation.


The government had fixed a reserve price of Rs 1,218.375 crore for its 25% stake in VSNL.
In an effort to bolster the VSNL valuation, the GOI intended to compensate the loss of
monopoly through special concessions. The government owned MTNL and BSNL would
have to use VSNL as their ILD carrier for two years on the condition that it would offer the
most competitive terms in the market. VSNL would also get a free license to provide NLD,

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and a nationwide ISP license. In addition, VSNL possessed prime real estate in Mumbai and
Delhi and also cable capacities to facilitate international traffic. One of the major assets was
the cash stockpile of Rs 5,182 crore which was considerable even after disbursement of the
special dividends. Among the concerns were the loss of monopoly and the uncertainty of the
loyalty of BSNL and MTNL to continue to use VSNL for their international traffic, the
dipping share prices of VSNL and the falling accounting rates that could lead to lower

One of the major issues involved during the valuation process included the management of
real estate owned by VSNL. The disinvestment process stipulated that at least four VSNL
surplus properties valued at Rs 778 crore would not be available and were to be disassociated
from VSNL after the disinvestment. Even so, real estate value that would accompany VSNL
was around Rs 1,200 crore [Economic Times, February 15 2002].


The privatisation of VSNL is seen as leading to public expenditure accountability through a

realisation of higher return on the government’s asset formation. It also leads to an
appreciation of the remaining shares that are held by the government. To the citizen, the
process is a step towards the provision of better quality communication services at the most
competitive prices.

Public flotation of stock might have led to better values for VSNL's stock, had the company
been correctly `prepared' for privatisation. Thus, disinvestment of VSNL was clouded with
controversies and speculations and this fact further indicates the failure of the disinvestment
policy adopted in the case of VSNL, and also highlights the wrong reasons for which the
disinvestment of VSNL took place and its ultimate failure to match the required expectation
of such a step. This case on VSNL further corroborates to the fact, that the disinvestment
policies adopted in India have been a failure so far.

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In May 2002, a two-stage sell off began in Maruti Udyog Ltd

(MUL) with a Rs 400 crore (4 billion) rights issue at a price
of Rs 3,280 per share of Rs 100 each (12,19,512 shares) in which the government renounced
whole of its rights share (6,06,585) to Suzuki, for a control premium of Rs 1000 crore.
Relative share holding of Suzuki and government after completion of the rights issue was
54.20 % and 45.54 % respectively. The second stage government offloaded its holding in
two tranches – first where government sold 36 lakh shares out of then existing 65.80 lakh
shares in March 2003. After the public offer, governments share had been down to 25%.

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Thereafter in the second tranche, the government sold off its remaining equity by public offer
and quit from MUL. The government sold shares at Rs 2300 per share in the first tranche and
at Rs 2000 in the second tranche.

In other cases of disinvestment, the strategic partner did not have any control before
acquiring government equity. But in the case of MUL, even before disinvestment, the share
of government was 49.74 % and that of Suzuki was 50%. This was due to Suzuki being
technology suppliers. Therefore at the time of disinvestment the government had a minority
holding vis-a-vis Suzuki. In an agreement it was decided that only after Suzuki’s approval
could government sell its share to third party. So the disinvestment in Maruti started with
certain constraints.

In 1982 and 1992 Suzuki’s shareholding was allowed to be increased from 26 percent
to 40 percent and then 50 percent respectively. For this no control premium was paid by
Suzuki when the control passed to them. Later after hard negotiation a control premium was
agreed upon to be Rs 1000 crore. It started with an initial offer of Rs 170 crore by Suzuki.
Similarly Suzuki was not willing to incorporate any underwriting of the public issue by

Since Maruti Udyog Ltd was not a listed company, the government agreed to
determine the fair value of MUL shares through valuation by three independent valuers and
then take the average – KPMG, Ernst & Young, and S. B. Billimoria were appointed as
valuers. The recommended value per share was Rs 3,200 by KPMG, Rs 3142.18 by Ernst &
Young, and Rs 3500 by S. B. Billimoria. Thus average came out to be Rs 3280. The fair
value of governments stake comes down to Rs 2158 crore but the book value (1000 crore
control premium and 1424 additional tranche undertaking) was Rs 2424 crore. So for the
government to get maximum receipt it should sell to public in such a manner that they can get
a value more than 2424 crore than the initial 2158 crore.

The significant aspect of the Maruti divestiture plan is the prima facie decision of the
government to exit from Maruti completely by March 2004. Other than hotel properties,
Maruti was the first enterprise where government had completely exited.

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The issue was oversubscribed by over 10 times. Later keeping in view the
overwhelming response from sale of Maruti, government sold its remaining shares in the
privatised companies of VSNL, CMC, IPCL, BALCO and IBP to public through IPO’s.


Lagan Jute Machinery Company Limited (LJMC) was run by a private company (James
Mackie & Co) from 1955 till it was nationalised in 1978. In 1986 it became a wholly owned
subsidiary of Bharat Bhari Udyog Nigam Ltd (BBUNL), a centra PSE. The manufacturing

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works of the company are situated near Kolkata. It is engaged in the manufacture and
marketing of jute spinning and drawing frames and alswo spare parts for the same. The
authorised and paid-up capital as on 31 March 2000 were Rs 4.00 crore (50 million) and Rs
1.05 crore (10.5 million) respectively. The number of employees as on 31 March 2000 was


Initially LJMC made marginal profits, but from 1996 – 97, it started making losses. There
was mounting arrears of salaries and high level of inventory. LJMC required investment to
modernise and renovate the plant and machinery as most of the machines were installed
before 1960. The operational and financial performance of LJMC prior to disinvestment is :

LJMC: Pre – Disinvestment Performance

Details 1997 - 98 1998 – 99 1999 - 2000 2000 – 2001

(Arp – June
Machinery sold (nos) 58 59 51 4
Exports of spares 0.11 0.17 0.27 0.05

(in Rs crore)
Gross turnover (Rs in crore) 5.77 6.47 6.32 0.60
Loss -1.04 -0.74 -0.42 -1.00

( in Rs crore)
Source: Ministry of Disinvestment, Government of India

The government decided in July 1997 to disinvest 74 % of the equity of LJMC. M/s
A. F. Ferguson & Co were appointed in May 1998 as advisors to execute the transaction.
Accordingly, the advertisements inviting EOTs were issued in January 1999 and financial
bids were invited in May 1999. The cabinet approval the disinvestment in December 1999
and execution of the transaction documents and receipt of final payment was effected in May

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2000. Thereafter shares/management control was transferred to the strategic partner M/s
Murlidhar Ratanlal Exports Ltd. in June 2000.

The disinvestment of 74 % equity stake was effected through sale of 6330 equity
shares (face value Rs 1000 per share) at the rate of Rs 4000 per share by BBUNL for Rs 253
lakhs. Also fresh issue of 5680 equity shares (face value Rs 1000 per share) at the rate of Rs
2640 per share was made by LJMC for Rs 150 lakhs. As per the deal, the strategic partner
was to provide LJMC interest free loan of Rs 35.36 lakhs to repay the dues to BBUNL in
eight quarterly instalments. It was provided in the agreement that all employees of the
company on the date of disinvestment would continue in the employment of the company
after disinvestment.


The strategic partner has retained the same senior management team and there has been no
retrenchment of workers. The performance of LJMC post privatisation (July – September
2000), as compared to pre privatisation period (April – June 2000) is:

LJMC: Post – Disinvestment Performance

Details Pre – Disinvestment Post – Disinvestment

1999 – 2000 Apr – June 2000 2000 – 2001

Machine sold (nos) 51 4 54

Exports of spares 0.27 0.05 0.48

Gross turnover 6.32 0.60 6.63

Profit/Loss -0.42 -1.00 0.48

Orders booked 3.17 1.20 3.87

Source: Ministry of Disinvestment, Government of India.

There was no retrenchment of employees but there was reduction due to resignation/natural
separation. However, change in employee service condition was made by rolling back
retirement age from 60 to 58 years.

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Critical Analysis

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Disinvestment was initiated by selling undisclosed bundles of equity shares of selected
central PSEs to public investment institutions (like the UTI), which were free to dispose of
these shares in the booming secondary stock market. The process however came to an abrupt
halt when the market collapsed in the aftermath of Harshad Mehta led scam, as the asking
prices plummeted below the reserve prices. Since the stock market remained subdued for
much of the 1990s, the disinvestment targets remained largely unmet. The change of
government at the Centre in 1996 led to some rethinking about the policy, but not a reversal.
A Disinvestment Commission was constituted to advise the government on whether to
disinvest in a particular enterprise, its modalities and the utilization of the proceeds. The
commission, among other things, recommended (Disinvestment Commission, 1997):

• Restructuring and reorganization of PSEs before disinvestment,

• Strengthening of the well-functioning enterprises, and

• To utilize the disinvestment proceeds to create a fund for restructuring of PSEs.

The new government that came to power in 1998 preferred to sell large chunks of equity in
selected enterprises to “strategic” partners – a euphemism for transfer of managerial control
to private enterprises. A separate ministry was created to speed up the process, as it was
widely believed that the operating ministries are often reluctant to part with PSEs for
disinvestments as it means loss of power for the concerned ministers and civil servants.
The sales were organized through auctions or by inviting bids, bypassing the stock market
(which continued to be sluggish), justified on the grounds of better price realization.
Notwithstanding the serious discussion on the utilization of disinvestment proceeds, they
continued to be used only to bridge the fiscal deficit.

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Strategic sale in many countries have been controversial as it is said to give rise to a lot of
corruption, discrediting the policy process. Aware of such pitfalls, efforts were made to be
transparent in all the stages of the process: selection of consultants to advice on the sale,
invitation of bids, opening of tenders and so on. Between 1999 and 2003, much greater
quantum of public assets were sold in this manner, compared to the earlier process, though
the realized amounts were consistently less than the targets – except in 2003.

Nonetheless, there are series of allegations of corruption and malpractice in many of these
deals that have been widely discussed in the press and the parliament. Instances of under
pricing of assets, favouring preferred buyers, non-compliance of agreement with respect to
employment and retrenchment, and many incomplete contracts with respect to sale of land,
and assets have been widely reported.
Thus, during the last 13 years Rs. 29,520 crore were realized by sale of equity in selected
central government PSEs, (in some cases) relinquishing managerial control as well.

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This formed less than one per cent of central government’s cumulative fiscal deficit in this
In principle, disinvestment is unlikely to affect economic performance since the state
continues to be the dominant shareholder, whose conduct is unlikely to be influenced by
share prices movements (or return on equity). Privatization can be expected to influence

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economic outcome provided the firm operates in a competitive environment; if not, it would
be difficult to attribute changes performance sole or mainly to the change in ownership.



Instead of seeking the reasons for privatization, one could instead ask why a certain firm
should remain in public sector. Some would contend that with rapid technological change,
natural monopoly, as a powerful argument for public ownership has simply disappeared.
Such an argument would surely hold for telecommunications, not but for the rest of public

Based on studies of privatization of natural monopolies, some important implications that can
be carried out are:

• Sectors such as railways, however, are harder to regulate after privatization. The
regulatory task can be especially difficult in sectors such as highways, or water or
sewage, where competition is weak or totally absent, investments are lumpier,
externalities are much more important, and pay back periods run 8-10 years or more,
thereby increasing uncertainty and risk for contracting parties. Renegotiations are
likely to be the rule, brought on by unanticipated developments or simply
opportunism on the part of investors or governments.

But in the twentieth century, with the separation of ownership from control in modern
industry, there is a serious agency problem regardless of its ownership. The view that the
secondary capital market and the market for managers provide adequate discipline on a firm’s
performance is at variance with evidence.



In fact, one of the authors of the study, Pankaj Tandon, in an independent paper was more
categorical in rejecting the hypothesis of efficiency gains from privatization in less developed

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countries. If this selective review of evidence is anything to go by, then one should have a
modest expectation from whatever privatization that has happened in India.

Britain, the cradle of modern capitalism, has witnesses the public policy pendulum swing
from nationalization to privatization (or denationalization) many times over, in the 20th
century. While the US has a model of private ownership, and control with public regulation,
continental Europe and Japan have, by and large, stayed steady with greater public ownership
in such industries.

Although there have been some privatization in these economies, such attempts have
remained relatively modest with limited changes in ownership and control of national assets.
Thus, there seems to be no unique ‘model’ that is universally sound for promoting efficiency
of resource use.

Perhaps it has a lesson for us: we have to search for a solution suited for our conditions that
are broadly consistent with economic reasoning. Before seeking evidence on the effects of
the disinvestment in India, perhaps it would be useful to ask how valid the premises of the
disinvestment policy were to begin with.

It is widely believed, as large and growing share of the fiscal deficit was on account of
PSEs’ financial losses getting rid of them would restore the fiscal back to health. How
valid was such a diagnosis?

Using a widely accepted a methodology that PSEs’ financial losses were not the principal
cause of the growing fiscal deficit in the 1980s, and in fact PSEs’ share in the fiscal deficit
had steadily declined in the decade. In other words, the government per se was largely
responsible for the growing fiscal deficit, not the enterprises owned by it.

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Source :Disinvetment Ministery Report
Updating these estimates for the 1990s using a more refined method, the estimated deficits of
the general government confirmed our previous findings. 16 Government’s share (in terms of
equity and debt) as a proportion of PSEs’ total fixed investment shows a steady decline since
the mid-1970s, suggesting a gradual tightening of their budget constraint.
The decline in government’s contribution is being met increasingly by a rise in internal

Source :Disinvetment Ministery Report

These long-term trends indicate, contrary to the widely held views, the growing fiscal deficit
since the 1980s is not on account of financial losses of the enterprises.

• The above evidence suggests that the popularly used indicator of net profit as a
proportion of total equity does not adequately reflect PSEs’ financial performance.
While such a measure may be useful for a private shareholder, it has many
shortcomings to gauge the return on public investment. For many reasons, PSEs tend
to be over capitalized.
• While these enterprises are expected to develop infrastructure on their own using
budgetary resources, state government agencies usually vie with each other to provide
larger and better infrastructure for private firms, thus reducing their capital cost.
Therefore, depreciation charges for PSEs tend to be much larger.

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• Capital structure of PSEs is seldom designed to maximize returns for the shareholder,
namely the government. Usually PSEs are granted large loans in the initial year; when
they are unable to service the loans, these are often converted into equity to reduce
their debt repayment burden. Thus, many PSEs have high equity, not by design but by
default, adversely affecting the net profitability ratio. Moreover, from an economic
viewpoint, capital structure of an enterprise is of secondary importance compared to
return on capital employed.

Source :Disinvetment Ministery Report

It is widely believed that PSEs’ respectable profitability ratio (gross profits to capital
employed) is mainly on account of the surpluses of the petroleum sector enterprises whose
pricing includes an element of taxation. Interestingly, as shown in Figure, the profitability
ratio has improved since the 1980s even excluding the petroleum sector enterprises – clear
evidence on improvements in PSEs financial performance. But could it be merely due a faster
rise in administered prices of PSEs’ output? This is not so, as evident from the fact that the
ratio of deflators of public sector output and GDP has declined since the mid-1980s.

Public sector GDP deflator, relative to GDP deflator, 1982-96

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Source :Disinvetment Ministery Report



The problem seems to lay in poor financial returns in electricity boards, road transport
corporations and railways, which are probably not adequately reflected in the above
measures. For instance, revenue-to-cost ratio in SEBs has remained less than one for much of
the 1990s, a decade of much talked about reforms, despite a steady rise in physical efficiency
of thermal power plants.

Source :Disinvetment Ministery Report

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If the above reasoning and evidence is persuasive, then they suggest that the empirical
premises for the ownership reforms were rather thin. While undoubtedly public sector’s
financial performance needed an improvement, they were not, in the main, on account of the
central PSEs that were the targets of the disinvestment. They mainly lay in:

(i) The growing expenditure and subsidies of the government.

(ii) Poor return on investment in electricity, irrigation and road transport.

In all these cases, the real problem is not so much public ownership, but pricing of public
utilities and government ’s inability to collect user charges, for a variety of political and
social reasons.

To sum up, as the sale of equity has been quantitatively a modest, in relation to the size of
public sector in India, it is hard to judge the efficacy of the reform effort. Moreover, it is
perhaps too early to be definitive about the outcomes. Analytical bases of the policy reform
were fragile to begin with, and comparative experience does not give much optimism for
measurable efficiency gains from these changes in ownership of industrial assets. Above all,
if the evidence reported is anything to go by, the premises of the D-P policy were rather

In principle, disinvestment without a change in management is unlikely to make

much difference to efficiency. It may help raise limited resources from the capital
market, mainly reflecting the government monopoly in the industry. But this is a
costly source of finance with high transaction costs. Given excess liquidity
currently in the financial system it would be cheaper to sell bonds domestically to raise
the required finances.


In the evolution of modern capitalism, with separation of ownership from control as firms
grow in size and complexity, agency problem arises: how to ensure that the managers
(“promoter” in Indian parlance) work to maximize return on shareholders’ capital. Given the

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information asymmetry, managers could pursue their private goal disregarding the
shareholders’ interests.

This is at the heart of the problem of modern literature on corporate governance. Various
institutional and contractual mechanisms have evolved in the last century to grapple with this

In the context of efficiency of resource use in a socialist economy, to solve the problem of
how to ensure that managers of public firms maximized efficiency consistent with the goals
set by the central planners. However, looking at the microeconomics of firms in a socialist
economy, it has been argued that they were unlikely to be efficient because of the soft budget
constraint: that is, firms do not go bankrupt or managers do not lose their jobs for their poor
performance. Firms can always renegotiate their contracts with the planners to hide their

In India public sector firms are often face with multiple objectives, and multiple owners or
monitors – central government, state governments, legislators, public auditors and so on.
Managers may not necessarily maximise profits as they could always highlight a particular
achievement to suit their convenience. Managers may be risk averse as they face
constitutionally mandated procedural audit by the CAG if an enterprise is majority
government owned. Managers’ efficiency objectives may come in conflict with dysfunctional
political interference in operational matters (at the expense of policy issues) to meet narrow
political goals. However, at the same time, poor performance by managers does not involve
any punishment as they can re-negotiate the output prices, budgetary support, or have access
to soft and/or government guaranteed loans; in other wards they do not face a hard budget

Thus, the agency problem is endemic to all economic systems. Moreover, problem of soft
budget constraint is not restricted to socialist economies but evident in market economies as
well when the firm is question is large and considered of strategic importance for the
economy, though perhaps too much lesser extent. Rescue of Chrysler Corporation – the third
largest automotive firm in the US – in the late 1970s and United Airlines after “9/11” in the

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US are clear instances of state support for failing companies. Such support is more common
in financial sector, where failure of firms can have significant systemic risk.


Disinvestment is considered desirable for two sets of reasons. One has to do with the money
that flows into the government’s coffers as a result of the stake sale, augmenting the
government’s non-borrowed receipts and, thereby, reducing the fiscal deficit. The other set of
arguments of disinvestment has to do with efficiency.

Disinvestment would bring in shareholders who would, it is hoped, question arbitrary

decisions by the government that harm the finances of these public enterprises. Both benefits
are exaggerated.

Look at the reduction in the government’s fiscal deficit brought about by disinvestment. The
effect of selling shares to the public is not materially different from the effect of selling
government bonds, as far as the quantity of the public’s savings mopped up by the
government is concerned.

In the year in which the disinvestment takes place, the private sector would feel squeezed for
funds exactly as it would if the government were to raise the same amount by issuing bonds.
The public ends up holding shares, in one case, and bonds, in the other. In either case, the
public’s savings stand transferred to the government, rather than to the private sector looking
for funds to invest.

That said, the future effect of selling shares would prove superior, from a budgetary point of
view, to the future effect of issuing bonds. By issuing bonds, the government takes on the
obligation to pay interest, year after year. By selling shares, the government forgoes dividend
receipts on the shares sold. Both widen the fiscal deficit in the subsequent years.

However, the interest payment obligation taken on to get one rupee from selling bonds would
be significantly higher than the dividend forgone per rupee received from selling shares in
public enterprises. This is because these shares would be valued significantly higher, in terms

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of asset price per rupee of income accruing from that asset, than the bonds sold to fill the
fiscal gap.

What about the efficiency gains at the enterprise level by inducting non-government
shareholders into the ownership structure, and possibly onto the board of directors? There is
likely to be some additional benefits, given the political culture that treats public enterprises
as sources of revenue for the minister (and officials) in charge of the controlling ministry.

However, the overall reform project entails improving corporate governance across the board
to a level where the running of any company seeks to maximise the returns to shareholders
regardless of who the shareholders are, whether the state or private shareholders. If this goal
is realised, efficiency arguments for disinvestment would lose steam.

More germane is to what end the government keeps some enterprises under its ownership and
control. If it wants to own nuclear power companies because of the risks involved, or if it
wants to own the Food Corporation of India to ensure food security, the companies in
question sub serve public goals outside the calculus of commercial profit and loss. It does not
make sense to privatize such public enterprises.

Many other public enterprises were set up at a time when the private sector was too weak to
create production capacity in areas considered vital for the economy’s long-term dynamism.
Steel, or machine tools, for example. Now, every Punj, Mittal and Jindal makes steel, of the
highest quality and lots of it. Is there any strategic goal being served by retaining steel
production in the public sector, anymore than is served by keeping hotels and banquet halls in
the public sector?

Satellite, aero plane and rocket manufacture, in contrast, are still be-yond the Indian private
sector’s capacity. It might arguably make sense for the government to own enterprises in
these sectors. What are strategic sectors would change, with time. The government should
ideally exit from areas that are no longer strategic, and use the re-sources to build new
strategic capability.

However, we don’t live in an ideal world. Even if the government continues to own some
companies in non-strategic sectors, but these companies are professionally run as commercial

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enterprises, there would be little efficiency loss to the economy as a whole. Therefore,
disinvestment is not any key reform.


Experience of the last century shows how different economic systems have sought to solve
this problem in a variety of ways with varying degrees of success. The Soviet system was
perhaps quite capable of solving the problem in the initial phases of ‘extensive growth’ with a
clear objective of maximization of national output. However the system began to falter, as the
economy got more complex, in the phase of ‘intensive growth’ when objective was to
increase productivity of resources. The command economy was unable to resolve the agency
and incentive problems at the micro level because of the soft budget constraint.

As noted earlier, in the Anglo Saxon economies, the secondary stock market acted as the
disciplining device on corporate performance and as market for managers. In principle, stock
prices that summarize all publicly available information on the firm performance should
provide adequate signals for managers to act optimally. The system is also seems capable of
providing risk capital to spur rapid technological progress, as witnessed in the role that
venture capital funds played in promoting the Internet revolution. However, given the agency
problem, there is enormous scope for abuse of the system, adversely affecting the
shareholders’ interests and possibly hurting economic efficiency in the aggregate. Hostile
takeovers and leveraged buyouts have exposed the inefficiency of such a disciplining
mechanism. The recent implosion of some of the world’s biggest companies, astronomical
rise in managerial remuneration disproportionate to performance of firms, and widespread
abuse of stock options by top managements in firms like Enron and Tyco by the turn of the
last century have seriously dented the credibility of the stock market based principles of
corporate governance.

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• 6 out of Top 10 companies in India are Public Sector Companies.
• Of the 50 companies which make up the NIFTY, 10 companies are PSUs.
• In many businesses PSUs are virtual monopolies.
• Top 18 PSU companies (called ‘Navratnas’) total income is equal to 15% of India’s
• In 2008, Public Sector Companies paid over 33.5% of their net profits as dividends.

• Strong Fundamentals - Most of the PSU companies are leaders in their category and in
many cases have a virtual monopoly in business
• Most of the PSU companies* are present in sectors, which are core to the India Growth
• Government focus on Listing of Public Sector Companies and further divestment of stake in
existing companies.
• PSU companies are currently available at reasonable valuations compared to broader
• The expected re-rating of these companies in future in the event of Government divesting
stakes in PSU companies, can lead to above average gains over a period of time.


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It is only due to the strong fundamentals of the PSU’s that they are among the most
profitable companies in India. The strong fundamentals of these companies
provided a substantially high growth of 19.37% in the past 10 years. Something
private companies envy upon.

It is only due to the strong fundamentals of the PSU’s that they are among the most profitable
companies in India. The strong fundamentals of these companies provided a substantially
high growth of 19.37% in the past 10 years. Something private companies envy upon.

Source : Bloomberg; Prowess. BSE India ; Data as on 31/08/2009


• Balance Sheet virtually debt free
• Ability to show greater resilience in an economic downturn – less vulnerable to a slowdown
in earnings growth
• Huge cash on books puts them in an advantageous position when it comes to funding their
expansion plans

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Source : Bloomberg; Prowess. BSE India ; Data as on 31/08/2009


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• Many of the PSU companies belong to sectors, which are core to the India Growth Story
• These sectors will benefit from the ongoing Government focus on infrastructure and
Pranab Mukherjee, in his budget speech said “The average public float in Indian listed
companies is less than 15 per cent. Deep non-manipulable markets require larger and

diversified public shareholdings. This requirement should be uniformly applied to the private
sector as well as listed public sector companies. I propose to raise, in a phased manner, the

threshold for non-promoter public shareholding for all listed companies.”

Looking at the growth story of India and the optimism of future growth as well, the govt. of
India has already planned and finalized its expansion projects. It has planned to come out in a
big way in infrastructure development projects.

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• Government could raise more than US$160bn from divestment.

• To reduce holding as per norms by the Indian Capital Market Regulator.
• Divestments of around US$4-5 billion (estimate) in FY2010, which would give the
Government some flexibility on the fiscal front
• Privatization of companies could lead to wealth creation.
In these companies, the average Government shareholding is more than

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Candidates for 2nd round of divestment

Source : Bloomberg; Prowess. BSE India ; Data as on 31/08/2009


Another point in favor of PSUs is that these companies are among those most liked by the
stock markets. It is only due to the confidence in the functionality and stability of the PSUs
that a commen investor is willing to invest in these companies and hence is affected by the
positive sentiments in the stock market. The recent performance of PSUs is:
Divestment / Stake Sale - Post IPO Performance

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BSE PSU Index which consists of 47 public sector companies have outperformed leading
companies, which are represented as part of the Sensex in both short term and long term.

Source : Bloomberg; Prowess. BSE India ; Data as on 31/08/2009



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Some of the PSUs have outperformed many big private firms in terms of financial
performance in a big way. These companies are among the top profit makers and top gainers
in India. They include:

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Source : Bloomberg; Prowess. BSE India ; Data as on 31/08/2009


• A portfolio of these 10 stocks (equal weighted) has outperformed the Nifty in the last 1
year, by generating returns of 24.36% vis-à-vis Nifty return of 6.89%
• BSE PSU Index (an aggregate of 47 PSU companies) has appreciated by 24.09% over the
last 1 year, as against BSE Sensex’s return of 7.52%

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On the basis of the above, if we accept that the real problems facing PSEs are,

(i) Dysfunctional political interference

(ii) Constitutionally mandated procedural audit

(iii) Soft budget constraint

Then following measures can be suggested:

• Reduce the government holding in PSEs to less than 50 per cent by transferring share to
mutually complementary firms by creating Japanese style, tied around a public sector bank or
financial institution. For instance, interlocking of equity holding among steel, coal and
electricity firms or petroleum exploration, refining and petrochemical complexes. Such a
measure would eliminate the procedural audit as well as political interference on the day-to-
day operational matters.

However, to ensure public accountability managers may be asked to make presentations to

the parliamentary sub-committees on efficiency of resource use. At the same time, managers

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should have clearly defined security of tenure for say 3 or 5 years to ensure continuity and to
show measurable performance.

• Harden the budget constraint for PSEs by a clear sunset clause on budgetary support or
government guarantee for loans, except for specific public purpose oriented investments.
Given that banks provide substantial equity and loans, they would, in principle, have
incentive to monitor PSEs performance to retain their reputational capital.

However, question would still remain who will monitor the banks? There are no easy
answers to it. Given the increasing independence of the Reserve Bank, it is conceivable to
device a system to where the central bank and other regulatory authorities are given the
responsibility of appointing top managers of banks. Such a scheme of delegated monitoring is
in principle is better for efficiency. Such a monitoring could focus on long term corporate
goals such as productivity growth market shares, and R&D outcomes.

• To ensure that PSEs do not abuse their oligopolistic position in the domestic market,
reasonably open trade and investment regime could impart the discipline of the world market.



• Disinvestment and Privatisation in India Assessment and Options…By: R Nagaraj

• Disinvestment in India, I lose and you gain...By: Pradip Baijal
• Public Sector performance since 1950, a fresh look... By: R. Nagaraj
GRADUALISM by: Devesh Kapur and Ravi Ramamurti
• World Economic Forum: India ECONOMIC SUMMIT
• Indian Economic Reforms: A Stocktaking By: T. N. Srinivasan
• Planning Commssion Report
• Disinvestment Commission Report, 1999
• Public enterprise Survey Report 1996-1997,2002-2004 Vol-1.
• Annual Report of VSNL

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• Annual Report Released by Govt. Of Orissa

• Economic Survey, 1991-2008
• Disinvestment in India...By Sudhir Naib
• Business Environment...By Shaikh Saleem

• www.
• Department of disinvestment, Ministry of Finance ,

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