Disinvestment

Public Sector Undertaking (PSU)

In India, public sector undertaking (PSU) is a term used for a government-owned corporation (company in the public sector). The term is used to refer to companies in which the government (either the Union Government or state or territorial governments, or both) owned a majority (51 percent or more) of the company equity.A Public Sector Undertaking is a corporation in the public sector in India, where management control of the company rests with the Government, it can be Central Government or the State Governments.

DisinvestmentDefinition of Disinvestment

At the very basic level, disinvestment can be explained as follows:

“Investment refers to the conversion of money or cash into securities, debentures, bonds or any other claims on money. As follows, disinvestment involves the conversion of money claims or securities into money or cash.”   Disinvestment can also be defined as the action of an organisation (or government) selling or liquidating an asset or subsidiary. It is also referred to as ‘divestment’ or ‘divestiture.’ In most contexts, disinvestment typically refers to sale from the government, partly or fully, of a government-owned enterprise. A company or a government organisation will typically disinvest an asset either as a strategic move for the company, or for raising resources to meet general/specific needs.

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 of liabilities to the Government than being 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. Of the various factors responsible for low profits in the PSUs, the following were identified as particularly important: 

     •  Price policy of public sector undertakings     •  Under–utilisation of capacity     •  Problems related to planning and construction of projects     •  Problems of labour, personnel and management     •  Lack of autonomy 

Hence, the need for the Government to get rid of these units and to 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 PSUs. The following main objectives of disinvestment were outlined: 

     •  To reduce the financial burden on the Government     •  To improve public finances     •  To introduce, competition and market discipline     •  To fund growth     •  To encourage wider share of ownership     •  To depoliticise non-essential services

Importance of Disinvestment

Presently, the Government has about Rs 2 lakh crore locked up in PSUs. Disinvestment of the Government stake is, thus, far too significant. The importance of disinvestment lies in utilisation of funds for:      •  Financing the increasing fiscal deficit     •  Financing large-scale infrastructure development     •  For investing in the economy to encourage spending     •  For retiring Government debt- Almost 40-45% of the Centre’s revenue receipts go towards repaying public         debt/interest      •  For social programs 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 value of the public assets making it critical to disinvest early to realize a high value.

Different Approaches to Disinvestments

There are primarily three different approaches to disinvestments (from the sellers’ i.e. Government’s perspective)

Minority Disinvestment

A minority disinvestment is one such that, at the end of it, the government retains a majority stake in the company, typically greater than 51%, thus ensuring management control.  Historically, minority stakes have been either auctioned off to institutions (financial) or offloaded to the public by way of an Offer for Sale. The present government has made a policy statement that all disinvestments would only be minority disinvestments via Public Offers.  Examples of minority sales via auctioning to institutions go back into the early and mid 90s. Some of them were Andrew Yule & Co. Ltd., CMC Ltd. etc. Examples of minority sales via Offer for Sale include recent issues of Power Grid Corp. of India Ltd., Rural Electrification Corp. Ltd., NTPC Ltd., NHPC Ltd. etc. Majority Disinvestment 

A majority disinvestment is one in which the government, post disinvestment, retains a minority stake in the company i.e. it sells off a majority stake. 

Historically, majority disinvestments have been typically made to strategic partners. These partners could be other CPSEs themselves, a few examples being BRPL to IOC, MRL to IOC, and KRL to BPCL. Alternatively, these can be private entities, like the sale of Modern Foods to Hindustan Lever, BALCO to Sterlite, CMC to TCS etc. Again, like in the case of minority disinvestment, the stake can also be offloaded by way of an Offer for Sale, separately or in conjunction with a sale to a strategic partner. 

Complete Privatisation 

Complete privatisation is a form of majority disinvestment wherein 100% control of the company is passed on to a buyer. Examples of this include 18 hotel properties of ITDC and 3 hotel properties of HCI. Disinvestment and Privatisation are often loosely used interchangeably. There is, however, a vital difference between the two. Disinvestment may or may not result in Privatisation. When the Government retains 26% of the shares carrying voting powers while selling the remaining to a

strategic buyer, it would have disinvested, but would not have ‘privatised’, because with 26%, it can still stall vital decisions for which generally a special resolution (three-fourths majority) is required.

Disinvestments-A Historical Perspective

For the first four decades after Independence, the country was pursuing a path of development in which the public sector was expected to be the engine of growth. However, the public sector overgrew itself and its shortcomings started manifesting in low capacity utilisation and low efficiency due to over manning, low work ethics, over capitalisation due to substantial time and cost over runs, inability to innovate, take quick and timely decisions, large interference in decision making process etc. Hence, a decision was taken in 1991 to follow the path of Disinvestment. 

Period from 1991-92 - 2000-01

The change process in India began in the year 1991-92, with 31 selected PSUs disinvested for Rs.3,038 crore. In August 1996, the Disinvestment Commission, chaired by G V Ramakrishna was set up to advice, supervise, monitor and publicize gradual disinvestment of Indian PSUs. It submitted 13 reports covering recommendations on privatisation of 57 PSUs.Dr R.H.Patil subsequently took up the chairmanship of this Commission in July 2001.However, the Disinvestment Commission ceased to exist in May 2004. 

The Department of Disinvestment was set up as a separate department in December, 1999 and was later renamed as Ministry of Disinvestment from September, 2001. From May, 2004, the Department of Disinvestment became one of the Departments under the Ministry of Finance.

Against an aggregate target of Rs 54,300 crore to be raised from PSU disinvestment from 1991-92 to 2000-01, the Government managed to raise just Rs 20,078.62 crore (less than half). Interestingly, the government was able to meet its annual target in only 3 (out of 10) years. In 1993-94, the proceeds from PSU disinvestment were nil over a target amount of Rs 3,500 crore. 

The reasons for such low proceeds from disinvestment against the actual target set were: 

    i.   Unfavorable market conditions     ii.  Offers made by the government were not attractive for private sector investors     iii. Lot of opposition on the valuation process     iv. No clear-cut policy on disinvestment     v. Strong opposition from employee and trade unions     vi. Lack of transparency in the process     vii. Lack of political will

This was the period when disinvestment happened primarily by way of sale of minority stakes of the PSUs through domestic or international issue of shares in small tranches. The value realized through the sale of shares, even in blue chip companies like IOC, BPCL, HPCL, GAIL & VSNL, however, was low since the control still lay with the government. 

Most of these offers of minority stakes during this period were picked up by the domestic financial institutions. Unit Trust of India was one such major institution. 

Period from 2001-02 - 2003-04

This was the period when maximum number of disinvestments took place. These took the shape of either strategic sales (involving an effective transfer of control and management to a private entity) or an offer for sale to the public, with the government still retaining control of the management. Some of the companies which witnessed a strategic sale included:

• BHARAT ALUMINIUM CO.LTD.• CMC LTD.• HINDUSTAN ZINC LTD.

• HOTEL CORP.OF INDIA LTD. (3 PROPERTIES: CENTAUR HOTEL,JUHU BEACH, CENTAUR HOTEL AIRPORT,MUMBAI & INDO HOKKE HOTELS LTD.,RAJGIR)

• HTL LTD.• IBP CO.LTD.• INDIA TOURISM DEVELOPMENT CORP.LTD.(18 HOTEL PROPERTIES)• INDIAN PETROCHEMICALS CORP.LTD.• JESSOP & CO.LTD.• LAGAN JUTE MACHINERY CO.LTD.,THE• MARUTI SUZUKI INDIA LTD.• MODERN FOOD INDUSTRIES (INDIA) LTD.• PARADEEP PHOSPHATES LTD.• TATA COMMUNICATIONS LTD.

The valuations realized by this route were found to be substantially higher than those from minority stake sales. 

During this period, against an aggregate target of Rs 38,500 crore to be raised from PSU disinvestment, the Government managed to raise Rs 21,163.68 crore. 

Period from 2004-05 - 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 from disinvestments were only Rs. 8515.93 crore. 

2009-10 onwards

A stable government and improved stock market conditions has led to a renewed thrust on disinvestments. The Government has started the process by selling minority stakes in listed and unlisted (profit-making) PSUs through public offers. As on 31st July 2010, Rs. 24615.47 crore had been raised in this period. 

The role of the State vs. Market has been one of the major issues in development economics and policy. In a mixed economy such as India, historically the public sector had been assigned an important role. However, in the year 1991 the national economic policy underwent a radical transformation. The new policy of liberalization, privatization and globalization de-emphasized the role of the public sector in the nation�s economy. The faculty at IIT-Bombay has been

studying various aspects of the New Economic Policy such as financial sector reforms, fiscal implications of reforms, and of globalization.

To date several arguments have been proffered by the apologists of market-oriented economic structures:

the government must not enter into those areas where the private sector can perform better

market-driven economies are more efficient than the state-planned economies the role of the state should be as a regulator and not as the producer government resources locked in commercial activities should be released for their

deployment in social activities.It is also contended that the functioning of many public sector units (PSUs) has been

characterized by low productivity, unsatisfactory quality of goods, excessive manpower utilization, inadequate human resource development and low rate of return on capital. For instance, between 1980 and 2002, the average rate of return on capital employed by PSUs was about 3.4% as against the average cost of borrowing, which was 8.66%. Disinvestment (or divestment) of the PSUs has therefore been offered as one of the solutions in this context.

Disinvestment involves the sale of equity and bond capital invested by the government in PSUs. It also implies the sale of government�s 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.

Disinvestment is generally expected to achieve a greater inflow of private capital and the use of private management practices in PSUs, as well as enable more effective monitoring of management discipline by the private shareholders. Such changes would lead to an increase in the operational efficiency and the market value of the PSUs. This in turn would enable the much neededrevenue generation by the government and help reduce deficit financing.

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.Problems associated with DisinvestmentA number of problems and issues have bedevilled the disinvestment process. The number of bidders for equity has been small not only in the case of financially weak PSUs, but also in that of better-performing PSUs. Besides, the government has often compelled financial institutions, UTI and other mutual funds to purchase the equity which was being unloaded through disinvestment. These organizations have not been very enthusiastic in listing and trading of shares purchased by them as it would reduce their control over PSUs. Instances of insider trading of shares by them have also come to light. All this has led to low valuation or under pricing of equity.

Further, in many cases, disinvestment has not really changed the ownership of PSUs, as the government has retained a majority stake in them. There has been some apprehension that disinvestment of PSUs might result in the �crowding out� of private corporates (through lowered subscription to their shares) from the primary capital market.

An important fact that needs to be remembered in the context of divestment is that the equity in PSUs essentially belongs to the people. Thus, several independent commentators have maintained that in the absence of wider national consensus, a mere government decision to disinvest is not enough to carry out the sale of people�s assets. Inadequate information about PSUs has impeded free, competitive and efficient bidding of shares, and a free trading of those shares. Also, since the PSUs do not benefit monetarily from disinvestment, they have been reluctant to prepare and distribute prospectuses. This has in turn prevented the disinvestment process from being completely open and transparent.

It is not clear if the rationale for divestment process is well-founded. The assumption of higher efficiency, better / ethical management practices and better monitoring by the private

shareholders in the case of the private sector � all of which supposedly underlie the disinvestment rationale � is not always borne out by business trends and facts.

Total disinvestment of PSUs would naturally concentrate economic and political power in the hands of the private corporate sector. The US economist Kenneth Galbraith had visualized a role of �countervailing power� for the PSUs. While the creation of PSUs originally had economic, social welfare and political objectives, their current restructuring through disinvestment is being undertaken primarily out of need of government finances and economic efficiency.

Lastly, to the extent that the sale of government equity in PSUs is to the Indian private sector, there is no decline in national wealth. But the sale of such equity to foreign companies has far more serious implications relating to national wealth, control and power, particularly if the equity is sold below the �correct� price!

If the disinvestment policy is to be in wider public interests, it is necessary to examine systematically, issues such as - the �correct� valuation of shares, the �crowding out� possibility, the appropriate use of disinvestment proceeds and the institutional and other prerequisites.

Ministry Of Disinvestment

The Department of Disinvestment was set up as a separate Department on 10thDecember,1999 and was later renamed as Ministry of Disinvestment from 6thSeptember,2001. From 27th May, 2004, the Department of Disinvestment is one of

the Departments under the Ministry of Finance.

  ALLOCATION OF WORK (as on date)

    1.  (a) All matters relating to disinvestment of Central Government equity    from

Central Public Sector Undertakings,

(b)All       (b) All matters relating to sale of Central Government equity through offer for     

sale or     private placement in the erstwhile Central Public Sector Undertakings*

(inserted through amendment Notification dated 28th June, 2007)

    2.     Decisions on the recommendations of the Disinvestment Commission on the

modalities of disinvestment, including restructuring.

    3.     Implementation of disinvestment decisions, including appointment of advisers,

pricing of shares, and other terms and conditions of disinvestment.

4.      Disinvestment Commission;

    5.     Central Public Sector Undertakings for purposes of disinvestment of

Government equity   only.

    6.    Financial Policy in regard to the utilization of the proceeds of disinvestment

channelized into the National Investment Fund.

(inserted through amendment dated 12th January, 2006 to the Allocation of Business Rules)

* Note:       All other post disinvestment matters, including those relating to and arising out of the exercise of Call option by the Strategic partner in the erstwhile Central Public Sector Undertakings, shall continue to be handled by the administrative Ministry or Department concerned, where necessary, in consultation with the Department of Disinvestment.

CURRENT POLICY ON DISINVESTMENT

Current Government Policy

The President of India’s address on 4th June 2009 unveiled the agenda of the Congress- led Government at the Centre. In keeping with the election manifesto of the Congress Party, the President’s address mentioned: “Our people 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%.”  In line with the Presidents’ address, the Economic Survey (2008-09) stated the following as the Governments plan of action: "Revitalize the disinvestment program and plan to generate at least Rs. 25,000 crore per year. Complete the process of selling of 5-10% equity in previously identified profit making non-navratnas. List all unlisted public sector enterprises and sell a minimum of 10% of equity to the public. Auction all loss making PSUs that cannot be revived. For those in which net worth is zero, allow negative bidding in the form of debt write-off."   The subsequent Union Budgets have also taken disinvestment on the agenda of the Government.  The Government has also announced its intentions of raising the minimum public shareholding in listed companies to 25%. This figure was subsequently revised to 10%. This, besides bringing more quality paper in the market, shall also lead to disinvestment as the Government shall have to dilute its present holding to ensure the minimum public shareholding in the listed PSUs. At current prices, this could mean a divestment amount of over Rs. 90484 crore, in case 25% public shareholding were to be achieved and Rs. 7278 crore, in case 10% public shareholding were to be achieved. Click here for details.

The policy on disinvestment has been articulated in paragraph 34 of President’s Address to Joint Session of Parliament on 4th June, 2009 and reads as under:

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

of 10%, are to be made compliant;

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.

Approach to Disinvestment           

The Department of Disinvestment to dialogue with Administrative Ministries to identify CPSUs for disinvestment.  As each CPSU has different capital structures, financial strength and differing status in compliance with mandatory listing requirements, each disinvestment to be considered on a case-by-case basis for approval by Government

EVOLUTION OF DISINVESTMENT POLICY IN INDIA:

Policy on Public Sector and Disinvestment

The Industrial Policy Resolution of 1956 gave the public sector a strategic role in the economy. Massive investments were made over the next four decades to build the public sector. Many of these enterprises successfully expanded production, opened up new areas of technology and built up a reserve of technical competence in a number of areas. Nevertheless, after the initial concentration of public sector investment in key infrastructure areas, public enterprises began to spread into all areas of the economy including non-infrastructure and non-core businesses.

The Government announced on 24th July 1991 the ‘Statement on Industrial Policy’ which inter-alia included Statement on Public Sector Policy. The statement contained the following decisions: 

“Portfolio of public sector investments will be reviewed with a view to focus the public sector on strategic, high-tech and essential infrastructure. Whereas some reservation for the public sector is being retained, there would be no bar for area of exclusivity to be opened up to the private sector selectively. Similarly, the public sector will also be allowed entry in areas not reserved for it.

Public enterprises which are chronically sick and which are unlikely to be turned around will, for the formulation of revival/rehabilitation schemes, be referred to the Board for Industrial and Financial Reconstruction (BIFR), or other similar high level institutions created for the purpose. Social security mechanism will be created to protect the interests of workers likely to be affected by such rehabilitation packages.In order to raise resources and encourage wider public participation, a part of the government’s shareholding in the public sector would be offered to mutual funds, financial institutions, general public and workers.

Boards of public sector companies would be made more professional and given greater powers.

There will be a greater thrust on performance improvement through the Memorandum of Understanding (MOU) System through which managements would be granted greater autonomy and will be held accountable. Technical expertise on the part of the Government would be upgraded to make the MOU negotiations and implementation more effective.

To facilitate a fuller discussion on performance, the MOU signed between Government and the public enterprises would be placed in Parliament. While focusing on major management issues, this would also help place matters on day-to-day operations of public enterprises in their correct perspective”.

In accordance with the decision announced in the aforesaid statement on industrial policy on public sector and also as per budget speech of July 1991, in order to encourage wider participation and promote greater accountability, the Government equity in selected CPSEs was offered to mutual funds, financial institutions, workers and the general public.

In the subsequent years, there have been constant policy changes. While on one hand, disinvestment as a policy has been much debated, there have also been changes and disagreements in terms of the different approaches that can be taken for disinvestment to happen. 

 The policy of disinvestment has largely evolved through the policy statements of Finance Ministers in their Budget Speeches.  The policy as evolved is enumerated below:-

         In the Interim budget 1991-92, it was announced that Government would

divest upto 20% of its equity in selected PSU’s in favor of mutual funds, financial

and institutional investors in public sector.

         In the budget speech of 1992-93, the cap of 20% was reinstated and the list

of eligible investor was enlarged to include FII’s, employees and OCB’s.

         In April, 1993, Rangrajan committee recommended to divest upto 49% of

PSE’s equity for industries explicitly reserved for the public sector and over 74%

in other industries.  But Government did not take any decision on

recommendations.

         In 1996, as per the Common Minimum Programme, the Budget Speech 1996-

97 announced the setting up of Disinvestment Commission for 3 years.  CMP also

emphasized to add more transparency to disinvestment process and examine the

non core areas of public sector.

         In the Budget Speech of 1998-99, it was announced that Government

shareholding in CPSEs should be brought down to 26% on case to case basis,

excluding strategic CPSEs where Government would retain majority

shareholding.  The interest of workers is to be protected in all cases.  For this

purpose on 16th March, 1999, the Government classified the PSE’s into strategic

and non strategic areas.  It was decided that Strategic PSE’s would be those in

areas of:

         Arms and ammunition and the allied items of defence equipment, defence

aircrafts and warships;

         Atomic energy (except in the areas related to the generation of nuclear power

and applications of radiation and radio-isotopes to agriculture, medicine and non-

strategic industries);

         Railway transport.

All other PSE’s were to be considered non strategic. 

In 1999-2000 Budget Speech it was announced that Government will

continue to strengthen the strategic units and “privatizing” the non-strategic ones

through gradual disinvestment or strategic sale and devise viable rehabilitation

strategies for weak units.

The 2000-01 Budget Speech focused on restructure and revival of viable

CPSEs; close down  PSEs which cannot be revived; bring down Government

shareholdings in non-strategic CPSEs to 26% or lower, if necessary; and protection of the

interest of workers.  The receipts from disinvestment will be used for social sectors,

restructuring of CPSEs and for retirement of public debt. 

The suo-motu statement 2002, specific aim was given to the disinvestment

policy: modernization and upgradation of PSEs, creation of new assets, generation of

employment and retiring of public debt.

In the Budget Speech for 2003-04, Government announced details regarding

the setting up of Disinvestment Fund and Asset Management Company to hold, manage

and dispose the residual holdings of Government.

In 2004 with the change in the Government, there was a change in the

outlook of Disinvestment policy.

 In May, 2004, Government adopted National Common Minimum Programme,

which outlines the policy of Government with respect to Public sector.

 “The UPA Government pledged to devolve full managerial control and

commercial autonomy to successful, profit-making companies operating in

competitive environment; they won’t be privatized ‘Navratna’ companies can

raise resources from the capital market.  Efforts will be made to modernize and

restructure sick Public sector companies.

         It favoured sale of small proportions of Government equity through IPO/FPO

without changing the character of PSE’s.  In regard to this, it approved listing of

unlisted profitable CPSE’s subject to residual equity of the Government remaining

atleast 51% and Government retaining the control of management. 

         It also constituted the formation of ‘National Investment Fund’.  The proceeds

from disinvestment of CPSE’s will be channelized into NIF.  75% of annual income

of NIF will be used to finance selected social sector schemes- education, health,

employment and the rest 25% to meet the capital investment requirements of

profitable and revivable CPSE’s.

         On 27th January, 2005 the Government, approved in principle:

a.    listing of currently unlisted profitable CPSEs each with a Net Worth in excess of Rs.200 crore, through an Initial Public Offering (IPO), either in conjunction with a fresh equity issue by the CPSE concerned or independently by the Government, on a case by case basis, subject to the residual equity of the Government remaining at least 51 per cent and the Government retaining management control of the CPSE;

b.    the sale of minority shareholding of the Government in listed, profitable CPSEs either in conjunction with a Public Issue of fresh equity by the CPSE concerned or independently by the Government subject to the residual  equity of the Government remaining at least 51 per cent and the Government retaining management control of the CPSE; and

c.    Constitution of a “National Investment Fund”.

On 25th November, 2005, Government decided, in principle, to list large, profitable CPSEs on domestic stock exchanges and to selectively sell small portions of equity in listed, profitable CPSEs (other than the navratnas).

PSUs approved for Disinvestment:

ROAD AHEAD

1. Steel Authority of India Ltd.(SAIL)

PIB Press Release dated 8 th   April, 2010.

Raising of additional Equity by the Steel authority of India Limited(SAIL) and disinvestment of a portion of government equity in SAIL through Offer for Sale.

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 The Cabinet committee on Economic Affairs approved the proposal for raising additional equity by the Steel Authority of India Ltd.(SAIL) to the extent of 10% of the paid up equity and disinvestment of a portion of Government of India’s shareholding in SAIL by an extent of 10% through offer for sale, to be carried out in two separate tranches.

 The further public offering(FPO) would comprise the first tranche of the fresh issue of 5% pre-issue paid up equity of the company and offer for sale of 5% of Government equity in SAIL. The CCEA has accorded permission for effecting the first tranche and the second tranche, similar to the first, would be issued at an appropriate time depending on prevailing market conditions.

 The further offerings along with disinvestment would be carried out as per SEBI regulations and procedure adopted by the Department of Disinvestment which is the nodal agency for handling of disinvestment of Government public sector units.

 As a result of the further public offer, there would be enhanced public holding in SAIL from the present level of 14.2% to 31% and it is expected that the enhanced holding would lead to greater depth in the market. As a result of the secondary offering and equity dilution, there would thus be larger public ownership of the company, leading to greater public oversight and increased accountability.

 Background:

  The disinvestment of Government’s equity in SAIL is in line with the overall policy of the government that ownership of CPSEs would be shared with the public as articulated in both the President’s speech to Parliament and FM’s Budget speech. FPO of SAIL would allow for greater public accountability, and is expected to lead to greater depth in the market.

 The proceeds from fresh issue of equity by SAIL would help in filling the resource gap in availability for funding SAIL’s capital expenditure emerging from the increased pressure on steel prices and diminished margins. SAIL is presently amidst massive expansion plans for increasing its installed hot metal production capacity from existing 13.82 million tonnes per annum(MTPA) to 23.46 MTPA in the current phase.

To facilitate easy reference to SAIL website,link is being provided here.Please click here http://www.sail.co.in for the same

2.Engineers India Limited (EIL)

PIB Press Release dated   14 th   January , 2010.

Disinvestment of 10 Percent paid up equity capital in ENGINEERS INDIA LIMITED (EIL) out of  Government of India shareholding of 90.40 PERCENT

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 The Cabinet Committee on Economic Affairs today decided to disinvest 10% paid up equity capital of Engineers India Limited, out of Government’s shareholding, in the domestic market through Public Offering. After this disinvestment Government shareholding in the company would come down to 80.40%. 

It has also been decided that before the Public Offering the company will take the following steps: 

(a) Issue bonus two shares for every one share;(b) Split one share of the face value of Rs.10 into two the face value of Rs.5 each; and(c) Declare special dividend of 1000 percent of the paid up equity capital

Engineers India Limited is a Public Sector Undertaking under the Ministry of Petroleum & Natural Gas and is engaged in providing engineering and related technical services for petroleum refineries and other industrial projects. Government of India is holding 90.40% paid up equity capital of the company and the balance is held by the general public. The shares of the company are listed on the stock exchanges with less than 10% mandatory public shareholding.

To facilitate easy reference to EIL website,link is being provided here. Please click here   http://www.engineersindia.com  for the same

 3.Hindustan Copper Limited(HCL)

PIB Press Release dated   15 th   June , 2010.

Disinvestment of 10 Percent paid up equity capital of Hindustan Copper Limited out of Government of India's shareholding along with issue of fresh

equity of equal size by the Company in the domestic market

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 The Cabinet Committee on Economic Affairs approved the proposal for disinvestment of 10% paid up equity capital of Hindustan Copper Limited out of Government of India’s shareholding along with issue of fresh equity of equal size by the Company in the domestic market. The divestment will be done in the following manner:

(i) Issue of fresh equity by Hindustan Copper Limited to the extent of 10% of the pre-issue paid up capital of the company equivalent to 9,25,21,800 shares of face value of Rs.5 each in the domestic market as per SEBI rules and regulation.

(ii) In conjunction with the issue of fresh equity as at (i) above; Government to disinvest its 10% of pre issue paid up capital of the company, equivalent to 9,25,21,800 shares of face value of Rs.5 each.

(iii) Reservation of shares for employees of HCL will be on a discount of 5%, which will also be available to retail investors as per the guidelines of SEBI.

Background: 

The paid up equity capital of the company is Rs.462.61 crore. Government of India is holding 99.59% paid up equity capital of the Company at present. The face value of the share is Rs.5 each.  

To facilitate easy reference to HCL website,link is being provided here. Please click here   http://www.hindustancopper.com  for the same

4.Coal India Limited (CIL)

PIB Press Release dated   15 th   June , 2010.

Disinvestment of 10 Percent paid up equity capital in COAL INDIA LIMITED (CIL) out of  Government of India shareholding of  100 %

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 The Cabinet Committee on Economic Affairs today gave its approval to divest 10% equity of the Coal India Limited out of its holding of 100% through book building process in the domestic market. One percent of the equity will be offered to the employees of CIL and its eight subsidiaries. The CCEA has also decided to allow 5% price concession to the retail investors in order to encourage greater public ownership of the public sector companies.

The CCEA also approved a 5% concession to the employees of the company and its subsidiaries to encourage their becoming stakeholders in the company. After this disinvestment, Government of India’s shareholding in the company would come down to 90%..

Coal India Ltd. (CIL), a Central Public Sector Enterprise, is a Navratna Company engaged in production and marketing of coal and coal products. At present, the paid up equity capital of the company is Rs.6316.36 crore and the Government of India holds 100% of the equity in the company. 

To facilitate easy reference to CIL website,link is being provided here. Please click here   http://www.coalindia.in for the same

  5.Power Grid Corporation of India Limited (PGCIL)

PIB Press Release dated     22 nd   July , 2010.

Follow-on Public Offer for Power Grid Corporation of India Limited

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The Cabinet Committee on Economic Affairs today approved the Follow-on Public Offer (FPO) of Power Grid Corporation of India Limited (PGCIL) of 84,17,68,246 (Eighty Four crore seventeen lakh sixty eight thousand two hundred forty six) Equity shares of Rs.10 each constituting 20% of existing paid-up capital. This comprises fresh issue of 42,08,84,123 Equity Shares (10% of existing paid-up capital) and offer for Sale (Disinvestment) of 42,08,84,123 Equity Shares (10% of existing paid-up capital) by selling Shareholder i.e. the President of India.

Additional resources generated through the issue of an FPO will be utilized by PGCIL in its investment programmes.

PGCIL will be required to approach the capital market for raising funds through issue of fresh equity for funding its investment programme commencing from Financial Year 2010-11. The requirement of funds to be raised through issue of fresh equity for funding the capital expenditure for the balance XI plan period will be in the order of Rs 4200 crore. The fresh issue of FPO would result in the PGCIL meeting with the CERC allowed norms of 30% equity contributions during the XI Plan period.

PGCIL went for a maiden Initial Public Offering (IPO) of equity shares consisting of issue of fresh equity shares with 10% of paid up capital and disinvestment of Government of India equity holding of 5% of paid up capital in October 2007 through the book building process and the issue was subscribed 64.50 times. The shares of the PGCIL got listed in the National Stock Exchange and Bombay Stock Exchange on 5.10.2007. PGCIL raised Rs. 2984 crore at the issue price of Rs. 52/- per share out of which Rs. 995 crore was paid to the Government of India towards the disinvestment proceeds and the balance amount, after meeting the issue expenses, was utilized for capital expenditure of identified projects during the financial year 2007-08 and 2008-09.

GUIDELINES

Guidelines for Bidders

No. 6/4/2001-DD-II Government of India 

Department of Disinvestment Dated 13th July, 2001

OFFICE MEMORANDUM

Subject: Guidelines for qualification of Bidders seeking to acquire stakes in Public Sector Enterprises through the process of disinvestment

 Government has examined the issue of framing comprehensive and transparent guidelines defining the criteria for bidders interested in PSE-disinvestment so that the parties selected through competitive bidding could inspire public confidence. Earlier, criteria like net worth, experience etc. used to be prescribed. Based on experience and in consultation with concerned departments, Government has decided to prescribe the following additional criteria for the qualification / disqualification of the parties seeking to acquire stakes in public sector enterprises through disinvestment:-(a) In regard to matters other than the security and integrity of the country, any

conviction by a Court of Law or indictment / adverse order by a regulatory authority that casts a doubt on the ability of the bidder to manage the public sector unit when it is disinvested, or which relates to a grave offence would constitute disqualification. Grave offence is defined to be of such a nature that it outrages the moral sense of the community. The decision in regard to the nature of the offence would be taken on case to case basis after considering the facts of the case and relevant legal principles, by the Government.

(b) In regard to matters relating to the security and integrity of the country, any charge-sheet by an agency of the Government / conviction by a Court of Law for an offence committed by the bidding party or by any sister concern of the bidding party would result in disqualification. The decision in regard to the relationship between the sister concerns would be taken, based on the relevant facts and after examining whether the two concerns are substantially controlled by the same person/persons.

(c) In both (a) and (b), disqualification shall continue for a period that Government deems appropriate.

(d) Any entity, which is disqualified from participating in the disinvestment process, would not be allowed to remain associated with it or get associated merely because it has preferred an appeal against the order based on which it has been disqualified. The mere pendency of appeal will have no effect on the disqualification.

(e) The disqualification criteria would come into effect immediately and would apply to all bidders for various disinvestment transactions, which have not been completed as yet.

(f) Before disqualifying a concern, a Show Cause Notice why it should not be disqualified would be issued to it and it would be given an opportunity to explain its position.

(g) Henceforth, these criteria will be prescribed in the advertisements seeking Expression of Interest (EOI) from the interested parties. The interested parties would be required to provide the information on the above criteria, along with their Expressions of Interest (EOI). The bidders shall be required to provide with their EOI an undertaking to the effect that no investigation by a regulatory authority is pending against them. In case any investigation is pending against the concern or its sister concern or against its CEO or any of its Directors/Managers/employees, full details of such investigation including the name of the investigating agency, the charge/offence for which the investigation has been launched, name and designation of persons against whom the investigation has been launched and other relevant information should be disclosed, to the satisfaction of the Government. For other criteria also, a similar undertaking shall be obtained along with EOI.

(A.K. Tewari)Under Secretary to the Government of India.

.No. 6/4/2001-DD-II 

Government of India Department of Disinvestment

Dated 13th July, 2001

OFFICE MEMORANDUM

Subject: Guidelines for qualification of Advisors for disinvestment process

 Government has examined the issue of framing comprehensive and transparent guidelines defining the

criteria for selection of Advisors, so that the parties selected through competitive bidding inspire public confidence. Earlier, a set of criteria like sector experience, knowledge, commitment etc. used to be prescribed. Based on experience and in consultation with concerned departments, Government has decided to prescribe the following additional criteria for the qualification / disqualification of the parties to act as Advisors to the Government for the disinvestment transactions:-(a) Any conviction by a Court of Law or indictment / adverse order by a regulatory authority for a grave

offence against the Advising concern or its sister concern would constitute a disqualification. Grave offence would be defined to be of such a nature that it outrages the moral sense of the community. The decision in regard to the nature of offence would be taken on a case to case basis after considering the facts of the case and relevant legal principles by the Government. Similarly, the decision in regard to the relationship between the sister concerns would be taken, based on relevant facts and after examining whether the two concerns are substantially controlled by the same person/persons.

(b) In case such a disqualification takes place, after the entity has already been appointed as Advisor, the party would be under an obligation to withdraw voluntarily from the disinvestment process, failing which the Government would have the liberty to terminate the appointment / contract.

(c) Disqualification shall continue for a period that Government deems appropriate.(d) Any entity, which is disqualified from participating in the disinvestment process, would not be allowed

to remain associated with it or get associated merely because it has preferred an appeal against the order based on which it has been disqualified. The mere pendency of appeal will have no effect on the disqualification.

(e) The disqualification criteria would come into effect immediately and would apply to all the Advisors already appointed by the Government for various disinvestment transactions, which have not yet been completed.

(f) Before disqualifying a concern, a Show Cause Notice why it should not disqualified would be issued to it and it would be given an opportunity to explain its position.

(g) Henceforth, these criteria will be prescribed in the advertisements seeking Expressions of Interest (EOI) from the interested parties to act as Advisor. Further, the interested parties shall be required to provide with their EOI an undertaking to the effect that no investigation by a regulatory authority is pending against them. In case any investigation is pending against the concern or its sister concern or against the CEO or any of its Directors/Managers/Employees, full details of such investigation including the name of the investigating agency, the charge/offence for which the investigation has been launched, name and designation of persons against whom the investigation has been launched and other relevant information should be disclosed, to the satisfaction of the Government. For other criteria also, similar undertaking will be obtained along with EOI. They would also have to give an undertaking that if they are disqualified as per the prescribed criteria, at any time before the transaction is completed, they would be required to inform the Government of the same and voluntarily withdraw from the assignment.

(h) The interested parties would also be required to give an undertaking that there exists no conflict of interest as on the date of their appointment as Advisors in handling of the transaction and that, in future, if such a conflict of interest arises, the Advisor would immediately intimate the Government of the same. For disinvestment proposes, 'conflict of interest' is defined to include engaging in any activity or business by the Advisor in association with any third Party, during the engagement, which would or may be reasonably expected to, directly or indirectly, materially adversely affect the interest of Government of India or the Company (being disinvested) in relation to the transaction, and in respect of which the Advisor has or may obtain any proprietary or confidential information during the engagement, that, if known to any other client of the Advisor, could be used in any manner by such client to the material disadvantage of Government of India or the Company (being disinvested) in the transaction. The conflict of interest would be deemed to have arisen if any Advisor firm/concern, has any professional or commercial relationship with any bidding firm / concern for the same

disinvestment transaction during the pendency of such transaction. In this context, both Advisor firm and bidding firm would mean the distinct and separate legal entities and would not include their sister concern, group concern or affiliates etc. The professional or commercial relationship is defined to include acting on behalf of the bidder or undertaking any assignment for the bidder of any nature, whether or not directly related to disinvestment transaction.

(i) On receiving information on conflict of interest, the Government would give the option to the Advisor to either eliminate the conflict of interest within a stipulated time or withdraw from the transaction and the Advisor would be required to act accordingly, failing which Government would have the liberty to terminate the appointment/contract.

Benefits of Disinvestment

Some overall benefits of Disinvestment, irrespective of the approach used are as follows:

For the Government

1.

Raising valuable resources for the government, which could be used to bridge the fiscal deficit for one, but also for various developmental projects in key areas such as infrastructure. The Financial Times (20th May 2009) quotes a report brought out by the French securities firm CLSA to state: “A reduction in shareholding to hypothetically 51% across all the state-owned entities could bring in USD 62 bn (Rs. 2.9 lakh crore approximately) at current market prices (thus valuing the government holdings in listed state-owned companies at Rs 8.8 lakh crore). Even a 10% stake sale in the ten large public state undertakings that are likely disinvestment candidates can bring in USD 17 bn (Rs. 80000 crore approximately)". Another such estimate by Delhi-based PRIME Database suggests that if the Government follows up on its promise of bringing down its equity stake in listed CPSEs to 86%, it can mobilise Rs. 7248 crore going by the current market valuations.

2. Apart from generating a one-time sale amount, a lot of these stake sales would also result in annual revenues for the government, as has been shown in the past. 

3.

The government can focus more on core activities such as infrastructure, defense, education, healthcare, and law and order.

4. A leaner government with reduction in the number of ministries and bureaucrats.

For the Markets and Economy

    1.   Brings about greater efficiencies for the economy and markets as a whole 

For the Taxpayers

1.

Letting go of these assets is best in the long term interest of the tax payers as the current yield on these investments in abysmally low. Even if the funds from the sale are not utilised for bridging fiscal deficit, a much better utilisation of these ‘stuck’ funds would be into critical sectors such as healthcare, education and infrastructure

2. Unlocking of shareholder (in this case the citizens of India) value

For the Employees

    1.   Monetary gains through ESOPs and preferential issue of shares    2.   Pay rises, as has been seen in past divestments    3.   Greater opportunities and avenues for career growth- further employment generation

For the PSUs

    1.   Greater autonomy leading to higher efficiencies 

Benefits specific to each approach used for Disinvestment

Complete Privatisation

In most parts of the world, it has been proven that Privatisation brings the maximum returns to the tax payer, thus making it the best form of Disinvestment. Since complete control is given off by the government, the reforms are immediate, and the results start showing soon.

Majority Sale

A majority stake sale to a strategic buyer has its positives in getting a superior valuation (though sometimes not as good as an outright sale) for the government purely due to market dynamics. With some of the PSUs being virtual monopolies, private players have a lot of interest in acquiring stakes in them. It was because of this reason that this became the chosen vehicle for Disinvestment in the early 2000's. 

Minority Sale

Given the current political and social compulsions, complete privatisation may not be a solution in the Indian context. Even a majority stake sale would be met with opposition. Offloading a part of the government’s equity by way of a minority stake sale is the only workable option, as in this case, the control would still be with the government. Minority stakes can be sold either to selected private players, or to the public by way of a Public Offer or auctioned off to financial institutions. Offloading minority stakes to private players does not make sense for the government since valuations would be driven down by the fact that the government still retains control/ decision making of the company. This has been proven in transactions in the past wherein the P-E ratios typically accompanying such a sale were found to be low. 

On the other hand, a minority stake sale via a Public Offer has several benefits. 

For the Government

1. Minority Stake sales via Public Offers provide benefits of long term capital appreciation- Disinvestment done in a staggered manner can help the government realize the real ‘value’ of these PSUs, as has been shown by recent PSU IPOs wherein the valuation that the market has given to the PSUs is far higher than the original offer price. For example, in the case of NTPC, the Government sold each share at Rs. 62 in its IPO in October 2004. In its FPO in February 2010, the Government was able to realise Rs. 201 for the same share!

For the PSU 

1.  Listing leads to better and timely disclosures, bringing in greater transparency and professionalism, thus protecting the interest of the investors

2. Greater efficiency by way of being accountable to thousands of shareholders3. Listing provides an opportunity to raise capital to fund new projects/undertake

expansions/diversifications and for acquisitions. An initial listing increases a company's ability to raise further capital through various routes like preferential issue, rights issue, Qualified Institutional Placements and ADRs/GDRs/FCCBs, and in the process attract a wide and varied body of institutional and professional investors.

4. Listing raises a company's public profile with customers, suppliers, investors, financial institutions and the media. A listed company is typically covered in analyst reports and may

also be included in one or more of indices of the stock exchanges.

For the Employees

1. Though there could be opposition from employees of some PSUs, this can be countered and also turned into a favourable situation by offering ESOPs/preferential issue of shares to them. This would provide tangible monetary benefits to them, and also make them an interested party in better performance of their companies.

For the Markets and Economy

1. These PSU IPOs present the best opportunity of widening the equity investing retail base by providing greater and safer investment opportunities. Curbs and measures, however, would need to be put in place to ensure that institutional investors do not run away with the bulk of this sale and only retail participation is allowed in these issues. Public offers have been one of the frequently used techniques in the UK to transfer state assets and businesses to private ownership. The method has been fairly successful, having increased the shareholding population from 4% to 25%. For example, British Telecom alone created 2.1 million shareholders in the UK, when privatized.

2. Listed PSUs already form about 30% of the total market capitalisation. With more PSUs being listed, this would provide a greater depth and width to our capital market

A minority stake sale via Auctioning to financial institutions also has certain benefits: 

     1.  Bidding by a group of large, informed investors would provide the highest likelihood of the assets receiving the           best valuation      2.  The process takes relatively little time as the modalities are less demanding than those for a full-scale public offer          process that can take many months.      3.  This will provide a direct conduit for interested foreign investors     4.  Retail participation can come in through the mutual funds, Provident Funds and the NPS.

Arguments against Disinvestment (and Defenses)

There have been several arguments that have been raised against disinvestment, both specific as well as general in nature. Some of them are listed below, with their counter-arguments (in bold italics):

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The Government will forego dividends on the equity holdings by selling off its stakes. According to the Public Enterprises Survey 2007-08, the Central PSUs taken together contributed Rs. 19,423 crore to the central exchequer in 2007-08 as dividends, witnessing an increase of over Rs. 4,000 crore from 2005-06. Considerable disinvestment of government’s stakes in CPSEs would squeeze this important source of revenue for the Government. 

 Apart from generating a one-time sale amount, a lot of these stake sales have also resulted in higher annual revenues for the government, thus nullifying the effect of loss of dividends. More so, while they were dividend yielding, there were annual outgoes associated with them, thus again nullifying the effect of dividends. Moreover, the loss of dividends, if any, is well compensated by gains in capital appreciation. 

-

A nationwide survey conducted by the NCAER in 2007-08 revealed that only 0.5% of Indian households invest in equities. A recent article in The Economist (21st May 2009) estimates this section to be 0.7% of Indian households. Thus, in case the public offer route is followed, it would imply transferring the common ownership of the PSUs by all Indians into the private ownership of 0.5-0.7% of Indians. Thus essentially implying that the real beneficiaries would not be the

ordinary retail investor but institutional investors. 

 While the current equity penetration remains low, it is precisely these PSU IPOs themselves that present the best opportunity of widening the retail base. To also ensure that institutional investors do not run away with the bulk of this sale, curbs and measures can be put in place that ensure only retail participation in these issues. 

-

Using funds made available from disinvestment to bridge the fiscal deficit is an unhealthy and a short term practice. It is said that it is equivalent of selling ‘family silver’ to meet short term monetary requirements. Borrowing which is the currently used practice for bridging fiscal deficit, should continue to be used since while borrowing, the government has to make interest payments in the future against a one-time borrowing from the market, in the case of disinvestment, future streams of income from dividends are forgone against a one-time receipt from the sale of stakes.

 Letting go of these assets is best in the long term interest of the tax payers as the current yield on these investments in abysmally low. Even if the funds from the sale are not utilised for bridging fiscal deficit, a much better utilisation of these funds would be investments into critical sectors such as healthcare, education and infrastructure or for retiring government debt rather than letting the low yielding capital remain locked in these assets.  

-

Effective tax rate for the CPSEs taken together in 2006-07 was 30.78%, while the average effective tax rate for private sector companies in the same year was 19.5% only (as per the Statement on Revenue Forgone, Receipts Budget, 2008-09). Criticism stems from the fact that while not only a major tax revenue source will be lost, the private sector which ideally should be paying an equivalent tax rate is exempted due to tax concessions. 

 As mentioned above, while there will be a loss in terms of dividend and tax income, this shortfall would be more than adequately compensated by revenues and capital gains. More so, the returns on capital employed for the entire PSU sector is very low and the government can find alternate avenues for deploying this capital which would yield far better returns, both monetarily and otherwise. All the same, revisions need to be made in tax laws to ensure that all such loopholes currently being exploited by the corporate sector are closed.  

-Profit making PSUs should not be disinvested as they are performing well in any which way

 A good example against this criticism would be BALCO which was a profit making company that earned the Government an average dividend (over eight years) of Rs. 5.69 cr every year on the equity sold. The Government post-disinvestment, however started getting Rs. 82.65 crore every year. Similarly, CMC was a very well managed and profitable company, yet the average dividend was only 0.80 crore. The Government's benefit, post-disinvestment however was Rs. 15.2 crore annually. Similarly, Maruti Udyog Ltd. gave average returns to the tune of Rs. 13 crore annually to the Govt. and IPCL gave Rs. 16.24 crore on equity sold against Rs. 242 crore and 149 crore respectively post-disinvestment. There can possibly be no justification of maintaining public sector character in such companies, especially them being non-core sectors. 

-Employees of PSUs would lose jobs

Past privatisations have shown that these fears are totally unfounded. Some of the companies started the process of restructuring and accepted some voluntary retirement applications but no retrenchments were made. These companies gave VRS to the employees, at scales, which were normally higher than the Government VRS. Shareholders Agreement with private companies normally have a provision that employees interest would be protected by ensuring VRS, which is higher or equal to the Government VRS, if there is a need for restructuring in the number of employees. More so, such exercises were done during the public sector regime also. It has been reported that the response to VRS offered to employees before disinvestment was also sometimes lukewarm as the employees expected a better package after privatisation by the strategic buyer, if and when VRS was offered to them. Very often additional recruitment also took place in privatised companies and the wages increased. To give an example, wages increased by an average of Rs. 1600 per employee in Modern Food Industries Limited in spite of the fact that the company had to approach BIFR within months of being privatised. Hindustan Levers took measures to financially restructure the company and bring it out of BIFR, at their own expense. Had Modern Foods remained a Government Company, the tax payer would have paid for financial restructuring of the company perhaps repeated by another restructuring a couple of years later, as is usual in the public sector. In BALCO, wages had not been increased after April 1999, even though a revision was due. In spite of a loss of about Rs. 200 crore due to the strike which happened as a result of the privatisation exercise, an ex-gratia payment of Rs. 5,000/- was paid to all employees and a long term wage agreement for a period of five years was entered into by the Management with the employees in October 2001, which guaranteed benefits of 20% of basic pay to each employee, besides increase in a number of allowances.  

-

Complete Privatisation may result in public monopolies becoming private monopolies, which would then exploit their position to increase costs of various services and earn higher profits It needs to be ensured that Privatisation leads to greater competition in all cases 

-Complete Privatisation results in a situation where political compulsions may make companies being sold cheap to preferred parties

 The process followed for Privatisation needs to be very fair and transparent to ensure a situation such as this does not arise 

-A majority stake sale done to another CPSE results in no real change in ownership, and is thus just hogwash

 This is fair to some extent, though it must be realized that some of the CPSEs are very well run, competitive and profit making. Thus, a sale of a loss making CPSE to a well performing CPSE can be a proposition well worth considering. 

-

Public Offer being the chosen approach for Disinvestments does not yield the best realisation on the assets and is a far too time consuming process. Auctioning to financial institutions (QIBs) should be the preferred modus operandi since it gives the best realisation on the assets, and has minimal transaction cost

While the realisation on assets might be higher in case of an auctioning process, it must be remembered that the Government is not a private enterprise and hence should not be looking at short-term gains. It should look at the greater good and sell these stakes by public offers to increase retail participation in the capital markets as well as to increase the depth and width of the capital markets. In any case, the loss is minimal as very small stakes are being sold. The real gains for the government lie in the appreciation post-listing. Let us look at the PSU IPOs since 2004 with a trading period of over 1 year. The

value of the government holding, courtesy the market, has gone up nearly 3 times from Rs. 90467 crore on the issue date to Rs.249227.14 crore (as on 17 August 2010). 

Is this the right time for Disinvestment? 

With the equity markets having come off their historic lows in March 2009, there are certain signs of recovery. However, this should not be of any concern to the Government as PSUs, being high quality paper, would always find ready investors if the pricing is reasonable. PSU disinvestment of 10% as per the Government’s announced intentions, at attractive prices to retail investors, could ensure a strong message to the investment community about the Government’s resolve to continue with reforms.