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Disinvestment Policy in PSU

The concept of Disinvestment of Public Sector Units have not been fabricated or
formulated over a night. For the clear cut Understanding of Disinvestment of Public Sector
one has to peep into history of evolution of this concept. For that one has to study this
concept in chronological order of its evolution which is given below:

 Initial Phase:

The divestment policy, as enunciated by the Chandrashekhar Government in the

Interim Budget 1991-92, was to divest up to 20% of the Government equity in selected PSEs
in favour of public sector institutional investors. The objective of the policy was stated to be
to broad-base equity, improve management, enhance availability of resources for these PSEs
and yield resources for the exchequer.

The Industrial Policy Statement of 24th July 1991 stated that the government would
divest part of its holdings in selected PSEs, but did not place any cap on the extent of
disinvestment. Nor did it restrict disinvestment in favour of any particular class of investors.
The objective for disinvestment was stated to be to provide further market discipline to the
performance of public enterprise. However, Budget speech 1991-92, reinstated the cap of
20% for disinvestments and eligible investors’ universe was again modified to consist of
mutual funds and investment institutions in the public sector and the workers in these firms.
The objectives too were modified, the modified objectives being: “to raise resources,
encourage wider publics participation and promote greater accountability.”

In 1993Government of India set up a Committee of Disinvestment in Public Sector

Enterprise under the chairmanship of C. Rangarajan.

The Common Minimum Programme of the United Front Government: 1996, sought
to carefully examine the pubic sector non-core strategic areas and to set up a Disinvestment
Commission for advising on the disinvestment related matters; to take and implement
decision to disinvest in a transparent manner; and to ensure job security, opportunities for
retraining and redeployment. No disinvestment objectives was, however, mentioned in the
policy statement.
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Pursuant to the above policy of the United Front Government, a Disinvestment

Commission was formed in 1996. It made recommendation of 58 PSEs. The
recommendations indicated a shift from publics offerings to strategic/ trade sales, with
transfer of management, as the following table shows:

Mode of disinvestment recommended Number of PSEs

A. Involving change in ownership/management
1. Strategic sale 29
2. Trade sale 08
B. Involving no change in ownership/
Management Offer of shares 05
C. No change
1. Disinvestment deferred 11
2. No disinvestment 01
D. Closure/ sale of assets 04

 The Second Phase:

In its first budgetary pronouncement (1998-99), the new Government decided to bring
down Government shareholding in the PSUs to 26% in the generality of cases, (thus
facilitating ownership changes, as was recommended by the Disinvestment Commission). It
however, stated that Government would retain majority holdings in PSEs involving strategic
considerations and that the interests of the workers would be protected in all cases. The
policy for 1999-2000, as enunciated by the Government in Budget Speech, was to strengthen
strategic PSUs, privatize non-strategic PSUs through gradual disinvestment or strategic sale
and devise viable rehabilitation strategies for weak units. A highlight of the policy was that
the expression ‘privatisation’ was used for the first time.

Strategic & Non-strategic Classification:

On 16th March 1999, the Government classified the Public Sector

Enterprises into strategic and non-strategic areas for the purpose of disinvestment.

It was decided that the Strategic Public Sector Enterprises would be those in the areas
of arms and ammunitions and the allied items of defense equipment, defense air-crafts and
warships; atomic energy (except in the areas related to the generation of nuclear power and
application of radiation and radio-isotopes to agriculture medicine and non-strategic
industries); and railway transport.
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All other Public Sector Enterprises were to be considered non-strategic. For the non-
strategic Publics Sector Enterprise, it was decided that the reduction of Government stake to
26 per cent would not be automatic and the manner and pace of doing so would be worked
out on a case-to-case basis. A decision in regard to the percentage of disinvestment i.e.,
Government stake going down to less than 51 per cent or to 26 per cent, would be taken on
the following considerations: Whether the industrial sector requires the presence of the public
sector as countervailing force to prevent concentration of power in private hands, and
whether the industrial sector requires a proper regulatory mechanism to protect the consumer
interest before public sector enterprises are privatized.

The highlights of the policy for the year 2000-01 were that for the first time the
Government made the statement that it was prepared to reduce its stake in the non-strategic
PSEs even below 26% if necessary, that there would be increasing emphasis on strategic
sales and that the entire proceeds from disinvestment/ privatization would be deployed in
social sector, restructuring of PSEs and retirement of public debt.

According to a policy state laid in both the Houses of Parliament on December 9,

2002, the main 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


In pursuance of the common Minimum Programme of the United Front, Government of

India constituted a Public Sector Disinvestment Commission on 23rd August, 1996, with the
following broad terms of reference:

1. To draw a comprehensive overall long term disinvestment programme within 5-10 years
for the PSUs referred to it by the Core Group.

2. To determine the extent of disinvestment (total/partial indicating percentage) in each of

the PSU.

3. To prioritize the PSU referred to it by the Core Group in terms of the overall
disinvestment programme.

4. To recommend the preferred mode(s) of disinvestment (domestic capital markets/

international capital markets/auction/private safe to identified investors/any other) for
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each of the identified PSUs. Also to suggest an appropriate mix of the various
alternatives taking into account the market conditions.

5. To recommend a mix between primary and secondary disinvestment taking into account
Government’s objective, the relevant PSU’s funding requirement and the market

6. To supervise the overall sale process and take decisions on the instrument, pricing,
timing, etc. as appropriate.

7. To select the financial advisers for the specified PSUs to facilitate the disinvestment

8. To ensure that appropriate measures are taken during the disinvestment process to
protect the interest of the affected employees including encouraging employees’
participation in the sale process.

9. To monitor the progress of disinvestment process and take necessary measures and
report periodically to the Government on such progress.

10. To assist the Government to create public awareness of the Government’s disinvestment
policies and programmes with a view to developing a commitment by the people

11. To give wide publicity to the disinvestment proposals so as to ensure larger public
participation in shareholding of the enterprises; and

12. To advise the Government on possible capital restructuring of the enterprises by

marginal investments, if required, so as to ensure enhanced realization through

The Disinvestment Commission is an advisory body and its role and function would
be to advise the Government on Disinvestment in those public sector units that are referred
to it by the Government. The Commission shall also advise the Government, and also carry
out any other activities relating to disinvestment as may be assigned to it by the
Government. In making its recommendations, the Commission is also required to take into
consideration the interest of workers, employees and other stake holders, in the public
sector units(s). the final decision on the recommendations of the Disinvestment Commission
vests with the Government.
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The Commission has recommended disinvestment at varying levels for a number of

and U-Ashok and NALCO).

Strategic sales in various proportions have been recommended for many enterprises,

For several enterprises, namely, ONGC, MOIL, OIL, RITES, PGCL, NTPCK, NCL
and NHPC, the commission has advocated no disinvestment for the present.


The privatization process began in India 1991-92 with sale of minority stakes in some
PSUs. From 1999-2000 onwards, the focus shifted to strategic sales. Privatization is an
integral part of disinvestment so one has to think about it so we should start it with its
definition so as we can get the further insight in it.

Privatization means transfer of ownership and/ or management of an enterprise form

the public sector to the private sector. It also means the withdrawal of the State from an
industry or sector, partially or fully. Another dimension of privatization is opening up of an
industry that has been reversed for the public sector to the private sector.

• Expansion of Public Sector and Its Defects

Regardless of whether socialist or market-oriented, a large number of countries in the 1960s

and 1970s saw an expansion of the public sector, and in particular an expansion of state-
owned enterprises, across a broad front. In the 1960s, there was a trend towards
nationalization in Britain. But, since the late 1970s, the trend was towards privatization by
selling State-owned enterprises (SOEs). It indeed became a universal trend.

The performance of SOEs in many countries was, by and large, been far from
satisfactory. They often put large burdens on public budgets and external debt.

The heavy financial burden imposed by the SOEs and the growing public discontent
against them due to their inefficiency, indifferent, irresponsible and sometimes even
arrogant attitude and lack of concern for the customer needs; and corruption, nepotism ad
squander associated with their organizations and management led to the growing interest in
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privatization. As Professor Samuel Paul points out, in country after country, unbridled state
expansion has led to:

1. Economic inefficiency in the production activities of the public sector, with high costs of
production, inability to innovate, and costly delays in delivery of goods produced;

2. In effectiveness in the provision of goods and services, such as failure to meet intended
objectives, diversion of benefits to elite groups, and political interferences in the
management of enterprises; and

3. Rapid expansion of the bureaucracy, severely straining the public budget, causin
problems in labour relations within the public sector, inefficiency in government, and
adverse effects on the whole economy.

Theses problems have led many governments to undertake programmes of public

sector reforms, and pushed by a need to curb public expenditure, to reevaluate the
possibilities for shifting publicly managed activities into the private sector.

• Benefits of Privatization

Privatization benefits the society in several ways. The fact that privatization is an important
strategy of economic rejuvenation of even the ‘communist’ nations is a testimony to the
economic role of privatization.

Countries like the U.K. have shown how it could help solve the fiscal crisis of the
State and to usher in a new industrial democracy. The benefits of privatization may be listed
down as follows.

1. It reduces the fiscal burden of state by relieving it of the losses of the SOEs and reducing
the size of the bureaucracy.

2. Privatization of SOEs enables the government to mop up funds. Government of India’s

Budget for 2000-2001 proposed to raise Rs. 10,000 crore during the year through
privatization. (The achievement, however, was dismal as the privatization plan could not
be carried out in real earnest due to various reasons).

3. Privatization helps the State to trim the size of the administrative machinery.

4. It enables the government to concentrate more on the essential State functions.

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5. Privatization helps accelerate the pace of economic development as it attracts more

resources form the private sector for development.

6. It may result in better management of the enterprises.

7. Privatization may also encourage entrepreneurship

8. Privatization may increase the number of workers and common man who are
shareholders. This could make the enterprises subject to more public vigilance.


The communist parties, with whose support the United Progressive Alliance
Government was formed in May 2004, have tried to control the progress of privatization.
The statement of the Common Minimum Programme (CMP) made by the Government has
proposed a case-by-case approach towards privatization. It has been stated the Government
is ‘generally’ against privatization of profit making public sector undertakings. It was also
decided to windup the ministry of Disinvestment.

The policy reforms, however, has set the stage for privatization. For instance, evenif
the government will shy away from privatization of the baking sector, it is likely to take
place by rapid growth of existing private sector banks, establishment of new private sector
banks and expansion of business of the foreign banks.


Year Target (Rs. Crore) Achievements (Rs. Crore)

1991-92 2500 3038
1992-93 2500 1913
1993-94 3500 -
1994-95 4000 4483
1995-96 7000 362
1996-97 5000 380
1997-98 4800 902
1998-99 5000 5371
1999-00 10000 1829
2000-01 10000 1869
2001-02 12000 5632
2002-03 12000 3348
2003-04 14500 15547