Enhanced investment

As privatisation happens, there is a spur of investment in that country. This is because the
situation in that country promotes more investment by both the native and foreign investors.1

Foreign direct investment

With increased privatisation, a lot of foreign investors become interested in investing in that
country if the conditions are suitable. This also helps a lot in decreasing the public sector
deficit. 

Features of privatisation 

Privatisation has three features, namely-

Ownership of enterprises

There is a shift in the ownership of assets from the government to private individuals. This
process is opposite to nationalisation and is a consistent way towards denationalisation. 2

Operational measures

Public corporations and companies, often become incompetent due to a lack of motivation.
Their efficiency can be catalyzed by providing them with adequate competition from the
private sector.

Organizational measures

With privatisation, the organizational setting of industries changes. This can range from the
restructuring of the company to leasing to a complete shift in the management of a public
sector company. 

Privatization in India 

Before 1991, India was a closed and conservative economy with very little involvement of
foreign investors. This occurred as a response to the economic impact of the partition of the
country in 1947. However, with the coming of the year 1991, the Rajiv Gandhi government

1
ROBSON, W.A, PROBLEMS OF NATIONALIZED INDUSTRY, 105-109.(4th ed., 1952)
2
Supra Note 1
became of the firm belief that India’s industries were ready for competing in the world
economy. 3

This was when large scale economic reforms were made, privatisation being one of them.
After 1991, India experienced major policy changes, which were brought about by the then
Finance Minister, Dr Manmohan Singh. This was the starting point from where privatisation
has further evolved in India. The pivotal concepts related to privatisation in India are-

Delegation- In this, the government remains the primary stakeholder in the company while
the management of the company shifts to private individuals. The daily activities are then
regulated by private individuals.4

Divestment- In this case, the government ends up selling the majority of the shares of its
company to private individuals. Hence, it becomes a minority stakeholder in its own
company. 

Displacement- The primary step in this process is deregulation. This is done so that private
prayers get a platform to enter the market. With time, these private companies end up
replacing the public sector undertakings completely by outperforming them. 

Disinvestment- this is the process by which a constituent of a public sector enterprise or the
whole company is sold to a private enterprise. 5

Major issues related to privatization in India

Privatisation in India has the following issues-

In the changing scenario, the biggest threat is that the private sector enterprises, performing
government like functions may jeopardize the fundamental rights of the citizens of the
country.

It is often contended that the economic growth and prosperity brought by privatisation is not
shared proportionally by all. The rich become richer and the poor poorer. 

3
Hanson, A.H, Public Enterprises and Economic Development, LONDON: ROUTLEDGE AHD KEGAN
PAUL LTD, Vol.X , 385(1954)
4
Id
5
DAS, NABAGOPAL, THE PUBLIC SECTOR IN INDIA, 166-189,(11th ed., 1966)
The government also fears that private investors may transfer vital resources of the country to
third parties, especially hostile nations.6

One of the biggest issues related to privatisation in India is that wholesome privatisation of
large public sector undertakings is not possible for private investors. 

The public sector undertakings in India are excessively staffed, and getting rid of this labour
is a very challenging task for private investors. 

For privatisation, specific action for that purpose is important. This is because there is a
legislative presumption against the delegation of power from the hands of government to
private organisation. In addition to this, every country has various other factors that influence
privatisation, like the legal traditions, political scenario, etc of the country. In India, limited
privatisation is allowed. 7

Case laws

For a better understanding of the evolution of the applicability of administrative principles to

the issues of privatization in India, we need to understand the cases that have come before the
Indian judiciary. The first one being Balco Employees Union v Union of India. 

This 2001 case was regarding the extent of administrative power, and control that the
government possessed over its share in a government company. In this case, the employees of
Balco company challenged the decision of the government for selling its majority shares in
the company. This sale of shares would result in a shift in the management of the company
from the hands of the government to private hands. This change would have a drastic impact
on the professional lives of these workers, and hence they filed the case at hand.8

The apex court, however, pronounced the judgment in favour of the government. It was of the
view that disinvestment was a purely administrative decision of the state’s economic policy.
Therefore, the labour force should not have any say in the decision. It cannot claim in any
way that it should be consulted or be given any prior notice at any step of the decision-
making process of the government. 

6
PRAKASH, JAGADISH, PUBLIC ENTERPRISES IN INDIA - A STUDY IN CONTROLS,155-169,(5 th ed.,
1980)
7
RAMANADHAM V. V, THE NATURE OF PUBLIC ENTERPRISE, LONDON CROOM HELM, 5-16.(3 rd
ed.,1984)
8
ROBSON, W.A, PROBLEMS OF NATIONALIZED INDUSTRY, 105-109.(4th ed., 1952)
The court was of the view that not even government servants have the absolute right to
employment. Henceforth it was solely the government’s decision to sell its stake in Balco
company even if it resulted in a shift in the ownership of the company. 9

Important developments in this case

Due to this case, the administrative law has witnessed several significant developments. Let’s
take a look at the most important ones-

The most important development is the silent approval of the disinvestment process,
signifying that privatisation and disinvestment are pivotal for national interest and progress of
the Indian economy. 

Secondly, this case provided the much-needed impetus to the administrative discretion of the
government in these matters. It cemented the position of the executive with regard to policy-
making decisions of the country. 10

Thirdly, it was made clear that in cases concerning the change of employer, principles of
natural justice did not apply to the prerogative of the employees. 

Fourthly, it brought into picture the limited interference that the judiciary can make in
administrative action through the process of judicial review. The courts were not supposed to
interfere in policy-decisions or laws passed by the government, until there is a malafide
intention or illegality. 

It was also noted that policy-making being a political decision, should be left to the executive
and should not be mixed with constitutionality. 11

Analysing the case of Balco Employees Union v Union of India, it is evident that the
Supreme Court  of India is of the view that the decisions of privatisation are solely a matter of
policy. This approach has however proved to be flawed, taking into consideration the current
scenario. It has to be noted that some vital spheres like defence of the country and the
criminal justice system cannot be privatised. 

9
Siedman, Harold, Public Enterprise Autonomy- Need for a New Theory, INTERNATIONA1’REVIEW OF
ADMINISTRATIVE SCIENCES, XLIX (I), 65-72,1983
10
PRAKASH, JAGADISH, PUBLIC ENTERPRISES IN INDIA - A STUDY IN CONTROLS,155-169,(5 th ed.,
1980)
11
Id
Therefore for the legitimisation of privatisation, there has to be an effective policy for its
regulation. The foremost thing that has to be adopted is, framing of norms to regulate the
private sector, for which a body has to be established. However, sadly there is no
comprehensive policy in India for the regulation of privatisation. 12

This regulation is primarily required because now the private sector companies have taken
over functions that were previously assumed by the government. Therefore the initiatives
taken by private sector actors that infringe the fundamental rights of Indian citizens should be
made actionable in a court of law. 

Measures to rule out bias and hence corruption, by ensuring fair competition between all
contractors should also be taken. Steps should also be taken to ensure that the highest bidder
is awarded the bid, to maximise economic benefits for the state. Legal measures should also
be adopted to ensure the same.

Some improvement was seen with the case of Delhi Science Forum v Union of India. In this
case, the Supreme Court of India held that the government of India and Telecom Regulatory
Authority of India have to take an active part in ensuring that there is an adequate
contribution of the private sector for the development of the telecom sector in India.13

It was held that ‘Sankat Vahini’, a high-speed data network, was cleared hastily without
taking proper measures. This was particularly important because this project was to become
the backbone of Telecom Regulation In India. 

The next point to be taken into consideration is whether the actions of these private actors
would be treated as actions of the state, depending on the functions they are performing and
hence be subjected to “state action doctrine”. In the case of MC Mehta v. Union  of India, it
was held that these private actors did not fall within the purview state. 14

This reasoning was reiterated in the case of Zee Telefilms Ltd. v Union of India, where it was
held that BCCI would not come under the definition of a state. In Rahul Mehra v. Union  of
India, the public function test was laid down. It was held that whether actors would come
under the meaning of state would be dependent on the functions that that company or
organisation performs. Hence, private actors may be subjected to regulation if they infringe
the fundamental rights of citizens. 
12
Supra Note 1
13
DRUCKER, PETER, THE PRACTICE OF MANAGEMENT, 117, (2nd ed., 1955)
14
Id
Therefore it can be concluded that the applicability of administrative principles has seen
improvement but a lot still needs to be done. 15

Private Enterprise

The organised sector of private enterprises in this country has been III the purview of the
centre. This relates to their establishment, running and earnings almost in toto. Let us take the
case of companies. At present some 27,000 public and private limited companies are
functioning. These companies are administered by the Indian Companies Act, 1956 which is
a central legislation. The firms and unitary concerns are also subject to various degrees of
central control depending on the lines of their activities. Banking and insurance companies
are also matters of exclusive central control. The states have almost no motivation in regard
to their development and functioning.

The benefits that arise to the states out of the functioning of these enterprises are in most
cases indirect and marginal, if not altogether absent. This has been partially met in cases
where the states themselves have established such enterprises or otherwise participated in the
share capital of private enterprises. The extent of state participation in various productive
activities is grossly inadequate to create any visible impact. It is from this point of view that
the subject is very significant and of some topical interest.

In regard to the exercise of control over employment choice of product and product-mix, size,
location, and form of enterprise. whether companies, firms or unitary concerns, and the
pattern, doses and size of investment. as also the prices and the return on capital invested. the
role of the states is rather small and insignificant. This would require some detailed
explanation, particularly in the context of noticeable indifference to such activities of private
sector. The states have remained powerless in some of the crucial questions in this respect. In
some important respects, even the centre has not been able to do much. 11 is proposed to deal
with the above points ill the same serial order.16

Employment

In many of the states the pressure of people migrating from other states has grown into
alarming proportions, Desirability of such large scale migration would depend on several
factors, In matters of private sector employment, it is in very few cases that recruitments are
15
DAS, NABAGOPAL, THE PUBLIC SECTOR IN INDIA, 166-189,(11th ed., 1966)
16
RAMANADHAM V. V, THE NATURE OF PUBLIC ENTERPRISE, LONDON CROOM HELM, 5-16.(3 rd
ed.,1984)
based purely on merit. The cnterpreneurs coming from other states not only bring their funds
with them but also their own trusted personnel to man the key positions and in some cases it
extends to the lower levels of hierarchy. The employment benefits from such industrialisation
from the point of view of states have been negligible. On the other hand. such enterprises
have invariably created tremendous pressures on the available infra-structure. housing and
consumption. In an essentially non-affluent area, the large income differentials, between
these people and the local people. create all kinds cf tension a large part of which could be
avoided. The states get from these enterprises only such fringe benefits as sales tax and other
local taxes from their activities.17

The states do not in any other way participate in their profits. The taxes on income of such
enterprises are collected by the centre and the stales get only such share of the total collection
of these taxes all over the country as arc awarded to them by the Finance COli/mission from
time t~) time. The rationale of the Finance Canunissiou's awards is not doubted here, but the
motivation of stales towards industrialisation under private sector initiative is not adequate in
this respect. particularly because such awards are not exclusively based on collection ofsuch
taxes. The corporation tax is. however, a central jurisdiction exclusively. The influence of
states on the choice of product and product-mix is not quite adequate.18

While such choices arc generally based on the availability of the productive factors. the
discretion is almost exclusively of the privat e onterprencurs, so that the states themselves
have 110t been in a position to regulate overcrowding in particular lines of activities, except
to a relatively small-extent. Thus. states have not always been in a position to direct their
economic efforts in a way that would re.Iuce their dependence on other states or ensure fuller
utilisation of resources available. Any question related to inter-state activity would involve
the centre. In a large measure the private enterprise activity has resulted in augmenting the
power exercised by the centre. While the resources available to states for organised
exploitation may have been considerable. the bene/its accruing to them from such resources
have been doubtful.

17
Supra Note 1
18
ROBSON, W.A, PROBLEMS OF NATIONALIZED INDUSTRY, 105-109.(4th ed., 1952)