CHAPTER VI

Problems in Disinvestment in India

Privatization is a fuzzy concept. It covers a wide range of ideas, programmes and
policies. In the broad sense of the term, privatization is roll-back of the state in the
lives and activities of citizens and strengthening the role of markets. In the narrow
sense, privatization is transfer of ownership from the public to the private sector, or
transfer of control over assets or activities as in the case of privatization through
leasing, where ownership is retained, leaving management of assets and activity to
private parties.
It may be noted that privatizations changes the role of the stale, and not ncccssadly
reduces it. The monitoring and regulation of the privatized system, discussed latci. is
a complex and difficult job. The state also has the ownership responsibility of
ensuring that a meaningful competition prevails in the privatized sectors of the
economy and the vulnerable sections of the society arc not unduly adversely affected.
Effective privatization is a difficult and complex job. It has been compared to dri\ ing
a two-horscs carriage of which the political horse is Highly and Hcklc. and the
economic horse slow and steady. They have to pull the carriage along the roan of
privatization which is a rough, boulder strewn track. The horses could pull in different
directions. Only the most skillful driver can negotiate the track up the hill ol vested
interests. Achieving the goal is dependent upon the strength and skill of the dri\er. the
government. It is possible that the driver may get exhausted and give up the attempt
halfway and wait for the propitious time to begin again.
Disinvestment or Privatisation is a process whereby government withdraws its a uit\
from Public Sector undertakings. The objectives of Disinvestment arc very sacred.
But it has not been fulfilled in real terms. In the beginning of every financial year the
target is set for the Disinvestment and at the end of that financial year it is found that
these targets arc not met. There has been always a wide gap between the target set and
achievement there of except in the years 1991-1992, 1994-1995 and 1998-1999.
2003-2004. Table6.1, given below is showing target & achievements for every year
since 1991.

241
Tabic 6.1 - Chronology and methodology of Disinvestment in India, 1991 to 2005.

Year No of Target Receipts Actual Receipts

transactions (Its Crorc) (Its Crorc)
with equity
sold
1991-92 47 2500 3037.74 Monthly share soltl in Dec 1091 A 'eh

1992 by auction method in bundles

1992-93 29 2500 1912.42 Share sold separately lor each eo imam In

tyi auction method.

1993-94 0.00 Equity of six companies sold In ,u.m

O
- O
auction but proceed received m llN l 9s

1994-95 17 4000 4843.10 Sale through auction method ,:i rv i-ch

NRIs and other persons allimed to

participate.

1995-96 5 7000 168.48 Equity of lour companies auctioned

1996-97 1 5000 379.67 GDRfVSNI.) in international malic;

1997-98 1 4800 910.00 GDR(MTNL) in international market

1998-99 5 5000 5371.1 1 GDR(VSNI.)/domestie olTermg with the

participation of Fils ( t’ONt'OR'i \ l

Cross purchase by three oil companies i e

GAII..ONGC.IOC.

1999-00 5 10000 1860.14 GDR(GA1L,VSNL) domestic issue HA ■'U

restructuring .M!:JL .strategic sale

2000-01 5 10000 1871.256 Strategic sale of BA1.CO. 1 JMC lake ui

KRI. (CR1.).CI’CL(MRI.).HRI’

2001-02// 8 12000 5632.25 Strategic sale of CMC- 51% .1111

VSNL-25% . IBP-V! 5S% . I*PI - " 1",. -ml

sale of hotel properties of fll)( and III 1

.receipts from surplus cash reserves tom

STC and MMTC.

2002-0311 8 12000 3347.98 Strategic sale- 1171,(26%). Il't 1 (.’ - '■>)

IIC1. ITIX'.Mariiti: control piemium 1 im

renunciation of right issue . pm opt ion

MFIL(26%). shares to employee 111

IIZL.CMC.& VSNi..

2003-04 2 14500 15547.41 .Icssop & Co (72%) Strategic sal. ) j

HZL( 18.92% call option ). troio-.h public

offer Maruti (27.5%). IKI(9’%,

IBP(26%), IPCI.(2S.9-I%). CMCV6 7>

DC1(20%). GAI 1.(10%). & ONGCl'i 96 '.,)

2004-05 J 4000 2764.87 NTPC(5.25%). IPCI (5% to employee A

ONGC (0.01%) .

2005-06 - 1567.60 By sale of shares to public seeloi I111auc1.il

institutions and public sector hanks

Total 96800 49214.03 j

Source: Department of Disinvestment. hUp://divcst.nic.in
Note: # Figures arc inclusive of control premium, dividend/dividend tax. restructuring
and transfer of surplus cash reserves prior to Disinvestment.

It is now a matter of consideration that why the pace of Disinvestment is very slow 7 Win
the dream is not realising in a way as being thought of? Is government fully responsible
for this? No government can be blamed fully but partially all. There are a number of
causes resulting in the very slow speed of Disinvestment.

242
PROBLEMS IN DISINVESTMENT IN INDIA
A number of problems coming in a way of Disinvestment are discussed as:
Lack of Political Will
Due to lack of political will for Privatisation as a means towards economic well being not
withstanding, the fact that in India the present Government is in power has taken step
towards liberal economy in a big way since 1990. Politicians find it easier to take the
constituents with anti privatisation move rather than economic achievements through the
process of private ownership. As was happened with the scooters India Limited. An
attempt to sell out scooters India Limited, a recurring loss maker in a non-stralegie area
all members of the major opposition parties stage a walk out from the parliament on
March 7, 1988. There are many such instances where proposals for Disinvestment of
PSUs or for closing down of loss making units with compensation to the work force
could not cross the political barriers for implementation.
Capital Market
The place of Disinvestment Programme is very fast in the developed countries, as hey
have mature capital market. As against this, India’s capital market is very young and is
not very developed, for helping the Disinvestment Process in a good way.
The state of the capital market has a great relevance to Disinvestment. Its depth and u idlh
determines the extent to which it can adsorb the offloading of equity and debt by a Public
Enterprise Identified for Privatisation.
Administrative Capacity
Problems have also arisen due to the lack of well established and competent consul, mg
groups, accounting companies, and other financial institutions providing technical ad\ ice
on matters related to privatisation. Once a public enterprises assets arc evaluated, a
certain level of administrative capacity is required to assess the bids made by die
potential buyers, arrange finance and insurance cover and deal with the complex legal
entanglements. Very few countries actually possess the desired level of admini.strati\c
capacity. 'Phis very reason may be behind the slow speed of disinvestment programme of
India as the process was initiated in the year 1990-91 but the Disinvestment Commission
was constituted in the year 1996, and Disinvestment Ministry was formed in the year
1999, nine years after the initiating the Disinvestment Programme. Now the issue arises
do we possess sufficient machinery to fasten the process.
243
National Consensus
There is absence of a clear understanding of the rationale for Disinvestment, liven though
Disinvestment has been going on since 1991, this lack of proper public awareness and
consensus has definitely hindered the progress of Disinvestment. While there is
widespread dis-satisfaction among the public about the poor performance of a large
number of PSUs, there is insufficient recognition that disinvestment could be the
corrective action to tackle this problem.
Studies of the experience of Disinvestment in different countries across the globe clearly
show that in almost all the countries the impetus to Disinvestment came from the general
perception among large sections of the people that the performance of the public sector
by and large lacked commercial and market orientation and that there existed ncet; for
better utilisation of the returns from the public resources invested in the PSUs.
In India too, therefore there has need to be a conscious effort towards building up such a
consensus among the different sections of the people before disinvestment can really lake
off with any seriousness of purpose.
Opposition from Work Force
Disinvestment is seen by workforce employed in various PSUs as a threat to job sea rit\.
The organised labour and trade unions generally strongly opposes any move towards
privatisation. They put forward the general argument that the non profitability of public
sector unit is the result of management failure and wrong government policy that need to
be replaced rather than pursuing Privatisation. They feel that transfer of ownership iom
Government to the Private Sector imply closure or total retrenchment.
Bureaucratic Will
Bureaucracy is one of the reason for the poor performance of Public Sector undcrtakmgs.
And is averse to the privatisation as it is used to “back seat drive" the public sector
management and officials will find it difficult to digest if no chairman of an}' public
sector turns up to this ‘darbar’ for something or other. Even for giving more autononn to
the public sector management, the bureaucracy in India puts forward the arguments that
since the Government in power is responsible to Parliament, autonomy beyond cenain
points cannot be granted to the public sector. This is an interesting argument to keep
ministers happy and burcacratic control in tact.

244
Lengthy Process
The process of disinvestment which is executed by the Government of India, is somew hat
lengthy. The Decision of Disinvestment in certain Public Enterprises is taken according
to the favourable environment, sometimes it may not be able to fetch as much result as
desired only due to time involved in the process. Now, Government is following the
strategic sale methodology for Disinvestment of the Public Sector understanding w nidi
lakes six to ten months in completion of the process and sometimes many delays are
created by other persons. For example The resistance from Indian Tourism Development
Corporation’s labour Unions led to interruptions and postponement of due diligence by
bidders and advisors visit to ITDC properties resulting in delays the process.
Lack of support from state governments
Although the Disinvestment Programme is primarily relate to central public sector
undertakings, but state government are also given some guidelines regarding the
Disinvestment of state owned Enterprises. They arc suggested to follow the route of
centre. But the real picture is different, not only they are initiating the process very slow
but sometimes they create the hurdles in the Disinvestment of Central owned enterprses.
This lack of support revealed from the case of BALCO, where slate government raised
many issues for the land. This was one of the reason for the delay of BALCO strategic
sale.
Capacity of Private Sector
The success of Disinvestment Programme in India also largely depends upon the capacity
of Private Sector to participate in the programme. Although the private sector has
developed considerable managerial and Financial ability, but there will always be a doubt
whether large scale privatisation will find ready takers. And also there may arise a
problem due to lack of Public response also. The Public sector has not been able to set
any impressive track record of performance in the minds of the general people. Vn\
equity issue may therefore fail to receive adequate response for subscription.
Invitation to foreigners
Unlocking the large resources from public sector undertakings needs buyer who is able to
invest a big sum. There are cases when there is no responder for the invitation of bid as
was happened with Centaur Hotel Airport Delhi including Che fair Delhi and Chelair
Mumbai of Hotel Corporation of India Limited after the invitation of Financial bit's in
January 2002, there was no bidder. Although there may a number of reasons but high risk
245
profile with huge investment or lack of advanced technology for the particular PSIJ
may be behind for cold response. In this scenario only foreigners can take a oarl
warmly, but the Government policy is not much liberal in this context. Although the
Government has opened some areas for them.
Loss Making Units
There arise a number of problems with the loss making units. Financial, technical and
legal restructuring would be necessary in the majority of the eases rcstructing invo \ es
substantial expenses. The Government would need to make such investment before
going to the market unless the government is financially sound, it may find it difficult
to go ahead for the privatisation of the weaker units/loss making units in pariieu ar.
Even if the Government restructures them before going to the markets, the future
potential of such units needs to be safeguarded. As many of these public sector units
were cither nationalized or taken over from the private sector on the verge of their
closure, or even after they had already been closed down. Selling them back to the
private sector may look perverse on the one land, and will make the people
apprehensive about the future of these units on the other.
Participation by large section of population
It is argued that large section of population is still below poverty line. Because of
poverty they will not be able to participate in the share issues resulting to the
concentration of wealth in only the hands of the well-to-do. This is the ease not only
with India but with many developing countries, Nepal presents an example unere
shares were exclusively held by Private Limited companies and about 70 percent of
the shares arc held by some 2000 persons there. Wealth concentration will therefore
result in income concentration and therefore will benefit the well to do an managerial
group of people the higher income group resulting in income skewness.
Like all economic reforms, privatisation too, has distributional consequences. It may
favour certain groups (within a policy) at the cost of others. The losers arc likcL to
organic against privatisation particularly if it covers only a small group. I'he
termination of certain consumer subsidies or import tarrifs can also mobilize the
concerned groups against the reforms. As such, the beneficiaries of the status quo may

246
jeopardise the privatisation move before the future beneficiaries arc able to organi/.e
themselves.
In many developing countries including India privatisation is likely to pose more
problems. Infected with ethnic religious or regional tensions, it may not be possible to
allow certain groups to reap economic or political gains out of privatisations, For
instance in Kenya the Kikuyu or Asian business groups arc not likely to be allow a1 to
buy public assets. In Cameroon, there is a general apprehension of the Bamik kcc
dominance. If we take the Indian case, the reservation in Government Job is prov tied
to the backward people for their upliftment but with the Public sector as going
concern there is marked reduction in Government Jobs, Now they arc protesting,
against privatisation and demanding for the reservation also in Private Sector Jobs. In
South Africa too the privatisation process is seemed by anti blacks. So in some way
Disinvestment / Privatisation is creating a social problem too.
Privatisation has been very slow, uneven and plauged with unforeseen obstacles.
Some of the problems have arisen for not understanding the concept of privatisation
adequately. Others have arisen due to the lack of the necessary pre conditions for
privatisation to succeed and some others have arise due to lack of adequate
preparatory work and the efficient management. Without a well thought out plan and
action program the privatisation more cannot yield the desired results. Dehjani
Chowdhcry has pointed out three reasons for slower privatisation activities in
developing countries, as compared to advanced countries. First, the motivation for
divestiture in a developing country is very different from that an Industrial society.
Secondly, the availability of modalities of privatisation or divestiture arc not the same
in the western industrialized societies as in the developing countries. The i.DC
markets arc lean and potential buyers are few in number. T hirdly, the economic policy
environment in the two sets of countries is very different and it is much less
conductive to privatisation in LDCs. These three issues related to privatisation in
developing countries are worth noting in the Indian context.

247
FOCUS ON IMPORTANT ISSUES OF DISINVESTMENT

1. Government of India’s Disinvestment decisions and Stock Markets

Stock markers arc highly volatile. They have shown their sensitivity towards whether it is
11th September incidence of attack on World Trade Centre in New York it is attack on
Parliament in New Delhi on 13lh December, 2001. Even it is observed that market \ulue
of listed PSU shares have responded to Government of India’s Disinvestment Decisions.
A PSU index of 34 listed Public Sector undertaking is established by the Bomba} Stock
Exchange (BSE) on June 2001. The value of PSU index and their market capitalisation
have been minutely marked and found the above said fact. A table6.2 is given here u nidi
reveals some more fact

Tabic 6.2: Performance of Listed PSUs: Market Capitalisation

Date BSE-PSU PSU Total BSE % PSl' Iota

Index BSE
April 2, 2001 934.09 97501.33 560617.39 17.3%
.Tan 8, 2002 932.32 96062.63 " 556551.62 17.26",
July 15, 2002 1699.74 170375.17 645774.25 26.38",
Between increase 77.3% 16%
08/01/02-15/07/02 (Rs. 74312.54 (Rs. 89222.63
Cr) Cr)
Oct 1,2002 1370.98 137421.11 565778.89 24.29%
Between decrease 19.37 12%
15/07/02-01/10/02 (Rs. 32954.06 (Rs. 79995.36
cr) cr.)
Source: Bombay Stock Exchange, 2002.

Observations
1. On 2nd April, 2001 and 8th Jan. 2002 the % of PSU market cap to iota!

BSE market cap and the BSE-PSU index was almost the same.
2. There was a rise in market cap of PSU shares February 2002 onwards.
(Due to Big disinvestments in VSNL, IBP, TIXL, Maruti and IPCI. which
sowed Governments seriousness towards the process).
3. On 1st October 2002 the index and the market cap BSE-PSU and the total
BSE was at its lowest due to uncertainities in Governments decisions
regarding certain disinvestments.

248
Table 6.3: This tabic shows the high percentage of decline in the share prices of those
companies in which disinvestment decision was deferred.
Company Name Market Price on Mkt. Price (as on % Decrease
01/04/02 (Rs. pro 01-10-02) Rs. per
share) share
BPCL 338.5 175.95 48
MP'CL 312.95 172.45 44.89
Source: Bombay Stock Exchange,2002.
Market price of shares of BPCL was 338.5 Rs. per share as on 1 April 2002 but dechncd
to Rs. 175.95 per share as on 1st October, 2002. There is market decrease in value of
shares by 48%. Same is the case with HPCL the value of its shares as on 1 April. 3002
was Rs. 312.95 per share whereas it was only Rs. 172.45 on 1 October 2002. the \.ilue
declined by 44.09%.

Table 6.4: this table shows particular increase in the share prices of those companies
which under disinvestment

Company name Market Share Price Market Share Price as % increase

as on Jan. 8,2002 on July 15, 2002 (Rs.
(Rs. per share) per share)
Madras Fertilizer Ltd. 3.5 T3.2O 277
Engg. India Ltd. 80.15 T74.55 367
Balmcr Lawric Ltd. 23.85 97.90 310
Hindustan Organics
Chemicals Ltd. 7/25 "22.45 " 209
Shipping Corporation 31.55 86.20 173
on India
Hindustan Machine 4.50 28 HO" 531
'fools
Total 150.80 622.70 313

Source : Bombay Stock Exchange,2002.

249
Stock Market Capitalization and Trading: World Scenario
II is very that Privatisation has major impact on capital markets. A table given here
describes the growth in the value of shares traded on the world's stock exchanges
from 1983 to 1999.
Table 6.5: The growth of World stock market capitalization and trading volume. 1983-99

Aggregate market capitalization jind trading volume in $US millions

1983 1986 1989 1992 1995 1998 1999
Market
Capitalizaiton
Developed
countries 3301117 6387234 10957463 9921841 15842152 24530692 32829 174
United states 1898063 2636598 35025686 4485040 6857622 12926177 1661'162
Japan 565164 1841785 4392597 2399004 3667292 2495757 4554886
United Kingdom 225800 439500 826598 927129 1407737 2372738 2855 i5l
Developing
countries 83222 135056 755210 1000014 1939919 1908258 2181899
'Total World 3384339 6513290 11712673 10921855 17782071 26519773 3500'V'3
World, ex US 1486276 3876692 8206987 6436815 10924449 13593596 1 836 Dll
US as % of
world 56.1 40.5 29.9 41.1 38.6 48.7 •r .5
Trading volume
**
Developed
countries 1202546 3495708 6297069 4151573 91698761 20917462 3 5 1 8 '632
United stales 797123 1795998 2015544 2081658 5108591 13148480 1999 1 139
Japan 230906 1145615 2800695 635261 1231552 948522 18975 5 1
United Kingdom 42544 132912 320268 382996 510131 1 167382 3'99381
Developing
countries 25215 77972 1170928 631277 1046546 1956858 22'20891
Total World 1227761 3573680 7467997 4782850 10216307 22874320 37508523
World, ex US 430638 1777682 5452453 2701192 5107716 9725840 17515084
US as % of
world 64.9 50.3 27.0 43.5 50.0 57.5 5 7.3
Sources: Data sources : 1983-98, the World Bank’s Emerging Markets fact book (various
issues): 1999 data from Statistics section of the International Federation of Stock Exchange.
* Year and values, translated from local currencies into US$ at the contemporaneous
exchange rate.
** Total value of all trades executed daring the year.

Explanation - The period of sixteen years i.c. from 1983-1999 is a period of npid
growth in the capitalization of markets in every country except Japan, which suflcied a
four year, 70 percent decline in total market capitaliation after reaching a value of s l.-l
trillion in 1989. At year end 1999, Japan's market was eight times as valuable in dollar
terms (and less than four times as valuable in yen terms) as it was in 1983. By contract,
total world market capitalialion increased over tenfold (to $35.0 trillion) between 983

250
and 1999, and the total capitalization of the U.S. market increased almost nine Ibid (I om
$1.9 trillion to $ 16.6 trillion) over the same period. The growth in markets outside the
United States was even greater. It is also in these markets that privatization's impact has
been greatest, since there have been only two significant PSHs in the United States in the
modern era (Conrail in 1987 and U.S. Enrichment Corporation in 1999). Between 1983
and 1999, the total capitalization of non-U.S. stock markets increased from $1.49 trillion
to $18.36 trillion. The total market capitalization of developing country stock exenanges
increased by 26 times during these sixteen years, even after declining significant I \ Ibim
1997's peak value of $2.5 trillion to $2.2 trillion in 1999.
Though the rise in market capitalization has been impressive, trading volumes hue
increased even more. The total value of shares traded worldwide between 1983 and 1 099
rose from $1.2 trillion to more than $37.5 trillion. As before non-US markets experienced
the greatest increases. The value of shares traded on markets in developing countries • >sc
from $25 billion in 1983 to more than $2.3 trillion in 1999. This rise in market liquidity
was probably due in large part to the increasing popularity of "emerging market"
investing among western investors, particularly institutional investors such as pension
and mutual funds.
2. Disinvestment and Employment:
Recent privatisations have shown that the fears of losing jobs arc totally unfounded.
Of a total workforce of about 350 million in this country, the public sector (TSl-s
employee only about 2 million. During the last 10 years, without any privatisation or
strategic disinvestment, this workforce has reduced from 2.18 million in 1991-9? to
1.74 million in 1994-2000, on account of economic pressure. Privatised company
have not retrenched a single person. In the process of restructuring, some of t lese
companies are giving VRS to their employees, at terms, which are normalls better
than the government VRS. Very often additional recruitment also takes piaco in
privatised companies and the wages arc increased. To give an example, wages have
been increased by an average of Rs 1,600 per employee in Modern food industries. In
BALCO, wages had not been increased after April 1, 1999, even though a revision
was due. In spite of loss of about Rs 200 crore due to strike, an cx-gratia pa) mem of
Rs 5,000 was made to all employee and a long term wage agreement between prisate
management and employee for a period of five years, which guaranteed a benef i of
*

20 percent of basic pay to each employee, besides increase in a number of allowances.

251
What is significant is that barring the organised private sector cmploymcnl 1 e\ els
were stagnant in the 1990s. As Table given below, shows, there has been a consistent
decline in absolute employment level for both public sector and private sector since
1998.Over the period 1998 to 2003 the employment in public sector fell by 8.38 lakhs,
while in the private sector it fell by 3.27 lakh. .The total decline of 11.05 iakh
represents approximately 4 percent of the workforce in the organised sector.
We will now study the effect of the market structure on employment. To do this the
employment in disinvested competitive and monopoly enterprises over the pc hod
1981 to 2000 were studied and are shown in Tablel3. The table shows that the
employment declined in the post reform period for the complete sample of 28
enterprises (manufacturing) as well as for the enterprises operating in competitive and
monopoly. However, the rate of decline was much higher for enterprises operating in
a competitive environment. In these SoEs, employment decreased from 4,58.885 to
3,72,15 i.e. a decline of more than 86,000 emplyees ovc the 10-year period. 1 his
amounts to an average decrease of more than 8,000 employees per annum. Since there
were 19 Solis operating in the competitive sector, this amounts to an average decrease
of 456 employees per SoEs in the competitive sector. On the other hand, the number
of employees in the monopoly enterprises decreases from 1,31.762 to 1,24.501 over
the same period. This total decrease of 7,261 employees in the 10-year period
amounts to an average decrease of 726 employees per annum. Since there were line
Solis in the monopoly sector, this amounts to an average decrease of onl\ 80
employees per SoE.
We will now discuss the break up of the level of employment in 240 SOlis in terms of
employment in the disinvested and non-disinvested SOEs for the period from 198 i to
2000. The dccreae in employment for the disinvested SoEs over the corresponding
period was from 6 lakh to 5.1 lakh. The employment in non-disinvested SOlis came
down from 15.8 lakh to 13.5 lakh over this 10-year period.
To conclude, employment in central SOEs did decline in the post-reform period.
However, the decline in the disinvested enterprises was no greater than the overall
decline. Further, the decline in employment was more closely linked to the market
structure in which the enterprises operated than to the structure of owner ship. The public
sector unfriendly policy stance and inadequate budgetary support also led to lowered
employment.
252
Tablc6.6: - Employment in organised public and private sector (lakh)
Year Public Sector Private Sector Grand total
1972 112.10 67.70 179.80
1982 159.50 75.50 235.00
1990 187.72 75.82 263.54
1991 190.57 76.76 267.33
1992 192.10 78.46 270.56
1993 193.26 78.51 271.77
1994 194.45 79.30 273.73
1995 194.66 80.59 275.25
1996 194.29 85.12 279.41
1997 195.59 86.86 282.45
1998 194.18 87.48 281.66
1999 194.15 86.98 281.13
2000 193.14 86.46 279.60
2001 191.38 86.52 277.90
2002 187.73 84.32 272.05
2003 185.80 84.21 270.01
Percent Growth
1972-82 42 12 31
1982-92 20 4 15
1992-02 -2 7 1
1998-03 -4 .4 4

Source Economic survey, 2004-05.

Tablc6.7: - Employment in disinvested competitive and monopoly SOHs.

Year Employment in Employment in Total Employment
disinvested disinvested in disinvested
competitive SOEs monopoly SOEs SOEs
1981-82 411849 89409 501258
1991-92 455805 133025 588830
1992-93 454263 132050 566313
1993-94 440317 131841 572158
1994-95 432482 129507 561989
1995-96 424994 127617 552611
1996-97 415492 126333 541825
1997-98 404490 125883 530373
1998-99 394551 125117 519668
1999-00 372150 124501 496651
Average decline in employment 456 80 335
per SOli per annum since 1991

Source - Data collected from various issues of PESurvey.

253
The table6.8 reveals that the total workforce in Central Public Sector Enterprises has
come down from 19.21 million on 3l’st march 92 to 18.5 million on 31 march 03. This is
mainly due to economic pressures.
Table 6.8: The given table reveals another fact
1990 2000
GOI____________ 3A 3.3
State Govt__ 7.0 7.5
Municipal iti cs___ 2.2 2.3
Quasi Government 6.2 63
Private 7.6 8.6 '

Total 26.4 28.0

Source: Economic survey, 2001-02.

The above table tells the data of employment level during 1990 and 2000. Except in case
of organised private sector, employment levels were stagnant in the 1990’s. Of the total
1.6 million jobs were added during the period 1 million in the private sector enl) for the
same period. This proves not the government but it is private sector which has provided
more opportunity for livelihood over the last decade.
Another study by NSSO (in year 1997) clears the same point as the Tabic 6.9 show s
Table 6.9: NSSO Statistics,India,2003.
1. Total Workforce in India
Rural 269 million
Urban 86 million
Total 355 million
Total workforce in organized sector
Government 20 million
(includcs-Central / State / Semi Govt. Central / State / Semi Public Sector)
Private 7 million
otal 27 million
Total workforce in CPSE's about - 2 million
Investment supporting retention of this workforce Rs. 274.114 cr. (as on
31.3.01)
From the above table it can be concluded that according to NSSO statistics, the total
workforce in CPSEs is only 2 million. Whereas of the total workforce in India during
1997 of 355 million, the organised sector accounted for 21 million worker.

254
Employee's Protection - Against Retrenchment:
During the last ten years, the workforce has reduced by 6 million without any
Privatisation and the companies privatised till now have not retrenched a single person.
While there arc the cases when the employees arc given more benefits than be I ore
disinvestment in Public sector undertakings. If we take the case of Bharat Aluminium
Company Limited, which was privatised in year 2001, wages had not been increased alter
1999, even though the rivision was due on 7 October 2001, a long term wage agreement
for a period of five years entered into by the management with the employees, which
guaranteed benefit of 20 percent of basic pay to each employee besides increase in the
number of allowances and inspite of loss about Rs. 200 cr, due lo strike an ex-grutia
payment of Rs. 5000/- was paid to all employees.
In Modern Food Industries Limited wages have been increased by an average of ILs.
16007-pcr employee.
Though some of the companies are now in the process of restructuring and these h ive
been undertaken a VRS package. As it is stated in the IV report of the Disinvestment
Commission given the need to remain competitive in a globalised business environment it
is important and necessary that all PSUs continually review their staffing levels and lake
appropriate measures to balance the size of their workforce. An effective VRS can ensure
long term productive employment for a substantial number of residual employees m a
going concern.
In the companies suffering From over staffing a VRS package at least equal to dial
offered by the PSU before privatisation is offered. As a policy, employees are given
shares at discounted rates, even at lower of one third of the strategic sale price or market
price.
Further, to protect the Employee interest certain provisions arc made in the
SHAREHOLDER'S AGREEMENT. Shareholder's Agreement is a very important
agreement. It defines the rights and obligations of both the parties, concerns of
Government on protection of employee's rights, future investment/ business plans and 'he
precautions against assets stripping are generally reflected in it. Regarding empknee
protection, normally following clauses are included -

255
1. The parties envision that all employees of the company on the date hereof s’,mil
continue in the employment of the company, (If there are surpluses, the
Government tries to give VRS/VSS before disinvestment).
2. The company shall not retrench any part of its labour force for a stipulated period
from the closing date. Other than any dismissal or termination of employees of;he
company from their employment in accordance with the applicable staff
regulations and standing orders of the company or applicable law.
3. 'BEST EFFORT' clause is also incorporated in SIIA mentioning the benefits gi\ en
by the Government to the members of SC/ST, physically challenged person and
other socially disadvantaged categories of the society stating that the strategic
partner shall use its best efforts to cause the company to provide adequate lob
opportunities to such persons.

Industrial Dispute Act 1947:

Industrial Dispute Act 1947 also protects the employees in some way or other as c\cn
after the disinvestment its provisions are applicable to the company.
Under the provisions of Industrial Dispute Act, 1947 read with the provisions of
Industrial Employment (Standing orders) Act, 1946 , any change in the service conditions
of the workmen will be governed by the provisions of the law of the land as applicable in
the company prior to the disinvestment. It is not to say that certified standing onler
cannot be changed even prior to the disinvestment by the company management to the
workmen which does not necessarily mean that just by giving a notice, service conditions
may be changed in a manner detrimental to the interest of the workers. If the workers find
that notice envisages change in working conditions detrimental to their interests lhc\ can
immediately raise an "Industrial Dispute" before the Appropriate Authorities defiled
under the Act.
Arbitrary / Closure of an Undertaking:
According to this the company management before or after disinvestment is not free to
close down any part of the company at their sweet will. The closure is governed b\ the
law of land and so far the existing provisions of Industrial Disputes Act arc concerned,
"genuineness and adequacy of the reasons stated by the employer" and "the interests of
the general public and all other relevant factors have to be examined by the appropriate
Government and for doing that the Government has to give a reasonable opporltmit'. of
256
hearing to the employer and workmen and the persons interested in such closure", ll
means that unless company management will not be competent to close down any
undertaking of the company even after disinvestment there arc protections available
under the act against arbitrary closure of any undertaking of the compam after
Disinvestment.
Functional Director :
Regarding Functional Director, it is required that they resign along with the complete
Board as per requirements of closing of the transaction of strategic sale. These whole
time Directors may, however be renominated by the strategic Partner and such provisoes
arc made in the share purchase Agreement. However, if any whole lime director (s).
whose resignation is accepted in the Closing board Meeting, is not nominated to the
Board by the purchases or is not employed by the company on terms & conditions
mutually acceptable to the purchaser and such whole time dircctor(s), which arc no less
favourable than the terms and conditions of employment of such whole lime director Is),
before the closing date, then such whole time director(s) shall be entitled to compensation
from the company that is the equivalent to amounts that are the higher of:
i) Remuneration for the balance period remaining of their term of employment
under their respective employment contract(s) with the company ; or
ii) Remuneration as provided under their respective employment contracts for a
period of six months.
In any case, Functional Directors are contractual appointees and after termination of
contract, they arc entitled to terminal benefits, leave encashment, gratuity etc. as per the
rules of the company.

3. Mode of Disinvestment adopted by the GOI:

Though there are many modes of disinvestment but to Government of India 'the strategic
sale' suits best as the price realised through the strategic disinvestment is higher. Before
the year 2000 the GOI primarily sold minority shares in Public Sector Companies, bm the
price realised through the sale of shares was very low. IOC, BPCL, IIPCL, GA1IVSNI,
were the companies in which GOI sold its minority shares.
The comparison is shown through the Table of Price earning Ratios of the companies:

257
Table 6.10: P-E Ratios

Sale of Shares Strategic Disinvestment

(1991-99) (2000-2002)

IOC 4.9 BALCO 19

BPCL 5.7 CMC 12
HPCL 5.9 NTL 37
GAIL 4.4 MFIL Very high as earning per
share was negative
VSNL 6.0 (in monopoly LJMC do
days)
PPL do
JESSOP do
IBP 63
VSNL 11 (inclusive of income from
dividend its after the end ol
monopoly)
FIZL ~26
MARUTI 89
IPCL [_58
Source: - Annual Report, 2000-2001, Ministry of Disinvestment, GO I.
Government had earned 19000 cr. during 1991-00, through the sale of minority shares in
Public Sector Companies .At that time many financial institution come forward to pick
the shares, and one of that institution was UTI who lost Rs.5056 cr. over an investment of
Rs. 6403 cr. as it had picked up sizeable number of shares but in number of cases the
prices of shares fall. However later on the loss has decreased to Rs.4284crs.
Advantages of Strategic Sales Option:
After 2000 the government has followed the strategic sales option, due to its some
advantages over other options
• Low cost and less regulation.
• Increased value of residual GOI shareholding.
• Maximises price because of control premium.
• Brings technical / marketing / financial / managerial expertise of the buyer to the
company.
• And its main precedents arc MFIL, BALCO, Vikrant tyres, OPGC etc.

258
4. Legal Issues:
Due to lack of awareness of Disinvestment programm or various other reasons this
programme has seen so many oppositions, resultant a number of lawsuits filed against the
process.
The Given table gives the details -

Table 6.11: Summary of Disinvestment related court cases - (As on 31.12.2002)

1. Total no. of cases filed up to 30.11.2002 - 40

2. ITDC rctalcd cases - 23
3. dotal cases out of40 dismised - 21
4. No. of pending cases - 19
5. Out of pending cases related to ITDC cases
transferred to Supreme Court - 7
The table docs not include cases where the challenge is not to Disinvestment but lo other
aspects like pay revision etc.

Source : Disinvestment Policy Procedure and Progress. Ministn of

Disinvestment,GOI, February, 2003.

5. Performance of PSE’s:
(a.) PSEs profitability
The performance of a very large number of public sector industries is disappointing,
often owing to reasons beyond the management control. Performance is particularly
poor in public sector manufacturing industries. For the period 1990-91 lo 1997-98.
Indian PSUs involved in manufacturing yielded significantly lower profitability than
private firm, as can be seen in Table, in every year the manufacturing PSUs earned on
average negative profit margin, while private firms had healthy positive margins.
Apparently, half of all PSUs are loss-making, according to the department of
disinvestment.
Tablc6.12 - PSEs profitability compared to the private sector PAT/Ncl Sales (percent)
As on march 31’st 1990- 1991- 1992- 1993- 1994- 1995- 1996- 1997-
91 92 93 94 OS 96 97 98
Pure -4.50 -5.30 -5.40 -6.90 -2.30 2.40 -4.30 -3.90
manufacturing
CPSUs
Manufacturing 5.70 4.90 4.90 6.60 9.10 9.00 7.00 6.20
private sector
Source - NCAER Report, 1998.

259
On the other side, in all cost categories, the PSU had higher costs compared to private
firms it depicts in Table. Further more, there is a discernible trend among private
firms to cut costs over time, while the PSUs appear to be unsuccessful in controlling
their expenses. The situation appears to be worsening.

(b.) Real return to investment

There are so many studies on performance of CPSEs. Among them. Joshi and l.ialc
(1994) have attempted to estimate the real rates of return to investment in the public
an private manufacturing sector. Their estimates do not take in to account
technological diversity. Instead, changes in output arc explained as resulting wholly
from investment and changes in the quantity and quality oflabour. Given Tabie5 the
public sector show little change between the two periods, while in both the period the
returns arc extremely low. The record of private sector organised manufacturing, is
much less dismal .the improvement in the efficiency is impressive and probably
brings returns in this sector in line with those that has been achieved in industrialised
country.

Table6.13 - Real return to investment (public & private sector).

1960-61 to 1975-76 manufacturing 1976-77 to 1986-87 manufacturing

Public Private Public Private

rl 2.1 11.1 5.1 22.6

r2 0.1 7.7 3.1 16.7

Source: - Joshi and Little (1994).

260
(c.) Rate of Saving in PSEs
Also the rate of saving in the public sector is very low. In fact savings in the public sector
as a percent of GDP have declined in recent years to negative value as you can see in
Tabic 3.
Table 6.14:- Domestic saving (at current prices)
Item 1993-94 1998 -99 1999 -01 2000 -01 2001 -02 2002 -05 ’OO.l 0 1
1 Gross Domestic 193621 374659 468681 490049 532274 642298 '76420
saving
!.! I louse hold share 158310 326802 404401 452268 513110 574691 hi 1692
1.2 Private Corporate
29866 65026 84329 86142 81076 94269 i14157
sector
1.3 Public Sector 5445 -17169 -20049 -48361 -61912 -26652 4499
2 Net Domestic
110268 206593 286322 292154 314595 409346 522783
Saving
2.1 House hold share 129369 269551 342587 386187 436288 492164 579917
2.2 Private Corporate
12838 21443 35655 30579 22920 31489 46747
sector
2.3 Public Sector -31939 -84401 -91920 - - -

124612 144613 114307 103891

J. Net Capital Flow 4791 18362 21988 8130 -18731 -32010 49552
4. Gross Domestic 859220 174098 193683 208950 227198 246324 176002
Flow 5 1 0 4
5. Rate of gross 22.5 21.5 24.2 23.5 23.4 26.1 18.1
saving
nn -i
5.1 House hold share 18.4 18.8 20.9 21.6 22.6 ZJ.J 11.3
5.2 Private Corporate 3.5 3.7 4.4 4.1 3.6 3.8 1.1

sector
5.3 Public Sector 0.6 -1.0 -1.0 -2.3 -2.7 -1.1 0.3
Source: - Central Statistical Organisation (CSO).

(d.) Surviving on Support:

Leaving the reasons that the PSU is were infant and Government had to support them,
even today they are not able to survive themselves. [In the year 1990-91 the total
budgetary support was Rs. 7075 crs. (including plan and non plan), and just 10 years
later the amount has gone to Rs. 25377]. Even today they need the governmental
support, and government is providing more funds every year for maintaining unvianle
or weak PSUs. This is clear from the table -

261
Tabic 6.15: (Rs. in erorcs
Year Total investment Dividend Budgetary Guarantees Waiver Total liability on
declared loans / l_.Cs/ loans inlt.
in PSUs support govt. on account
other
Penal, inti. orCI's to. (41516)
equity Loan equity loan payment

1997-98 76591 154433~ 3609 3004 4133 5372 556 13065

1998-99 80323 158854 4932 3215 4015 4059" 1769 13058
1999-00 84436 168309 5455 4378 4028 6094 6191 20691
2001-01 89337 184777 8260 4742 4154 14651 1830 25377
Source: Finance Ministry ( 3udgct c ocument), CAG 1 2002)

Through the table it reveals that Total liability on Government on account of Rublic
Sector undertakings was Rs. 13065 cr. in 1997-1998, but in year 2000-2001 it was Rs.
25377 cr. whereas dividend declared by these PSUs was Rs. 3609 cr. in 1997-1998
and in 2000-2001 increased to Rs. 8260 cr. Budgetary support in the form of equity
and loans also went on increasing.

The table shows that despite huge investment in the public sector, the Government is
required to provide more funds every year that go into maintaining of the PSEs and
the extent of drain that the PSEs continue to cause on the exchequer. Written of loans,
conversion of loans into equity, waiver of guarantee, freezing of loan and interest
payments, moratorium on repayment and exemption from payment of taxes arc the
name of the hidden subsidies which the government is bearing in the name of
Reviving or Restructuring the sick PSEs. The given table reveals this fael-

Table 6.16 (Rs. in crorcs)

Since 1992-93 Proposals* approved in the last 3 years Total
upto March 2000 *(23 new proposals
approved)
Fresh infusion of funds 3190 2053 574:'
Loans converted into equity 7630 2720 10350
Loans written off 10126 8285 i 84 1 I
Total amount involved 20946 13058 34104

Plus: Waiver of guarantee fee, freezing of loan/interest payment, moratorium on

repayment, exemption from payment of taxes etc.

Source: Disinvestment: Policy of procedures, Department of Disinvestment. GOI. 201) I.

262
Although a number of rcslructing packages have been announced from time to time by
the government yet of the total operating CPUs as on 31.03.01, which arc 234. 1 11 wore
loss making and 66 were registered with the BIFR.

Another given Table 6.17 below shows the status of 66 PSUs registered with BIFR

(as on 31.12.2001).

Table 6.17

Status No. of companies

Declared no longer sick 3

Dismissed as non maintainable 2

Drafts scheme circulated 13

Failed and reopened 5

Revival scheme sanctioned 10

Under enquiry 9

Winding up notice 6

Winding up recommended 18

Total 66

Source: Disinvestment Policy: Procedures & Progress, Ministry of Disinvestment.

GOT, Feb, 2003.

An illustrative list is given in Table 6.16 below tells about the losses which the PSPs
have accounted though they arc provided several restructuring packages.

263
Table 6.18

No. of PSEs No. of Approx Pack up Net worth P& C A/c

rehabilitation / amount of capital accumulate
restructuring
waiver / fresh d losses on
attempts mode
for revival
funds infused* (31.3.00)

Haldia Fertilizer Project never 1040.49 520.9 -

Project commissioned
Paradcep 1994,2000,2001 568.72 432.65 1.15 -131.5
Phosphates Ltd.
EPIL - 901.44 8 -806.52 -875.99
Hindustan Paper 1994,1996 136.68 691.41 102.28 -5Q5
Corp. I.td.
I-IM'f 2000 347.09 130.5 24.1 -301.93
NEPA 1999 72.15 65.06 -18.8 -I2-1.I
Praga Tools Ltd. 1999 81.06 15.73 -148.88 -185.05
Scooters India Ltd. 1996 661.8 38.38 40.08 \A
Trivcni Structural 1977 & 1986 117.74 21.02 -99.59 -120.61
Tungbhadra Steel 1986 437.87 7.09 7.47 -2.4 :
Product Ltd.
Hindustan Copper 1998 762.16 531.61 5.53 -5-12.6
Heavy Engineering 1972, 75,81,89, 1640.34 448.12 -695.07 -1 152.-11
Corporation 97,1999
Bharat Refractories two revival 61.64 103.9 -66.19 -169.06
packages
approved (July
96 and Jan 99)
I Iindustan cables Jan 99 432.78 411.41 -93.03 -559.74
Hindustan Shipyard Two attempts 470.9 96.81 -969.58 -1071,19
since 1995
Hind Steel Works 1997-99 1469.96 20 -414.43 -5.3 1 ."'O
Const. Ltd.
Indian Drugs and 1993-2002 630.58 116.88 -1095.72 -I 125.21
Pharma Ltd.
Instrumentations referred to BIFR 133.98 24.05 -26.76 -101.3
in 1993
Jcssp and Co. 1986, 1997, 466 49.16 -21 1.2 •302 11
2002
Minning and Allied 1993,76, 1980, 134.5 39.19 -1060 i 05 3.8
Machinery 86 etc
Corporation
Rashtriya Ispat July 93 & May 4509.79 7827.32 3197.97 *461 5.5 1
Nigam Ltd. 98
Total 15077.67 11599.19 -2327.19 ■ 13959.57

Source: BIFR, CAG Report, administrative ministry of the PSU concerned.

* Indicate only one part of rehabilitation packages, which included many other concerssion
as follows. The revival packages include a combination of some or all of the following.

264
(c.) Comparison of Private and Public Sector - Basic - Cost Structure :

In most of the cases and especially with the advent of WTO, it is seen that prixatc
sectors are able to take measures to cut costs. In this concern the PS Iks are met with
limited success. NCAER study report pointed out that “between 1984-85 and 1997-98
whereas the per capita emoluments of the PSE employees have risen at a compound
annual rate of 3.95% in real terms, the real value of sales was 3.51%, which indicates
that the PSE labour force has appropriated disproportionately large factor payments tit
the expense of sales. On the other side, in all cost categories, the PSU had higher costs
compared to private firms it depicts in Table. Further more, there is a discernible trend
among private firms to cut costs over time, while the PSUs appear to be unsuccessful
in controlling their expenses

Tabic 6.19: Comparison of cost structure of manufacturing PSU and private manufacture
firm (As percentage of sales)

As on 31st 1990 1991 1992 1993 1994 1995 1996 1 997

March -91 -92 -93 -94 -95 -96 -97 -98
Power and fuel /
net sales
PSUs 10.3 10.9 12.7 13.5 12.0 13.3 14.9 19.5
Private 6.8 7.0 6.9 6.6 6.2 6.5 6.6 5.0
Wages/ Net
Sales
PSUs 18.6 17.3 18.1 17.7 17.6 19.2 19.1 23.3
Private 8.9 8.8 8.6 8.1 7.9 7.9 8.2 6.5
Interest/ Net
Sales
PSUs 8.8 9.9 11.3 11.5 9.0 9.1 9.8 1 1.7
Private 6.0 6.7 6.0 5.2 5.2 5.8 5.9 4.7
Notes:-Cosls are given as a percentage of sales. The Petroleum PSU arc excluded.
Sources:- NCAER Report
The table reveals that the cost structure in PSEs is increasing and their performance is
quite poor as compared to private sector with regard to various cost parameters. T he
table shows that whereas the private manufacturing industry was able to take
measures to cut costs, the public sector could not take such measures, perhaps o\\ ing
to the nature and compulsions of its ownership.

265
Table6.20:- Privatisation - Some Empirical Studies

Study Sample description, study period Summary of findings and

and methodology conclusions
1. Meggionso, Compares 3 year average post Documents economicalh* and
Nash, Van privatization performance ratios to 3 statistically significant post-
Randenborgh year pre-privatisation values for 61 privatisation increases output
1994 firms from 18 countries and 32 (real sales) ocraling cfficienc).
industries from 1961-89. Tests profitability, capital
signi ficance of median change in post investment spending and
versus pre-privatisation periods. dividend payment, significant
Binomial tests for % of firms changing decrease in leverage, no
as predicted evidence of employment
declines, but significant
changes in firm directors.
This stud was done on performance changes for firms Privatised via Public Share
offerings: Non transition Economies.
2. Claessens Studies effect of management turnover Finds that the appointment of
and Djankov on change sin financial and operating new manager is associated
1999 ' performance of 706 privatised Czech with significant improvements
firms over the period 1993-97. in profit margins and labor
Examines changes in profitability and productivity, particular!)' if the
labour productivity new managers arc selected by
private owners. New managers
appointed by the National
Property Fund also improve
performance through not b\ as
much
This study was of Privatization in Transition Economies : Central and Eastern
Europe.
3. Le Porat Using date from 92 countries examines Extensive state ownership.
Lepcz dc whether state ownership of banks especially in poorest countries.
Silanes, and impacts financial system development retards financial system
Shlcifcr 2000 and growth rates of economy and development and restricts
productivity economic growth rates inosdy
due to impact on productivii\
4. Boardman Examines economic performance of SOI is and MEs arc
and Vinning 500 largest non-US firms n 1983 significantly less profitable
1989 classified by ownership structure as and productive than prnate
SOE, private or mixed (ME) firms, MEs arc no more
Employees 4 profitability ratios and 2 profitable than pure SOFs so
measures of X-cfficicncy full private ownership is
required to gain efficiency.
These two studies was done on Public Vs Private ownership.

Source: Journal of Economic Literature Vol. XXXIX (June 2001). From stale to
Market: A survey of Empirical studies on Privatisation by William L. Mcgginson and
Jeffry M. Metier.

266
Conclusion:

Despite the fact that disinvestment is one of India's recent success, the process and
its outcome, indicate many weaknesses and drawbacks.

Public sector companies arc being sold only to the indigenous entrepreneurs with
the result that the process of disinvestment of PSE is not bringing to much foreign
investment, and in that sense it is not adding much to globalization.

In terms of the recommendations of the disinvestment commission of lb%.

priority for sale of PSEs was to be given to loss making units. But in recent \ears
this recipe has been ignored and all kinds of companies are being sold to the
private sector in a rush without following any proper sequencing on tfe basis of
the given criteria of performance and efficiency.

The enormous amount of money that is being unlocked through the sale of public
sector undertakings is filling the coffers of the government without being utilised
for social development in terms of social provisions, say, in the Held of human
resource development and also in terms of developing the basic infras.ructure in
relatively backward regions of the country. Infact the process of disinvestment and
privatisation has to be effectively linked with the provision of social needs of the
country.

There is good amount by political controversy around disinvestments which perhaps

is motivated by the self-interest of the political entrepreneurs and their linkages with
people who matter. Sale of public sector undertakings provides a good pretext to such
people to get more involved in 'rent-seeking' and 'directly unproductive profit seeking'
activities. There is, therefore, an urgent need to check privatisation from being
hijacked by such unscrupulous political entrepreneurs.

267