Economic Survey] Ch9: Public Sector Undertakings

,
CPSE-ETF, Disinvestment, NIF, Mini-Nav-Maharatna
1. Prologue
2. [Act 1] PSU Classification
1. Classification #1: where they operate?
2. Classification #2: How they were born?
3. [Act 2] Disinvestment
1. National investment fund (NIF-2005)
4. [Act 3] CPSE-ETF Exchange traded fund
1. How is CPSE ETF different from Mutual funds?
5. [Act 4] Various “Ratna” for PSU
Prologue
Economic Survey Ch.9 Industrial performance. Four subparts:
1. Industries, Acts, Policies, excise and customs duty
2. PSUs, Disinvestment, CPSE-ETF
3. Companies Act 2013
4. MSME sector

[Act 1] PSU Classification
Classification #1: where they operate?
STRATEGIC NON-STRATEGIC
1. Arms, Ammunition, defense equipment Those who are not under
2. defense air-crafts and warships
3. Atomic Energy (except nuke energy for agriculture,
medicine and non-strategic industries)
4. Railways transport
“Strategic” category

Classification #2: How they were born?
GOVERNMENT COMPANIES
PUBLIC
CORPORATIONS
ONGC, SAIL, Coal India ltd etc. LIC, Air India, IDBI, UTI etc.
registered under companies act, Government owns
>50% shares
setup under an act of parliament
/Vidhan Sabha
Government decides majority of the board of directors.
(independent directors will have to be appointed as per
Companies Act 2013)
Government decides ALL Board of
directors. the independent director
provision under Companies act
doesn‟t apply
Audit by CAG appointed private auditors. (with term
limits as per Companies Act 2013)
CAG directly audits using his own
staff (some exceptions to certain
large corporations).
 Their Employees are not “public servants” or
“Government employees”.
 Their disciplinary rules, salary-pension benefits are
separate from Government employees.
same
RTI applies same
Dept. of public enterprises (under Heavy ministry) acts
as nodal agency
same
Their top executives are selected by Public sector
enterprises selection board (PSEB) under personnel
ministry.
same
What about Railways and Postal department?
Viewpoint #1:
 Railways and posts are departmental undertakings.
 And since all departmental undertakings are “public sector undertakings”, as per the
classification given in Laxmikanth (Public Administration book) and NIOS courses.
 Therefore, railway, posts, also “PSU” or “PSE”.
Viewpoint #2:
Railways and Postal department are not “public sector enterprises” (PSE) or public sector
undertaking (PSU) because of the following reasons:
1. Department of public enterprises has no jurisdiction over them.
2. Their manpower and finance are directly controlled by respective ministries.
3. Their top Executives are Group-A Government officers recruited through UPSC civil service
exam. [And not through Public sector enterprises selection board (PSEB) under personnel
ministry.]
4. If railway and post were PSUs then parliamentary Committee on PSU would have been
examining them.
5. But railways under parliamentary standing Committee on railways; Postal under
parliamentary standing Committee Information Technology.
Names not important except for PSU
interviews
Top profit maker Top loss makers
1. The Oil and Natural Gas Corporation Ltd
2. National Thermal Power Corporation Ltd
3. Fertilizer Corporation of India Ltd
4. Coal India Ltd
5. Bharat Heavy Electricals Ltd
1. Bharat Sanchar Nigam Ltd
2. Mahanagar Telephone Nigam Ltd
3. Air India Ltd
4. Chennai Petroleum Corporation Ltd
5. Hindustan Photo Films Manufacturing Co.
Ltd
 Overall 277 Central public sector enterprises
 Out of them ~80 loss making.
Problems with PSUs REFORMS TAKEN
 Overstaffed. can‟t hire and fire easily like private
companies
Voluntary retirement scheme-
VRS
 APM: Administered pricing mechanism- over coal,
steel, cement, fertilizer petroleum products etc.
 Government began
deregulating the prices-
example petroleum, steel,
cement
 survey recommends
Government to deregulate coal
prices as well
Since Government is majority shareholder- constant
political interference in board appointments, policy
decisions, factory locations, product pricing etc.
 disinvestment
 operational flexibility to
Miniratna, Navratna and
Maharatna PSUs
[Act 2] Disinvestment
Mind the money flow in annual financial statement
Revenue Part: Annual
financial statement
(Non-Tax) Receipts Expenditure
 interest from loans given
to PSU
 dividend from shares
owned in PSU
1. Cost of running the department of disinvestment,
Department of Public Enterprises etc.
2. grants () given to PSUs
Capital Part: Annual financial statement
Receipt Expenditure
1. money earned from selling PSU shares aka Proceeds from
disinvestment
2. When PSU repays loan principal, counted here. (interest payment in
revenue reciept)
loans given to
PSUs
Current skeleton framework of “disinvestment” comes from UPA-I‟s Common Minimum
Program
1. Department of Disinvestment will look after this matter.
2. We‟ll not disinvest from “strategic” Public sectors viz. arms, ammunition, defense
equipment, railways and atomic energy.
3. We‟ll not privatize the profit making PSU. Government will control atleast 51%
shareholding in them
4. We‟ll not disinvest Navratna PSU
5. We‟ll close / sell off the loss making PSUs, with adequate compensation to workers.
6. We‟ll setup Board for reconstruction of public sector enterprises (BRPSE) + National
investment fund.
National investment fund (NIF-2005)
 Disinvestment = when Government sells its shares of Public sector undertaking.
 Obviously, Government would earn „money‟ from this share-selling.
 This money doesn‟t go into Consolidated Fund Of India
 It goes to National investment fund (under Public accounts of India), therefore, outside
parliament control.
 Three fund managers look after NIF viz. UTI, LIC and SBI
From NIF, money goes
into
75%
into sarkaari schemes- MNREGA, health education, JNNURM
etc.
25% into reviving / expanding other PSUs
Above 75:25 rule continued till 31st March 2013. After that, NIF Money is used for following
purposes
 buying shares of CPSE to enture 51% sarkaari ownership
 recapitalizing sarkari banks and insurance companies
 Investing in EXIM bank, NABARD, Regional rural banks,
 Uranium corporation, Nabhikiya Vidyut Nigam
 Metro projects and Indian railways capital Expenditure.
And Government budget will decide where to spend money among these sectors. For Budget
2013, NIF money was spent on Bank recapitalization and Indian railways.
Disinvestment
targets
Budget 2013
Rs. 40,000 crore but
#EPICFAIL
Budget 2014 ~63,000 crores.
[Act 3] CPSE-ETF Exchange traded fund

CPSE-ETF = A NOVEL METHOD OF DOING “DISINVESTMENT”
 Government takes out its shares of TEN Central public sector enterprises (CPSE) – ONGC,
CIL, GAIL etc. worth total 3000 crore rupees.
 gives them to fund manager Goldman Sach.
 Goldman Sach packs these shares into a box. Then, he cuts off this box into smaller pieces,
each piece sold for Rs. 17.45 as “new fund offer”.
 You can buy these pieces (minimum order has to be Rs.5000)
 if you‟re first time investor, you can even get tax benefit under Rajiv Gandhi Equity Savings
Scheme.(upto Rs.50k)
 Later, you earn dividend (From the profit of those CPSE companies).
 If you don‟t want to wait for the dividend, simply sell your piece to another guy in the
secondary market/stock exchange (BSE, NSE). (July rate Rs.26 for each unit).
 Hence these are called “Exchange traded funds” (ETF)
 and since the original shares were of Central public sector enterprises (CPSE)=> hence we
call‟em CPSE-ETF.
How is CPSE ETF different from Mutual funds?
Mutual fund CPSE-ETF
no such “free offer”
Initially Goldman sach made an offer- if you buy 15 ETF
units, they give you 1 unit free. (but with caveats on
investment limit etc.)
When you return your mutual
fund “UNIT” to the fund
manager, he‟ll repay CASH.
when you return your ETF, Goldman SAch won‟t give you
CASH, he‟ll give you shares (of those CPSE companies), then
you can sell them in secondary market (at BSE/NSE etc) and
recover the CASH
Fund manager takes higher
Commission than ETF
manager
lower commission (meaning more “return” for you).
1963: UTI was the first
mutual fund company in
India
 1993: ETF launched in USA
 2002: ETF launched in India
SEBI Public listing norms
Minimum public shareholding
Non PSU (listed) public ltd.
company
25%
PSUs
25% within next 3 years. (Earlier
10%)
 So in other words, Government shareholding in PSUs, will decline to atleast 75% in the days
to come.
 Since Government will have to sell its shares= automatic disinvestment = ~60,000 crores
will be earned = less fiscal deficit.
 May be Jaitley himself secretly told SEBI to order this? One can come up with many
conspiracy theories.
 Related topic: PJ Nayak Committee for reducing Government shareholding in Sarkaari
banks. But we‟ll see that under chapter on financial intermediaries.
[Act 4] Various “Ratna” for PSU
Cost benefit of mugging up this topic= bad. But putting for the record.
Miniratna
 two categories: CAT1 and CAT2
 Common condition: must have made profit in last 3 years.
 then further classification, based on “how much” profit they made
 common benefit: capital Expenditure without Government approval
Miniratna CAT1 CAT2
condition
 30 cr. profit in any one year
 profit all three years
 positive networth
Expenditure
freedom
 500 crore or upto their –
whichever higher
 300 crore or 50% of their
networth
examples Airport Authority of India, Antrix HMT, Mineral Exploration
(ISRO), BSNL Corporation Limited etc.
Navratna PSU (1997)
CONDITIONS BENEFITS
1. already has miniratna cat1 status
2. MoU with Government- has “very
good” or “excellent” ratings
3. 60 out of 100 marks in various
criterias
4. 4 independent directors in the
board
 can invest 1000 cr / 15% of networth in a single
project- without Government approval
 Examples: BEL, Hindustan Aeronautics, MTNL,
Neyveli Lignite etc. total 17 as of June 2014.
Maharatna PSU (2010)
CONDITIONS BENEFITS
 already has navratna status
 significant global presence
 listed on Indian stock exchange with minimum
public shareholding as per SEBI rules (earlier
10%, new limit 25%)
in the last 3 years
1. turnover >25,000 crores
2. net worth >15,000 crores
3. net profit after tax >5000 crores
can invest 5000 cr / 15% of networth in a
single project- without Government
approval.Full List (7)
 BHEL, SAIL, GAIL
 NTPC, Coal India
 ONGC, Indian oil