9. Dis-Investment

economy study material 9


 Initially motivated by the need to raise resources for the budgetary allocations.

List of Maharatna, Navaratna&Miniratna (as on August 16, 2014) Maharatna CPSEs:

  1. Bharat Heavy Electrical Limited
  2. Coal India Limited
  3. GAIL (India) Limited
  4. Indian Oil Corporation Limited
  5. NTPC Limited
  6. Oil & Natural Gas Corporation Limited
  7. Steel Authority Of India Limited

Navaratna CPSEs: 

  1. Bharat electronics Limited
  2. Bharat Petroleum corporation Limited
  3. Container corporation of India Limited
  4. Engineers India Limited
  5. Hindustan Aeronautics Limited
  6. Mahanagar Telephone Nigam Limited
  7. Hindustan Petroleum Corporation Limited
  8. National Aluminium Company Hindustan
  9. National Buildings Construction Corporation Limited
  10. NMDC Hindustan
  11. Neyveli Lignite Corporation Limited
  12. Oil India Limited
  13. Power finance corporation Limited
  14. Power grid corporation of India Limited
  15. Rashtriya Ispat Nigam Limited
  16. Rural Electrification Corporation Limited
  17. Shipping Corporation of India Limited

Miniratna category -1: 54 central public sector enterprises

Miniratna category -2:18 central public sector enterprises

Type of Disinvestment

 Since the process of disinvestment was started in India (1991), we see its two official types.

Token Disinvestment

Disinvestment started in India with a high political caution-in a symbolic way known as the “token” disinvestment.

The general policy was to sell the shares of the PSUs maximum upto the 49 per cent (i.e. maintaining government ownership of the companies). But in practice, shares were sold to the tune of 5-10 per cent only.

This phase of disinvestment though brought some extra funds to the government (which were used to fill up the fiscal deficit considering the proceeds as the ‘capital receipts’) it could not initiate any new element to the PSUs which could enhance their efficiency.

Strategic Disinvestment

In order to make disinvestment a process by which efficiency of the PSUs could be enhanced and the government could be-burden itself of the activities in which the private sector has developed better efficiency (so that the government could concentrate on the areas which have no attraction for the private sector such as the social sector support for the poor masses), the government initiated the process of strategic disinvestment.

The Government classifying the PSUs into “Strategic” and “non strategic” Public Sector Enterprises (PSEs) to 26 per cent or below if necessary and in the “strategic” PSEs (i.e. arms and ammunition; atomic energy and related activities; and railways) it will retain its majority holding.

The essence of the strategic disinvestment was

The minimum shares to be divested will be 51 per cent, and

The wholesale sale of shares will be done to a ‘strategic partner’ having international class experience and expertise in the sector.

This form of disinvestment commenced with the Modern Food Industries Ltd. (MFIL). The second PSUs was the BALCO which invited every kind of criticism from the opposition political parties, the government of chattisgarh and experts, alike. The other PSUs were CMC Ltd, HTL, IBPL, VSNL, ITDC (13 hotels), Hotel Corporation of India Ltd. (3 hotels), Paradeep Phosphate Ltd (PPL), HZL, IPCL, MUL and Lagan Jute Manufacturing company Ltd. (LJMC)-a total number of 13public sector enterprises, were part of the “strategic sale” or “strategic disinvestment” of the PSEs.

Method of disinvestment:

In our country, the government has usually follows the below method for disinvestment:

Initially, equity was offered to retail investors through domestic public issues.

By issuance of global depository receipts (GDRs) to tap the overseas market.

Cross Holding, e. government simply sells part of its shares in one PSI to other PSIs.

Warehousing, e. government’s own financial institutions buying government’s equity in select PSUs and holding them until any third buyer emerges.

Retaining Golden Share, e. retaining government’s equity up to 26% in the PSU to protect its interest.

Strategic Sale Method, e. sell a major portion of its equity to a strategic buyer and also give over the management control

Current Policy of Disinvestment

 The current policy of disinvestment followed by India was announced by the UPA Government in mid-2003. As per the Common Minimum Programme (CMP) of the new coalition,liberalisation the Government is committed to the following policy regarding the disinvestment of the PSEs:

Profit-making PSUs such that they are not disinvested, generally. If such companies are put for disinvestment the Government to maintain a majority equity holding (i.e. at least 51 percent stake) in them.

“Navratnas” not be divested with but to be allowed in the capital market for the purpose of resource mobilization.

Sick, chronically loss-making PSUs to be sold off, or closed after the workers/personnel get their legitimate dues and compensation.

Private Partnership will be invited to turnaround (to make profitable) the concerned PSUs.

Proceeds of disinvestment to go into the National Investment fund (putting them out from the earlier fashion of considering as the capital receipts

Proceeds of Disinvestment: Debate Concerning the Use

The debate has by now evolved to a certain stage coming off basically in three phases.

Phase I

 This phase could be considered from 1991-2000 in which whatever money the Governments received out of disinvestment were used for fulfilling the budgetary requirements (better say bridging the gap of fiscal deficit)

Phase II

This phase which has a very short span (2000-03) saw two new developments. First, the government started a practice of using the proceeds not only for fulfilling the need of fiscal deficit but used the money for some other good purposes, such as-re-investment in the PSEs, pre-payment of the public debt and social sector. Second, by the early 2000-01 a broad concensus emerged on the issue of the proposal by the then Finance Minister

The proposal regarding the use of proceeds of disinvestment was as given below.

Some portions of the disinvestment proceeds should be used

  • In the divested PSU itself for upgrading purposes
  • In the turn-around of the other PSUs
  • In the public debt repayment/pre-payment
  • In the social infrastructure (education, healthcare, etc.)
  • In the rehabilitation of the labour-force (of the divested PSUs) and In fulfilling the budgetary requirements.

Phase III

 The current policy regarding the use of the disinvestment proceeds is as follows.

  1. A National Investment Fund (NIF) was set up in 2005-06 to which all the disinvestment proceeds are channelized now. The fund is outside the Consolidated Fund of India (opposite to the earlier policy) and would be managed professionally by selected public sector mutual funds with a view of sustainable returns out of the fund without depletion in the corpus of the
  2. The annual income which will accrue out of the NIF investments by the mutual fund companies will be used/invested on the following
  3. 75% of the income to be used to finance/support selected social sector schemes which promote education, health and employment; and
  4. 25% of the residual income to be used to meet the capital investment requirements of the profitable and revivable PSEs that gives adequate returns-for their expansion, diversification,

Macro Economic Reforms Of 1991:

The reform package outlined by Manmohan Singh in 1991 had three distinct components:

  1. Fiscal stabilisation to check the growing fiscal deficit and contain it at a much lower level in such a manner that public investments in basic social and economic infrastructure could be substantially stepped up without generating inflationary pressuliberalization
  2. Internal to increase competitive pressures, leaving enterprises free to make their production and investments decisions in the light of market conditions and enlarging the scope and freedom for private
  3. Integration with the global economy by removing controls on foreign trade and exchange rates, lowering tariffs and rationalising their structure and substantially relaxing regulations regarding external capital flows and a proactive policy for attracting foreign direct

The policy changes brought into force since July 1991 fall broadly into two categories. The first set of measures is part of what is normally known as stabilisation policy. The second set of measures comes under the category of structural reform policies.The stabilisation policies were intended to correct the lapses and put the house in order in the short term, the structural reform policies were intended to accelerate economic growth over the medium term.

Structural reform policies cannot successes unless a degree of stabilisation has been brought about. But stabilisation by itself will not be adequate unless structural reforms are undertaken to avoid the recurrence of the problems faced in the recent period.

Structural Reforms

Structural reforms were broadly in the area of industrial licencing and regulation, foreign trade and investments and the financial sector.

Implementation Of The Agenda Trade Policy Reforms

A major reform of trade policy regime has been effected since 1991. The import licencing system has been dismantled. All Non-Tariff Barriers (NTBs) have been phased out from all tradable except consumer goods.

Besides India has also undertaken a major commitment to liberalise its trade regime under WTO Agreement

Tariffs have come down from a peak rate of 150 per cent in 1990 to a peak non- agricultural rate of 10 per cent in 2007-08, Agricultural tariff’s remain relatively high and stable, isolating this segment of the economy from both the benefits and costs of Globalisation. The reduction in tariffs on non-agricultural products has played an important role in the convergence of India to global inflation rates and needs to continue.

Removal of QRs

The process of removal of import restrictions, which began in 1991, has been completed in a phased manner with removal of restrictions on 715 items (Exim Policy 2001-02). Out of these 715, 342 are textile products, 147 are agricultural products including alcoholic beverages and 226 are other manufactured products including automobiles.

Industrial Policy Reforms

 New Industrial Policy (NIP) announced on July 24, 1991 and subsequent amendments brought far-reaching changes in the policy regime governing industrial investments. The NIP dismantled the industrial licencing for (or approval) system that regulated the industrial investments in the country by abolishing the requirement of obtaining an industrial licence from the government in all except 14 specified industries. These specified industries need to be regulated in view of environment hazards, national security or social well-being considerations.

NIP has thrown open new industries and services to private including foreign private sector by pruning the list of “Industries Reserved for the Public Sector”.

Only six Industries, which are now reserved for exclusive development by public sector, include those considered sensitive from national security point of view. Thus, a large number of industries and services including infrastructure such as telecommunication, roads, ports, power generation, petroleum refining have become accessible to the private sector.

NIP accords a much more liberal attitude to foreign direct investments (FDI) than ever in post-Independence India. The policy allows automatic approval system for priority industries by the Reserve Bank of India within two weeks subject to their fulfilling specified equity norms. A more favourable treatment is also accorded to non-resident Indian (NRI) investors who are allowed up to 100 per cent ownership priority industries.

A Foreign Investment Promotion Board (FIPB) has been set up to consider all other proposals that do not qualify for automatic clearance. However, to bring transparency into the working of FIPB, elaborate guidelines and time frame of six weeks in normal cases are also specified.

FIPB is authorised to negotiate with foreign investor in person to expedite the clearances.

FIPB is empowered to approve up to 100 per cent foreign ownership in cases involving transfer of high technology, projects producing predominantly for exports, energy and infrastructural projects, consultancy or trading companies.

The restrictions on investments by large industrial houses and foreign controlled companies under the MRTP Act were also abolished.

A phased programme of disinvestment of public sector corporations has been launched. A Disinvestment Commission followed by Department of Disinvestment was set up to make recommendations on the phasing of the disinvestments. The outward investments of Indian enterprises were also liberalised and proposals fulfilling certain norms could now be granted automatic approval.

Exchange Rate Reforms

 The rupee was devalued twice in July 1991 leading to 20% depreciation in its value. The partial convertibility of rupee on the trade account was announced in the 1992- 1993 budgets that were subsequently broadened to full convertibility on current account by August 1994.

Capital Market

 The Capital Issues Control Act was repeated and the Securities and Exchange Board of India (SEBI)was set up as a watching for regulating the functioning of the capital market.

SEBI has focused on regulatory reform of the capital market as well as on market modernisation. Online trading and dematerialised trading have been introduced. Companies have been allowed to buy back their own shares subject to the regulations laid down by SEBI.

In September1992, the government announced guidelines for investments by foreign institutional investors (FIIs) in the Indian capital market. FIIs were now welcome to invest in all types of securities traded on the primary and secondary market with full repatriation benefits and without restrictions on either volume of trading or lock-in-period.

Financial Sector

 In January 1993, a package of financial sector reforms was announced that included permission to new private sector banks including foreign joint ventures. The government has also established a policy regime for functioning of private non- banking finance companies (NBFCs) and agencies for rating their credit worthiness.




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