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Disinvestment involves the sale of equity and bond capital invested by the
government in PSUs. It also implies the sale of governments loan capital in PSUs
through securitization. However, it is the government and not the PSUs who receive
money from disinvestment.
The fixation of share/bond price is an important aspect of disinvestment. Now, the
Disinvestment Commission determines the share/bond price. Disinvested shares are
listed, quoted and traded on the stock market. Indian and foreign financial institutions,
banks, mutual funds, companies as well as individuals can buy disinvested shares /
bonds.
However, to date the market experience has been otherwise. The large
national budgetary deficit on revenue account has been increasing. The
government has not used the disinvestment proceeds to finance expenditure on
capital account; i.e. the disinvestment policy has resulted in capital consumption
rather than generation. Administrative costs of the disinvestment process have
also been unduly high.
The actual receipts through disinvestment have often fallen far short of their
target (see figure). During the period 1991-92 to 2002-2003, the government had
targeted the mobilization of about Rs. 78,300 crores through disinvestment, but it
could actually mobilize only Rs. 30,917 crores.
8. On 16th March 1999, the Government classified the CPSUs into strategic
and non-strategic areas for the purpose of disinvestment. It was decided that
the strategic CPSUs would be those functioning in areas of:
o Arms and ammunition and the allied items of defence equipment, defence
aircrafts and warships
o Railway transport.
All other CPSUs were to be considered as being non-strategic. For the non-
strategic CPSUs, it was decided that reduction of the Government’s
shareholding to 26% would not be automatic and the manner and pace of
doing so would be decided on a case-by-case basis on the following
considerations: a) Whether the industrial sector required the presence of
the public sector as a countervailing force to prevent concentration of power in
private hands, and b) Whether the industrial sector required a proper
regulatory mechanism to protect the consumer interests before Public Sector
Enterprises were privatised.
The NEP consisted of wide ranging economic reforms. The thrust of the policies was
towards creating a more competitive environment in the economy and removing the
barriers to entry and growth of firms. This set of policies can broadly be classified into
two groups:
The stabilization measures - are short term measures, intended to correct some of the
weaknesses that have developed in the balance of payments and to bring inflation under
control. There was a need to maintain sufficient foreign exchange reserves and keep the
rising prices under control.
The structural reform measures - are long-term measures, aimed at improving the
efficiency of the economy and increasing its international competitiveness by removing
the rigidities in various segments of the Indian economy. Disinvestment means selling
government equity in public sector units (PSUs) to private parties. Thus Disinvestment
refers to the sale or liquidation of an asset or subsidiary of an organization or
government. It is also known as divestiture or divestment. In India the process of
disinvestment began since 1991-92. The need for disinvestment arises from the fact of
poor performance of PSUs.
The major thrust for Disinvestment Policy in India came through the Industrial Policy
Statement 1991.The policy stated that the government would disinvest part of their
equities in selected PSEs. However it did not stake any cap or limit on the extent of
disinvestment. It also did not restrict disinvestment to any class of investors. The main
objective was to improve overall performance of the PSEs.
OBJECTIVE OF DISINVESTMENT:
The main argument in favor of disinvestment is the poor performance of PSUs. For
instance the average return on investment was hardly 2% during the 1980s and 1990s.
One of the factors of budgetary deficits is the allocation of huge amount of funds to
PSUs. Due to lack of improvement of performance in such units, these deficits lead to
rising prices which in turn affected the economy.
There was too much political interference with respect to location of the project, selection
and promotion of top personnel, awarding important contracts etc. This has lead to poor
performance of the PSUs.
It is of the belief that by transferring PSUs to private players, it would enable the
government to concentrate on the government’s main job i.e. social development in areas
such as primary health, primary education, law and order, family welfare and so on.
OTHER OBJECTIVES WOULD INCLUDE
Public sector enterprises (PSEs) or Public Sector Units (PSUs), which were given a
special role in India’s planned economy, grew both in terms of numbers and investment
for over four decades from the early 1950s.
At the end of the Seventh Plan in 1990, there were 244 PSEs and the investment in them
had gone up to Rs. 99, 329 crores. Although disinvestments had started from the early
1990s,
at the end of the Eighth Plan in 1997, investment had soared to Rs. 2, 13,610 crores. At
the end of the fiscal year 2000-01, PSEs had a total investment of Rs. 2, 74, 114 crores.
The PSEs made a significant contribution to industrial production, 100 per cent in lignite,
over 80 per cent in coal, crude oil and zinc, almost 50 per cent in aluminum and over 30
per cent in finished steel.
Our fellow citizens have every right to own part of the shares of public sector companies
while the Government retains majority shareholding and control. My Government will
develop a roadmap for listing and people-ownership of public sector undertakings while
ensuring that Government equity does not fall below 51 %.
The above policy was reaffirmed by the Finance Minister in paragraph 37 of his Budget
Speech on 6th July, 2009. Paragraph 37 of FM’s Budget Speech reads as:
The Public Sector Undertakings are the wealth of the nation, and part of this wealth
should rest in the hands of the people. While retaining at least 51 per cent Government
equity in our enterprises, I propose to encourage people’s participation in our
disinvestment programme. Here, I must state clearly that public sector enterprises such
as banks and insurance companies will remain in the public sector and will be given all
support, including capital infusion, to grow and remain competitive.
The Government, on 5th November 2009 has approved the following action plan for
disinvesting Government equity in profit making CPSUs:
i) Already listed profitable CPSUs, not meeting the mandatory public shareholding
ii) All CPSUs having positive net worth, no accumulated losses and having earned net
profit for the three preceding consecutive years are to be listed through Public Offerings,
out of Government shareholding or issue of Fresh Equity by the company or a
combination of both; and
iii) The proceeds from disinvestment would be channelized into National Investment
Fund and during April, 2009 to March, 2012 would be available in full for meeting the
capital expenditure requirements of selected social sector programmes decided by the
Planning Commission / Department of Expenditure. The status quo ante will be restored
from April, 2012.
1. Most of the public sector companies are loss-making and are a burden on public
funds.
2. Since the government is corrupt, the public sector companies are also corruptly
managed.
3. In the hands of the private sector, the public sector companies would be run more
efficiently.
As pointed out by experts, if the government sells the asset that provides income or profit
equal to or more than the prevailing interest on government securities, then the
government would lose future income by selling it. On the other hand, from the private
sectors point of view,it makes no sense to purchase an asset unless it provides at least a
rate of return equal to the rate of interest on government securities, because that is where
the private investor could otherwise put the money. This means that for such sales to
occur, either
a. The private sector must believe that it is capable of generating more profits than
the public sector.
b. The asset must be undervalued so that the actual rate of return for the private
buyer turns out to be higher, which really means that the State exchequer has lost
the money.
According to experts, whatever be the technique, to think that sale of PSU shares is the
only method of reform, reflects a closed mind. Treating process of disinvestment as
revenue in budgets creates pressure in selling, apart from being fiscal imprudence; the
capital proceeds could be used to consolidate and revitalise Navratnas. Critics point out
that, the whole disinvestments programme has been carried out by the government in a
hasty, unplanned and hesitant way. As a result, the public sector equity has been sold for
a fraction of what it could actually fetch. However this is only one part of the story.
The entire manner in which the proceeds from the disinvestments have been used is also
being debated. The government has used these proceeds to offset the shortfalls in revenue
receipts and thus reduce the fiscal deficit which it was required to do as a part of the IMF
stabilization programme. The disinvestments of governments proceeds in profitable
public sector enterprises and using the proceeds for current consumption needs amounts
to frittering away of valuable public assets.
The correct policy would have been to allow the public sector themselves to use the
resources they generate via this programme. This would have helped them to revitalize
and expand their activities .The present policy has deprived the government of future
yield from these enterprises.
CONCLUSION
The debate and the case study indicates that there are many complicated economic,
political and legal issues such as Debate on the Sale Profitable vs. Unprofitable
Enterprises, debate on the sale of Large or Small Firms, Investment decisions before
Disinvestment and Investment requirement from the private participants post
disinvestment, management of Public Enterprises Debt, categorizing the Social Assets
and economic assets of the PSU’s, probable environmental concerns.
The proposed projects include building rail and road connectivity, besides
deepening of approach channel to 20 metres for handling capesize bulk carriers.
However, the port being a mini-ratna, can not expect to receive any financial
support from the government towards the expansion.
It is in this context that the country's only corporate port entity is proposing to
float initial public offer ( IPO )) for the funds. The port has two shareholders:
Centre (68%) and Chennai Port Trust (32%) and with issuance of share, the
shareholding of the Centre could fall from its current level.
According to port analysts, if the float materialises, the issue would be in line with
the disinvestment policy of the government. Accordingly, the government is seen
diluting its stake in various undertakings.
For example, the Centre last week decided to sell 10% of its equity in Shipping
Corporation of India through a follow-on public offer, in which the company will
also issue fresh shares. Similarly, the Centre has approved Steel Authority of
India and Coal India to go for public offer of shares as it seeks to raise Rs 40,000
crore through disinvestment.
Though in the initial stages yet, according to sources, the port is expected to
submit a plan before the ministry can take a call. Once the ministry agrees, the
Disinvestment Department in finance ministry will take a view. Accordingly, the
Cabinet Committee on Economic Affairs will take the final decision.
With the ministry of shipping planning to corporatise more ports within its control,
the way this first corporate entity performs will help shape the future course of
India's 12 major ports.
The initial public offer (IPO) of India's largest coal producing company Coal
India (CIL) has seen huge response from investors and has received bids for
more than USD 53 billion worth of equity shares as against issue size of USD 3.5
billion on last day.
The issue has been subscribed more than 15.28 times, including major
contribution from qualified institutional buyers (QIBs) followed by non-institutional
investors (NIIs) and retail investors.
For the reserved portion of QIBs (which closed on Wednesday and was
subscribed 24.7 times), foreign institutional investors put in bids for USD 27.5
billion worth of equity shares followed by domestic financial institutions and
mutual funds with USD 10 billion and USD 1.4 billion, respectively. (USD 1 = Rs
44)
The reserved portion of non-institutional investors was subscribed 25.4 times and
retail 2.31 times while employees' portion was subscribed just 0.1 times.
Institutional investors have gone all out for Coal India with the IPO getting
highest-ever demand received by an Indian issue.
11 Aug, 2010
The government is now looking to add MMTC and Shipping Corporation of India
to its disinvestment list, raising the possibility of the proceeds crossing the
budgeted Rs 40,000-crore mark for the current fiscal.
The Union Cabinet has already approved disinvestment in Coal India, SAIL,
Power Grid and Hindustan Copper and Manganese Ore India. All these
companies could raise Rs 28,000 crore for the government while a 10% stake of
MMTC alone could fetch over Rs 15,000 crore.
The government has so far mopped up about Rs 2,000 crore through stake sale
in Satluj Jal Vidyut Nigam and Engineers India. It had raised Rs 25,000 crore in
2009-10.
The government filed the offer document for a 10% stake sale in Coal India on
Monday, and it has shortlisted merchant bankers to manage the MOIL offer,
which is expected to fetch about Rs 2,500 crore. The Coal India public offer,
tipped to be the largest offer from a public sector company, is expected by
October and could help the government raise over Rs 17,000 crore.
In MOIL, the Centre will offload 10%, while the state governments of
Maharashtra and Madhya Pradesh would dilute 5% each. The Centre holds
81.57% in the mini-ratna entity, while Maharashtra and Madhya Pradesh have
9.62% and 8.81% stake, respectively. However, the stake sales in SAIL and
MOIL may happen only in the next calendar.
The Shipping Corporation board will take up a proposal for issue of 10% fresh
equity in the proposed offer on Wednesday.
The government will disinvest 10% in the offer. In a move towards disinvestment,
the MMTC board recently approved a proposal for stock split and issue of bonus
shares. At Tuesday’s closing price of Rs 1,549.70 crore on the Bombay Stock
Exchange, a 10% stake sale in the company could raise nearly Rs 15,000 crore.
A change in the public holding norms, giving relaxation to public sector entities to
list on bourses with 10% float, is expected to prompt many PSUs to shed their
reservations and access markets.
Many public sector firms like CIL and Nalco as well as the department of
disinvestment had sought a review of the norms apprehending a negative impact
on the valuations.
The government has rapped state-owned Bharat Sanchar Nigam Ltd (BSNL) for poor
financial performance and made a case for disinvestment through an initial public offer
(IPO).
“I hope the BSNL IPO happens in the coming year (2010-11). I can’t say exactly when,
but I certainly hope that it does happen, because BSNL does need to open up to public
ownership, primarily with a view to strengthen its own management and its
accountability,” Disinvestment Secretary Sunil Mitra told a private news channel.
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The public sector unit (PSU) has been negotiating with the trade unions, which have been opposing any
disinvestment. The unions say disinvestment or listing would serve no interest of people. The government
had earlier proposed to divest 10 per cent stake.
“The company’s financials are doing pretty badly and it certainly shouldn’t be so because
telecom, as you know, is one of the sectors that you have to be competitive and they
(BSNL) have to pull up,” Mitra said. The government may announce a roadmap for
disinvestment in PSUs through IPOs and follow-on public offer (FPOs) by March this
year and BSNL could be one of the 60 PSUs identified by the government.
BSNL, which was eyeing a top slot in the mobile market at one point of time, is
struggling to retain its fifth position in the market. The company is also in the process of
adding to its Global System for Mobile Communications (GSM) capacity, at an
investment of over Rs 35,000 crore. It had floated the tender nearly 18 months ago. Being
a government-owned company, it has faced bureaucratic hurdles in placing orders with
the lowest bidders. Disinvestment and listing are expected to help the PSU take decisions
faster and compete with the private sector.
Despite equity support from the government, the financial mess at Air India is unlikely to abate soon, as the
cash-strapped carrier would not be able to bring in funds through disinvestment or an IPO for a period of at
least five more years.
This is because of two reasons: the Union Cabinet’s decision to list only profit-making public sector
enterprises (PSUs), and Air India being expected to suffer substantial losses for a period of at least two
more years.
When asked whether Air India’s divestment is possible under a policy announced on November 5, Civil
aviation minister Praful Patel on Saturday told FE, “Not at all. That is not on the cards.” “The Cabinet policy
on disinvestment is only for profit making CPSUs. Air India divestment is not possible in this framework,” he
said, after inaugurating India’s first aerospace special economic zone built in Belgaum by Karnataka-based
QuEST Global. The 300-acre SEZ, founded by Aravind Melligeri and Ajit Prabhu, involves an initial
investment of Rs. 150 crore.
Patel has so far maintained that the government will try to list Air India on the stock exchange in the ‘near
future’ but this is the first time he has ruled out any divestment. The minister however, said the government
has agreed to provide equity support of Rs. 800 crore to Air India in the next two months. The Rs. 800-crore
equity infusion requires a Cabinet clearance, and it is likely to come in two tranches of Rs. 400 crore each.
Disinvestment secretary Sunil Mitra on Friday ruled out any exception for
loss-making PSUs and said the government will stick to the Securities
and Exchange Board of India rules while divesting government stakes in
such companies.
Sebi rules state that a company going for an IPO should have a track
record of distributable profits for three out of preceding five years,
besides four other key conditions. However, an exception is allowed to a
company not satisfying any or all of the five conditions.
Since Air India has not made any profits in the last two years and its
losses are expected to continue for at least two more years; the three-
year-profit rule would mean it cannot be a disinvestment candidate for at
least five more years. Also, a lack of funds could potentially exacerbate
the problems at Air India, which is desperately seeking financial support from the government.
Air India suffered losses of Rs. 5548 crore in 2008-09, up from Rs. 2,400 crore in 2007-08. Officials expect
it to incur further losses of at least Rs. 5,000 crore in the current fiscal. The turnaround at Air India could
take another 4-5 years, according to a secretary-level official.
The government has agreed to an equity infusion of up to Rs. 5,000 crore into Air India over a period of
three years, subject to substantial cost cuts and revenue enhancement. Air India’s market share rose to
18.6% in October from 17.5% in September, according to data from the directorate-general of civil aviation.
It’s seat factor, which is the number of seats booked in proportion to total seats, has improved to 72.8% in
October from 67.5% in September.