Disinvestment in CPUs of India

There has been a phenomenal and tremendous growth of public enterprises in India. As industrialists were not coming forward to set up heavy industries in the country, the government took the initiative to set up such enterprises to bridge the gaps in the economy. They were established to attain the ‘commanding height’ of the economy of the country and accelerate the growth of industrialization and fast economic development. They influence the growth in the economy and are affected by the overall growth in the economy. Later, some of these enterprises became chronically sick industries and started incurring losses. With economic liberalization, post-1991, sectors that were the exclusive preserve of the public sector enterprises were opened to the private sector. Disinvestment of government equity in PEs began in 1991-92. The Industrial Policy Statement of 1991 stated that the Government would divest part of its holdings in select public enterprises. Broadly, the objectives of divestment have been to raise resources, encourage wider public participation and bring in greater market accountability.

Disinvestment Policy

The policy of disinvestment has largely evolved through the policy statements of Finance Ministers in their Budget Speeches. It may be construed to be an integral part of the reforms triggered post-1990's economic crisis. In brief, the policy on disinvestment can be divided into four phases, viz,

1991 to 1999: When the focus was on the disinvestment of the minority shareholding in favor of financial institutions.

1999 to 2004: In the period the focus was on disinvestment through strategic sale.

2005 to 2014: The focus is on disinvestment of minority stakes in the domestic market to the general public in conjunction with the issue of fresh equity by the company.

Since 2014: The exuberance in the market following Narendra Modi’s swearing-in has provided the backdrop for stake sales to go through.

Features of Disinvestment Policy

1. Public Sector Undertakings are the wealth of the Nation and to ensure this wealth rests in the hands of the people, promote public ownership of CPSEs;
2. While pursuing disinvestment through minority stake sale in listed CPSEs, the Government will retain majority shareholding, i.e. at least 51 percent of the shareholding and management control of the Public Sector Undertakings;
3. Strategic disinvestment by way of sale of a substantial portion of Government shareholding in identified CPSEs up to 50 percent or more, along with the transfer of management control.

Let us discuss the summary of disinvestment policy since 1991-92 till date in the following points:

• In the Interim Budget of 1991-92, it was announced that the Government would disinvest up to 20% of its equity in selected PEs in favor of mutual funds and financial and institutional investors in the public sector.
• In the Budget speech of 1992-93, the cap of 20% was reinstated and the list of eligible investors was enlarged to include FIIs, employees, and OCBs.
• In April 1993, the Rangarajan Committee recommended disinvesting up to 49% of PSEs equity for industries explicitly reserved for the public sector and over 74% in other industries. But the then Government did not take any decision on the Committee’s recommendations.
• In the Budget speech of 1996-97, as per the Common Minimum Programme, announced the setting up of Disinvestment Commission for 3 years. CMP also emphasized adding more transparency to the disinvestment process and examine the non-core areas of the public sector.
• In the Budget speech of 1998-99, it was announced that the Government shareholding in PEs should be brought down to 26% on the case-to-case basis, excluding strategic CPSEs where the Government would retain the majority shareholding. The interest of workers was to be protected in all the cases. For this purpose, on 16 March 1999, the Government classified the PSEs into Strategic and Non-Strategic areas. It was decided that Strategic PEs would be those in areas of (i) Arms and ammunition and allied items of defense equipment, defense aircraft and warships; (ii) 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); (iii) Railway transport; and (iv) All other PEs were to be considered Non-Strategic.
• In the Budget speech of 1999-2000, it was announced that the Government would 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.
• In the Budget speech of 2000-01, focused sifted on restructuring and revival of viable PEs, closure of PEs which cannot be revived; bringing down Government shareholdings in Non-Strategic PEs to 26% or lower, if necessary, and protection of the interest of workers. The receipts from disinvestment would be used for the social sector, restructuring of PEs and for the retirement of public debt.
• In the suo-moto statement of 2002, the specific aim was given to the Disinvestment Policy- modernization and up gradation of PEs, the creation of new assets, generation of employment and retiring of public debt.
• In the Budget speech of 2003-04, the Government announced details regarding the setting up of Disinvestment Fund and Asset Management Company to hold, manage and dispose of the residual holdings of Government.
• In 2004, with the change in the Government, there was a change in the outlook of Disinvestment Policy. The Government adopted the National Common Minimum Programme, which outlined the policy of the Government with respect to the Public Sector. The UPA Government pledged to devolve full managerial control and commercial autonomy to successful, profit-making companies operating in a 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 PSEs.
• It favored the sale of small proportions of Government equity through IPO/FPO without changing the character of PEs. In regard to this, it approved the listing of unlisted profitable PEs subject to residual equity of the Government remaining at least 51% and Government retaining the control of management.
• It also constituted the formation of the ‘National Investment Fund’, where the proceeds from disinvestment of PEs would be channelized. 75% of annual income of NIF would 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 PEs.
• On 27 January 2005, the Government approved in principle: Listing of currently unlisted profitable PEs, 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 PE concerned or independently by the Government, on a case-by-case basis, subject to the residual equity of the Government remaining at least 51% and the Government retaining management control of the PE; Sale of minority shareholding of the Government in listed, profitable PEs either in conjunction with a Public Issue of fresh equity by the PE concerned or independently by the Government, subject to the residual equity of the Government remaining at least 51% and the Government retaining management control.
• Disinvestment Policy of Shri Narendra Modi led NDA government has been articulated in the recent President’s addresses to Joint Sessions of Parliament and the Finance Minister Shri Arun Jaitley’s Budget Speeches 2014-15. The salient features of the Policy are- (i) Citizens have every right to own part of the shares of public enterprises, (ii) Public enterprises are the wealth of the Nation and this wealth should rest in the hands of the people, (iii) While pursuing disinvestment, Government has to retain majority shareholding, i.e. at least 51% and management control of the Public Sector Undertakings

Approach for Disinvestment

Disinvestment through minority stake sale

The government approved the following action plan for disinvestment in profit-making government companies on 5th November 2009:

1. Already listed profitable CPSEs (not meeting mandatory shareholding of 10%, which stands revised to 25%) are to be made compliant through ‘Offer for Sale’ (OFS) by Government or by the CPSEs through issue of fresh shares or a combination of both
2. Unlisted CPSEs with no accumulated losses and having earned net profit in three preceding consecutive years are to be listed.
3. Follow-on public offers would be considered taking into consideration the needs for capital investment of CPSE, on a case by case basis, and Government could simultaneously or independently offer a portion of its equity shareholding.
4. All cases of disinvestment are to be decided on a case by case basis
5. The Department of Investment and Public Asset Management (DIPAM) is to identify CPSEs in consultation with respective administrative Ministries and submit proposal to Government in cases requiring Offer for Sale of Government equity

(b) Strategic Disinvestment

1. To be undertaken through a consultation process among different Ministries/Departments, including NITI Aayog.
2. NITI Aayog to identify CPSEs for strategic disinvestment and advice on the mode of sale, percentage of shares to be sold of the CPSE and method for valuation of the CPSE.
3. The Core Group of Secretaries on Disinvestment (CGD) to consider the recommendations of NITI Aayog to facilitate a decision by the Cabinet Committee on Economic Affairs (CCEA) on strategic disinvestment and to supervise/monitor the process of implementation.

(c) Comprehensive management of GoI’s investment in CPSEs

1. The Government recognises its investment in CPSEs as an important asset for accelerating economic growth and is committed to the efficient use of these resources to achieve optimum return.
2. The Government will achieve these objectives by adopting a comprehensive approach for addressing critical inter-linked issues such as leveraging of assets to attract fresh investment, capital restructuring, financial restructuring, etc.
3. Different options for optimal utilization of Government’s investment in CPSEs will be assessed to adopt suitable investment management strategies to improve investors’ confidence in the CPSEs and support their market capitalization which is essential for raising fresh investment from the capital market for their expansion and growth.
4. Efficient management of investment in CPSEs shall be ensured through rationalization of decision making process for all related issues and seamless inter-departmental coordination in the matter.

Conclusion

Public Enterprises played a catalytic role as an engine of growth in India. However, later on, PEs performed poorly and become deep swamps of inefficiency. They were taken to be the ‘white elephants’. This paved the way for disinvestment in the new industrial policy. This policy clearly laid emphasis on their disinvestment. Later, the NDA government followed this policy and pushed the process of disinvestment more vigorously. The UPA-1 government has declared that no profit-making PEs will be disinvested and ministry of disinvestment also has been closed down. It appears that the process of disinvestment will be slowed down. The UPA-2 government had given a late push to stake sales but was unable to meet the target. The volatility in the stock market prompted the UPA government to adopt a cautious stance. However, the exuberance in the market following Narendra Modi’s swearing-in has provided the backdrop for stake sales to go through. But there were several determinants which would determine the success of the disinvestment programme. If the market remains buoyant and the government follows through with the execution of the budget steps then it would be possible to meet the target. The sale would depend on the market’s ability to absorb a series of disinvestments as the government has lined up plans to sell stakes in state-run firms such as ONGC, NHPC, and REC.

References

• GOI, Budget Speech of Finance Minister 2012, 2013, 2014
• GOI, Economic Survey 2012-13, 2013-14
• GOI, Public Enterprise Survey 2011-12, 2012-13
• Prakash; Jagdish; Rao, Nageshwar; & Shukla; M. B. (2002), Administration of Public Enterprises in India, Mumbai, Himalaya Publishing House.
• Rao, Nageshwar; Srivastava, Vinay K. (2014), New Delhi, Public Enterprises and Changing Scenario, Research India Press.
• Srivastava Vinay K. (2007), Privatisation of Public Enterprises in India, Allahabad, Kitab Mahal.