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The transIer oI ownership and/or management oI an
enterprise Irom the public sector to the private sector. It also
means the withdrawal oI the State Irom an industry or sector,
partially or Iully. Another dimension oI privatization is
opening up oI an industry that has been reserved Ior the
public sector to the private sector.
According to the World Bank, 'privatisation is the transIer oI
ownership oI State owned Enterprises (SOEs) to the private
sector by sale (Iull or partial) oI going concerns or by sale oI
assets Iollowing their liquidation¨.
!rivatisation oI ownership through the sale oI equity i.e.
Selling stock to the public. This has largely been
undertaken in industrial countries.
Contracting: Government contracts out services planned
and speciIied to other organizations that produce and
deliver them. Common in public works and deIence etc.
but there is scope oI corruption in this as long term
contracts tend to encourage monopolistic behavior by the
Withdrawing Irom the provision oI certain goods and
services leaving them wholly or partly to the private sector.
Strategic sale by auction method: There is a transIer oI a block oI
shares by government to the strategic partner. Companies that have
witnessed strategic sale in India in the recent past include Modern
Foods, BALCO, VSNL, ITDC hotels etc. In India this method has
been preIerred to that oI sale oI equity shares to the public.
!rivatisation oI management using leases and management
Liquidation involves the closure oI an enterprise and sale oI its
assets. InIormal liquidation is when the Iirm retains its legal status
even though its operations have been suspended.
It reIers to the action oI an organization or the government in selling
or liquidating an asset or subsidiary. In simple words, disinvestment
is the withdrawal oI capital Irom a country or corporation.
Some of the salient features of disinvestment are:
Disinvestment involves sale oI only part oI equity holdings held by
the government to private investors.
Disinvestment process leads only to dilution oI ownership and not
transIer oI Iull ownership. While, privatization reIers to the transIer
oI ownership Irom government to private investors.
Disinvestment is called as !artial !rivatization`.
Offer for sale to public at fixed price: in this type oI disinvestment,
the government holds the sale oI the equity shares to the public at large
at a pre determined price. examples:-MFIL, BALCO, CMC, HTL, IB!,
HZL, !!L, and I!CL.
Strategic sale: in this type, signiIicant management rights are
transIerred to the investor i.e. maiority oI equity holdings are divested.
examples: -oIIer oI 1 million shares oI VSNL, listing oI ONGC I!O.
International offering: this is essentially targeted at the FII (Foreign
Institutional Investors). ex:-GDR oI VSNL, MTNL etc.
Asset sale and winding up: this is normally resorted to in companies
that are either sick or Iacing closure. this is done by the process oI
auction or tender. ex:-auction oI sick !SU`s.
Commitment Irom the !olitical leadership is mandatory.
There should be a multiplicity oI suppliers in the industry and government
monopoly should not be replaced by private monopoly.
There should be Ireedom oI entry to provide goods and services.
!ublic services to be provided by the private sector must be speciIic or
have a measurable outcome. Lack oI speciIicity makes it diIIicult to control
It is extremely important to educate the consumers.
!rivately provided services should be less susceptible to Iraud iI they are to
Short term view
This will indicate the net assets oI the enterprise as
shown in the books oI accounts. It does not reIlect the
true position oI proIitability oI the Iirm as it overlooks
the value oI intangibles such as goodwill, brands,
distribution network etc. This model is more suitable in
case oI liquidation than in case oI disinvestment.
PROFIT EARNING CAPACITYVALUE METHOD:
The proIit earning capacity is generally based on the proIits
actually earned or anticipated. It values a company on the basis oI
the underlying assets. This method does not consider or proiect
Iuture cash Ilows.
3. DISCOUNTED CASH FLOW METHOD :
In this method the Iuture incremental cash Ilows are Iorecasted and
discounted into present value by applying cost oI capital rate. The
method indicates the intrinsic value oI the Iirm and this method is
considered as superior than other methods.
ObjcctIvcs fnr thc fnrmatInn nf P5Us
To help in the rapid economic growth and industrialization oI the
country and create the necessary inIrastructure Ior economic
To earn return on investment and thus generate resources Ior
To promote redistribution oI income and wealth
To create employment opportunities;
To promote balanced regional development
To assist the development oI small-scale and ancillary
To promote import substitutions, save and earn Ioreign
exchange Ior the economy
1. !rice policy oI the !ublic Sector undertakings.
2. Underutilization oI capacity.
3. !roblem related to planning and construction oI proiects
4. !roblems oI labour, personnel and management
5. Lack oI autonomy
nw µrnductIvItv nf Invcstmcnt.
ear ŧũ¶Ŧ-¶ŧ ŧũ6Ŧ-6ŧ ŧũ)Ŧ-)ŧ ŧũŨŦ-Ũŧ ŧũŨũ-ũŦ
(CurrenL Prlces,% CLP)
ŧŦ.z ŧ¸., ŧ6.6 zz., zi.ŧ
(ConsLunL ŧũŨŦ-Ũŧ prlces, % CLP)
ŧi., ŧŨ.ŧ ŧŨ., zz., zŧ.Ũ
(CurrenL Prlces, %CLP)
ŧŦ.i ŧz., ŧ¸., zŧ.z zŧ.,
evenue ŧz., ŧ¸.i ŧi.6 ŧ,.Ũ ŧŨ.ŧ zŦ.Ŧ
ŧŧ.Ũ ŧz.ũ ŧi.z ŧ6.¸ ŧŨ.6 z¸.Ŧ
Ŧ.ũ Ŧ.¸ Ŧ.i ŧ.¸ (Ŧ.¸) (z.ũ)
6.6 6.Ŧ ¸.ŧ 6.ũ ,.¸ ,.ŧ
ŧŨ.i ŧŨ.ũ ŧũ.¸ z¸.z z6.ŧ ¸Ŧ.Ŧ
llscul LeflclL ¸., ¸.¸ i., ¸.i Ũ.Ŧ ŧŦ.Ŧ
¸.¸ ¸.z i.z i., 6.Ũ ,.¸
Isca! sItuatInn In 1980
Othcr Imµnrtant factnrs
RBI adopted sharp contractionary measures and had taken
huge amounts Irom International Monetary Fund in July,
1990 and January, 1991 amounting to $2.4 billion.
Foreign Exchange Reserves were reduces $ 1 Billion which
could support only two weeks imports.
InIlation was staring at 14°
On July6, 1991 47 tons oI gold were transIerred Irom RBI
to Bank oI England, London. Already 20 tons oI gold were
sold in International market through State Bank oI India
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 eIIort to institutionalize
the disinvestment process was undertaken on a Iirm Iooting by
constituting the Disinvestment Commission.
The third Phase 1998-99 to 2007-08 where Department oI
Disinvestment (Now a Ministry) and National investment Iund
was Iormed to look aIter the disinvestment process and the Iunds
generated Irom it.
Fourth phase. the Current one where government is planning to
sell its stake in NT!CL, SJVNL, RECL and NMDCL
It started when Chandrasekhar government, while presenting
the interim budget Ior the year 1991-92 declared disinvestment
up to 20°.
The Industrial !olicy Statement oI 24th July 1991 stated that
the government would divest part oI its holdings in selected
!SE`s, but did not place any cap on the extent oI disinvestment.
During this !hase the sole was to generate revenue without
Iollowing any obiective seriously.
16 industries were reserved Ior public sector prior to 1991
which reduced to 8 aIter July 1991.
%hc HIgh!Ights nf thc cnmmIttcc rcµnrt
wcrc as fn!!nws
49° oI equity could be divested Ior industries explicitly reserved
Ior the public sector
In exceptional cases the public ownership level could be kept
In all other cases it recommended 100 per cent divestment oI
Holding 51° or more equity by the Government was
recommended only Ior six Schedule industries.
The government constituted !ublic Sector Disinvestment
Commission with the obiective oI preparing an over-all long
term disinvestment programme Ior public sector undertakings .
A comprehensive overall long-term disinvestment programme
(extent oI disinvestment, mode oI disinvestment etc.) within 5-
10 years Ior the !SUs.
Industries were divided into core and non-core industries.
The commission recommended disinvestment up to 49° in core
industries and 74° in non-core industries.
ŧũũŧ-ũz z¸ŦŦ ¸Ŧ¸Ũ.ŦŦ ¸Ŧ (¸Ŧ) MlnorlLv shures sold bv
ln bundles of 'verv good',
ŧũũz-ũ¸ z¸ŦŦ ŧũŧz.¸ŧ ŧ6 (z) 8undllng of shures
sold sepuruLelv for euch
ŧũũ¸-ũi ¸¸ŦŦ LoulLv of , compunles sold
uucLlon buL proceeds
recelved ln ŧũũi-ũ¸.
ŧũũi-ũ¸ i,ŦŦŦ iŨi¸.ŦŨ ŧ6 (,) Sule Lhrough uucLlon
meLhod, ln whlch Nls und
oLher persons legullv
permlLLed Lo buv, hold or
ŧũũ¸-ũ6 ,,ŦŦŦ ¸6z.ŦŦ i(-) LoulLles of i compunles
uucLloned undgovL plggv-
bucked ln Lhe lL8l flxed
prlce offerlng for Lhe flfLh
ŧũũ6-ũ, ¸,ŦŦŦ ¸ŨŦ.ŦŦ ŧ (-) CL (vSNL) ln
ŧũũ,-ũŨ i,ŨŦŦ ũŦz.ŦŦ ŧ (-) CL (M1NL) ln
ŧũũŨ ÷ ũũ ¸,ŦŦŦ ¸¸,ŧ.ŧŧ ¸ (-) CL (vSNL)l LomesLlc offerlngs
wlLh Lhe purLlclpuLlon of llls
(CONCO, CAlL). Cross purchuse bv
¸ oll secLor compunles l.e., CAlL,
ONCC 8 lOC.
ŧũũũ ÷ ŦŦ ŧŦ,ŦŦŦ ŧ¸,¸.,Ũ ¸ (ŧ) CL (CAlL) ln lnLernuLlonul murkeL,
vSNL domesLlc lssue, cross-holdlng
ln lOC und ONCC, und sLruLeglc sule
zŦŦŦ ÷ Ŧŧ ŧŦ,ŦŦŦ ŧŨ6Ũ.,¸ ¸ (ŧ) 8ALCO, KL (CL) 8 ML Lhrough
zŦŦŧ ÷ Ŧz ŧz,ŦŦŦ ¸ŧ¸Ŧ.ũi 6 (¸) SLruLeglc sule of CMC, H1L, l8P,
vSNL und PPL. Sule of elghL hoLels
und long Lerm leuse of one hoLel of
zŦŦz ÷ Ŧ¸ ŧz,ŦŦŦ ¸z6¸.ŧi ¸ (ŧ) SLruLeglc sule of HZL, lPCL,
MuruLl Udvog LLd. Sule of ŧŦ
properLles of l1LC und reslduul
eoulLv of MllL
zŦŦ¸ - Ŧi ŧi,¸ŦŦ ŧ¸,¸i, ŧŦ SLruLeglc sule of 1CL, cull opLlon of
HZL, offer for sule of MUL, l8P,
lPCL, CMC, LCl, CAlL, und ONCC,
sule of shure of lCl LLd
zŦŦi - Ŧ¸ i,ŦŦŦ z,,6i.Ũ, ¸ Offer sule of N1PC und splll over
ONCC, sule of shures Lo lPCL
zŦŦ¸ - Ŧ6 No LurgeL
ŧ,¸6ũ.6Ũ ŧ Sule of MUL shures Lo lndlun
Publlc SecLor flnunclul lnsLlLuLlons
und bunks und emplovees
zŦŦ6-Ŧ, No LurgeL
- - -
zŦŦ,-ŦŨ No LurgeL
z,¸66.ũi ŧ Sule of MUL shures Lo
publlc secLor flnunclul
lnsLlLuLlons, publlc secLor
bunks, und lndlun MuLuul
zŦŦŨ-Ŧũ No LurgeL
- - -
zŦŦũ-ŧŦ No LurgeL
i,z¸ũ.ũŦ - zŦŧz.Ũ¸-NHPC
This phase marked a paradigm shiIt in the disinvestment process.
First, in 1998 99 budget the BJ! government decided to bring
down the government shareholding in the !SEs to 26 °to Iacilitate
ownership changes which were recommended by Disinvestment
In 1999 2000 government stated that its policy would be to
strengthen strategic !SEs privatise non-strategic !SEs through
For the Iirst time the term privatisation` were used instead oI
The government later Iormed the Department oI Disinvestment on
10 December 1999.
In 1998-99, the government decided to disinvest through oIIer oI
shares in GAIL, VSNL, CONCOR, IOC and ONGC.
In 1999 2000, the government disinvested Irom Modern Foods
India Ltd and did a strategic sale to their strategic partner HLL Ior
Rs 105, 45 crore Ior a 74 ° equity stake.
This was the Iirst time government had sold more than 50 °
In 2002-03, target oI the government Ior disinvestment in the year was Rs
The maior highlight was the two-stage sell oII in Maruti
Udyog Ltd with a Rs. 400 crore right issue at a price oI Rs
3280 per share oI Rs 100 each in which the government
renounced whole oI its rights share (6,06,585) to Suzuki, Ior a
control premium oI Rs 1000 crore. Relative share holding oI
Suzuki and government aIter completion oI the rights issue
was 54.20 ° and 45.54 ° respectively.
The second stage government oIIloaded its holding in two
tranches Iirst where government sold 27.5 ° oI its equity
through I!O in June 2003. The issue was oversubscribed by
over 10 times.
Later keeping in view the overwhelming response Irom sale
oI Maruti, government sold its remaining shares in the
privatised companies oI VSNL, CMC, I!CL, BALCO and
IB! to public through I!O`s.
Strategic sale oI I!CL was also Iinalised in May 2002. The
decision to disinvest I!CL was although taken in December
1998, it took three and halI years to Iinalise the deal. Reliance
!etro industries Ltd (Reliance group) was Iinally inducted as
a strategic partner with a 26 ° sale in I!CL.
On 27th January 2005, the Government had decided to
constitute a 'National Investment Fund¨ (NIF) into which the
realisation Irom sale oI minority shareholding oI the
Government in proIitable C!SEs would be channelized. The
Fund would be maintained outside the Consolidated Fund oI
India. The income Irom the Fund would be used Ior the
Iollowing broad investment obiectives: -
Investment in social sector proiects which promote education,
health care and employment;
Capital investment in selected proIitable and revivable !ublic
Sector Enterprises that yield adequate returns in order to
enlarge their capital base to Iinance expansion/
The corpus oI the National Investment Fund will be oI a
The Fund will be proIessionally managed to provide
sustainable returns to the Government, without depleting the
corpus. Selected !ublic Sector Mutual Funds will be entrusted
with the management oI the corpus oI the Fund.
75 per cent oI the annual income oI the Fund will be used to
Iinance selected social sector schemes, which promote
education, health and employment. The residual 25 per cent
oI the annual income oI the Fund will be used to meet the
capital investment requirements oI proIitable and revivable
C!SEs that yield adequate returns, in order to enlarge their
capital base to Iinance expansion/diversiIication.
With the LeIt no longer in the power equation, the
government has decided to Iocus on selling government
shares either through public oIIers or institutional placements
(especially Ior listed blue-chips).
The issue oI disinvestment has grown in importance because
the government Iaces a Iiscal deIicit oI 6 per cent oI Gross
Domestic !roduct, owing to Iarm loan waivers, pay increases,
a country-wide rural iob guarantee scheme and a Iiscal
The government has prepared a list oI over 40 companies in
which it is planning to divest part oI its shareholding through
the stock market. This includes 15 listed entities in which the
government holds more than 90 per cent.
The government has also prepared a list oI around 25 unlisted
companies with a net worth oI Rs 200 crore which have earned a net
proIit in each oI the last three years Ior selective disinvestment.
Some oI these are Bharat Sanchar Nigam Ltd, Rashtriya Ispat
Nigam, Coal India, Hudco, Export Credit Guarantee Corporation,
Indian Railway Finance Corporation and North East Electric !ower
The government concluded public oIIers oI equity in NH!C and Oil
India. The market capitalisation oI these companies, post-listing, has
increased to Rs 37,702 crore and Rs 27,220 crore, respectively, a
rise oI 106 per cent and 177 per cent. There was a mix oI direct
disinvestment as well as Iresh equity in the case oI these companies.
The government plans to oIIer six loss-making public sector units on
long-term lease to private players Ior periods up to 99 years.
The companies that may be oIIered on lease are HMT , Hindustan
Fertiliser, Scooters India , Hindustan Cables, Triveni Structurals and
The Rs8,286 crore issue oI NT!C Ltd. received a lukewarm
response Irom both retail and institutional investors.
With recent issues Irom state-run companies receiving lukewarm
response Irom the markets, the government has downscaled its
disinvestment programme this year, restricting it to a maximum oI
A signiIicant part oI the disinvestment target would be met through
stake sales in companies such as Coal India Ltd (CIL) and Steel
Authority oI India Ltd (SAIL), he added.
Other big issues could come Irom Bharat Sanchar Nigam Ltd
(BSNL) and MMTC, while Hindustan Copper, Manganese Ore India
Ltd (MOIL), SJVNL and Engineers India Ltd (EIL) would be
6 out oI Top 10 companies in India are !ublic Sector
OI the 50 companies which make up the NIFTY, 10
companies are !SUs.
In many businesses !SUs are virtual monopolies.
Top 18 !SU companies (called Navratnas`) total
income is equal to 15° oI India`s GD!.
It is only due to the strong Iundamentals oI the !SU`s that
they are among the most proIitable companies in India. The
strong Iundamentals oI these companies provided a
substantially high growth oI 19.37° in the past 10 years.
Something private companies envy upon.
Balance Sheet virtually debt Iree.
· 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 Iunding their expansion plans
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