public sector disinvestment
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Public Sector Undertakings (PSUs)
The public sector is the part of economic and administrative
life that deals with the delivery of goods and services by and
for the government.
After independence and with the advent of planning, Indiaopted for a public sector oriented planning.
It was believed that a dominant public sector would reduce
the inequality of income and wealth, and advance thegeneral prosperity of the nation, 'trickle down' of growth.
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Objectives of PSUs
To help in the rapid economic growth and Industrialization of the
country and create necessary infrastructure for economicdevelopment.
To earn return on investment and utilize generated resources fordevelopment.
To promote redistribution of income and wealth.
To create employment opportunities.
To promote balanced regional development.
To promote import substitutions, save and earn foreign exchangesfor the economy.
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Problems faced by PSUs
The most important criticism levied against public sector undertakings has
been that in relation to the capital employed, the level of profits has been
too low. Factors responsible for the low level of profits are :
Low Productivity
Low capacity utilization and low efficiency
Low rate of return on capital
Large number of loss making firms
Poor work ethics and quality of services
Over capitalization due to substantial time and cost overruns
Bureaucratic controls
Most of the PSUswere monopolies in their industries due to tight
governmental controls, and hence they were not very efficient
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Disinvestment
Disinvestment : It is a process in which the public undertakingreduces its portion in equity by disposing its shareholding.
Disinvestment as per SEBI guideline, means the sale by the
central government/state government, of its shares or voting rights
and control, in PSUs. The disinvestment reduces governmentparticipation in the company.
A company or a government organisation will typically disinvest an
asset either as a strategic move for the company, or for raisingresources to meet general or specific needs.
Disinvestment is called as Partial Privatisation.
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The following are the main objectives of the
disinvestment policy of the government :
To reduce financial burden on the government
To encourage wider share of ownership
To introduce competition and market discipline
To help public enterprise upgrade their technology to become
competitive
To rationalize and retain their workforce
To improve efficiency and productivity in public enterprise
through new industrial policies.
Objectives of Disinvestment
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There are primarily three different approaches to
disinvestments (from the sellers i.e. Governmentsperspective)
1. Minority Disinvestment
2. Majority Disinvestment
3. Complete Privatization
Different Approaches to Disinvestment
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Privatisation :
It implies a change in ownership, resulting in a change inmanagement.
The privatization of public sector enterprises will occur only
when govt. sells more than 51% of its ownership to private
entrepreneurs.
Disinvestment :
It could either involve dilution of govt. staketo a level that result
in a transfer of management or could also be limited to such a
level as would permit govt. to retain control over the
organization. Disinvestment beyond 50% involves transfer of management,
where as disinvestment below 50% would result in the govt.
continuing to have a major say in the undertaking.
Privatization and Disinvestment
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In order to achieve the various objectives and goals of
disinvestment many methods have been formulated andimplemented. These includes:
1. Public Offer : Offering shares of public sector enterprises at a
fixed price through a general prospectus, the offer is madeto the general public through the medium of recognized
market intermediaries.
2. Cross Holding : In the case of cross holding, the govt. would
simply sell part of its share of one PSU to one or more PSUs.
3. Golden Share : In this model, the govt. retains a 26 percent
share in the PSU. This 26 percent share will continue to give
the govt. the status of majority share holder.
Types of Disinvestment
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4. Warehousing : Under this model, the govt. owned financial
institutions were expected to buy the govt.s share inselected PSUsand holding them until third buyer emerged.
5. Strategic Sale: Under this model, govt. sells a major portion
(51% and above) of its stake to the strategic buyer and alsogives over the management control.
6. FPO : An issuing of shares to investors by a public company
that is already listed on an exchange. Retail participation ismostly high.
Types of Disinvestment
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There are certain arguments which are favoring for the
disinvestment of public sector undertakings.
Poor Performance of the Public Sector Units.
The government must not enter into those areas where the
private sector can perform better. Government resources locked in commercial activities should
be released for their deployment in social activities.
There is a huge amount of debt overhang, which needs to be
serviced and reduced before money is available to invest ininfrastructure.
Criteria for Disinvestment
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Whether there is decrease in number of beneficiaries . Whether serving the national interest will be affected
because of disinvestment .
Whether private sector can efficiently operate and manage
the undertaking. Whether the original rate of return targeted could not be
possible to achieve.
Criteria for Disinvestment
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Disinvestment A Historical Perspective
Period from 2004-05 to 2008-09
The issue of PSU disinvestment remained a contentious
issue through this period. As a result, the disinvestment
agenda stagnated during this period. In the 5 years from
2003-04 to 2008-09, the total receipts fromdisinvestments were only Rs. 8515.93 crore.
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Disinvestment A Historical Perspective
2009-10 onwards
The Government started the process by selling minority
stakes in listed and unlisted (profit-making) PSUs. This
period saw disinvestments in companies such as NHPC Ltd.,
Oil India Ltd., REC, NMDC, SJVN, EIL, CIL, MOIL, etc. throughpublic offers.
However, from 2011 onwards, disinvestment activity has
slowed down considerably. For the financial year 2012-13,
there would be a target of Rs. 30,000 crore and the
Government was able to raise only Rs. 23,956 crore.
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Disinvestment A Historical Perspective
Chart below shows various disinvestments done by GOI during
FY 13 and FY 14
0
2000
4000
6000
8000
10000
12000
14000
NBCC
HCL
NMDC OIL
NTPC
RCF
NALCO
SAIL
MMTC
HCL
NFL
ITDC S
TCNLC
NHPC
PGCIL EIL
BHEL
2012-2013 2013-2014
Amount Realized
Amount Realized
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Recent Disinvestments
Metals and Minerals Trading Corporation of India (MMTC) :
At the floor price of Rs. 60 apiece, a 9.33 per cent stake sale in MMTC
has garnered Rs. 571 crore to the exchequer.
The 9.33 crore shares, or 9.33 per cent, stake sale of the trading giant
through the Offer For Sale (OFS)route.
MMTC disinvestment would be the first stake sale of the government
in the current fiscal. The government aims to raise Rs. 40,000 crore
from PSU stake sale in 2013-14.
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Recent Disinvestments
Hindustan Copper Limited (HCL) :
At the floor price of Rs. 70 apiece, a 4.00 per cent stake sale in
HCL has garnered Rs. 260 crore to the exchequer.
Stake sale of HCL could be done through the Offer ForSale(OFS)route. This mechanism is just like an auction, where
every investor bids on the floor price or above that.
HCL is the second public sector divestment in the current
fiscal.
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Why Low Disinvestment ?
Unfavorable market conditions
Offers made by the government were not attractive for private
sector investors
Lot of opposition on the valuation process
No clear-cut policy on disinvestment
Strong opposition from employee and trade unions
Lack of transparency in the process
Lack of political will
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C i i i f Di i
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Criticisms of Disinvestments
Disinvestment has always been a very politically sensitive
issue, with different parties taking different views in differentpositions.
Mainly to fill fiscal deficits of the government. Generated
capital has not been utilized for the benefit of the disinvestedPSU.
Targets Unachieved :
o Some of the years the Govt. has failed to raise even 20%of the
budgetary disinvestment targets.
o The Government has measurably failed to attract various parties
for buying the PSU's.
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C iti i f Di i t t
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Criticisms of Disinvestments
Strategic Mistakes :
o Monopolies created by privatization(?).o E.g.: Selling of IPCL to reliance despite the fact that it held 60% of
market share already.
o Possibility of concentration of shares in few hands.
o E.g.: ONGC disinvestment, Claim by left party activist that large
number of shares were being bought over by Canadian firm.
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S ti
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Suggestions
The primary objective of disinvestment should be to increase
efficiency, not to maximize revenue.
Avoid large new investments in privatisation candidates, the
risks usually outweigh the rewards. Rather prepare for sale by
carrying out legal, managerial and organisational changes.
Experience shows that labour does not lose in privatisation, if
governments pay attention to easing the social cost of
unemployment through adequate pay, unemployment benefits,
retraining and job search assistance.
C l i
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Conclusion
Disinvestment in India has never been an attractive idea simply
because successive governments have treated disinvestmentmerely as a tool to raise resourcesrather than as one designed
to restructure the massive public sector.
Government should stop setting up of the targets in every yearannual budget and should have a long-term plan.
The privatization policy that the government adopted was
closely related to efficient channelization and utilization of
resources, but process was notthat satisfactory.
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R f
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References
Dr. Ajay Verma : DISINVESTMENT PROCESS IN INDIA, Shodh, Samiksha aur
Mulyankan (International Research Journal), Vol. 2, Issue-6 Dr. M. K. Rastogi, Sharad Kr. Shukla : Challenges and Impact of
Disinvestment on Indian Economy, IJMBS Vo l . 3, Issue 4, Oct-Dec 2013
URL :o http://www.bsepsu.com/o http://www.thehindubusinessline.com/markets/hind-copper-divestment-
today-at-base-price-of-rs-70share/article4873314.ece
o http://www.thehindubusinessline.com/economy/govt-to-sell-764-stake-in-
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o http://www.thehindu.com/business/Economy/govt-clears-disinvestment-of-stc-itdc/article4904904.ece
o http://www.hindustantimes.com/business-news/nhpc-share-buyback-to-
add-rs-2-200-cr-to-divestment-kitty/article1-1153325.aspx
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