Disinvestment in public sectors in INDIA


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Disinvestment in public sectors in INDIA

  2. 2. Introduction  Public sector undertakings were established in India as a part of mixed economy. After independence public sector undertakings played a vital role in the economic development of the country.  Generation of employment, balanced regional development and economic development of the country were the objectives of PSE's at the time of their establishment.
  3. 3.  During mid 1991 onwards the economic scenario of the country has changed with the onset of liberalization and Globalization measures.  Disinvestment of PSU means the sale of public sector equity leading to a dilution of the government’s stake. In India the term disinvestment is used rather than privatization.  A well designed disinvestment program helps in the long term growth process through increased foreign investment, technology transfer and the subsequent enhancements in the productivity.
  4. 4. Rangarajan Committee  Disinvestment was flagged off in 1991 without any clear cut objectives. The stated objective was to raise resources to finance fiscal deficit.  In 2001, the government introduced a special provision for setting aside a quota for shares for small investors and workers.  The government of India set up a committee under the chairmanship of the former RBI governor, C.Rangrajan, in 1993.
  5. 5.  Rangarajan Committee produced report in April 1993 and recommended the percentage of equity shares for disinvestment should be below 49 per cent in the industry reserved for public sector and more than 74 per cent in others industries.  The number has increased from 163 in 80-81 to 236 in 90-91 and then remained stagnant over the years. This indicates that the government promoted P.S.E's till 1990-91 and the process came to a halt when the disinvestment started.
  6. 6. Methods of Disinvestment Government has adopted following methods to sell off shares in PSUs  Bidding  Sale of shares in the Market  Global Depository Receipts (GDR) route  Cross-holdings  Strategic Sales
  7. 7. Result of Disinvestment  It is required to disinvest not only the lose making PSUs but also the profit making PSUs with proper valuation.  The proceeds from disinvestment of PSUs will be channelized into the National Investment Fund which will be maintained apart from the consolidated fund of India.  75% of the annual income of the fund will go to finance selected social schemes, which will promote education system, health care and employment
  8. 8.  Rest 25% of the annual income of the fund will go to meet the capital investment requirement of profitable and revivable PSUs that produce good returns, in order to increase their capital base to finance expansion or diversification.  The role of government has changed from a producer to a regulator.  Privatization of PSE's will create a certain degree of monopoly in the market and it is important that the Government should play the role of a tough regulators to Protect the Consumers from market exploitation.
  9. 9.  The amount realized from disinvestments will be used for meeting expenditure in social sector, restructuring the PSE's and for retiring public debt.  Trade union and valuation of PSU's disinvestments. Fair valuation and transparency is disinvestments process are equally important to make this exercise free from criticism and better public acceptance.  Disinvestment process through liberalization and privatization leads to cost reduction, quality of service and operational efficiency.
  10. 10. Conclusion  India is already confronting the challenges of fiscal deficit due to the huge symphonizing of capital for the social sector. The current account deficit is also the cause of concern for the Indian government. The expenditure on different front namely defense (16% of GDP) is larger in extent and worthwhile also.  But the growing fiscal deficit and current account deficit will not be bearable for longer span of time. There is immediate need to tame this gap. The only way out is disinvestment of Public Sector Undertakings.  It results in efficient use of resources whereby scarce resources like land, capital and machinery are put to more efficient use. The economy as a whole is benefited by increase efficiency of the units and the fiscal mess is reduced by lessening of liabilities.
  11. 11.  It is observed that interest on borrowed funds comes to larger amount than dividend received through PSE's annually. Thus it indicates that even profit making PSE's are worth for disinvestments provided it is valued properly and full transparency is maintained  Inefficient PSU’s were largely responsible for the macro- economic crisis faced by India during 1980’s although they were set up for the purpose of providing employment and the same time generate revenue surplus. But they could not stand to expectations. Hence steps for disinvestment had to be taken.
  12. 12. Thank You