disinvestment in india -- an overview !!

5/21/2014 Disinvestment in India -- An Overview ! ! - IAS OUR DREAM

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Disinvestment in India -- An

Overview !![1]

Until a couple of months ago, the Congress-led UPA government

was struggling to meet its disinvestment target of Rs 40,000 crore

for 2013-14. Thanks to a financial jugglery, letting some central

public state enterprises to pick up government shares in a few public

sector companies, the government has earned the dubious

distinction of not only meeting its much-reduced target of Rs 16,027

crore but also exceeding it by about Rs 1,000 crore.

The sale of Maharatnas (the biggest jewels), Navratnas (nine

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precious jewels) and Miniratnas (small jewels) has always been a

matter of debate since the government announced its

disinvestment policy in the early 1990s. Though the

categorisation of public sector undertakings (PSUs) provides an idea

of their enormous wealth, it is also a pointer to why the government

has been reluctant in pushing its disinvestment plans.

Ministers do not want to lose control of these white elephants for

political and pecuniary reasons.

Disinvestment targets and decisions are announced in advance,

leading their stock prices to fall, providing a strong reason for

delaying the much-hyped sale of stake.

Hence, every year the receipts fall short of their budgeted targets.

Besides, the government also gets a pat on its back for not selling at

lower prices. Small wonder that the government’s disinvestment

programme has been an outright failure.

Nehruvian Era

Nehru viewed the PSUs as temples of modern India. True, they

played a vital role in the country’s development. They were engaged

in manufacturing a variety of products, processing raw material and

providing services, besides offering employment to millions. But, it

gradually became difficult to manage their affairs. The bureaucrats

vested with the responsibility of running them adopted unfair and

corrupt practices to serve selfish ends. The “temples” also started

taking a toll on the public exchequer as many of them were running

into huge losses.



The times of 80’s -

For the first time in the mid-eighties, the government’s revenue

account turned negative. Since then fiscal deficit has risen

unabatedly. The government was not even able to meet the basic

expenses for running the PSUs, making ground for privatisation and

disinvestment to ensure their smooth functioning and management.

The disinvestment policy has witnessed many ups and downs.

The earliest recommendation for disinvestment came from the

Estimates Committee of the first Parliament in 1955.

It recommended that at least 25 per cent shares of government

companies should be subscribed by the public.

Unfortunately, its recommendation was not accepted as the

government did not want to lose its control on the PSUs.

Post 90’s

For a change, the Chandra Shekhar government took a bold stand on

disinvestment, thanks mainly to circumstances that led to the

shameful shifting of government-owned gold bars to a new vault in

Britain. The IMF also forced the government to raise `2500 crore

through disinvestment in 1991. Thus, the government began

selling its stake in a few PSUs to institutions like Unit Trust of India

that had no obligation to retain the holding and could sell it in the

secondary market.



The process came to a halt, when stock markets were hit by the

Harshad Mehta scam.

Disinvestment could take off again only when the new government

formed a disinvestment commission in 1996. The commission was

given the responsibility of advising the government on the ways and

means of disinvestment. On its recommendation, a few PSUs were

given greater financial and managerial autonomy. The fate of

disinvestment was again in limbo even as India faced numerous

scams like the teakwood plantation scam and the vanishing

companies scam.

The Vajpayee government -

The Vajpayee government that came to power in 1998 created a

separate ministry to speed up the process of disinvestment. The

government sold stocks in selected PSUs to strategic partners

through bidding based on stock valuation, without going by stock

market prices, which remained low. Strategic sales during the period

were criticised because of alleged corruption involving under-pricing

of assets, favouring certain buyers, breach of employment

agreements and contracts pertaining to sale of land.

The UPA regime -

Disinvestment slowed down considerably when the UPA government

came to power for want of consensus and lack of support from the

Left, which was ideologically opposed to it. The agenda was again

taken up when UPA-2 came to power in 2009 as the Left was no

longer its part. The present government preferred partial



disinvestment, rather than strategic sales.

Despite serious discussions in these 23 years, the disinvestment

proceeds were largely used to reduce fiscal deficit rather than

to create assets

The proceeds were credited to the National Investment Fund and 75

per cent of the amount so credited was used to meet India’s financial

and socio-economic needs and the balance for the capital

expenditure requirements of the PSUs.

The main agenda of widening the equity base and improving

performance by giving managerial control to private parties has

taken a backseat. If one goes by official figures declared by the

department of disinvestment, one can make out that less than 5 per

cent of the total disinvestment proceeds of around Rs 1.50 lakh crore

came from the privatisation of PSUs. In other words,

disinvestment did not lead to privatisation as was expected.

The Singaporean Model of Disinvestment and lessons for India

!!

Countries like the UK and Japan also faced similar difficulties. The

difference, however, lies in managing the issues. It is pertinent to

mention that Singapore managed its PSUs by establishing a separate

fund during the early years of its independence. The fund, an

investment company, looks after the Singapore government’s

investment portfolio and its assets and is managed by a separate

board responsible for taking strategic investment decisions without

sacrificing the national interests, keeping intact the commercial and



1. http://swapsushias.blogspot.in/2014/04/disinvestment-in-india-

overview.html

non-commercial considerations. Since its inception in 1974, the

fund value has grown manifold.

The Indian government can also form a separate holding company

on similar lines with an efficient board, independently responsible

for decisions but accountable to government, embracing corporate

governance practices and transparency. The entire assets and

investments the government holds in PSUs can be transferred to the

company, which shall switch in and out appropriately in view of the

national interests.

Who knows all the ratnas the country hold may turn out to be a

trillion-dollar enterprise over a period of, say, 15 years. Does it seem

like a dream? Yes, dreams do come true if right decisions are taken

at the right time.

disinvestment in india -- an overview !!

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