Cover Feature

Disinvestment in public sector enterprises

V. Gangadhar Dr. M. Yadagiri

The new economic policy and economic reforms in India have given rise to
significant focus for disinvestments or privatization of Public Enterprises. The
basic objective of this process is to mitigate the budget deficit of the government
on the one side and reduction of the burden of financing public enterprises
through budgetary support on the other. The Government of India has taken
several measures for disinvestment and had setup an administrative machinery
to implement its disinvestments programme. This disinvestment process involves
valuation of assets, selecting appropriate modalities, inviting bids and deciding
appropriately based on the bids. The disinvestment in practice of the Central
Government is not encouraging. The amount of proceeds realized is only 40.9%
of the target of the disinvestments for the decade of 1991-2001. The
performance of the disinvestments policy in relation to budget deficit and capital
receipts is also not much significant. If government decides to dispose off 23
selected listed public sector enterprises for a 10% and 20% of equity can realize
Rs.8,060.04 crores and 16,120.08 crores respectively. The overall performance
of the Government with regard to disinvestment is not much appreciable.

T
he public sector is at the cross
roads. A sector which was to
achieve commanding heights
and was taught to be the correct path
for India's economic growth, right from
independence stands today condemned
not only by those whose tax paid money
went into its expansion but also by our
makers. A sector which characterised
as over invested but gives poor returns,
over employed but yields low produc-
tivity, excessive capital equipment but
under utilised capacity, excessive con-
trols but lower efficiency, abandoned
assets but lack of resources and lots of
talent but under utilised. A sector which
Government wants get rid off 1.
The New Economic Policy initiated
in July 1991, clearly indicated that the
Department of Commerce & Business
Management, Kakatiya University,
Warangal-506 009, A.P.
Lecturer in Commerce, L. B. College,
Warangal-506001
Public Enterprises have shown a very
negative rate of return on capital em-
ployed. On account of this phenomenon
many public sector enterprises have
become more a burden than an asset to
the Governmeznt 2 . The economic
policy comprises various policy meas-
ures and changes. The objective of such
policy is "to improve the efficiency of
the system" 3.
In order to give some concreteness
to changing role of the public sector,
the VIII Plan has identified the princi-
ples governing public sector invest-
ments in the following manner:
i) The public sector should make
investment only in those areas
where investment is mainly
infrastructural in nature and where
private sector participants are not
likely to come forth to an adequate
extent within a reasonable time
prospective.
ii) The public sector must withdraw
from the areas where no public
purpose is surved by its presence,
and
iii) The principle of market economy
should be accepted as the main
operative principle by all public
sector enterprises, unless the
commodities and services
produce and distributed are
specifically for protecting the
poorest in the society.
The approach paper of IX Plan also
states that "Disinvestment will be
considered up to 51 per cent and
beyond in the case of PSUs operating
in a non-strategic and non core sector".
Further, the Government is of the
view that the public enterprises have
not generated internal surpluses on
account of heavy losses. In view of this
the Government has changed its
direction in favor of the private sector
and the market economy. The reasons
for such perceptible change in the

aptitude of the Government are as
follows:
i) PEs seldom take advantage of a
competitive profit maximizing
market environment.
ii) They are encountered with nu-
merous non-commercial objec-
tives.
iii) They operate in non-competitive
markets.
iv) Their management is more
bureaucratic entrepreneurial.
v) They are impeded by the execu-
tive, legislative and even the ju-
diciary wings of the system in
day-to-day management deci-
sions.
vi) They lack initiatives to improve
performance ("The carrot is stale
and the stick is almost broken").
vii) The accountability for perform-
ance is hazy, and
viii) The final sanction of going
bankrupt is non-existent.
In this direction the reforms to
improve the PEs performance have
been recognised, appreciated and
identified. To provide a solution to the
problems of public sector the
Government has decided to adopt a
new approach i.e., disinvestment
policy. The disinvestment policy is a
gaining lot of significance. The
Government of India and the State
Governments have seriously perceiving
the policy of disinvestment to lesson
the burden of financing public
enterprises.
"Disinvestment is a wider term
extending from dilution of the stake of
the Government to a level where there
is no change in the control to dilution
that results in the transfer of
management" 4 . The transfer of
ownership may occur when in an
enterprise the dilultion of Government
ownership is beyond 51 per cent. The
disinvestment implies that the
Government will sell to public or
private entreprises / public institutes
Cover Feature
part of its holding in public sector
enterprises.
Objectives of the study :
The study of disinvestment of
Central Government Public Sector
Enterprises is aimed at examining the
following :
Firstly, to analyze the objectives,
existing procedures, administrative
machinery for disinvestment.
Secondly, to examine the
performance of the disinvestment
against the target set for a current
decade of 1991-2001 and bring out the
difficulties in achieving the target of
disinvestment.
Thirdly, to relate and bring out the
significance of disinvestment proceeds
vis-a-vis the budget deficit and capital
receipts.
Fourthly, to present the progress
and prospects of disinvestment.
Finally, to bring out the findings of
the study.
The reasons for disinvestment
There are basically two main rea-
sons in support of disinvestment. One
is to provide fiscal support and the
other is to improve the efficiency of the
enterprise. The argument for fiscal sup-
port emphasises that the resources
raised through disinvestment must be
utilised for retiring past debts and there
by bringing down the interest burden
of the Government.
The second argument in support to
improve the efficiency of public
enterprises through disinvestment is the
contribution that it can make to
improve the efficiency of the working
of them.
The objective of the disinvestment
The following are the main
objectives of disinvestment policy of
the Government.
i) To reduce the financial burden on
Government.
ii) To improve public finances.
iii) To introduce, competition and
market discipline.
iv) To find growth.
v) To encourage wider share of
ownership.
vi) To depoliticise essential services.
As a part of the economic reforms,
the public sector reforms are also
initiated to improve their efficiency and
productivity. In this direction
disinvestment and privatisation are
gaining attention of the Government.
The New Industrial Policy provides
that "In order to raise resources and
encourage wide public participation, a
part of the Government share holing in
the public sector, would be offered to
mutual funds, financial institutes,
general public and employees". This is
a process for disinvestment in the
public enterprises.
Goals of the disinvestment
The Goals of the disinvestment are
clearly identified and classified into
short term and long term. Disinvestment
may be undertaken to reduce or mitigate
fiscal deficit, bring about a measure of
economic stabilisation or to improve
efficiency in public enterprises through
structural adjustments. It is in this
context the PE's have been demanding
that a part of the disinvestment process
should be allowed to retained by PEs in
order to:
i) Help them upgrade their technol-
ogy to become competitive.
ii) Build competence and strengthen
their R & D.
iii) Rationalise and retrain their work
force.
iv) Initiate diversification and
expansion programmes.
In the present era of globalisation,
disinvestment could provide the stimu-
lus to some robust PE's to grow and
become truly global corporations.
The disinvestment process
The disinvestment process is
related to the procedure adopted by the
Government. This procedure involves

the valuation of shares and modalities
to be adopted for sale of such shares.
There are three broad methods which
are used for valuation of shares:
1. Net Asset Value Method: This will
indicate the net assets of the
enterprise as shown in the books of
accounts. It shows the historical
value of the assets. It is cost price
less depreciation provided so far on
assets. It does not reflect position
of profitability.
2. Profit Earning Capacity Value
Method: The profit earning
capacity is generally based on the
profits actually earned or
anticipated. It is an accounting
profit. It is excess of earnings over
expenditure. It does not really
indicate the intrinsic value of the
enterprises.
3. The Discounted Cash Flow
Method: This technique is popu-
larly used to evaluate viability of
an investment proposal. In this
method the future incremental cash
flows are forecasted and discounted
into present value by applying cost
of capital rate. This method indi-
cates the intrinsic value of the en-
terprise. This method is a far more
comprehensive and complicated
method of reflecting the expected
income flows to the investors.
Out of these three methods the
discounted cash flow method is greatest
relevance though it is the most difficult.
Modalities of disinvestment
There are three broadly acceptable
and transparent modalities for
disinvestment. These are given below:
(a) Offering shares of public sector
enterprises at a fixed price through
a general prospectus. The offer is
made to the general public through
the medium of recognised market
intermediaries.
(b) Sale of equity through auction of
share amongst pre determined
clientele, whose number can be a
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large. The reserve price for the
PSE's equity can be determined
with the assistance of merchant
bankers.
(c) Offer for sale determining the fixed
price for sale of a public enterprise,
inviting open bidders and accepting
highest bidders quotation for sale.
Privatisation
The privatisation of PE's as a
concept is a fairly new. It was originated
in 1980's. The word privatise first
appeared in the dictionary in 1983,
which defined "privatise" as "to make
private, especially to change from
public or Government ownership to
private control or ownership".
Privatisation is the act of "relying more
on societies, private institutions and
less on Government to satisfy the needs
of the people" 5.
Privatisation implies a change in
ownership resulting in a change in a
management 6 . The privatisation of
public enterprises will occur only when
the Government sells more than 51 per
cent of its ownership to private entre-
preneurs. "The issues relating to the
disinvestment revolve around three
principal questions. Why, how and how
much? The tress on disinvestment, as
against privatization is significant. Pri-
vatization aims at shrinking the role of
the state in economic activities.
Disinvestment on the other hand, has a
much wider connotation as it could ei-
ther involve dilution of Government
stake to a level that result in a transfer
of management or could also be lim-
ited to such a level as would permit
government to retain control over the
organization. Disinvestment beyond 50
per cent involves transfer of manage-
ment, whereas disinvestment below 50
per cent would result in the government
continuing to have a major say in the
undertaking" 7.
However the impression did gain
ground that all efforts at public sector
disinvestment has as their aim, the
reduction of the budget deficit and not
the efficiency of these undertakings or
investing the funds so realised in the
social sector.
Types of privatisation
Privatisations are broadly catego-
rised in to following three types:
i) Privatisation of competitive
firms: Generally, it involves
transfer to the private sector.
Under this method the PE's
operating in competitive markets
free from substantial market
failures. For example privatisation
of competitive industries like
banking and insurance in public
sector .
ii) Privatisation of Monopolies:
This type implies that transfer of
public enterprises with substantial
market power to private sector.
The utilities like telecommunica-
tions, electricity belongs to this
category.
iii) Transfer of public organizations
to private sector: This process of
privatisation involves transfer of
public financed services to the
private sector, which were previ-
ously performed by the public or-
ganisations. This type does not
involve the sale of physical assets.
For example garbage collections,
hospital cleaning, street sweeping,
street repairing, street lighting,
transportation services, water sup-
ply, health and ambulance serv-
ices, fire protection, maintenance
of parks, marines and swimming
pools etc.
Disinvestment machinery
The following is machinery for
disinvestment:
(i) Cabinet Committee on
Disinvestment
The Central Government has set
up a separate "Ministry for
Disinvestment with a cabinet rank
Further the Government has
appointed Cabinet Committee on
Disinvestment (CCD) consisting

of Minister for disinvestment,
Minister for industries and
Finance Minister as its members.
(ii) The Disinvestment Commis-
sion
Disinvestment Commission was
set up by an executive order in
August 1996 as an advisory body
and not as a statutory commission.
It is located in the Ministry of
Industry and that has led to some
difficulties in its smooth
functioning. The Chairman of the
Commission is Mr. G. V.
Ramakrishna.
The primary terms of reference are
to draw up an overall long-term
programme recommend a mode of
disinvestment, supervise the sale
process and monitor the progress of
disinvestment.
The mechanism available to the
Disinvestment Commission in terms of
administrative support, professional
technical inputs has been in adequate
and raises questions about it success-
ful functioning. In the light of this it
may be advisable to have a permanent
statutory disinvestment body under a
separate act which should function in
decentralised manner. Its recommenda-
tions should have credibility and bind
the Government to a transparent proc-
ess of disinvestment. The Disinvest-
ment Commission was abolished in
November 1999.
(iii) The Department of Public
Enterprises (DPE):
DPE was the nodal agency to
steer the disinvestment process.
The department was empowered
to prepare the bundles, advertise
the bids, select the bidders, final-
ize the price and effect the
disinvestments. An empowered
committee of Secretaries was ap-
pointed to oversee the process of
disinvestment affected by the
DPE. The DPE had to furnish the
recommendations on behalf of
the committee to the Cabinet
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Committee on economic affairs,
whose approval was necessary
for seeing the transactions
through.
(iv) Department of Disinvestment:
The Government has set up a new
Department of Disinvestment
after the tenure of the
Disinvestment Commission
ended in Nov, 1999, to establish
a systematic policy approach to
disinvestment and to give a fresh
impetuous to the program
disinvestments, which will
increasingly emphasize strategic
sales of identified PSU's.
Recent trends in disinvestments:
The Finance Minister, while
proposing budget for the year 2001-
2002 has estimated Rs.12,000 crores
from the privatisation proceeds.
In the first round of disinvestment,
began by the P .V. Narsimha Rao,
Manmohan Singh combine in 1991,
driblets of the Equity of 47 PSU's were
sold in bundles consisting of "very
good", "good" and "average" compa-
nies. The rationale then was that it
would be difficult to get rid off "the
average" (loss making) companies. In-
vestors could only buy such companies
if they were tagged on to better per-
forming companies.
In the year 2000-2001, the
Government of India has raised
Rs.1,868 crores against a target of
Rs.1 0,000 crores. In the past 10 years,
the Government has been able to
mobilise only Rs. 20,506 crores from
sale of equity of PSU's against a target
of Rs. 54,300 crores. On account of
this, the Government has lost the
fundamental reason for disinvestment.
The total disinvestment in India
between 1991-97 had up to Rs. 11,291
crores. The target for 1997-98 was
Rs. 4,500 crores, which would reverse
the total to 16,500 crores. On an invest-
ment of Rs. 2 lakh crores in the public
sector, an average annual order of
disinvestment of Rs.2,500 crores works
out to a mere 1.25 per cent. On the other
hand fresh investment in PSE's were
about 4 times the disinvested amount
during the period 1991 to 97. This in-
dicates the slow pace of disinvestment
process in India and also questions ex-
tent and order of effectiveness of the
disinvestment programme in relation to
the goals and public policy. Since the
disinvestment has initiated by the Cen-
tral Government, it is identified that in
39 Central Public Sector Enterprises
enabling the Government to raise about
10,000 crores over the last 6 years. For
this purpose, the Government has ac-
cepted the Commission's recommenda-
tion with respect to Gas Authority of
India Ltd. (GAIL), Container Corpo-
ration of India (ConCol) Ltd. and
Mahanagar Telephone Nigam Ltd
(MTNL). An international issue of
GDR with respect to GAIL and MTNL
is planned, which will help the Gov-
ernment to raise about Rs.35,000 crores
in the current fiscal year.
The Chairman of Disinvestment
Commission, Mr. G. V. Ramakrishna
has given its recommendation on 19
PSE's for disinvestment. (Table -1)
The United Front Government has
initiated an important move for
disinvestment up to 74 per cent or more
of Government holding in 9 loss
making PSEs of the Ministry of Heavy
Industry by the induction of joint
venture. This is also on line with the
report of the Committee on
Disinvestment of shares in Public
Sector Enterprises headed by Sri C.
Rangarajan, former Governor, Reserve
Bank of India, which had indicated that
the level of Central Government
holding in PSE's could be reduced to
less than 51 per cent.
The disinvestment in practice of
central government undertakings
The Group of Ministers (GOM)
consisting of Finance Minister, Petro-
leum Minister, Fertiliser and Chemicals
Minister and Disinvestment Minister,
on the disinvestment of Indian Petro
Chemical Corporation Limited (IPCL)

is in favour of its outright sale. The
GOM will refer a proposal to the Cabi-
net Committee on Disinvestment for
further approval and necessary action.
The IPCL's one of the units at Vadedra
(Gujarat) with a capacity of 130 mil-
lion tonnes would be given on nomi-
nation basis to IOC. The Government
has decided to sell its stake in the other
two units of IPCL Gandhar and
Nagothane would be divested through
the bidding process.
The Central Government has
decided to close down 5 public sector
industries under the control of the
Heavy Industries and Public
Enterprises as they could not be
revived. These were established in
West Bengal. The 5 Enterprises are as
follows:
i) Bharat Process and Mechanical
Engineering Company
ii) Weigh Bridge India
iii) Rehabilitation of Industries
Corporation
iv) Tanner and Footwear Corporation
and
v) National Bicycle Corporation of
India.
According to the Secretary, Union
Ministry of Heavy Industries and Pub-
lic Enterprises, "The. Government was
trying to distance itself from the PSU's
and the Government was above respon-
sible for the bad perfonnance of PSU's".
He has also stated that the PSU's were
being freed from the burden of innu-
merable guidelines issued over the 5
years. As many as 696 guidelines had
been scraped based on the recommen-
dation of the Vittal Committee and units
had been given higher autonomy and
functional freedom. Another Commit-
tee headed by Mr. T. K. A. Nair had
submitted its report on further freeing
of the PSU's from Controls of the Un-
ion Government.
The Central Government
announced its proposal to divesting
majority stake in 5 key heavy industrial
PSU's, including BHEL, HMT, and
Cover Feature
Table - 1
Disinvestment modalities recommended by disinvestment
commission in its reports I, II, III & IV
Modality of No. Name of Public Enteprise
Disinvestment
Trade Sale 3 India Tourism Development
Corporation@, Modern Food
Industries (India) Ltd., Pawan Hans
Limited.
Strategic Sale 7 Hindustan Teleprinters Limited,
Indian. Telephone Industries Limited,
Bharat Refineries & Petrochemicals
Limited, Bangaigaon Refineries &
Petrochemicals Limited, Kudremukh
Iron Ore Co. Ltd., Madras Fertilisers
Limited.
Stable Shareholders 1 Shipping Corporation of India
Limited
Offer of shares 4 Gas Authority of India Limited,
Container Corporation of India
Limited, Mahanagar Telephone
Nigam Limited, Manganese Ore
(India) Ltd.
No disinvestment 1 Rail Technical & Economics
Services
Disinvestment deferred 3 Oil India Limited, Oil & Natural
Gas Corporation, Power Grid
Corporation of India Ltd.
@ lease-cum-management contracts for hotels in prime locations like
Delhi and Bangalore
HEC, instead of diluting only minority business like efficiency. Further, the
stakes in these companies. Government has also taken up the
The Central Government's disinvestment of Hidusthan Zinc.
disinvestment programme seems to According to the agenda of the
have finally taken off. In this current Government it is proposed to sell off
financial year, the first sell of the 12 more PSUs including gaints like
management control of CMC and HTL BSNL, Maruthi and IPCL.
will pass on to private companies TCS On 16th October 2001 the
and HFCL respectively. The sale of Government of India through Ministry
CMC and HTL will fetch the of Disinvestment has transferred 74 per
Government Rs.207 crores amounting cent equity of HTL incorporated in
to less than 2% of the disinvestment 1960 (Hindustan Teleprinters Ltd.,) to
target of Rs.12,000 crores for the year Himachal Futuristic Communications
2001. If the pace of the disinvestment Ltd., (HFCL) for a consideration of
is maintained the Government will get Rs.55 crores. A tripartite agreement to
closure to the target than ever before this effect was signed by HFCL, the
the way CMC and HTL sell-offs have department of Telecom and the
gone through raises the hope of Department of Disinvestment. The
remaining once rolling of with similar HTL is among the 13 PSE's listed for

disinvestment during 2001-2002 is
the 3rd privatisation deal after Modern
Foods and BALCO.
Government has decided to sell 6
Hotels owned by the Indian Tourism
Development Corporation (ITDC)
while the 2 Five Star Ashoka Hotels in
Delhi and Bangalore will be offered on
30 years lease to the private parties. In
addition the 3 Centaur Hotels run by
the Hotel Corporation of India in Delhi
and Mumbai will be hived off along
with the Chefair subsidiary and small
Hotel Rajgir.
The transaction documents for the
sale have been cleared by the Cabinet
Committee on Disinvestment (CCD)
setting the stage for disinvesting
Government equity in these 13 entities
for which the price bids will be invited.
The CCD also decided that in the case
of IBP disinvestment, the bidding will
be restricted to companies which or
prepared to invest Rs.2,000 crores in
the Hydro-Carbon sector within 10
years. Further, it is also proposed for
26 percent disinvestment in Hindusthan
Zinc Limited (HZL) will begin
immediately as the transaction
documents had now been approved.
For disinvestment of Hotels, the
Government of India has invited bid-
ders, 124 bidders have submitted for
purchase of these properties of which
97 had shown interest in the ITDC
Hotels and 18 in the HCL Hotels.
Therefore, it had been decided to stag-
ger the bidding since it would be diffi-
cult for so many bidders to arrange for
bank guarantees altogether.
The more to withdraw Govern-
ment from the business of running ho-
tels had been initiated shortly after
market reforms and liberalization poli-
cies were put in place by the Narasimha
Rao Government in 1991. A short list
of Hotels had been finalised but it has
taken a decade for the disinvestment
to be actually implemented. The CCD
also examined the progress in
disinvestment for 13 PSU's which had
Cover Feature
been identified for action in the cur-
rent fiscal. The time table for
disinvestment was being adhered to
most cases. This would not affect over-
all time table which was not scheduled.
The Department of Disinvestment
has approached the SEBI for relaxa-
tion of take-over norms in regard to
listed PSU's being disinvested. The
Ministry for Disinvestment has written
to the SEBI for change of the open
offer guidelines in regard to the com-
petitive bidding in strategic sales.
Progress of disinvestment
The Government in July 1991 ini-
tiated the disinvestment process in In-
dia, while launching The New Eco-
nomic Policy (NEP). The Government
has appointed The Krishnamurthy
Committee in 1991 and Rangarajan
Committee in 1992. Both the Commit-
tees have recommended disinvestments
to fulfill objectives of modernisation of
the public sector through strengthening
R & D, initiating diversification / ex-
pansion programmes, retraining and
reemployment of employees, funding
genuine needs of expansion, widening
the capital market basis and mitigating
fiscal deficit of the Government. These
committees distinguished between the
short-term and long-term goals of
disinvestment and advised the Govern-
ment not to sacrifice the long-term
goals for the sake of fulfilling the short-
term objectives. The Government has
announced in its NEP that mitigating
the fiscal deficits is the only objective
of disinvestment.
The crucial shift in the Government
policy for disinvestment of PSU's was
mainly attributable to poor perfonnance
of these enterprises and burden of fi-
nancing their requirements through
budget allocations. In 1991 there were
236 operating public sector undertak-
ings, of which only123 was profit mak-
ing. The top 20 profit making PSU's
accounted for 80% of the profits, im-
plying that less than 10% of the PSU's
were responsible for 80% of profits.
The return on public sector investment
for the year 1990-91 was a just over
2%.
The basic charges against the pub-
lic sector for its poor performance are
as follows:
(i) Low rate of ROI
(ii) Declining contribution to national
savings
(iii) Poor capacity utilization
(iv) Over staffing, bureaucratization
leading to excessive delays and
wastage of scarce resources.
Further, it was also identified that
the goals of privatisation is to ensure a
better and more effective use of capital
and greater investment in the social
sector on the one hand and to enhance
the efficiency of public enterprises and
help them integrate into a competitive
environment of the other.
As per the economic survey 2001,
the Government was set out the
following policies towards PSUs:
(i) Bring down Govt. equity in all
non-strategic PSU's to 26 per cent
or lower, if necessary .
(ii) Re-structure and revive potential
viable PSU's.
(iii) Close down PSUS that can not be
revived, and
(iv) Fully protect the interest of
workers.
In this context now, we wish to ana-
lyse the progress of disinvestment in
the Central Government undertakings
from 1991-2001.The table-II presents
the data relating to target and
disinvestment proceeds.
It is clearly evident from the data
of the table that the cumulative pro-
ceeds of total disinvestments from
1991-92 to 2000-2001 was stood at
Rs. 23, 520 crores against a hefty tar-
get of 57,500 crores. The proceeds re-
alised against the target set were only
40.9 per cent. The investment made by
Central Government as on March 31,
1991 was of the order of Rs. 2, 30,140
 Cover Feature

crores. The total proceeds from Table-II

disinvestment worked out to be a mere Disinvestment during 1991-2001
10.22 per cent of the total investment"8.
(Rs.in Crores)
The disinvestment proceeds were
encouraging and exceeded than the tar- PSE's Target Amount Cumulative Disinvestment
get set in 3 out of 10 years, while it Year Offered Realised amount amount realised
was far lower than the target in the rest No. realised as % of Target
of the 7 years. In the year 1991-92 the 1991-92 46 2500 3038 3038 121.52
total proceeds realised were Rs.3, 308
1992-93 29 3500 1961 499 56.03
crores against a target of 2,500 crores,
accounting for 121.52 per cent. Simi- 1993-94 — 3500 1866 6865 53.31
larly in 1994-95 the proceeds realised 1994-95 17 4000 5078 11943 126.95
were Rs.5, 078 crores against a target
of Rs.4, 000 crores forming 126.95 per 1995-96 04 7000 357 12300 5.10
cent. Another attractive year for 1996-97 — 5000 455 12755 9.10
disinvestment proceeds realization was
1997-98 — 5000 902 13657 18.04
1998-99 with Rs.5, 371 crores for a
target of Rs.5, 000 crores, accounting 1998-99 — 5000 5371 19028 107.42
for 107.42 per cent. 1999-2000 — 10000 1892 20920 18.92
In the rest of the years the proceeds 2000-2001 — 12000 2600 23520 21.67
from the disinvestments were abnor-
mally low at 5.1 per cent in 1995-96, Total — 57500 23520 — —
9.1 per cent in 1996-97, 18.04 per cent Average — 575.0 (40.9%) — —
in 1997-98, 18.92 per cent in 1999-
2000 of the target mount. More than Source: Annual Report — 1999-2000, RBI Bulletin, September 2000
50 per cent of the target amount was
realised through disinvestment in 1992- and surplus employees are other utilized for retiring past debts, it would
93 at 56.03 per cent and 1993-94 at major attributes. It was estimated result in the reduction of the interest
53.31 per cent. that there were 2.2 million em- burden of the Government. However,
The reasons for such low propor- ployees in the public sector and all efforts at public sector
tion of disinvestment proceeds as nearly 25% of them are surplus. disinvestments are aimed at reducing
against the target set were identified (v) The Government does not have a the budget deficit and not improving
and presented below: comprehensive policy on the efficiency of these under takings or
disinvestment of its PSU's. reinvesting the funds so realised in the
(i) The unfavourable market condi- social sector.
tions are the main reason respon- (vi) The Government is not transpar-
sible for this down ward trend of ent about its approach towards In the light of this, it is proposed to
disinvestment. sequencing the restructuring and examine the proceeds from disinvest-
ment vis-a-vis deficit financing and
(ii) The proceeds realised through the methods of privatisation of
capital receipts from 1991-2001, with
disinvestment were not paid to the PSE's.
a view to know the share of disinvest-
enterprise concerned for its ex- Deficit Vis-A-Vis Disinvestment ment proceeds in the total deficits and
pansion and improving efficiency One of the objectives of disinvest- capital receipts, there by to bring out
but the Government has been us- ment / privatisation is to mitigating fis- the relative importance of the
ing such disinvestment proceeds cal deficit of the Government. There- disinvestment. Table -III presents the
to bridge the budget deficit. fore, much of the Government earnings relevant data.
(iii) The offers made by the Govern- through disinvestment were used to The data relating to fiscal deficit,
ment for disinvestment of PSUs bringe the budget deficit. Of the Rs.12, disinvestment and capital receipts
are not attractive and stringent bu- 300 crores earned between 1991-96 along with their relative ratios indicate
reaucratic procedures causing for through disinvestment, more than Rs. that the disinvestment proceeds are
discouraging the private sector 7, 300 crores was used to bridge the very meager in relation to both of them.
investors. deficit. It is also argued that if resources The proceeds of disinvestments were
(iv) The valuation process, procedures raised through disinvestments were also fluctuated widely showing greater
 Cover Feature

inconsistency in proceeds realised as
against an increased rate of growth in
fiscal deficit and capital receipts.
The average growth of fiscal defi-
cit as percentage of GDP in the current
decade of 1991-92 to 2000-2001 stood
at 5.7 per cent of GDP, whereas, the
disinvestment proceeds as a percentage
of fiscal deficit on an average was at
3.16 per cent. This forms a very meager
proportion of total deficit during the
decade, and also suggests that the aim
of the Government to mitigate the defi-
cit financing was not materialised
through disinvestment process.
The average capital receipts of the
Government and proceeds from
disinvestment for the current decade
stood at Rs.80, 670.4 crores and 2,352
crores respectively. The proceeds from
disinvestment formed 3.4 per cent of
the capital receipts. When we compare
the capital receipts vis-a-vis proceeds
from disinvestments, we observe that
the former is very meager with wide
fluctuations. The proceeds formed a
highest of 7.89 per cent in 1991-92 and
lowest of 0.91 per cent in 1997-98 of
capital receipts. Therefore, it is ob-
served that the disinvestment proceeds
were totally negligible and insignificant
in relation to both the capital receipts
and fiscal deficit during the decade of
1991-2001. This also indicates that the
Government has not met the
disinvestment proceeds against targets
set. In this context it is promptly said
that," A decade of economic reforms
saw very little activity on the
disinvestment front. Tall promises were
seldom put into action ." 9
Prospects of disinvestments
The disinvestment process of the
Government in the current decade has
not really successful both in terms of
realisation of proceeds from
disinvestments and achieving the tar-
gets for that purpose. The Government
has measurably failed to attract vari-
ous parties for buying the PSU's. The
disinvestment process is still in
progress and we have exhibited the
same in Table-IV.
According to the study conducted
by Business India in September, 200110
relating to disinvestment of 23 listed
PSU's shows that the Governrnent can
easily mop up Rs.7982.02 crores by
selling 10 per cent of the equity and
15,964.04 crores by rolling 20 per cent
of equity as per the price quoted in
Bombay Stock Exchange as on 30th
August, 2001.
In order to bring out the value of
23 PSU's which are on the agenda of
disinvestment in relation to current
market price, we have revised the Busi-
ness India's prospective proceeds by
taking prices on 13th November, 2001,
and presented in the following table
with revised 10 per cent and 20 per cent
prospective proceeds along with
Governrnent's holding.

Table-III
Deficit Financing and Disinvestment Proceeds
Rs. in Crores

1991- 1992- 1993- 1994- 1995- 1996- 1997- 1998- 1999- 2000- x
Particulars 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

1. Target of 2500 3500 3500 4000 7000 5000 5000 5000 10000 12000 575.0
Disinvestment

2. Amount realised 3038 1961 1866 5078 357 455 902 5371 1892 2600 2352
from Disinvestment

3. Amount realised as 121.52 56.03 53.31 126.95 5.10 9.101 8.04 107.42 18.92 21.67 53.81
percent of Target

4. Fiscal Deficit 36325 40173 60257 57703 60243 66733 83937 113349 108898 111275 74389.3

5. Fiscal Deficit as 5.9 5.7 7.0 5.7 5.1 4.9 5.9 6.4 5.6 5.1 5.7
percent of GDP

6. Disinvestment as
percent of Fiscal 8.36 4.88 3.1 8.8 0.6 0.7 1.0 4.7 1.7 2.3 3.61
Deficit

7. Capital Receipts 38528 36178 55440 68695 58338 61544 99077 129856 124234 134814 80670.4

8. Disinvestment as% 7.89 5.42 3.37 7.39 0.55 0.74 0.91 4.14 1.62 2.01 3.4
of Capital Receipts

Source: Annual Report -1999-2000, Supplementary to RBI Bulletin September 2000.

 Cover Feature

Table - IV : The Progress of PSUs Disinvestment

(Rs. In Crores)
S. Name of the PSU Date Percentage Amount Private Sector Company Purchased
No. of Equity Realised the PSUs
Disinvested
1. Bharat Aluminium 23rd Feb., 51 555.5 Sterilite Industries Ltd.
Company Ltd., (BALCO) 2001 (Reserve
price
Rs. 359
2. Juhu Centaur Hotel HCI 10th Nov., Out right 153.00 Mr. Ajit Karkar, Tulip Hospitals
2001 sale (Reserve Ltd., Mumbai
Price
Rs. 101.6)
3. Rajgir Hotel-HCI 10th Nov., Out right 6.51 Impact Travels Ltd.,
2001 sale (Reserve
price of
Rs. 3.86
4. Hindustan Zinc Ltd., 26 The bid of Sterilite Industries was
(HZL) rejected by the CCD due to lower
bid price than the reserve price
5. Indian Petrochemical 7th Nov., Out right The Group of Ministers (GOM) on
Corporation Ltd., (IPCL) 2001 Sale disinvestment decided for out right
sale
6. Two Hotels of HCI- 10th Nov., Out right Re-bids will be invited, because the
Airport Centaur Hotels 2001 Sale bids were below the reserve price
in Delhi and Mumbai
7. BHEL, HMT, HEC 10th Oct., Majority The Govt. has decided to sell the
(Heavy Engineering 2001 State majority state- The reserve price
Corporation) will be worked out
8. CMC 14th Oct., Majority 152 Tata Consultancy Services Ltd.
2001 State 51
9. HTL (Hindustan 14th Oct., Majority 55 Himachal Futurist Communications
Teleprinters Ltd.,) 2001 State 74 Ltd.
10. Six Hotels of Indian 23rd Oct., Out right The Transaction Documents were
Tourism Development 2001 sale cleared by the CCD and there were
Corporation (ITDC) and 97 bidders for these Hotels takeover
11. Two Five Star Ashoka 23rd Oct., Will be The Transaction Documents were
Hotels at Delhi & 2001 offered on cleared by CCD and bids will be
Bangalore a 30 year invited
lease
12. Modern Food Industries 14th March, Out right 105 FMCG Major Hindustan Level Ltd.,
(MFIL) 1997 sale
13. Indo-Burma Petrolium 18th Nov., Disinvestment process in on progress,
(IBP) 2001 Administrative ministers alongwith
the Dept., of Disinvestment were
working towards the schedule. The
financial bids will be invited as per
the schedule
14. Videsh Sanchar Nigam 18th Nov., The financial bids will be invited
Ltd., (VSNL) 2001 either in the last week of December
or in the first week of January 2002.
 Cover Feature

The total investments in equity of is in the court of Government to take Conclusions

these 23 listed PSU's of the Govern- up the necessary procedures to realise The study on disinvestment of Cen-
ment is of the order of Rs.13,197 proceeds from disinvestment process. tral PSU's, the procedures and proceeds
crores. The Government holding in per- The Government of India has de- realised have revealed the following
centage terms in these PSUs ranged cided to go ahead with the disinvest- conclusions:
between a highest of 98.56 per cent to ment process. It has cleared 30 PSUs i) The Government has set up vari-
51.06 per cent. (listed in the table-V) for disinvest- ous procedures, Committees,
If Government initiates a quick ment. Of these 10 have been finalised Commissions and a Cabinet Rank
process of disinvestment as per the as cases, where the road maps are ready Ministry for overseeing the
guidelines and procedures, it can for disposal during the Current fiscal disinvestment in Central Govern-
realise Rs.8,060.04 crores by selling year. Some of these are very popular ment PSU's in India, as per the
only 10 per cent and Rs.16,120.08 PSU's such as Air India (AI), IPCL, policy program of disinvestment
crores for a 20 per cent disinvestment Maruthi Udyog Limited, ITDC, NFL, as stated in the New Economic
of these select listed PSU's as per the IPCL, VSNL, Indian Airlines, Pradeep Policy (NEP).
price on 13th November, 2001. These Phosphates and Hindustan Zinc. These
ii) The study of disinvestment for a
prospective proceeds not only fulfills, prospective 30 PSU's for disinvest-
period of a decade from 1991-92
the target of Rs.12,000 crores for the ment, the action of the Government and
to 2000-2001 has revealed a very
year 2001-2002, but also provides sur- advisors for the disinvestment process
meager realisation of
plus over Rs.4,120 crores. However, it are presented in the Table- VI.
Table - V
Projected Proceeds from Disinvestment
(Rs. In Crores)
Company Equity No. of Govt. Govt. Govt. Price as on
Shares Holding (%) Divests 10% Divests 20% 31/11/01
BEL 80.00 8.00 76.00 51.20 102.40 64.00
BEML 36.4 3.67 60.81 6.24 12.48 17.00
BHEL 244.76 24.48 67.72 376.38 752.76 153.88
BPCL 300.00 30.00 66.20 544.50 1089.00 181.5
CMC 15.15 1.52 83.31 50.18 100.36 331.25
Container Corporation 64.99 6.50 63.08 87.10 174.20 134.0
Dredging Corporation 28.00 2.80 98.56 23.48 46.96 83.8
Engineers India 56.16 5.62 94.02 50.80 101.60 90.5
GAIL 845.65 84.57 67.34 482.44 964.88 57.05
Hindustan Zinc 422.53 42.25 75.92 72.04 144.08 17.05
HPCL 338.77 33.88 51.06 455.52 911.04 134.4
IBP 22.15 2.22 59.59 69.58 139.17 314.15
IOC 778.67 77.87 82.03 1102.31 2204.62 130.0
IPCL 249.05 24.91 59.95 110.97 221.94 44.5
ITI 88.00 8.80 76.67 7.88 15.75 8.95
MTNL 630.00 63.00 56.20 857.43 1714.86 136.1
NALCO 644.31 64.43 87.15 359.20 718.41 55.75
Neyveli Lignite 1677.71 167.77 93.99 181.19 362.39 10.80
ONGC 1425.93 142.59 84.11 2138.18 4276.36 149.95
RCF 551.69 55.17 92.50 31.17 62.34 5.65
SAIL 4130.40 413.04 85.82 202.39 404.78 4.90
SCI 282.30 28.23 80.12 73.54 147.08 26.0
VSNL 285.00 28.50 52.97 726.32 1452.64 254.8
Collections 13197.62 8060.04 16120.08
 Cover Feature

disinvestment proceeds as against
a hefty target.
iii) The primary objective of
disinvestment is to mitigate the
budget deficit was also not ma-
terialised, because the proceeds
of disinvestments were widely
fluctuated and not met target. In
3 out 10 years of the study, the
disinvestment proceeds were
above the target, but in the rest
of the years it was far lower than
the target.
iv) The average proceeds of
disinvestments as a percentage of
deficits for the decade were nearly
at 3.61 per cent and these were at
3.4 per cent of the total capital
receipts.
v) If Government disposes 10 per
cent and 20 per cent of equity of
23 select listed PSU's, it can real-
ise Rs.8,060.04 and Rs.16, 120.08
crores as per the prices on 13th
November, 2001. The agenda for
the 30 PSU's is finalised and the
action of the Government is also
indicated for future disinvestment.
References :
1. Roy. S. Dhankar: "PSU'S Dilemma -What
should we do now?", The Journal of I.P .E.,
Volume 17 ( (3 & 4)
2. Dr. A. G. Prasad: "Disinvestment Policy —
The APIDC A Trend Setter", Indian Jour-
nal of Commerce, Volume No.191, Part-II,
June 1997.
3. C.Rangarajan: "Disinvestment Strategies
and Issues" I.P.E., Journal, Volume 16 (1 &
2), 1993.
4. C.Rangarajan: "Disinvestment Strategies
and Issues", R.B.I. Bulletin, February 1997.
5. Subhendu Bhattacharya: "Efficiency Gains
of Privatisation", the Journal of IPE, Vol,
17 (3 & 4),1994.
6. C.Rangarajan: "Disinvestment Strategies
and Issues", R.B.I. Bulletin, February 1997.
7. Dr. M. S. Malik, NEP and restructuring of
public sector, Yojana, 2001.
8. Dr. R. K. Mishra, Disinvestment; 1992-
2001, the Chartered Accountant, June,2001
9. D. G. Prasoona, "Balco Disinvestment-dirty
politics play spoil sport" -Chartered Finan-
cial Analysts, Volume 11 issue VIII April
2001.
10. A. B. Ravi & Rakesh Joshi: A Different
Road Map for Disinvestment, Business In-
dia September 3-16, 2001.

Table - VI
30 PSUs for Disinvestment
PSUs Govt.'s decision Advisors
Air India To bring down the equity to 40% through sale of to a strategic J. M. Morgon
partner (SP), up to 10% equity to employees 40% equity and Stanley.
the balance to financial institution and / or on the share market.
Foreign holding is to be limited to a maximum of 26% of the
total equity.
Bharat Breaks & Valves To disinvest up to 74% in favour of a strategic partner.
Bharat Heavy To induct a strategic partner to hold 74% of the equity. S. B. Billimoria.
Plates & Vessels
Bharat Pumps & To disinvest 74% of the equity in favour of a strategic partner. SBI Capital
Compressors Markets.
Engineering To offer equity up to 74% to a strategic partner.
Projects (India)
Hindustan Cables To disinvest 74% of the company's equity in favour of a ICICI Securities.
strategic partner with transfer of management control.
Hindustan Copper Phase I : To restructure HCL by living off the Khetri unit and IDBI, SUmitomo
the Taloja plant into a new company and dilute the HCL's Bank
equity in the new compnay to 49% by issue of fresh shares,
Phase II : To restructure the remaining portion comprisng ICC
and the Malanji and copper project and then look for one more
strategic partner for 51% disinvestment.
Hindustan Organic To disinvest 32.61% of the companies equity through strategic A. F. Ferguson.
chemicals sale out of GOI's share holding
Hindustan Salts To disinvest 74% of the equity of the company in favour of a SBI Capital
strategic partner along with transfer of management control. Markets.
Hindustan Zinc Disinvestment of 26% equity in HZL through strategic sale along BP Pariba.
with an appropriate role in management to the strategic partner.
 Cover Feature

Hindustan To disinvest 51% of the company's equity capital through A. F. Ferguson

Insecticides stategic sale with transfer of management.
IBP To disinvest 33.58% shareholding of IBP to a strategic partner HSBC Securities.
with transfer of management control.
Indian Airlines To reduce the GOl's equity to 49% through sale of 26% stake IDBI, ANZ
to a strategic partner within the parameters of the domestic air Investment Bank,
transport policy followed by sale of 25% equity to domestic Speedwing.
financial institutions, employees and other investors. Foreign
holding to be limited to a maximum of 40% of the bidder's
equity.
Indian Petrochemi- To offer 25% equity to a strategic buyer along with transfer of Warburg Dillon
cal Corporation. management control. Read.
Indian Tourism On 16.9.97, to appoint an advisor to examine all alternatives Lazard India.
Development and options for disinvestment, including the ones recommen-
Corporation ded by the disinvestment commission, On 6.7.99, the
Government reviewed its earlier decision and decided to accept
and implement the disinvestment commission recommendations.
Instrumentation To convert the Pal ghat, Kota & Jaipur units into wholly owned IDBI.
subsidiaries and thereafter disinvest 51% of the equity of the
subsidiaries in favour of strategic partners.
Jessop & Company To disinvest 72% of the equity to a strategic partner with A. F. Ferguson.
transfer of management control.
Madras Fertilizers To disinvest 32, 74% of the equity in favour of a strategic ICICI Securities.
partner, with transfer of management control to the strategic
investors,
Maruti Udyog MUL to offer shares on a rights basis to the existing
shareholders with renunciation option for the Government.
Minerals and Metal To reduce the Government share holding to 26% through
Trading strategic sale. Out of 26% equity remaining with the
Corporation of Government, 10% equity to be used for issue of employees
India stock option ESOPs
MSTC In principle disinvestment of the Government stake in MSTC
cleared.
National Fertilizers To disinvest 51% of the NFL's equity to a strategic buyer along Rabo Finance.
with transfer of management control.
NEPA To disinvest 51% -98% of the equity of NEPA in favour of a SBI Capital
strategic partner. Markets.
Paradeep To disinvest 74% of the shareholding in PPL to a strategic Deloitte Touche
Phosphates buyer through strategic sale. Tohmatsu.
Praga Tools To disinvest up to 74% of the equity in favour of a joint
venture partner.
Scooters India To give in principle approval for disinvestment of 74% of PricewaterhouseCo
equity in Scooter India Ltd., opers.
Sponge Iron India To disinvest the entire share holding in the company through a A. F. Ferguson
trade sale to a strategic Ltd.,
State Trading To reduce the Government shareholding to 26% through
Corporation strategic sale. Of the 26% equity remaining with the
Government, the balance 10% to be used for issue of
employees stock option. ESOPS
Tungbhadra steel To disinvest 74% of the company's equity in favour of a IDBI.
Product strategic partner, along with management control.
Videsh Sanchar To disinvest of 25% of equity of VSNL to a strategic partner SBI Capital
Nigam and 1.97% to employees. Markets