Macroeconomics Project

DISINVESTMENT: What Does it mean and

how is it achieved?
Implications of diverse measures adopted to
secure disinvestment with reference to
India?
DISINVESTMENT

what does it mean and how is it

achieved?
Implications of diverse measures
adopted to secure disinvestment with
reference to India.
 INDEX
 Introduction
 Background
 Criteria of selection
 Disinvestment process
 Implications
 Employment
 Performance
 Other issues
 Introduction
Objective of disinvestment is to put national
resources and assets to optimal use and in
particular to unleash the productive potential
inherent in our public sector enterprises. The policy
of disinvestment specifically aimed at:

 Modernization and up gradation of Public Sector

Enterprises;
 Creation of new assets;
 Generation of employment;
 History of disinvestment
 Disinvestment was initiated in the late 1970s in the
UK, and in the early 1980s in Chile .
 Macroeconomic Justification
Privatisation was widely advocated as a quick and
sure means of restoring budgetary balance, to
revive growth on a sustainable basis.
 Microeconomic justification
The change in ownership is often advocated to
increase domestic competition, hence promotes
efficiency; and encourage public participation in
domestic stock market all of which are expected to
yield superior economic outcomes.
 PSUs in India
Employing about 19 million persons,
public sector currently contributes about a
quarter of India’s measured domestic
output. These include, close to 250 public
sector enterprises (PSEs) owned and
managed by the central government,
mostly in industry and services .
Why disinvestment??
Sectoral composition
 Disinvestment at centre
 In 1991, a small fraction of the equity in
selected central PSEs was sold to raise
resources to bridge the fiscal deficit.
 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 off these shares in the booming
secondary stock market.
 Disinvestment at state level
 Privatisation at the state level began
somewhat earlier than at the Centre.
 Sale of the state government’s equity holding
in Allwyn Nissan Limited in Andhra Pradesh
in 1989, UP State Cement Corporation to
Dalmia Group, and Auto Tractors in 1991 –
were precursors to the national level policy
changes
 Criteria of selection

Division of industries into

 Strategic

(No disinvestment)
 Core (tendency towards oligopoly) and

(Disinvestment limited to 49%)

 Non core group

(Disinvestment upto 74%)

Criteria of selection continued
The loss making PSUs were further
sub classified as :
 Those in which Government could
disinvest as a going concern on
an as-is-where-is basis;
 Those which could be restructured
and turned around before
disinvestment; and
 Those which may need closure.
 Process of disinvestment
The main feature of the disinvestment policy can be culled out
from the 2000-2001 budget speech as follows :

 To restructure and revive potentially viable PSEs

 To close down PSEs which cannot be revived

 To bring down Government equity in all non-strategic PSEs to

26% or lower, if necessary

 To fully protect the interest of workers

 Process of disinvestment

 To put in place mechanisms to raise resources from the

market against the security of PSEs' assets for providing an
adequate safety-net to workers and employees

 To establish a systematic policy approach to disinvestment and

privatisation, by setting up a new Ministry of Disinvestment

 To emphasise increasingly on strategic sales of identified PSEs

 To use the entire receipt from disinvestment and privatisation

for meeting expenditure in social sectors, restructuring of PSEs
and retiring public debt
 Disinvestment process
& Role of MODI
Selection of PSU by MODI

Approval by CCD

Formation of IMG & Selection of Global Advisors

2-3 months Submission of Expression of Interest

Submission of Initial Technical Proposal

Due Diligence / Commercial negotiations

3-6 months
Finalise Shareholders Agreement (SHA)
& Share Purchase Agreement (SPA)

Financial bids
1 week

Selection of strategic partner &

signing of SHA & SPA
 Main Constituents
Cabinet Committee
 The Cabinet Committee on Disinvestment is for Disinvestment
the apex body in the disinvestment process (“CCD”)

 The Ministry of Disinvestment is the key

Core Group of
constituent and manages the routine Secretaries (“CGS”)
functioning of the disinvestment process.

 MODI is helped by the relevant ministry and Inter Ministerial

various other Government departments and Group (“IMG”)
ministries during the process.

Working Group
 Main constituents
Core Group of Secretaries on Disinvestment

 Headed by the Cabinet Secretary and comprises of Secretaries

from MoF, Industry, Dept. of Disinvestment, Planning Commission
and any other Department as may be required

 Supervise, Monitors progress and Makes recommendations to

CCD

Inter-Ministerial Group

 Chaired by the Secretary, MoDi and comprises of officers of, MoF,

Dept. of PSE, Administrative Ministry and the CMD of the Public
Sector Enterprise concerned

 Responsible for day-to-day implementation of the disinvestment

decision
 Main constituents
Department of Disinvestment

The Department of Disinvestment (later, Ministry of Disinvestment)was set

up vide Notification No. CD.551/99 dated the 10th of December 1999

All matters related to disinvestment of Central Government equity from

Central Public Sector Undertakings

Decisions on the recommendations of the Disinvestment Commission on

the modalities of disinvestment, including restructuring

Implementation of disinvestment decision, including appointment of

advisors pricing of shares and other terms and conditions of disinvestment
All matters relating to the Disinvestment Commission
 Disinvested CPSEs
.

Lagan Jute Machinery Company Limited (LJMC), (subsidiary of

1
Bharat Bhari Udyog Nigam Ltd. hereinafter referred to BBUNL)

2 Modern Food Industries Limited (MFIL)

3 Bharat Aluminium Company Limited (BALCO)

4 CMC Ltd. (CMC)
5 HTL Ltd. (HTL)
6 Videsh Sanchar Nigam Limited (VSNL)

7 Paradeep Phosphates Limited (PPL)

8 Jessop and Company Limited, (subsidiary of BBUNL)

 
 Disinvested CPSEs
9 Hindustan Zinc Limited(HZL)
10 Maruti Udyog Limited (MUL)

11 Indian Petrochemicals Corporation Ltd.(IPCL)

12 Indo. Hokke Hotels Ltd. (subsidiary of HCI)

17 Hotel units of India Tourism Development Corporation Ltd.

13
(ITDC) *

Punjab Hotels Ltd. (subsidiary of ITDC) – unfinished Chandigarh

14
Project

15 2 Hotel units of Hotel Corporation of India Ltd. **

One hotel unit of ITDC has been given on 30 year lease cum-
16
management control. ***
 Legal issues in the D-P process:

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.

Privatisation is a policy decision, prerogative of the executive branch

of the state; courts would not interfere in it.

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.
 Employment in central PSEs
Employment in the central
PSEs has declined from about
2.2 million in 1991-92 to about Figure 1: Employment in Central PSEs

1.7 million a decade later 25

20
The fall in employment is clearly 15

In lakh
the result of voluntary retirement 10
scheme (VRS) initiated using the 5
National Renewal Fund, as part 0
of the structural adjustment 92 93 94 95 96 97 98 99 2000 2001 2002 2003

programme. Year ending

Employment
Popular reports suggest some
retrenchments and compulsory
retirement of workers. Reportedly
some private firms have violated
their contract in this regard
 Performance of PSEs after disinvestment
and privatization

Unlikely to affect economic performance since the

state continues to be the dominant shareholder

Privatisation can be expected to influence

economic outcome provided the firm operates in a
competitive environment

It would be difficult to attribute changes

performance sole or mainly to the change in
ownership.
 Other related issues

 Increasing Involvement of banks in financing PSE investments

 Limited control of banks in governance of PSE’s.

 Concepts of sound corporate governance overlooked.

 Managers averse in taking risks

 Multiple owners dilutes the motivation of performance of managers.

 National investment fund

The proceeds from disinvestment of CPSUs will be channelised into NIF,

which is to be maintained outside the Consolidated Fund of India.

NIF 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 NIF.

75% of the annual income of NIF will be used to finance selected social sector
schemes, which promote education, health and employment.

The residual 25% of the annual income of the Fund will be used to meet the
capital investment requirements of profitable and revivable CPSUs that yield
adequate returns, in order to enlarge their capital base to finance
expansion/diversification.
 
 Fund Managers of NIF

The following Public Sector Mutual Funds have been appointed initially as
FundManagers, to manage the funds of NIF

i) UTI Assets Management Company Limited

ii) SBI Funds Management Company (Private) Limited
iii) Jeevan Bima Sahayog, Asset Management Company Limited

The total amount of Rs. 994.82 crore received from the sale of Government
equity in PGCIL has been handed over to the Fund Managers by the Finance
Minister as per the allocation given below :

(i)UTI Asset Management Company Pvt. Ltd. Rs.368.91 crore

(ii)SBI Funds Management Pvt. Ltd. Rs.368.91 crore
(iii)LIC Mutual Fund Asset Management Rs.257.00 crore
Company Ltd. -----------------------
TOTAL Rs.994.82 crore
 CONCLUSION

Overlooking the hard task of institutional design to suit the specificities of

large, heterogeneous, democratic industrializing economy of India, the
reforms initiated in the 1990s sought to improve PSEs’ financial
performance by transferring ownership and control to private sector, and
resort to stock market based discipline.
QUESTIONS ??