Paper 3: Strategic Management

Module: 37, Strategic Management in Public Sector

Principal Investigator Prof. S P Bansal

Vice Chancellor
Maharaja Agrasen University, Baddi

Prof YoginderVerma
Co-Principal Investigator Pro–Vice Chancellor
Central University of Himachal Pradesh. Kangra. H.P.

Dr. Anil Gupta

Paper Coordinator The Business School
University of Jammu, Jammu

Tarun Kumar Vashisth

Content Writer University Business School
Panjab University Regional Centre, Ludhiana, Punjab
 Items Description of Module
Subject Management
Name
Paper Name Strategic Management
Module Title Strategic Management in Public Sector
Module Id Module No. – 37
Pre- Business Environment, Strategic Management
Requisites
Objec Figure 1 Public Sector Undertakings in India and to study the
transforming global world
(Source:http://ceschandigarh.com/course/psu)
Keywords Public Sector Undertakings, PSUs in India,

QUADRANT-I

Module – 27 Ethics, Corporate Social Responsibility And Strategic Management

1. Learning Outcome
2. Introduction
3. Evolution of Public Sector Undertakings in India
4. Classification of Public Sector Undertakings in India
5. Objectives of Public Sector Undertakings
6. Role of Public Sector Undertakings
7. Disinvestment in PSUs, a strategic move
8. Approaches to disinvestment
9. Is it the right time to disinvest PSUs
10. Limitations of Public Sector Undertakings
11. Summery

1. Learning Outcome:
After completing this module the students will be able to understand:
 Concept and classification of Public Sector Undertakings
 Evolution and objectives of Public Sector Undertakings
 Role of Public Sector Undertakings
 Disinvestment perspective and approaches in Public Sector Undertakings
 Limitations of Public Sector Undertakings

2. Introduction

Public Sector Undertakings (PSUs) lay a strong foundation for the industrial development of a
country. The public sector in India has been less concerned with making profits and has almost
singlehandedly contributed to the overall development of India in diverse strategic and non-
strategic areas. Hence, PSUs play a key role in nation building activities, which take any
economy in the right direction.

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 In India, the government- owned corporations are
termed as Public Sector Undertakings (PSUs. In a
Public Sector Undertaking, majority (51% or more) of
the paid up share capital is held by central government
or by any state government or partly by the central
governments and partly by one or more
governments. state
Figure 1

PSUs provideshareholder)
controlling leverage to (Source:http://ceschandigarh.com/course/psu) the
to Government
ntervene i the
(their economy directly or indirectly to achieve the desired socio-economic i objectives andn
long-term goals.

As India has been an agriculture dominant economy, Public Sector Banks (PSBs) have played a
crucial role in pushing rural India’s economy towards unparalleled progress through emphasis
on agriculture and alide cottage industries.. Moreover, PSUs play a substantial role in the rural
development by providing basic infrastructural services to citizens.

The Comptroller and Auditor General of India (CAG) is the

agency that audits government
government companies, CAG has
and to decide the manner in which
of the companies.
Figure 2 companies. In concern with
(Source:https://www.j the power to appoint the Auditor
avatpoint.com/cag-
full-form)
the Auditor shall audit the accounts

3. Evolution of Public Sector Undertakings in India

India was primarily an agricultural country with a weak industrial base, when India got
independence in 1947,. After independence, India grappled with grave socio-economic
problems, such as high disparities in income and high levels of unemployment, regional
imbalances in economic development and lack of trained and competent manpower, weak
industrial setup, inadequate investments and infrastructure facilities, etc.

The consensus was in favour of rapid industrialisation of the economy to provide large scale
economic development and improvement in living standards. Bombay plan stressed upon the
requirement of government intervention and regulation. In 1948, the first Industrial Policy
Resolution laid down broad contours of the strategy of industrial development. Thereafter,
the Planning Commission was established in March 1950 and the Industrial (Development and
Regulation) Act, 1951came into force with the objective of empowering the government to take
necessary steps to regulate industrial development. Jawahar Lal Nehru, the then Prime
Minister, advocated the mixed economy as the model for economic development of India. He
believed that the establishment of basic and heavy industry was fundamental to the

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 development and modernisation of the Indian economy. India's second five year plan (1956–
60) and the Industrial Policy Resolution, 1956 emphasised the development of public sector
enterprises to execute Nehru's national Industrialization Policy.

Figure 3
(Source:http://www.namastekadapa.com/2016/09/th
e-second-industrial-policy-resolution.html)
The Industrial Policy Resolution 1956 classified industries into three categories on the basis of the role
played by the State.

 The first category (Schedule A) encompassed industries whose future development would
be the sole responsibility of the State
 The second (Schedule B) category encompassed Enterprises whose development would
principally be carried out by the State but private participation would also be allowed and
encouraged for supplementing the efforts of the State
 The third category encompassed the remaining industries, left for the private sector

The major reasons for setting up of PSUs were to accelerate the growth of core sectors of the
economy; to serve the strategically important sectors, and to generate nation-wide
employment and income. Innumerable "sick units" were taken over from the private sector. 14
major banks were nationalised in 1969, and an additional 6 in 1980. The Industrial Licensing
Policy 1970 put certain restrictions on undertakings under to auspices of large industrial
houses, defined on the basis of assets exceeding Rs 350 Million. In 1973, the definition of large
industrial houses was adopted as defined under The Monopolies and Restrictive Trade Practices Act
(MRTP), 1969- and included companies whose assets exceeded Rs 200 Million. With the passage
of time in 1960s, 70s and 80s India witnessed the entry of the public sector into new fields like
manufacturing consumer goods, consultancy, contracting and transportation etc.

Government-led industrial policy, with significant restrictions on private enterprise, was the
dominant pattern of Indian economic development until 1991. After the 1991 economic crisis,
the government chose the path of globalization, Liberalization and Privatization and
began disinvesting its ownership in several PSUs to raise capital and privatised companies
facing poor financial performance and low productivity.

4. Classification of Public Sector Undertakings in India

Public Sector Undertakings (PSUs) can be classified as follows:

(1). Public Sector Enterprises (PSEs),

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(2). Central Public Sector Enterprises (CPSEs),

(3). Public Sector Banks (PSBs).

The Central Public Sector Enterprises (CPSEs) are

further classified into 'strategic' and 'non-strategic'.
Areas of strategic CPSEs are:as follows:

 Arms & Ammunition and the allied items of Figure 4

defence equipments, defence air-crafts and (Source:http://www.archive.india.gov.in/spotl
warships ight/spotlight_archive.php?id=78)

 Atomic Energy (except in the areas related to the operation of nuclear power and
applications of radiation and radio-isotopes to agriculture, medicine and non-strategic
industries)
 Railways transport.

All other CPSEs are considered as non-strategic.

SECTION 8 COMPANIES

Public Sector Enterprises having objects to promote charity, commerce, science, art, religion or
any other useful purpose and not having any profit motive whatsoever can be registered as
non-profit company under section 8 of the new Companies Act, 2013.

This section empowers the Central Government to grant a license directing that such an
association may be registered as a company with limited liability, without the addition of the
words `Limited' or `Private Limited' to its name.

Such companies are also known as the Non-profit or 'No Profit - No Loss' companies.

MAHARATNA/NAVRATNA/MINIRATNA STATUS FOR PUBLIC SECTOR UNDERTAKINGS

Figure 5
(Source: https://bsnljtoje.com/navratna-miniratna-maharatna-companies-in-india/)

The status of Maharatna, Navratna, Miniratna to CPSEs is conferred by the Department of

Public Enterprises to various Public Sector Undertakings. These prestigious statuses provide
them the greater autonomy to compete with the conglomerates in the global market.

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Maharatna

To qualify for the Maharatna status, a company should

have an average annual turnover of Rs 20,000 crore
during the previous three years and the average annual
net worth of the company should be Rs 10,000 crore. Figure 6
(Source:https://financesoeasy.wordpress.com
/2012/05/31/difference-between-maharatna-
The Maharatna status empowers a company to expand
miniratna-and-navratna/)
its operations and emerge as global giant. The status
empowers the company’s board to take investment decisions up to Rs 5,000 crore without
taking government approval. The Maharatna companies are free to decide on investments in a
project up to 15% of their net worth, with an absolute ceiling of Rs 5,000 crore.

Navratna

The CPSEs fulfilling the following criteria are eligible to be considered for grant of Navratna
status:

 A CPSE having Schedule 'A' and Miniratna

Category-1 status.
 A CPSE having at least three 'Excellent' or
Figure 7 'Very Good' MoU ratings in the previous five years.
(Source:https://www.slideshare.net/vineshmba
/navaratna-companies)
The Navratna status empowers a company to invest
up to Rs. 1000 crore or 15% of their net worth, whichever is lower, on a single project
without taking government approval. These companies can spend up to 30% of their net
worth with an absolute limit of Rs. 1000 cr. In a year. A Navratna company also enjoys
the freedom to enter into a joint ventures, to form alliances and to establish subsidiaries
abroad.

Miniratna Category

For Miniratna category I status, a CPSE must be profitable in the last 3 years continuously, the
pre-tax profit must be Rs. 30 crores or more in at least 1 of the 3 years and must have a positive
net worth. For category II, the CPSE must be profitable for the last 3 years continuously and
must have a positive net worth.

A Miniratna company can enter into joint ventures, set up subsidiaries and overseas offices
after satisfying certain conditions. This designation applies to PSEs that are profitable
continuously for the previous 3 years or earned a net profit of Rs. 30 crore or more in one of
the 3 years.

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 Miniratna Category-II CPSEs
Category II Miniratna companies have the autonomy to incur the capital expenditure up to Rs.
300 crore or up to 50% of their net worth whichever is lower, without government approval

5. Objectives of Public Sector Undertakings

The Public Sector Undertakings have been setup to achieve the following objectives:

1. To promote rapid and sustainable economic development through creation and

expansion of infrastructure
2. To generate and invest financial resources for development
3. To promote redistribution of income and wealth to diverse section of the society
4. To create employment opportunities in the tune to irradicate poverty and bring in
prosperity
5. To promote balanced regional growth
6. To encourage the growth and development of cottage,, small-scale and ancillary
industries
7. To maintain the balance of payments

6. Role of Public Sector Undertakings

The public sector plays a vital role in the economic development of any nation in general. Public
sector is considered a powerful engine of economic development and one of the most
important instruments of self-reliance and sustainability. Public Sector helped India emerge as a
large economy on the world map. The major contributions of public sector enterprises to a
country's economy may be discussed as follows:

1. Filling the Gaps in Capital Goods: At the time of independence, crucial gaps were there
in the industrial infrastructure of India, specifically in the area of heavy industries such
as iron & steel, heavy machinery, exploration and refining of oil, heavy Electrical
equipment, chemicals and fertilizers, defense equipment, etc. Public sector helped to fill
up these big gaps. The production of strategic capital goods helped build the basic
infrastructure requisite for the rapid industrial growth. Therefore, the public sector has
almost singlehandedly widened the industrial base of the country.
2. Employment: Public sector in India has created zillions of jobs to tackle
unemployment. Public sector accounts for around two-thirds of the total employment
in the organized sector in India. The public sector has protected the employment of
innumerable people by taking over sick units.. Public sector has also contributed
towards improving the living and working conditions of workers by setting
benchmarks.

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 3. Balanced Regional Development: Public sector undertakings have set up their plants
in backward and undeveloped parts of the country. These areas were in want of basic
civic facilities and industrial infrastructure like electricity, wholesome water supply and
progressive townships. Public enterprises have been developing these facilities and
bringing about a major transformation in the socio-economic life of the people in these
areas. Steel plants of Bhilai, Rourkela and Durgapur are few examples of the
developing backward regions by the public sector undertakings.
4. Contribution to Public Exchequer: Public sector undertakings have been making
substantial contribution to the Government exchequer through the payment of excise
duty, corporate taxes, custom duty, etc. In this way PSUs help mobilize funds for
financing the schemes for the planned development of the nation. Of late, the
contribution from the PSUs has increased considerably.
5. Export Promotion and Foreign Exchange Earnings: The State Trading Corporation, the
Minerals and Metals Trading Corporation, Hindustan Steel Ltd., the Bharat Electronics
Ltd., the Hindustan Machine Tools, etc., have done tremendously well in export
promotion. The foreign exchange earnings of the PSUs have been rising consistently.
6. Import Substitution: Some PSUs were started specifically to produce goods that were
formerly imported and thus have saved foreign exchange. The Hindustan Antibiotics
Ltd., the Indian Drugs and Pharmaceuticals Ltd., the Oil and Natural Gas Commission,
the Indian Oil Corporation Ltd., the Bharat Electronics Ltd., etc., have saved foreign
exchange by way of import substitution.
7. Research and Development: PSUs have undertaken research and development
programs in a big way. Public sector has laid strong and wide base for self-reliance and
sustainability in the field of technical know-how, maintenance of sophisticated
industrial plants, machinery and equipment. Through the development of advanced
technologies, PSUs have reduced our dependence on foreign knowhow.

Additionally, the public sector has played significant role in the achievement of constitutional
goals like reduction of concentration of economic power, increase in public control on the
economy, creation of a socialistic society, etc.

7. Disinvestment in PSUs, a strategic move

Typically disinvestment refers to the sale, partly or fully, of a government-owned enterprise by
the govt. We can also define disinvestment as the action of the government (or any organisation),
when it liquidates or sell a subsidiary or any asset. It is also known as ‘divestiture or
‘divestment’. Disinvestment is done in an organisation as a strategic move or for raising funds
for various government needs or for further investments.
In 1991, the New Economic Policy observed the following facts:

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  Most of the PSUs had been making negative rates of return on capital employed.
 Inefficient PSUs had become a drag on the Government’s resources and had been turning
to be a liability.
 The gross domestic product and gross national savings had also got adversely affected by
such low returns from Public Sector Undertakings.
 About 10 to 15 % of the gross domestic savings had been getting reduced because of low
savings from PSUs.

 The levels of profits had been very low in relation to the capital employed.

Figure 8
(Source:https://www.slideshare.net/swarajmishradigital/disinvestment9321537)

The following major factors were found responsible for the abovementioned problems.

 Price policy of PSUs

 Sub-optimal utilisation of capacity
 Problems related to planning and construction of projects
 Personnel Problems and mismanagement
 Lack of autonomy

The problems were sought to resolve by the government by getting out of the non-core and non-
strategic areas and allowing more participation of private sector in such areas. Only core and
strategic industrial sectors were kept solely in the domain of public sector. Through the years
after 1991, public sector undertakings operating in core areas have also been divested for
minority stakes time to time.
Consequently, the Government adopted the 'Disinvestment Policy'. It was identified as a strategic
tool to share the burden of financing the PSUs. The following main objectives of disinvestment
were identified:

 To reduce the burden on the Government

 To improve public finance
 To introduce healthy competition and market discipline
 To fund growth
 To encourage wider share of ownership
 To open the market for non-essential services

8. Approaches to Disinvestment

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 From the perspective of the seller (the Government), there are three basic different approaches to
disinvestments.

Minority Disinvestment: In a minority disinvestment, the government retains a majority stake

in the undertaking, typically greater than 51%, thus ensures management control. The present
policy statement maintains that all disinvestments will only be minority disinvestments through
Public Offers.
Examples of minority sales via auctioning to institutions were Andrew Yule & Co. Ltd., CMC
Ltd. etc. Examples of minority sales through Offer for Sale include issues of Power Grid Corp.
of India Ltd., Coal India Ltd., NTPC Ltd., NHPC Ltd. etc.
Majority Disinvestment: A majority disinvestment is one in which the government, retains a
minority stake i.e. it sells off a majority stake.
Historically, majority disinvestments have been typically made to strategic partners. These
partners could be other CPSEs themselves, a few examples being BRPL to IOC, MRL to IOC,
and KRL to BPCL. Alternatively, these can be private entities, like the sale of Modern Foods to
Hindustan Lever, BALCO to Sterlite, CMC to TCS etc.
Complete Privatisation
Complete privatisation is a type of majority
disinvestment wherein whole of the stake (100%
control) of an undertaking is passed on to a
buyer. Examples include 18 hotel properties of ITDC Figure 9
and 3 hotel properties of HCI. (Source:http://www.finrockz.com/articles/disi
nvestment/)
In loose terms, Disinvestment and Privatisation are used
interchangeably. Still, there is a subtle difference between the two. Disinvestment may or may
not result in Privatisation. When the Government retains 26% of the shares carrying voting
powers while selling the remaining to a strategic buyer, it would have disinvested, but would not
have ‘privatised’, because with 26%, it can still stall vital decisions for which generally a special
resolution (three-fourths majority) is required.

9. Is this the right time to disinvest PSUs

With the equity markets having come off their historic lows in March 2009, the equity markets
have pretty consistently been achieving higher levels.
However, this should not be of any concern to the
Government as PSUs would always find plenty of investors
if the pricing is reasonable. PSU disinvestment of 10% as
per the Government's announced investment policies and Figure 10
intentions, at attractive prices to retail investors, could ensure (Source:http://www.360logica.com/bl
a strong message to the investment community about the og/when-is-the-right-time-to-rewrite-
an-application/)
Government's resolve to continue with reforms. However,

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 FIIs and international economists don’t find this kind of disinvestment very enthusiastic because
government still divests a minority stake and controls and thus the decision making lies with the
government. It doesn’t help much to improve the productivity

10. Limitations of Public Sector Undertakings

Despite their impressive role, Public enterprises in India suffer from several problems and
shortcomings. Some of these are described below:

Poor Project Planning: Investment decisions and project execution in many PSUs are not
based upon proper analysis of demand and supply, cost benefit analysis and technical

Figure 11 (Source: http://slideplayer.com/slide/5070929/)

feasibility. Lack of a rational criteria and flaws in planning have caused undue
delays and inflated costs in the commissioning of projects. Many projects in the public
sector have not been finished within time deadlines.
Over-capitalization: Due to ineffective financial planning & control, and easy money from

Figure 12(Source: https://www.youtube.com/watch?v=iLeJkm5A5-g)

the government, many of the public enterprises suffer from over-

capitalization. Such over-capitalization results in high capital-output ratio and wastage of
scare capital resources.
Excessive Overheads: PSUs incur heavy
expenditure on overhead such as townships, schools,
hospitals, etc. In many cases such expenditures
Figure 13
amount to 10% of the (Source: http://www.itworks- total project cost. Repeated
expenditure is required inc.com/2015/11/18/delegating- for the maintenance of such
expenditure-approvals-
welfare facilities. Such streamlining-acquisition-while- amenities are desirable but
the expenditure mustn’t ensuring- be unreasonably high.
Overstaffing: Human Resource Planning in PSUs has not been effective so a good number
of public enterprises have excess manpower. Recruitment is not based on sound labour
demand forecasting. On the other hand, posts of CEOs etc. remain unfilled for years
despite the availability of competent personnel.

Figure 14
(Source:http://biznestblogger.blogspot.in/2014_05_01_archive.html

Under-utilisation of Capacity: In the absence of defined goals of

production, effective production planning and control and proper forecasting of future needs

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 many PSUs have failed to make optimal use of their fixed assets. In many cases productivity is
low because of improper materials management and/or poor inventory control.

Lack of a Proper Price Policy: Public enterprises are expected to achieve diverse socio-
economic objectives and pricing decisions are not always based on rational analysis.
Moreover, there is a lack of cost-consciousness, quality controls, and
effective waste management.

Inefficient Management: Inept management, uninspiring leadership,

excessive centralisation, ubiquitous politics and lack of personal drive
leads to low managerial efficiency and effectiveness. Figure 15(Source: http://www.intelegain.com/project-
management-how-to-project-the-failing-project/)

Civil servants deputed to manage PSUs often lack proper training and use bureaucratic style
of management. Moreover, ineffective delegation of authority hampers decisions making
process. Lack of appropriate incentives adds salt to the injury.

11. Summary
To sum up, the political leadership chose the socialistic pattern of society and set up various
PSUs with hefty capital investments to fulfil the national goals viz., the removal of poverty, the
attainment of self-reliance, reduction in inequalities of income, expansion of employment
opportunities, removal of regional imbalances, acceleration of the pace of agricultural and
industrial development, reduction of concentration of ownership and preventing growth of
monopolistic tendencies by acting as effective countervailing power to the private sector, to
make the country self-reliant in modern technology and create professional, technological and
managerial cadres so as to ultimately rid the country from dependence on foreign aid. PSUs
more or less achieved many of the objectives, but in the way created the problems of their
own. It’s the era of globalisation and India too is opening its doors to the foreign competition
and making its PSUs so able as to compete at the global level. It surely is the time to transform
the objectives and challenge the Public Sector with a yet new journey.

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