Disinvestment
G Bharathi

Introduction

India adopted the policy of disinvestment in the year 1991-92. Since then, the role of public sector in the economic development is supposed to have drastically reduced. This was in sharp contrast to the industrial policy resolution 1956 which gave a huge role for the public sector so as to take the economy to “commanding heights”. This change in the policy in the recent years with regard to public sector was mainly a reaction to the miserable performance of the public sector in many areas. Over these years the losses incurred by public sector has increased manifold and as a result, it has turned out to be a burden on the exchequer. The fiscal deficit of the union budget is ballooning every year.

There are many units, which turned into sick units but still continued to operate due to the employment concerns. The return on investment of these units is negative. There were many other enterprises in the public sector that were considered to be non-core. It was not the business of the government to be in such non-priority sectors. Besides these reasons, there were pressures faced from international community and organizations. The condition of the economy also was not stable to resist these pressures.

Meaning

If we go by the text book definition privatisation can range anywhere from liberating the industries from administrative procedures, delincensing, change in the management of public enterprises, transfer of the minority stake keeping the ultimate control in the hands of the government or complete change in the ownership of the enterprise.

Privatization is not a new phenomenon, it was first practiced in Great Britain and countries like Brazil, China, Argentina, and Russia have adopted their individual country specific strategy to reduce the role of public sector in business. It is known that there were around 15000 units that were disinvested across the globe between 1980-91, and most of them belonged to the former socialist and communist economies.

In India

Going by the experiences of other countries, we started with the process of disinvestment very late.
The Industrial Policy Statement of 24 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 favour of any particular class of investors. The objective for disinvestment was stated to be to provide further market discipline to the performance of public enterprises.

Later in the subsequent policy announcements, the equity stake of public sector was decided to be disinvested from 26% upto 100% in some cases. The government stake is supposed to come down to 26% in majority of cases except for in cases, which are strategic in nature.

The main aspects of the recent changes made in the disinvestment policies is to restructure and revive potentially viable PSEs; To close down PSEs which cannot be revived; To bring down Government equity in all non-strategic PSEs to 26% or lower, if necessary; To fully protect the interests of workers; To put in place mechanisms to raise resources from the market against the security of PSEs' assets for providing an adequate safety-net to workers and employees; To establish a systematic policy approach to disinvestment and privatisation and to give a fresh impetus to this programme by setting up a new Department of Disinvestment; To emphasize increasingly on strategic sales of identified PSEs; To use the entire receipt from disinvestment and privatisation for meeting expenditure in social sectors, restructuring of PSEs and retiring public debt.

Rationale

The main reasons for the strategy and the policy of disinvestment was that because of the heavy expenditure on unproductive items such as interest payments, wages and salaries of Government employee and subsidiaries, the Government is left with hardly any money to spend on priority areas such as social and physical infrastructure which includes hospitals, healthcare, education etc. Moreover, there is a huge amount of debt burden which overshadows all other expenses. This makes disinvestment of theGovernment stake in the PSEs absolutely imperative. According to the ministry of disinvestment

The primary objectives for privatising the PSEs are, therefore, as follows:
Releasing the large amount of public resources locked up in non-strategic PSEs, for redeployment in areas that are much higher on the social priority, such as, basic health, family welfare, primary education and social and essential infrastructure;
Stemming further outflow of these scarce public resources for sustaining the unviable non-strategic PSEs;
Reducing the public debt that is threatening to assume unmanageable proportions;
Transferring the commercial risk, to which the taxpayers' money locked up in the public sector is exposed, to the private sector wherever the private sector is willing and able to step in - the money that is deployed in the PSEs is really public money and is exposed to an entirely avoidable and needless risk, in most cases;
Releasing other tangible and intangible resources, such as, large manpower currently locked up in managing the PSEs, and their time and energy, for redeployment in high priority social sectors that are short of such resources;

The other benefits expected to be derived from privatisation are :
Disinvestment would expose the privatised companies to market discipline, thereby forcing them to become more efficient and survive on their own financial and economic strength or cease. They would be able to respond to the market forces much faster and cater to their business needs in a more professional manner. It would also facilitate in freeing the PSEs from Government control and introduction of corporate governance in the privatised companies.

Disinvestment would result in wider distribution of wealth through offering of shares of privatised companies to small investors and employees.

Disinvestment would have a beneficial effect on the capital market; the increase in floating stock would give the market more depth and liquidity, give investors easier exit options, help in establishing more accurate benchmarks for valuation and pricing, and facilitate raising of funds by the privatised companies for their projects or expansion, in future.

Opening up the public sector to appropriate private investment would increase economic activity and have an overall beneficial effect on the economy, employment and tax revenues in the medium to long term.

In many areas, e.g., the telecom sector, the end of public sector monopoly would bring relief to consumers by way of more choices, and cheaper and better quality of products and services - as has already started happening.

Progress

The process of disinvestment started with many apprehensions, loopholes in the policy, lack of clarity, suspicion, and hopes.

The following table indicates the actual disinvestment from 1991-92 to 1999-2001, the methodologies adopted for such disinvestment and the extent of disinvestment in different central PSEs

* Total number of companies in which disinvestment has taken place so far
The realisations of Rs. 20,261 cr. shown above account for an aggregate disinvestment of about 16% equity of 42 PSEs
Source: Ministry of Disinvestment, Govt of India.

The latest change made in the disinvestment plans are that the current year target set by the disinvestment minister Mr. Arun Shourie is 50,000 crores of rupees, out of which around 26,500 crores will be realized from the sale of the blue-chip companies.

Appraisal

The process of disinvestment in India has been slower than expected by many. When compared to other countries experience where the dis investment has been a major success story, the same cannot be claimed about in our country. There has been many problems and mistakes on the path of privatisation. The major ones are explained here. Majority of the sales that have taken place so far have been through the method of strategic sales. The other methods have been conveniently ignored. Politics is playing a upper hand than economics in deciding the price, strategic partner, conditions to be fulfilled by bidders, the units that have to be disinvested, their timings etc. The delay in the decision making has resulted in fall in the market price of many unit. The main cause for the fall in price is the uncertainty hovering over the entire issue of disinvestment. There has been a lot of opposition on the issue of disinvestment of many enterprises especially those which are considered the sacred cows for the economy. The table given above clearly indicates the shortfalls in the target every year. The seriousness of the issue is not given due consideration. No attention is paid at the state level disinvestment where there are around 2000 PSEs involving much more capital than CPSEs. Punjab is the first state, which has taken up an initiative in this regard by setting up a disinvestment commission to study, understand and recommend methods of quicker privatisation of the state PSEs. Other states need to emulate this step.

The disinvestment process has ultimately become a source to gather funds to cover the mounting fiscal deficit annually. It would not be wrong to call it a ritualistic ceremony. The transparency is another issue, which has been frequently talked about. The participants of the game have called for a foul many times, but they are given deaf ears.
The objectives of the disinvestment policy should be laid down and implemented in a clear-cut fashion. The sooner the government realizes that it should more be in the regulation of business ensuring a fair play rather than be a producer, the better it is for a large section of the economy who have waited for long to carry the burden of the economy on their shoulders. The time has come to give them a true and fair chance to prove themselves. It is to be remembered here that so far there has been no clear and established relationship between the efficiency of the unit and ownership. However, one fact is always proved that competition has always paved the way for more productive and efficient governance.
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------G Bharathi
bharathishan@hotmail.com
Faculty-Aurora PG College
Chikadpally, Hyderabad.