BCom Disinvestment in India Notes Study Material
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BCom Disinvestment in India Notes Study Material
Meaning of Disinvestment
The term “Disinvestment” is the opposite of the term “Investment”. Investment is the acquisition of the earning asset with the help of money. For example, if bonds are purchased or shares of companies are purchased by spending money it is known as investment. In the case of investment, money is converted into earning assets to earn income. On the other hand in the case of disinvestment, an earning asset is converted into liquid cash. Here we shall use the term disinvestment in a special sense. By disinvestment, we mean the sale of shares of public sector undertakings by the government. (BCom Disinvestment in India Notes Study Material)
The shares of government companies held by the government are earning assets at the disposal of the government. If these shares are sold to get cash, then earning assets are converted into cash. So it is referred to as disinvestment. Thus, it refers to the action of an organization or the government in selling or liquidating an asset or subsidiary. In simple words, disinvestment is the withdrawal of capital from a country or corporation. (BCom Disinvestment in India Notes Study Material)
Some of the salient features of disinvestment are:
(i) Disinvestment involves the sale of only part of equity holdings held by the government to private investors.
(ii) Disinvestment process leads only to dilution of ownership and not a transfer of full ownership.
(iii) Disinvestment typically refers to the sale from the government, partly or fully, of a government-owned enterprise.
(iv) Disinvestment is called Partial Privatization’.
Difference between Disinvestment and Privatization
Before we proceed further let us clear one semantic problem. There is a difference between disinvestment and privatization. Privatization implies a change in ownership resulting in a change in management. But disinvestment need not always imply a change in management. Disinvestment is actually a dilution of the stake of the government in a public enterprise.
If the dilution is less than 50 percent the government retains management even though disinvestment takes place. It is not privatized. But if the dilution is more than 50 percent there is a transfer of ownership and management. It will be called privatization. Thus disinvestment is wider than privatization. Only when disinvestment goes beyond 51 percent it implies privatization. The extent of dilution of the government’s stake is determined as part of the policy of disinvestment. (BCom Disinvestment in India Notes Study Material)
Objectives of Disinvestment
The new economic policy initiated in July 1991 clearly indicated that PSUs had shown a very negative rate of return on capital employed. Inefficient PSUs had become and were continuing to be a drag on the Government’s resources turning to be more liabilities to the Government than assets. Many undertakings traditionally established as pillars of growth had become a burden on the economy.
The national gross domestic product and gross national savings were also getting adversely affected by low returns from PSUs. About 10 to 15% of the total gross domestic savings were getting reduced on account of low savings from PSUs. In relation to the capital employed, the levels of profits were too low. (BCom Disinvestment in India Notes Study Material)
Of the various factors responsible for low profits in the PSUs, the following were identified as particularly important:
(i) Price policy of public sector undertaking;
(ii) Under-utilisation of capacity;
(iii) Problems related to planning and construction of projects;
(iv) Problems of labor, personnel, and management;
(v) Lack of autonomy.
Hence, the need for the Government to get rid of these units and concentrate on core activities was identified. The Government also took a view that it should move out of non-core businesses, especially the ones where the private sector had now entered in a significant way. Finally, disinvestment was also seen by the Government to raise funds for meeting general/specific needs. In this direction, the Government adopted the ‘Disinvestment Policy’. This was identified as an active tool to reduce the burden of financing the PUSs.
The following main objectives of disinvestment were outlined:
(i) To reduce the financial burden on the Government.
(ii) To improve public finances.
(iii) To encourage a wider share of ownership.
(iv) To introduce, competition and market discipline.
(v) To depoliticize essential services.
(vi) To help public enterprises upgrade their technology to become competitive.
(vii) To rationalize and retain their workforce.
(viii) To build competence and strengthen their R&D.
(ix) To initiate diversification and expansion programmes.
Disinvestment in India
The Government July 1991 initiated the disinvestment process in India while launching the New Economic Policy (NEP). The Government appointed the Krishnamurthy Committee in 1991 and Rangarajan Committee in 1992. Both the Committees, have recommended disinvestment to fulfill the objectives of modernization of the public sector through strengthening R&D, initiating diversification/expansion programs, retaining and re-employment of employees, funding genuine needs of expansion, widening the capital market basis, and mitigating the fiscal deficit of the government. (BCom Disinvestment in India Notes Study Material)
These committees distinguished between the short-term and long-term goals of disinvestment and advised the government not to sacrifice the long-term goals for the sake of fulfilling the short-term objectives. The Government has announced in its NEP that mitigating the fiscal deficits is the only objective of disinvestment. (BCom Disinvestment in India Notes Study Material)
There was a radical change in the government’s policy towards the public sector in 1991 when the new industrial policy was adopted. In the new industrial policy of 1991, the role of the public sector has been reduced. In the industrial policy of 1956, seventeen industries were reserved exclusively for the public sector. Moreover, there were twelve other industries that were to be progressively state-owned. But in the industrial policy of 1991 only eight industries have been reserved for the public sector. These eight industries include defense production, atomic energy, coal and lignite, mineral oils, iron ore, manganese, gold and diamond, atomic minerals, and railways.
It has also been stated that if the need arises private sector units may also be permitted to enter these industries. Thus in the new industrial policy, there is no such thing as the exclusive preserve of the public sector. In the new policy, it has been stated that the government will run the public sector on sound commercial principles. Chronically sick public sector units will be referred to Board for Industrial and Financial Reconstruction (BIFR) for examining their viability. The unviable public sector units will be closed down. A social security net will be created for the rehabilitation of the Workers working in the affected units. (BCom Disinvestment in India Notes Study Material)
Another important feature of the new Policy on the public sector is the disinvestment of some selected public sector units. It has been decided that 20% of the shares of selected profit-making public sector units will be sold to financial institutions, mutual funds, etc. These institutions will hold the shares for a specified period of time after which they will be permitted to sell the shares in the share market.
In the new policy, it is also stated that the government will provide more autonomy to public sector units. The governments will not interfere in the day-to-day functioning of the public Sector units. Instead, these units will be controlled by the government through a memorandum of understanding (MOU) signed between these units and the government. (BCom Disinvestment in India Notes Study Material)
The crucial shift in the Government policy for the disinvestment of PSUs was mainly attributable to the poor performance of these enterprises and the burden of financing their requirements through budget allocations. Further, the Government constituted a five-member public sector Disinvestment Commission under the chairmanship of G. K. Ramakrishna in 1996 for drawing a long-term disinvestment program for the PSUs. (BCom Disinvestment in India Notes Study Material)
The Disinvestment Commission submitted its report covering 58 enterprises, out of 70 enterprises referred to it by the Government recommendations ranged from strategic sales in various proportions to disinvestments at varying levels. The Commission’s recommendations are in various stages of implementation. (BCom Disinvestment in India Notes Study Material)
The Disinvestment Commission was ultimately abolished in November 1999. The government set up a new Department of Disinvestment in 1999 to establish a systematic policy approach to disinvestment and to give a fresh impetus to the program of disinvestment, which will increasingly emphasize strategic sales of identified PSUs. in 2001, the Government reconstituted the Disinvestment Commission with R. H. Patil as its chairman. The government has decided to refer all ‘non-strategic PSUs and their subsidiaries, excluding IOC, ONGC, and GAIL to the Commission for its independent advice. (BCom Disinvestment in India Notes Study Material)
PHASES OF DISINVESTMENT IN INDIA
(A) Phase I (1991-92 to 1995-96)
Phase one started when the Chandrashekhar government while presenting the interim budget for the year 1991-92 declared disinvestment up to 20%. The objective was to broad-base equity, improve management, enhance the availability of resources for these PSEs, and yield resources for the exchequer. (BCom Disinvestment in India Notes Study Material)
Industries Reserved for Public Sector Prior to 1991
- Arms and Ammunition and allied items of defense equipment.
- Atomic energy.
- Iron and steel
- Heavy castings and forgings of iron and steel.
- Heavy plants and machinery are required for iron and steel production, for mining.
- Heavy electrical plants.
- Coal and lignite.
- Minerals oils.
- Mining of iron ore, manganese ore, chrome ore, and gypsum.
- Mining and processing copper, lead, zinc, and tin.
- Minerals are specified in the Schedule to the Atomic Energy.
- Air transport.
- Rail transport.
- Telephones, Telephone cables, Telegraph, and Wireless apparatus (excluding radio receiving sets)
- Generation and distribution of electricity.
The Industrial Policy Statement of 24th July 1991 stated that the government would divest part of its holdings in selected PSEs, but did not place any cap on the extent of disinvestment. Nor did it restrict disinvestment in favor of any particular class of investors.
Industries Reserved for Public Sector after July 1991
- Arms and Ammunition and allied items of defense equipment, aircraft, and warship.
- Atomic Energy.
- Coal and Lignite.
- Mineral Oils.
- Mining of iron ore, manganese ore, chrome ore, gypsum, sulfur, gold, and diamond.
- Mining of copper, lead, zinc, tin, molybdenum, and wolfram.
- Minerals specified in the schedule to Atomic Energy Order, 1953.
- Railway Transport.
(B) Phase II (1996-97 to 1997-98): Disinvestment Commission
The Government constituted the Public Sector Disinvestment Commission under G. V. Ramkrishna on 23rd August 1996 for a period of 3 years with the objectives of preparing an overall long-term disinvestment program for public sector undertakings.
A comprehensive overall long-term disinvestment program (extent of disinvestment, mode of disinvestment, etc.) within 5-10 years for the PSUs referred to it by the Core Group. Select the financial advisors for specified PSUs to facilitate the disinvestment process. To monitor the progress of the disinvestment process and take necessary measures and report periodically to the Government. The “core” group industries-telecommunications, power, petroleum, etc. are capital-intensive and where the market structure could be an oligopoly.
By December 1997, the commission had given six reports which included recommendations in 34 enterprises. The commission also showed concern about slow progress in the implementation of its recommendations and it was particularly critical of the government’s going ahead with strategic sales leading to joint ventures in some PSEs not referred to the commission. However, its power was axed later by the government. Out of 72 companies referred to the commission gave its recommendations on 58 PSEs and finally, the commission lapsed on 30th November 1999. (BCom Disinvestment in India Notes Study Material)
In 1996-97 a target of 5,000 crores was fixed for mobilization of resources through disinvestment of PSE shares. In order to do this, companies from the petroleum and communication sectors were chosen namely IOC and VSNL. But due to unfavorable market conditions, the GDR of only VSNL could be issued. in the GDR, 39 lakh shares of VSNL were disinvested resulting in an amount of 380 crores. The budget for 1997-98 had taken credit for an amount of 4,800 crores to be realized from the disinvestment of government-held equity in PSEs. This was supposed to be achieved by the disinvestment of MTNL, GAIL, CONCOR, and IOC.
A GDR of 40 million shares held by the government in MTNL was offered international market in November 1997. A total of 902 crore was collected but due to highly unfavorable market conditions, the GDR issue of GAIL, CONCOR, and IOC was deferred.
(C) Phase III (1998-99 to 2007-2008)
This phase marked a paradigm shift in the disinvestment process. First, in the 1998-99 budgets, the BJP government decided to bring down the government shareholding in the PSEs to 26% to facilitate ownership changes which were recommended by Disinvestment Commission.
In 1999-2000 government stated that its policy would be to strengthen strategic PSEs and privatize non-strategic PSEs through disinvestment and for the first time, the term ‘privatization’ was used instead of disinvestment. The government later formed the Department of Disinvestment on 10th December 1999. (BCom Disinvestment in India Notes Study Material)
The following criteria were observed for prioritization for disinvestment:
(i) Where disinvestment in PSEs would lead to large revenues for the government.
(ii) Where disinvestment can be implemented with minimum impediments and in a relatively shorter time span; and
(iii) Where continued bleeding of government resources can be stopped earlier.
The government decided to disinvest through the offer of shares in GAIL, VSNL, CONCOR, IOC, and ONGC. The budget for 1998-99 had taken credit for 5,000 crores to be realized through disinvestment. The budget for 1999-2000 had taken a credit of 10,000 crores to be realized through disinvestment. The government disinvested from Modern Foods India Ltd. and did a strategic sale to their strategic partner HLL for 105.45 crores for a 74% equity stake. This was the first time government had sold more than 50% holding.
The target of the government for disinvestment in the year 2002-2003 was 12,000 crore. The major highlight was the two-stage sell-off in Maruti Udyog Ltd. with a 400 crore right issue at a price of 3,280 per share of 100 each in which the government renounced whole of its rights share (6,06,585) to Suzuki, for a control premium of 1,000 crores. (BCom Disinvestment in India Notes Study Material)
The relative shareholding of Suzuki and the government after completion of the rights issue was 54.20% and 45.54% respectively. In the second stage, the government offloaded its holding in two tranches—the first where the government sold 27.5% of its equity through IPO in June 2003. The issue was oversubscribed by over 10 times. Later keeping in view the overwhelming response from the sale of Maruti, the government sold its remaining shares in the privatized companies of VSNL, CMC, IPCL, BALCO, and IBP to the public through IPOs.
IMPORTANCE OF DISINVESTMENT
Disinvestment, the colossal weapon, and instrument in the hands of the Government of India has enabled the public sector to improve its efficiency and to become more responsible as well as accountable to the public. But unfortunately, the proceeds of the Disinvestment were not flown properly towards the further development of the country through productive activities.
Presently, the Government has about 2 lakh crore locked up in PSUs. Disinvestment of the Government stake is, thus, far too significant. The importance of disinvestment lies in the utilization of funds for:
(i) Financing the increasing fiscal deficit.
(ii) Financing large-scale infrastructure development.
(iii) For investing in the economy to encourage spending.
(iv) For retiring Government debt-Almost 40-45% of the Centre’s revenue receipts go toward repaying public debt/interest.
(v) For social programmes like health and education.
Disinvestment also assumes significance due to the prevalence of an increasingly competitive environment, which makes it difficult for many PSUs to operate profitably. This leads to a rapid erosion of the value of the public assets making it critical to disinvest early to realize a high value. (BCom Disinvestment in India Notes Study Material)
BCom Disinvestment in India Notes Study Material