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Disinvestment Policy in India: An Appraisal

Article · March 2006

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 Third Concept- An International Journal of Ideas, Vol. 20, No. 229, March, 2006, ISSN 0970-7247

Disinvestment Policy in India: An Appraisal

Dr. M. A. Lokhande

Professor
Department of Commerce,
Dr. Babasaheb Ambedkar Marathwada University, Aurangabad- 431004.
Email: drmalokhande@gmail.com

Public Sector Undertakings (PSUs) have been playing a pivotal role in accelerating the pace of
industrialization and achieving socio-economic goals in India. They have been substantially
contributing to the GDP (nearly 25 per cent), providing 65-70 per cent job opportunities in
organized sector and sharing about one third of the aggregate exports of India. The Industrial
Policy Resolutions (1948, 1956) clearly defined the role of PSUs economic activities.

The PSUs were supposed to be dynamic engines of economic growth for achieving
multidimensional activities. As a result of Government efforts, a number of PSUs engaged in
manufacturing, trading and service activities flourished over the years in terms of number and
capital investment. The number of central public undertakings (CPUs) and capital investment
during 1951-52 was 5 CPUs and Rs.29 crore respectively, which rose to 243 CPUs and Rs. 2,
04,050 crore in the year 1998-99.1 There were 240 CPUs having capital investment of Rs.3,
24,632 crore as on 31s' March, 2000.

The phenomenal growth of the PSUs laid a strong foundation for accelerating the pace of India's
economic development. However, the PSUs were afflicted with certain serious shortcomings as
well as some problems, which required urgent corrective measures. These problems, inter alia,
included huge cumulative losses incurred by majority of the PSUs, under-utilization of resources,
lower productivity, and inefficient management, lack of commercial approach and growing
incidence of industrial sickness due to which economic viability of the PSUs was in danger. As a
sequel to these developments, the public sector came under serious criticism.

In view of the worsening situation, the Government of India announced Industrial Policy
Resolution (1991) which laid emphasis on introducing liberalization, privatization and
globalization to Indian economy. The policy statement gave clear indication of restructuring of
the public sector. The statement observed: "In the case of selected public sector enterprises, part
of Government holdings in the equity will be disinvested in order to provide further market
discipline of the performance of the public enterprises."2

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 Third Concept- An International Journal of Ideas, Vol. 20, No. 229, March, 2006, ISSN 0970-7247

Review of Disinvestment Policy

The term 'Disinvestment' refers to the sale of the Government equity in public sector
undertakings partly or fully to mutual funds, financial institutes, workers, general public or a sole
bidder. The rationale behind disinvestment policy is that the Government should divest its funds
from loss making PSUs and use the realizations (receipts) for creating social as well as physical
infrastructure. The objectives of disinvestment policy can be stated as follows:

• To release a large amount of public resources locked up in non-strategic (non-core) PSUs and
invest these resources in the most priority areas, e.g. health, family welfare, education, creation
of social and physical infrastructure.

• To reduce the public debt that has widened the gap between income and expenditure to
unmanageable proportions.

• To transfer the commercial risk so far borne by taxpayers to the willing and able private sector.
• To release tangible and intangible resources locked up in the PSUs for redeployment in high
priority areas which are short of such resources.

In the context of seriously increasing fiscal imbalances, the then finance minister, in his budget
speech (budget-1991-92) had announced: "In order to raise resources, encourage wider public
participation and promote greater accountability, government equity up to 20 per cent in selected
PSUs would be offered to mutual funds and institutions in public sector and also to the workers
of these firms."3 At initial stage of disinvestment, the Government indicated that it doesn't want
to loose the ownership and control in the PSEs as the Government had invested a huge amount in
the public sector enterprises and the very objective of socio-economic development was yet to be
fulfilled.

In order to speed up the process of disinvestment in line with the world economic order, the
Government appointed Rangrajan Committee (April, 1993) which strongly recommended that
the government equity should be reduced up to 49 per cent in case of six the industries i.e. coal
and lignite, mineral oils, arms, ammunitions and defence equipment, atomic energy, radioactive
minerals and railway transport. In case of the public undertakings having dominant role in the
market, the equity holding of the government could be reduced up to 74 percent. The
commission recommended 100 per cent divestment of government equity in all other PSUs. This
recommendation, in real sense, widened the scope for disinvestment.

Disinvestment policy has been a controversial issue and is being opposed by political parties,
labour unions and workers probably due to lack of conducive environment. Obviously, the
progress of disinvestment process is not as per expectations.

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 Third Concept- An International Journal of Ideas, Vol. 20, No. 229, March, 2006, ISSN 0970-7247

The Disinvestment Commission (1996) identified 58 CPSUs for purpose of disinvestment. It

strongly suggested that the long term disinvest policy should stress not only on receipts through
disinvestment but on minimizing budgetary support to unprofitable PSUs. The modified
disinvestment policy (1999-00) classified the CPSUs in two categories. The first category,
termed as strategic, included—Arms and Ammunition, Atomic Energy, Allied items of Defence,
Defense Aircraft, Warships and Railway Transport. It was decided that all these industries would
have absolute Government control. The government has the sole responsibility of strengthening,
owning and controlling the strategic PSUs. The second category i.e. non-strategic PS Us,
included all the PSUs, other than strategic PSUs, would be privatized gradually through
disinvestment reducing the government stake up to 26 per cent on case to case basis. Taking into
consideration the need of accelerating the pace of Disinvestment, a separate department viz.
Department of Disinvestment was started in the year 2000.

The budget (2000-01) laid stress on restructure and revival of potentially viable PSUs and
closing down non-viable PSUs. The receipts from disinvestment were set aside for incurring
expenditure on social sectors, restructuring PSUs and retiring public debt.4

It is noteworthy that the government has taken every effort to safeguard the interests of the
workers by providing safety net i.e. voluntary retirement benefits, training and self-employment
opportunities to the retired workers from PSUs. In order to ensure proper utilization of
disinvestment proceeds for social and infrastructure sectors, the government has set up a
Disinvestment Proceeds Fund.

Progress of Disinvestment of PSUs

The Government has been implementing the disinvestment programme since 1991-92. Let's have
a look at the progress of disinvestment in India. During 1991-92 to 2004-05, the aggregate
receipts from disinvestment of central public enterprises were Rs.47, 833 crore accounting for
50.46 per cent of the budgeted receipts of Rs.94, 800 crore. In percentage terms, remarkable
performance was observed during 1991-92, 1994-95, 1998-99 and 2003-04 as the actual receipts
accounted for 121.52 per cent, 121.07 per cent, 107.42 per cent and 107.22 per cent of the
respective budgeted figures. However, dismal performance was observed during 10 year period.
Up to 31st March. 2002, actual disinvestment was completed in case of 48 PSUs (Table-1).

Table-1 Disinvestment- Budget Estimates & Actual Receipts

(Rs. In crore)

Years No. of CPEs Budget Estimates Actual Receipts Achievement in %

1991-92 47 2500 3038 121.52
1992-93 35 2500 1913 76.52
1993-94 - 3500 - -
1994-95 13 4000 4843 121.07
1995-96 05 7000 362 5.17

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 Third Concept- An International Journal of Ideas, Vol. 20, No. 229, March, 2006, ISSN 0970-7247

1996-97 01 5000 380 7.60

1997-98 05 4800 902 18.19
1998-99 03 5000 5371 107.42
1999-00 03 10000 1860 15.60
2000-01 04 10000 1871 18.71
2001-02 10 12000 5633 46.94
2002-03 06 # (48) 12000 3348 27.90
2003-04 - 14500 15547 107.22
2004-05 - *4000 *2765 69.12
Source: Department of Disinvestment, Ministry of Finance
*Up to December 2004
# Actual disinvestment cases.

The Government could not achieve disinvestment targets as per expectations due to uncertainty
in capital market, severe opposition by labour unions and political parties.

In order to avoid the criticism against the disinvestment process, the government should give
proper publicity to the disinvestment cases to have clarity and transparency. The need of the hour
is to speed up the process of disinvestment and privatization of non-profitable and incompetent
Public Sector Undertakings to reduce their financial burden on exchequer and use the proceeds
thus received in most productive and prioritized areas. The department of disinvestment should
speed up the process of identification and finalization of the cases for disinvestment.

In accordance with the disinvestment policy of the central government, the state governments
also have initiated disinvestment programme for state level public undertakings as most of the
Sepses are sick and having incurred huge cumulative loss. Out of total 919 SPSUs from 19
states, 290 SPSUs have been disinvested, wound up or restructured. In case of 221 SPSUs
disinvestment process has been started, 33 SPSEs have been privatized and 67 SPSUs have been
closed.5

Strategic Disinvestment

Disinvestment and Privatization has been slow in India in comparison to other countries. Many a
times, the government had to cancel the proposals of disinvestment due to lack of bidders,
political pressures and poor response of investors due to a series of scams in share market. The
disinvestment programme could not get proper momentum because of the policy of selling
minority stakes and keeping majority stake and control of the entity with the government.

In view of this situation, disinvestment policy was modified in 1999-00 which gave emphasis on
strategic sales through which the management control is transferred to the strategic partner i.e.
the majority stake holders. The Department of Disinvestment identified 36 CPSUs and sold
Government equity of Rs.894.23 crore for Rs.11344.03 crore up to 31st March, 2001 (Table-2)

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Third Concept- An International Journal of Ideas, Vol. 20, No. 229, March, 2006, ISSN 0970-7247

Table-2 Performance of strategic disinvestments during 2000-01

(Rs. In crore)

Name of CPSU Government equity sold Realisation

MFIL-I 9.63 105
MFIL-II 3.38 44
BALCO 112.52 826.5
CMC 7.73 152
HTL 11.10 55
LJMC 0.77 2.53
AGRA 1.70 3.61
BODHGAYA 0.44 1.81
HASSAN 0.21 2.27
MAMALLAPURAM 0.83 6.13
MADURAI 0.71 4.97
BANGALORE 0.96 39.41
QUTAB 0.83 34.46
LODHI 0.96 71.97
LVPH 0.55 6.77
MANALI 0.63 3.65
KOVALAM 1.85 40.39
AURANGABAD 1.16 16.50
AIRPORT KOLKATA 0.66 19.39
KHAJURAHO 0.97 2.19
VARANASI 1.74 8.38
KANISHKA 1.90 92.37
INDRAPRASTHA 0.80 43.39
CHANDIGARH PROJECT 7.00 17.27
RANJIT 3.20 29.20
HCI-JUHU BOMBAY 8.95 1.53
RAIGIR 1.72 153
AIRPORT BOMBAY 4.00 83
IBP 7.44 1153.68
VANL 71.25 3689
STC - 40
MMTC - 60
PPL 320.16 151.70
JESSOP 68.13 18.18
HINDUSTAN 109.85 445
MARUTI UDYOG 66.00 2424
IPCL 64.5 1490
TOTAL 894.23 11344.03

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 Third Concept- An International Journal of Ideas, Vol. 20, No. 229, March, 2006, ISSN 0970-7247

Source: Department of Disinvestments, Government of India

It is noteworthy that majority of these public enterprises are profit making enterprises. This
clearly indicates that disinvestment of the PSUs is not only for releasing government funds but
for improving the quality, productivity and competency of Indian industries by means of
privatization.

The Central government is expecting realizations through investments to the tune of Rs.78, 000
crore in 10th Plan period ie.2002-03 to 2006-07. This indicates that the Government is
determined and committed to speed up the disinvestment programme in spite of difficulties in the
way.

The disinvestment department expected Rs.23, 500 crore from strategic sale and Rs.26, 500 crore
from public offers. However the government could realize hardly Rs.3348 crore during 2002-03.
(Table-1) One of the reasons of slow progress of disinvestment programme in India is lack of
suitable environment.

There has been continuous opposition to disinvestment and privatization by a large section of
workers and politicians. In a sizeable number of disinvestment cases, the government had to
incur loss due to improper valuation of government held stocks and assets. For instance, in case
of disinvestment of CMC (Computer Maintenance Corporation), the government had to loose
Rs.87 per share sold, the aggregate loss being Rs.73 crore.6 In this regard it may be suggested
that there should be scientific and realistic valuation of government equity in the public sector
undertakings.

Disinvestment — a critical issue

Disinvestment has been a critical issue in India since its inception. It has become a political issue
rather than an economical. Recently the disinvestment of NALCO and SCI was opposed by the
former Union Coal and Mines Minister and Orissa Chief Minister. The Congress party opposed
the disinvestment proposals of HPCL and BPCL (expected realizations of these two PSUs are
Rs.1, 500 crore and Rs.4, 500 crore respectively) on the ground of legality.7

The CAG report (May 1993) had criticized the disinvestment of CPSUs shares on the ground of
faulty valuation procedures and not placing sales of shares in boom period. The government had
sold the shares of Rs.6, 488 crore at Rs.3, 038 crore incurring a huge loss of Rs.3, 450 crore!

In this regard the advice made by Dr. Mehboob-U1-Huq, an expert with UNDP, is an eye opener.
He had advised the government not to sell the shares and assets of the PSUs through
discretionary and non-transparent procedures, which invite allegations of corruption and
nepotism. He further advised that the sale proceeds should not be used for financing budget
deficits and retiring national debts.8

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 Third Concept- An International Journal of Ideas, Vol. 20, No. 229, March, 2006, ISSN 0970-7247

Recently, disinvestment of Centaur Hotel, Mumbai Airport was under severe criticism because
of its controversial sale. Batra Hospitality Group had purchased the hotel for Rs. 83 crore and
immediately sold it for Rs.115 crore earning a huge profit (and a huge loss to the exchequer) of
Rs.32 crore,9 reason being lack of realistic approach in valuation of the equity and marketing on
the part of the government. The disinvestment and privatization are opposed by workers as there
has been continuous reduction in workforce through various separation schemes. For instance,
SAIL reduced its workforce from 1, 83,300 to 1, and 47,601 (i.e. by 20%) during 2001-02.
BHEL also followed the suit by reducing its workforce by 20% during the same period.10

In spite of problems in the way of disinvestment of public sector enterprises, the government is
trying its best to speed up the disinvestment programme for utilizing the realized funds for
betterment of the masses by means of creating and providing social infrastructure.

In order to get the maximum benefits out of increasing share prices; the government should
accelerate the process of disinvestment in case of non-strategic PSUs. It is noteworthy that the
Sensex has shown a historical growth from 5000 point in October 1999 to 9000 plus points in
November 2005. The central government is the biggest gainer as it could generate wealth of Rs.
53, 274 crore because of the robust growth in equity market.11 the process of disinvestment
should be made more transparent and clear. The proceeds thus received and its utilization should
be made public.

There is a need to evolve a realistic and scientific valuation method for valuating stocks and
assets held by the government. The Department of Disinvestment, the Disinvestment
Commission, the Cabinet Committee and SEB1 should have proper co-ordination and co-
operation which is imperative for gaining best results from disinvestment.

Disinvestment and privatization are being criticized by political parties for one or another reason.
The government should make consensus on disinvestment cases and seek cooperation of
opposition parties. There should be efficient and effective publicity of disinvestment proposals
and marketing of government-held stocks and assets. The government should use the realized
funds for social welfare directly benefiting the public on large scale. Unemployment problem has
reached to serious proportions. Firstly, the government should create social security fund for
giving relief to unemployed workforce. Secondly, self-employment schemes should be promoted
on large scale to absorb the growing workforce. The programme of disinvestment and
privatization should be implemented in such a manner that it would strengthen our capital market
and bring investment opportunities to the investors. Taking into consideration the current boom
in stock market, the PSUs should exploit the benefits by offering their shares to investors.

Conclusion

Public sector has been playing a crucial role in all round development of Indian economy. In the
changed business scenario, there is urgent need of restructuring public sector undertakings to

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 Third Concept- An International Journal of Ideas, Vol. 20, No. 229, March, 2006, ISSN 0970-7247

make them competent and financially strong. Unviable, loss-making PSUs are burden on
government exchequer and must be closed down immediately.

Disinvestment of public sector undertakings is not for mobilizing resources for meeting
government expenditure. The government is committed to utilize the receipts for creating social
and economical infrastructure.

The restructuring programme is aimed at improving the competitiveness of Indian industry, up

gradation of technology and infrastructure and confines the role of the government to strategic
activities only. Of course, there have been voices for and against the disinvestment policy in
India. Need of the hour is to have more concern regarding growing unemployment and poverty.
The government undertakings engaged in the field of education, health and social welfare should
continue to play their role but in an innovative, professional and competitive way. Disinvestment
process of public sector undertakings should be transparent, accountable and gainful.

References

1. BKSP Rao and SVR Rao, "Disinvestment—an Indian Perspective", Indian Journal of
Commerce, Vol. 54, October -November, 2001, p. 92.
2. K. Aswathappa, Business Environment for Strategic Management, Himalaya Publishing
House, Mumbai, 1997, p. 38.
3. Central Budget, 1991-92
4. Central Budget, 2001-2002
5. State Government, Hyderabad, Public Enterprises-website
6. V. Ravi Anshuman in Economic limes, April 8, 2003.
7. WWW.e.Sakal.
8. Rudar Dutt and KPM Sundaram, Indian Economy, S. Chand. & Co., 1995.211.
9. Ashish Gupta; "Disinvestment, Horse-Trading", Business Today, November 10, 2002.
10. The Economic Times, April 14, 2003.
11. The Economic Times, November 29, 2005.

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