Disinvestment is a process in which the public undertaking reduces its portion in equity by disposing its shareholding. “Disinvestment” as per SEBI (substantial acquisition of shares) guideline, means the sale by the central government/state government, of its shares or voting rights and/or control, in PSUs. The disinvestment reduces government participation in the company.
In India , the new economic policy have given rise to significant focus for privatization of public sector enterprises.
Hence, disinvestment is one of the method of privatization, which started in the year 1992.
It implies selling of govt. equity shares of public sector units in the market.
It is a concrete step towards privatization and liberalization of our economy .
Criteria for disinvestment
The decision regarding disinvestment or liquidation viewed in the light of following criteria:
a) Whether the objectives of the company are achieved
b) Whether there is decrease in number of beneficiaries
c) Whether serving the national interest will be affected because of disinvestment
d) Whether private sector can efficiently operate and manage the undertaking.
e) Whether the original rate of return targeted could not be possible to achieve.
f) Whether socio-economic objectives lots its purpose
Merits of disinvestment
In Private Sector, the decision making process is quick and decisions are linked with the competitive market changes.
The disinvestment process would bring in better corporate governance, exposure to competitive, corporate responsibility, improvement in work environment etc.
The market participation in capital of PSUs through stock exchanges would enable the market to discover the latent worth of PSUs.
The Loss making PSUs can be successfully revived by asking the strategic partner to infuse fresh capital and exercising excellent management control over sick PSUs
Demerits of disinvestment
Selling of profit-making and dividend paying PSU would result in loss of regular source of income to the government.
There would be chances of ‘asset stripping’ by the strategic partner. Most of the PSUs have valuable assets in the shape of plant and machinery, land and buildings etc.
The Government’s Policy or disinvestment includes the disposal of both profit making, as well potentially viable PSUs.
Privatization and Disinvestment
Privatization implies a change in ownership, resulting in a change in management.
The privatization of public sector enterprises will occur only when govt. sells more than 51% of its ownership to private entrepreneurs.
Disinvestment on the other hand, has a much wider connotation as it could either involve dilution of govt. stake to a level that result in a transfer of management or could also be limited to such a level as would permit govt. to retain control over the organization.
Disinvestment beyond 50% involves transfer of management, where as disinvestment below 50% would result in the govt. continuing to have a major say in the undertaking .
Background of Disinvestment
The Indian economy had virtually embraced bankruptcy during the period of 1980-92.
In 1991, there was 236 operating public sector undertakings, of which only 123 were profit making.
The top 20 profit making PSU’s were responsible for 80 percent of profits.
The return on public sector investment for the year 1990-91 was just over 2 percent.
The basic charges against the public sector for its
Poor performance are as follows:
Low rate of return on Investment
Declining contribution to national savings
Poor capacity utilization
Overstaffing, bureaucratization leading to excessive delays and wastage of scares resources.
On account of these phenomenon, many public sector enterprises have become more a burden than an asset to the government.
Process of Disinvestment
The govt. in July 1991 initiated the disinvestment process in India, while launching the New Economic Policy (NEP).
The govt. had appointed the Krishnamurthy committee in 1991 and Rangarajan committee in 1992 to look after the disinvestment process.
Both the committees have recommended disinvestments to fulfill objectives of modernization of the PSE’s through:
Strengthening R &D
Initiating diversification/expansion programme
Retaining and reemployment of employees
Funding genuine needs of expansion
Mitigating fiscal deficit of the government .
These committees also distinguished between the short term and long term goals of the disinvestment and advised the govt. not to sacrifice the long term goals for the sake of fulfilling the short term objectives.
The govt. has announced in its NEP that mitigating the fiscal deficits is the only objective of disinvestment.
The crucial shift in govt. policy for disinvestment of PSU’s was mainly attributed to poor performance of these enterprises and burden of financing their requirements through budget allocation.
Further in 1996, the govt. constituted a five member public sector disinvestment commission under the chairmanship of G.K.Ramakrshna for drawing a long term disinvestment programme for the PSU’s.
The committee submitted its report covering 58 enterprises, out of 70 enterprises referred to it by the govt. recommendations ranged from strategic sales in various proportions to disinvestments ant various level.
This committee was ultimately abolished in 1999.
The govt. set up a new Department of Disinvestment in 1991 to establish a systematic policy approach to disinvestment and to give fresh impetus to the programme of disinvestment, which will increasingly emphasize strategic sales of identified PSU’s.
In 2001, the govt. reconstituted the disinvestment commission with R.H.Patil as its chairman.
The govt. has decided to refer all ‘non-strategic’ PSU’s and their subsidiaries, excluding IOC, ONGC, and GAIL to the commission for its independent advice.
Objectives of Disinvestment:
The following are the main objectives of the disinvestment policy of the government:
To reduce financial burden on the government
To encourage wider share of ownership
To introduce competition and market discipline
To help public enterprise upgrade their technology to become competitive
To rationalize and retain their workforce
To improve efficiency and productivity in public enterprise through new industrial policies.
Modalities of Disinvestment:
In order to achieve the various objectives and goals of disinvestment many methods have been formulated and implemented. These includes:
Public Offer: 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 recognized market intermediaries.
(2) Cross Holding: In the case of cross holding, the govt. would simply sell part of its share of one PSU to one or more PSU’s.
(3) Golden Share: in this model, the govt. retains a 26 percent share in the PSU. This 26 percent share will continue to give the govt. the status of majority share holder.
(4) Warehousing: Under this model, the govt. owned financial institutions were expected to buy the govt.’s share in select PSU’s and holding them until third buyer emerged.
(5) Strategic Sale: Under this model, govt. sells a major portion (51% and above) of its stake to the strategic buyer and also gives over the management control.
Progress of Disinvestment:
Disinvestment has also been undertaken in states.
Out for the 222 state level public enterprises identified for disinvestment, the process has been initiated in 124 enterprises.
Out of which 30 enterprises have been privatized and 68 have been closed down.
The reason for such low proportion of disinvestment proceeds against the target are:
The unfavorable market conditions.
Stringent bureaucratic procedure.
The Govt. is not transparent about its approach towards privatization of PSE’s.
1. The government has to form a policy framework for the entire disinvestment process.
2. The government should de-link the disinvestment process from the budgetary exercise.
3. Government should stop setting up of the targets in every year annual budget and should have a long-term plan.
4. Timing of disinvestment is crucial and the government should follow a specific method or process in order to reap more chunks.
The Telecom Commission, the policy-making wing of the, will soon take up the issue of disinvestment in state-run BSNL,DOT Telecom Minister A Raja .
Sam Pitroda gave a report that IPO is going to be discussed in the Telecom Commission.
Raja had said that the government will refer the issue of disinvestment in BSNL to a GOM, an announcement that brokered peace with employees' unions, who called off an indefinite strike
Sam Pitroda with banker Deepak Parekh & telecom secretary JS thomas recommended 30 % disinvestment in BSNL and VR of over 1 lakh staff as part of steps to improve the financial health of the PSU.
Sam Pitroda panel was set up by Prime Minister Manmohan Singh to suggest ways to improve BSNL financial health.
BSNL saw profits plummet to Rs 178 crore in 2009-2010 (up to December, 2009) from over Rs 575 crore in 2008-09, as the PSU is rapidly losing market share to new entrants. The PSU has 91 million users, both mobile and landline.
PM approves immediate 10% disinvestment of BSNL
Prime Minister, attended by BSNL CMD, MTNL CMD, Sam Pitroda and Union Communications Minister A Raja among others arrived at a consensus to offload 10 % stake in BSNL through listing. Effectively it means the privatization of BSNL.
BSNL and MTNL two PSUs have been witnessing declining market share month after month even as their private counterparts continue notching up large number of new subscribers.
Two PSUs have been witnessing declining market share month after month even as their private counterparts continue notching up large number of new subscribers.
A Raja also called for exemption of annual licence fee for BSNL which will result in annual savings of about Rs 4,000 crore to the company. As a first step, licence fee for fixedline services in rural areas may be considered for exemption. This move alone can result in savings of about Rs 1,800 crore to the PSU.
Unions are opposed to disinvestment in Steel Authority of India Ltd (SAIL), the government today informed the Rajya Sabha.
SAIL's 20 per cent share sale plan to mop up about Rs 16,000 crore, earlier planned in October-November this year, already faces some regulatory hurdles.
Sail unions have resorted to distribution of pamphlets and also staged demonstrations protesting against the decision regarding disinvestment of SAIL," Minister of State for Steel a Sai Prathap told the Upper House.
The disinvestment of Government of India's shareholding in SAIL in line with the Government's policy to develop larger people's ownership of CBS Enterprises with Government retaining majority shareholding and control .
In April, Govt. announce a proposal to sell 20% equity in the country's largest steelmaker.
Share sale would see the government offloading 10 % of its stake in the steel maker, while the company would raise fresh equity in the same proportion.
On share sale timing, Prathap said the Government has decided to disinvest its shareholding in SAIL besides raising add equity by SAIL, in two discrete tranches to be issued at appropriate times in consideration of SEBI guidelines and prevailing market conditions
The government, at present, holds a little over 85 % stake in SAIL and post-FPO, its equity in the company is expected to go down to about 69 %. Steel Minister Virbhadra Singh had said the FPO could fetch Rs 16,000 crore.
Prathap, said "the actual amount that would be raised through disinvestment as well as from FPO would depend upon a number of factors including inter-alia the prevailing market conditions, share price and investors' interest."
A top government official had last week said that SAIL share sale, earlier scheduled in October-November may not come in 2010 as it is still not SEBI compliant for the FPO
The country's largest steelmaker has 12 official directors onboard, besides two independent directors. The company would have to hire at least 10 more independent directors to become SEBI compliant. However, the company has proposed to trim the total board strength to 18, consisting of nine officials and an equal number of independent directors and a nod for restructuring of SAIL Board is awaited from the ACC.