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Detail of module and its structure

Module Detail

Political Science
Subject Name
Paper Name Public Policy, Governance and Indian Administration
Module Name/Title Public Enterprise Reforms since 1991 – Privatisation and Issues of
Disinvestment
Pre-requisites Awareness about Public Enterprises, evolution of public sector in India,
problems faced by PSEs in India.
Objectives To understand the public enterprise reforms in India, mainly
disinvestment and privatisation.
Keywords Public Sector Enterprise, Public Sector Undertaking, state-owned
enterprise, Disinvestment, Privatisation, Memorandum of
Understanding, sick enterprises, productivity.

Structure of Module / Syllabus of a module

Public Enterprise Need for Public Sector Enterprise Reforms; Public Enterprise Reforms
Reforms since 1991 – since 1991; Evolution ofDisinvestment Policy of Public Sector; and Issues
Privatisation and Issues of Disinvestment/ Privatisation
of Disinvestment
2. Development Teams

Role Name Affiliation

Principal Investigator Prof. Ashutosh Kumar Department of Political

Science, Panjab University,
Chandigarh
Paper Coordinator Prof. Ramanjit Kaur Johal, Department of Public
Administration, Panjab
University, Chandigarh.

Prof. Amit Prakash Centre for Law and

Governance, SSS, Jawahar
Lal Nehru University, New
Delhi.
Content Writer/Author (CW) Dr. Bhawna Gupta Assistant Professor,
Department of Public
Administration, Panjab
University, Chandigarh
Content Reviewer (CR) Prof. B. S. Ghuman Department of Public
Administration, Panjab
University, Chandigarh
Language Editor (LE)

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 Structure of the Module (CONTENTS AT A GLANCE)

Objectives of the study

Summary
1. Introduction
1.1. Need for Public Sector Enterprise Reforms
1.2. Prerequisites for the Success of Reforms
2. Public Enterprise Reforms since 1991
2.1 De-reservation
2.2 Revival / Rehabilitation of Sick Enterprises
2.3 Disinvestment
2.4 Professionalising the Boards
2.5 Memorandum of Understanding (MOU)
2.6 Autonomy Package (Maharatna, Navratna and Miniratna)
2.7 Relaxation of guidelines
2.8 National Investment Fund
2.9 Privatisation
2.10 National Renewal Fund
3. Disinvestment and (later)Privatisation in India
3.1 Concept
3.2 Rationale behind Disinvestment/Privatisation
3.3 Objectives of Disinvestment
3.4 Importance of Disinvestment
3.5 Policy of Public Sector and Disinvestment
3.5.1 Period from 1991-92 – 2000-01
3.5.2 Period from 2001-02 – 2003-04
3.5.3 Period from 2004-05 – 2008-09
3.5.4 Period from 2009-2010
3.5.5 Period from 2011-2014
3.5.6 Period from 2014 to present
3.6 Approaches to Disinvestment
3.6.1 Minority Disinvestment
3.6.2 Majority Disinvestment
3.6.3 Complete Privatisation
4. Issues of Privatisation and Disinvestment
4.1 Lack of Political Commitment
4.2 Bureaucratisation of the disinvestment process
4.3 Inappropriate Institutional Framework
4.4 Employee Unrest
4.5 Improper Valuation of PSEs
4.6 Ignores Public Welfare Motive
4.7 Profit making PSEs should not be disinvested
4.8 Loss making units do not attract investment easily
4.9 Uncertainty and Delays in Privatisation
4.10 Ideological Dimension of the Privatisation Policy
5. Conclusion

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Objectives of the Module

After studying this module, you will be able to:

 understand chronologically the implementation of public enterprise reforms;
 explain the concept, rationale and objectives of disinvestment / privatisation;
 analyse the policy of public sector and disinvestment in the post-reform period; and
 identify the issues of disinvestment and privatisation of public enterprises

Summary

Reform of the public sector is a critical element in structural adjustment programmes all over the
world and is also included in India’s reform agenda. The new industrial policy announced by the government
in July 1991 emphasised the following four major measures to reform the public sector enterprises: (i)
reduction in the number of industries reserved for the public sector from 17 to 8 (subsequently reduced still
further to 3) and the introduction of selective competition in the reserved area; (ii) the disinvestment of
shares of a select set of public sector enterprises in order to raise resources and to encourage wider
participation of general public and workers in the ownership of public sector enterprises; (iii) the policy
towards sick public sector enterprises to be the same as that for the private sector; and (iv) an improvement
of performance through an MOU (memorandum of understanding) system by which managements are to be
granted greater autonomy but held accountable for specified results. In addition, there was a drastic reduction
in the budgetary support to sick or potentially sick PSEs.
Instead of outright privatisation the Government had initiated a limited process of disinvestment of
Government equity in public sector companies, with Government retaining 51% of the equity and also
management control. Post 1998, outright privatisation via strategic sale mode was adopted. Guidelines
controlling PSEs were drastically reduced and a number of profitable PSEs were granted enhanced autonomy
and the status of Navratna, Miniratna and later Maharatna depending upon their performance. In December
2004, the government set up a Board for Reconstruction of Public Sector Enterprises (BRPSE) to
recommend measures for restructuring/reviving Central PSUs referred to them. In wider public interest
issues of disinvestment and privatisationhave to be addressed. Among these are lack of political
commitment, bureaucratisation, incorrect valuation of shares, the crowding out possibility, the appropriate
use of disinvestment proceeds, employee unrest, and institutional and other prerequisites.

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1. Introduction

The history of public sector enterprises in India can be broadly categorised in three phases. These
phases reflect the ideology of the political leadership at the time and the economic compulsions of
the State. Each phase can be roughly characterised as lasting 15 to 20 years. These are briefly
discussed below.

In this 1950s, seeds were laid to build modern India with a strong industrial base. It required a very
strong and indigenous capital goods sector for India to make it self-sufficient in the long run. There
was a need for the creation of a strong indigenous capital goods sector, which could not, however,
be undertaken by the then India’s fledgling private sector. It was in response to this that the State
stepped in with a vision of a mixed economy approach, in which both the public sector and the
private sector had roles to play.

In the next phase, public sector enterprises were seen as an instrumentality of the State.The State
also nationalised private sector companies (e.g. coal mining where safety norms were below
standards). Following a strong import substituting industrial development policy aiming at self-
reliance and the policy of licensing for industries, monopolies got created both in the public and the
private sectors.High tariffs were also imposed on imports to help the domestic industry grow.
Growth of private sector enterprises was also heavily regulated through licensing, import controls,
and MRTP regulations. Since profit was not a key lever of performance for CPSEs and attention
was paid more to adherence to rules, there was an in-built bias against risk taking. By the early
1980s, it had become clear that the government could not support the CPSEs at their prevailing
level of economic performance.

The reforms of 1991, inter-alia, aimed at improving efficiencies in the public sector enterprises and
reducing the fiscal deficit. Moreover, post 1991 reforms, the sectors retained exclusively for the
public sector were progressively reduced; even in sectors where they enjoyed monopoly,
competition was introduced. The public sector was increasingly told to cut its dependence on the
Government and get listed on the stock exchanges for raising funds from the capital markets. A few
public sector enterprises were also privatised during this period.

1.1 Need for Public Sector Enterprise Reforms:Over the years, there has been a declining trend in
the performance of the public sector. Various studies have shown that the PSEs have failed to
achieve the desired objectives. Thus, the need of the hour is that there must be attempts towards
reforming their way of functioning with a view to increase their capabilities in carrying out
goals for economic and social development in true perspective. All over the world, reforms are
initiated by restructuring the public enterprises. Unfortunately, in India this dimension has not
been paid due attention.

1.2 Prerequisites for the Success of Reforms:Any effort in bringing reforms can be successful if we
identify the various pre-requisites. The Indian experience has revealed a number of pre-
requisites such as:
a. Political will
b. Bureaucratic attitude
c. Organisational competence
d. Administrative feasibility
e. Proper timing
f. Well-conceived ideal
g. Proper implementation
h. National culture

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 In fact, in all reform efforts, the political will plays a prominent role. India opted for an active role
of the State but unfortunately the public sector could not deliver the goods as desired through
various policy statements. Thus, reforms became an imperative.
2. Public Enterprise Reforms since 1991
Good governance in public enterprises is inextricably linked with their survival under increasingly
competitive and complex conditions. In the wake of liberalisation, Government of India announced
New Industrial Policy (NIP 1991) which included five major public enterprise reforms:
 Dereservation:Portfolio of public sector investments will be reviewed with a view
to focus the public sector on strategic, high-tech and essential infrastructure.
Whereas, some reservation for the public sector is being retained there would be
no bar for reserved areas to be opened to the private sector selectively.Similarly
the public sector will also be allowed entry in areas not reserved for it.
 Disinvestment:In order to raise resources and encourage wider public
participation,a part of the Government’s shareholding in the public sector would
be offered to mutual funds, financial institutions, general public and workers.
 There will be a greater thrust on performance improvement through the
Memoranda of Understanding (MOU) system through which management would
be granted greater autonomy and will be held accountable. Technical expertise on
the part of the Government would be upgraded to make the MOU negotiation and
implementation more effective.
To facilitate fuller discussion on performance, the MOU signed between
Government and the public enterprises would be placed in parliament. While
focusing on major management issues, this would also help place matters on day to
day operations of public enterprises in their correct perspective.
 Public enterprises which are chronically sick and which are unlikely to be turned
around will, for the formulation of revival / rehabilitation schemes, be referred to
the Board for Industrial and Financial Reconstruction (BIFR), or other similar
high level institutions created for the purpose. A social security mechanism will be
created to protect the interests of workers likely to be affected by such
rehabilitation packages.
 Boards of public sector companies would be made more professional and given
greater powers.

Text for Voice Narration Chunk Text

Major Reforms (IPR – 1991)
Government of India announced New  Dereservation
Industrial Policy (NIP 1991) which
 Disinvestment
included five major public enterprise
 Greater thrust on MOU
reforms
 Referring of Sick PSEs to BIFR
 Professionalisation of PSE Boards
Reforms introduced thereafter
 Autonomy Package (Maharatna,
Navratna&Miniratna)
 Relaxation of DPE guidelines
 Privatisation

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  National Investment Fund
 National Renewal Fund

The NIP 1991 reform initiatives were followed by several other initiatives including deepening the
five already mentioned.
2.1 De-reservation:The IPR, 1956 reserved as many as 17 sectors of industry exclusively for the public
sector. A need was felt to review the portfolio of public enterprises to focus on strategic, hi-tech
and essential infrastructure. NIP 1991 reduced this list of 17 to 8 and allowed selective competition
in the reserved areas. Now this number is reduced to 2 only. The reserved industries are – atomic
energy and railways. Since 2001, the defence sector has been opened up selectively for investment
by the private sector.
2.2 Revival / Rehabilitation of Sick Enterprises:The problem of sickness in CPSEs is addressed by the
administrative ministries/departments in Government by evolving appropriate need based strategy
concerning a particular PSE. Some of the strategies for restructuring / revival of CPSEs including
sick units on long term basis include revival through the process of BIFR; financial restructuring;
formation of joint ventures by induction of partners capable of providing technical, financial and
marketing inputs and organisational restructuring through VRS. Under the present arrangement,
BIFR decides the viability and sanctions rehabilitation schemes for sick industrial PSEs under the
provisions of SICA, 1985. SICA was amended in 1991 to bring industrial PSEs under its
purview.In 2003, Sick Industrial Companies Repeal Act was enacted to look into revival and
rehabilitation work under National Company Law Tribunal. Government of India set up a Board for
Reconstruction of PSEs (BRPSE) in December 2004 to advise the Government on the measures to
be taken to restructure PSEs, including cases where disinvestments or closure or sale are justified..
In addition, BPRPSE gave recommendations on making PSEs autonomous and professional,
considering their restructuring, advise Government on their disinvestments, closure, sale etc and to
monitor incipient sickness in PSEs. In some cases these sick PSEs are sold to the private sector.
The Government approved on 07.10.2015 the winding up of Board of Reconstruction of Public
Enterprises (BRPSE) to streamline the multiple mechanisms for revival of sick CPSEs.
Accordingly, the BRPSE set up in Department of Public Enterprises was wound up vide
notification dated 9th November 2015. The concerned administrative Ministries / Department are
now responsible to monitor sickness of CPSEs functioning under them and take timely redressal
measures with the approval of competent authority. Department of Public Enterprises has issued
guidelines on 29.10.2015 for “Streamlining the mechanism for revival and restructuring of sick /
incipient sick and weak Central Public Sector Enterprises.
2.3 Disinvestment: Disinvestment of Government equity in Central PSEs began in 1991-92. No doubt,
the dominating aim of disinvestment is to raise revenues to reduce the fiscal deficit; it also aims to
encourage wider public participation including that of workers; penetrate market discipline within
public enterprises; and improve performance. Guided by this aim, the Disinvestment Commission
in its report on corporate governance and autonomy noted that a majority of investors attach
considerable importance to the quality of corporate governance in a company and are willing to pay
a premium for better managed companies. Till 1999-2000 disinvestment was primarily through sale
of minority shares in small lots. With a view to speed up the process of disinvestment, a new
Ministry of Disinvestment was set up in December 1999. From 1999-2000 till 2003-04, the
emphasis of disinvestment changed in favour of strategic sale. The emphasis was to list large,
profitable CPSEs on domestic stock exchanges and to selectively sell small portions of equity in
listed, profitable CPSEs (other than navratnas). In 2005, Government has reiterated that existing
navratnas will be retained in the public sector and these would be encouraged to raise resources
from the capital market. Till the end of March 2013, shares of public sector worth Rs. 1,34,519
crore were sold. Now share are sold through bidding process.

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2.4 Professionalising the Boards:The government took the first step to introduce changes in the
composition of Boards, tenure of directors and to induct professionalism in management. The
guidelines issued in 19921 made it clear that government has opted for mixed boards with not more
than 50 percent of the Directors being functional directors.The number of government directors on
the Boards should not exceed one-sixth of the actual strength of the Board and should be limited to
a maximum of two. At least one-third of the directors should be non-official part time directors who
are to be appointed from a panel of ‘suitable’ directors. Such a panel is to be maintained by the
DPE in consultation with the Public Enterprise Selection Board (PESB) and the secretary of the
concerned administrative ministry. In the case of listed PSEs headed by executive chairman, the
number of non-official Directors (Independent Directors) should be at least half of the strength of
the Board.
2.5 Memorandum of Understanding (MOU):MOU is an instrument which defines clearly the
relationship of the PSE with the Government and clarifies the respective roles of the PSEs as well
as the Government in order to achieve better performance. The MOU system in India aims at
achieving the following: (i) real operational autonomy and management responsible for results; (ii)
a culture of accountability about the organisation and not merely at the point of interface between
the government and the management; and (iii) operating the public enterprises on business lines.
After the introduction of reforms, the number of public enterprises signing the contract has
increased enormously. The MoU system that was started with four CPSEs signing MoU in the year
1986-87 increased its coverage to 195 CPSEs in the year 2012-13. Seventy seven percent of the
PSEs who have signed MOU have improved their performance.
2.6 Autonomy Package (Maharatna, Navratna and Miniratna): The government in 1997 granted
operational autonomy to very large public enterprises numbering eleven under ‘Navratna’
programme2 as a key initiative to empower these enterprises to become global giants. Under the
package, the government announced grant of autonomy to selected public enterprises in respect of
six major areas of their affairs: capital expenditure, organisation restructuring, personnel policies,
technical joint ventures, and borrowings. Likewiseat a later stage, another 97 profit earning public
enterprises (48 in Category I and 49 in Category II) were classified as ‘Miniratnas’3 to enable
selected enterprises to become big players in the domestic market. However in their case, the
degree of autonomy was lower as compared to Navratna status public enterprises. There were 4
government enterprises that were awarded Miniratna status, as of 2002. In 2005, Government
reiterated that existing navratnas will be retained in the public sector and these would be
encouraged to raise resource from the capital market. The Government has introduced Maharatna
scheme in February, 2010 with the objective of delegation of enhanced powers to the Boards of
identified large sized Navratna CPSEs so as to facilitate expansion of their operations, both in
domestic as well as global markets. The Government has conferred Maharatna status to 5 CPSEs
namely, (i) Indian Oil Corporation Limited, (ii) NTPC Limited, (iii) Oil & Natural Gas Corporation
Limited and (iv) Steel Authority of India Limited in May, 2010 and (v) Coal India Limited in April,
2011. Presently (as on 15.11.2012), there are 16 navratna and 68 Miniratna CPSEs (51 Category-I
and 16 Category-II).
2.7 Relaxation of guidelines:In order to provide considerable flexibility and autonomy to public
enterprises to be able to function in liberalised economic environment and respond to market
forces, on the recommendations of Vittal Committee (1997), the Government of India abolished as
many as 696 guidelines out of 892 guidelines earlier issued, retained 171 and modified another 25
of them in December 1997. This step has definitely granted functional autonomy to public
enterprises liberating them from the stronghold of Central bureaucracy. Government constituted an

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Government of India, BPE OM dt. 16th March 1992
2
Navratnas refers to “nine jewels” i.e. public enterprises which are top performers in their respective sectors.
3
Miniratnas meaning “tiny jewels” refers to public enterprises which are vast domestic players in the Indian
economy.

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 Adhoc Group of Experts under the chairmanship of Dr Arjun Sengupta to look into the issues of
empowerment of PSEs. This resulted in greater devolution of powers to PSEs in terms of
management. Another committee under Chairmanship of T.K.A. Nair, Chairman, Public Enterprise
Selection Board (PESB) has been constituted by the Government of India to review the existing
guidelines and to recommend cancellation/ redrafting/ simplification of the guidelines.
2.8 National Investment Fund was set up in 2005 with a view to use 25 percent of the disinvested
equity for the revival and capital investment requirements of PSEs. The remaining 75 percent
would be utilised for social sector schemes like health, education, employment, etc. From April 1,
2009, disinvestment proceeds are being utilised for various social sector schemes like MGNREGA,
Indira AwasYojana, Rajiv Gandhi GraminVidyutikaranYojana, etc. The Government on
17thJanuary, 2013 has approved restructuring of the National Investment Fund (NIF) and decided
that the disinvestment proceeds with effect from the fiscal year 2013-14 will be credited to the
existing ‘Public Account’ under the head NIF and they would remain there until
withdrawn/invested for the approved purpose.
2.9 Privatisation: In the budget of 1998, for the first time, the term ‘privatisation’ was used instead of
disinvestment.Privatisation is a process by which the government transfers the productive activity
from the public sector to the private sector. By strategic sale, privatisation was envisaged though
confined to non-strategic areas. The classification was redefined by Government in 1999 to include
only defence-related, atomic energy undertakings and railway transport among strategic enterprises
and treat all other undertakings as non-strategic. This major decision of the Government also
stipulated that reduction of its stake going down to less than 51 per cent or to 26 per cent would not
be automatic but would be governed by consideration as to whether continued presence of the
public sector in an enterprise was required to prevent concentration of power in private hands. A
Department of Disinvestment was established on December 10, 1999 to give an impetus to the
programme of disinvestment and privatisation.
2.10 National Renewal Fund (NRF) was established in February, 1992 for protecting the interest of
employees on account of privatisation. The employees were offered voluntary retirement under this
scheme. National Renewal Fund covered the expenses of VRS and provided for retraining to the
workers in the organized sector. The retraining activity was administered by Department of
Industrial Policy & Promotion. After the abolition of NRF in February, 2000, the Scheme for
Counselling, Retraining and Redeployment (CRR) of Rationalized Employees of CPSEs is being
implemented by Department of Public Enterprises since 2001-02. CRR Scheme was modified in
November, 2007 in order to widen its scope and coverage.
The impact of these policy decisions on the performance of the PSUs, is, as yet, debatable. As
regards the private sector, the Government has granted freedom to add new capacities, de-license
some industries and has allowed investments in certain sectors.

3 Disinvestment and (later) Privatisation in India

3.1 Concept:Disinvestment can be defined as the action of an organisation (or government) selling or
liquidating an asset or subsidiary. It is also referred to as ‘divestment’ or ‘divestiture.’ In most contexts,
disinvestment typically refers to sale from the government, partly or fully, of a government-owned
enterprise. A company or a government organisation will typically disinvest an asset either as a
strategic move for the company, or for raising resources to meet general/specific needs.
Text for Voice Narration Chunk Text
Disinvestment refers to the action of an Disinvestment involves sale of only part of equity holdings
organization or the government in selling held by the government to private investors.
or liquidating an asset or subsidiary. In • Disinvestment process leads only to dilution of ownership
simple words, disinvestment is the and not transfer of full ownership. While, privatization

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withdrawal of capital from a country or refers to the transfer of ownership from government to
corporation. private investors.
• Disinvestment is called as ‘Partial Privatization’.

Disinvestment and Privatisation are often loosely used interchangeably. There is, however, a vital
difference between the two. Disinvestment may or may not result in Privatisation. When the
Government retains 26% of the shares carrying voting powers while selling the remaining to a
strategic buyer, it would have disinvested, but would not have ‘privatised’, because with 26%, it can
still stall vital decisions for which generally a special resolution (three-fourths majority) is
required.Privatisation means opening the gates of the public sector to the private sector. It is the
process of transferring ownership (51% or more equity) and management of a business, enterprise,
agency, public service or public property from the public sector (a government) to the private
sector, either to a business that operates for a profit or to a non-profit organization.However in case
of the disinvestment the transfer of equity is less than 51%, thus the management and the ownership
remains in the hand of government.

3.2 Rationale behind Disinvestments/ Privatisation:Given an increasingly competitive environment on

the back of private enterprises gaining ground on several parameters, disinvestment of PSUs
assumed significance. Increased competition from private players was making it difficult for many
PSUs to operate profitability. As the result of a rapid erosion of the value of the public assets, it
became extremely important that the Government disinvests Central PSUs early in order to realize a
high value.

3.3 Objectives of Disinvestment:The new economic policy initiated in July 1991 clearly indicated that
PSUs had shown a very negative rate of return on capital employed. Inefficient PSUs had become
and were continuing to be a drag on the Government’s resources turning out to be more of liabilities
to the Government than assets. Many undertakings traditionally established as pillars of growth had
become a burden on the economy. The national gross domestic product and gross national savings
were also getting adversely affected by low returns from PSUs. About 10 to 15 % of the total gross
domestic savings were getting reduced on account of low savings from PSUs. In relation to the
capital employed, the levels of profits were too low. Of the various factors responsible for low
profits in the PSUs, the following were identified as particularly important:

 Price policy of public sector undertakings

 Under–utilisation of capacity
 Problems related to planning and construction of projects
 Problems of labour, personnel and management
 Lack of autonomy

Hence, the need for the Government to get rid of these units and to concentrate on core
activities was identified. The Government also took a view that it should move out of non-core
businesses, especially the ones where the private sector had now entered in a significant way.
Finally, disinvestment was also seen by the Government to raise funds for meeting general/specific
needs.
Disinvestment was seen by the government as a means to raise funds for meeting certain general and
specific needs. The government’s disinvestment policy was identified as an active tool to reduce the
burden of financing the PSUs. Following were the main objectives of disinvestment:
 Improving public finances

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  Reducing financial burden on the government
 Funding expansion plans
 Expanding share of ownership
 Initiating competition and market plans
 Remove politics from non-essential services
3.4 Importance of Disinvestment:The primary purpose of the government’s disinvestment initiative is to
utilize the funds that become available post disinvestment, for several purposes. The important among
them are:
 Financing the increasing fiscal deficit
 Financing large-scale infrastructure development
 Encouraging spending
 Retiring government debt, since almost 40-45% of the Central Government’s
revenue goes towards repaying public debt/interest
 Spending on social programs such as health and education, MNREGA, etc.
Disinvestment also assumes significance due to the prevalence of an increasingly competitive
environment, which makes it difficult for many PSUs to operate profitably. This leads to a rapid
erosion of value of the public assets making it critical to disinvest early to realize a high value. In
this direction, the Government adopted the ‘Disinvestment Policy’.

3.5 Policy of Public Sector Disinvestment:Disinvestment of a percentage of shares owned by the

Government in public enterprises emerged as a policy option in the wake of economic liberalisation,
globalisation and structural reforms launched in 1991.In accordance with the decision announced in
the aforesaid statement (section 2.1) on industrial policy on public sector and also as per budget
speech of July 1991, in order to encourage wider participation and promote greater accountability,
the Government equity in selected CPSEs was offered to mutual funds, financial institutions,
workers and the general public.

In the subsequent years, there have been constant policy changes. While on one hand, disinvestment
as a policy has been much debated, there have also been changes and disagreements in terms of the
different approaches (discussed in Section 3.6) that can be taken for to disinvestment to
happen. Initially, it was not conceived of as privatisation of existing public enterprises but as limited
sales of equity/shares with the objective of raising some resources.

3.5.1 Period from 1991-92 to 2000-01:In the first decadeThe Government of India enunciated a
policy to divest upto 20 per cent of its equity in selected public sector undertakings to
mutual funds and investment institutions in the public sector, as well as workers in these
firms. The stated purpose of the policy was to place equity across a broad base, improve
management, increase resources to the enterprises, and to raise funds for the general
exchequer.The change process in India began in the year 1991-92, with 31 selected PSUs
disinvested for Rs.3,038 crore.Later in 1992-93, to ensure better prices, individual shares
were auctioned separately.The Committee on Disinvestment in Public Sector Enterprises
under the Chairmanship of C.Rangarajan in 1993 suggested the correct method of
divestiture. The Committee recommended that the percentage of equity divested could be
upto 49 per cent for industries reserved for the public sector, and that, in exceptional cases
upto 74 per cent of the equity could be divested.
In August 1996, the Disinvestment Commission, chaired by G V Ramakrishna was set up to
advice, supervise, monitor and publicize gradual disinvestment of Indian PSUs. It submitted 12
reports covering recommendations on privatisation of 58 PSUs. In a break from a past policy of
share public offerings, the Commission recommended strategic sales with transfer of
management. By 1996- 97, sales were open to NRIs and foreigners, and through global depository

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receipts (GDRs) in the international markets. The government announced the classification of
industries into strategic and non-strategic areas. Strategic industries were limited to: Apart from (i)
arms, ammunitions, and related defense industries; (ii) atomic energy; (iii) mining of minerals for
the atomic industry; and (iv) railway transport. All other industries were classified as non-
strategic, for which, government stakes could be dropped to as low as 26 per cent on a case-by-
case basis.
Dr R.H. Patil subsequently took up the chairmanship of this Commission in July 2001.However,
the Disinvestment Commission ceased to exist in May 2004.
The Department of Disinvestment had been set up as a separate department in December,
1999 and was later renamed as Ministry of Disinvestment from September, 2001. From
May, 2004, and the Department of Disinvestment became one of the Departments under the
Ministry of Finance.
Against an aggregate target of Rs. 54,300 crore to be raised from PSU disinvestment from
1991-92 to 2000-01, the Government managed to raise just Rs. 20,078.62 crore (less than
half). Interestingly, the government was able to meet its annual target of funds to be raised
from disinvestment in only 3 (out of 10) years. In 1993-94, the proceeds from PSU
disinvestment were nil over a target amount of Rs. 3,500 crore.
The reasons for such low proceeds from disinvestment against the actual target set were:
1. Unfavorable market conditions
2. Offers made by the government were not attractive for private sector investors
3. Lot of opposition on the valuation process
4. No clear-cut policy on disinvestment
5. Strong opposition from employee and trade unions
6. Lack of transparency in the process
7. Lack of political will
This was the period when disinvestment happened primarily by way of sale of minority
stakes of the PSUs through domestic or international issue of shares in small tranches. The
value realized through the sale of shares, even in blue chip companies like IOC, BPCL,
HPCL, GAIL & VSNL, however, was low since the control still lay with the government.
Most of these offers of minority stakes during this period were picked up by the domestic
financial institutions. Unit Trust of India was one such major institution.

3.5.2 Period from 2001-02 to 2003-04:This was the period when maximum number of
disinvestments took place. In his address to the joint session of Parliament in February
2001, the President stated thus: “The government’s approach to PSUs has a threefold
objective: revival of potentially viable enterprises; closing down of those PSUs that cannot
be revived; and bringing down government equity in non-strategic PSUs to 26 per cent or
lower. Interests of workers will be fully protected through attractive Voluntary Retirement
Schemes and other measures.” These took the shape of either strategic sales (involving an
effective transfer of control and management to a private entity) or an offer for sale to the
public, with the government still retaining control of the management. Some of the
companies which witnessed a strategic sale included BALCO, CMC, Hindustan Zinc Ltd.,
Hotel Corporation of India Ltd., HTL Ltd, IBP Co. Ltd., IPCL, Jessop and Co. Ltd., Lagan
Jute Machinery Ltd., Maruti Suzuki India Ltd. etc. The valuations realized bythe strategic
salesroute were found to be substantially higher than those from minority stake sales.
During this period, against an aggregate target of Rs. 38,500 crore to be raised from PSU
disinvestment, the Government managed to raise Rs. 21,163.68 crore.

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3.5.3 Period from 2004-05 to 2008-09:The issue of PSU disinvestment remained a contentious
issue through this period. The National Common Minimum Programme (NCMP) of the
UPA coalition government confirmed the commitment of the UPA government to a
‘strong and effective public sector’ and laid down the following guidelines as far as
privatisation of Central PSEs is concerned:
(i) all privatisations will be considered on a transparent and consultative case-by-case
basis;
(ii) generally profit making companies will not be privatised;
(iii) the government will retain existing ‘navratna’ companies in the public sector while
these companies can raise resources from the capital market;
(iv) while every effort will be made to modernise and restructure sick public sector,
companies and revive sick industry, chronically loss-making companies will either
be sold-off, or closed, after all workers have got their legitimate dues and
compensation; and
(v) the government believes that privatization should increase competition, and not
decrease it

As a result, the disinvestment agenda stagnated during this period. In the 5 years from 2003-04 to
2008-09, the total receipts from disinvestments were only Rs. 8515.93 crore. The government
approved the constitution of a National Investment Fund (NIF) from April 1, 2005 comprising of
proceeds from disinvestment of public sector undertakings.

On May 26, 2005, the Finance Minister announced the intention to disinvest 10 per cent of
government-owned equity in the navratna company BHEL but after protests from the Left parties,
his move was dropped. The Finance Minister also ruled out the strategic sale route of
disinvestment while keeping open the offer of sale route in 13 profit-making PSEs identified by
the earlier NDA government. In June 2006 another attempt was made, this time for the sale of 10
per cent stake each in two non-navratna profit-making companies — NALCO (National
Aluminum Company) in Orissa and NLC (Neyveli Lignite Corporation) in Tamil Nadu. However,
following indefinite strike by NLC workers, the move was shelved. On July 6, 2006, the Prime
Minister decided to keep all disinvestment decisions and proposals on hold, pending further
review.

Strategic sale of Central PSUs witnessed renewed activity post 2008-2009. Historically, majority
of disinvestments have been typically made to strategic partners including sale to private entity or
to another Central PSU.

3.5.4 2009-10:A stable government and improved stock market conditions initially led to a
renewed thrust on disinvestments. The Government started the process by selling minority
stakes in listed and unlisted (profit-making) PSUs. This period saw disinvestments in
companies such as NHPC Ltd., Oil India Ltd., NTPC Ltd., REC, NMDC, SJVN, EIL, CIL,
MOIL, etc. through public offers.

The President of India’s address on 4th June 2009 unveiled the agenda of the Congress- led
Government at the Centre. In keeping with the election manifesto of the Congress Party, the
President’s address mentioned: “Our people have every right to own part of the shares of
public sector companies while the Government retains majority shareholding and control.
My Government will develop a roadmap for listing and people-ownership of public sector
undertakings while ensuring that Government equity does not fall below 51%.”

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 In line with the Presidents’ address, the Economic Survey (2008-09) stated the following as
the Governments plan of action: “Revitalize the disinvestment program and plan to generate
at least Rs. 25,000 crore per year. Complete the process of selling of 5-10% equity in
previously identified profit making non-navratnas. List all unlisted public sector enterprises
and sell a minimum of 10% of equity to the public. Auction all loss making PSUs that cannot
be revived. For those in which net worth is zero, allow negative bidding in the form of debt
write-off.”

On 5th November 2009, Government approved the following action plan for disinvestment in
profit making government companies:
(i) Already listed profitable CPSEs (not meeting mandatory shareholding of 10%) are
to be made compliant by ‘Offer for Sale’ by Government or by the CPSEs through
issue of fresh shares or a combination of both
(ii) Unlisted CPSEs with no accumulated losses and having earned net profit in three
preceding consecutive years are to be listed
(iii) Follow-on public offers would be considered taking into consideration the needs
for capital investment of CPSE, on a case by case basis, and Government could
simultaneously or independently offer a portion of its equity shareholding
(iv) In all cases of disinvestment, the Government would retain at least 51% equity and
the management control
(v) All cases of disinvestment are to be decided on a case by case basis
(vi) The Department of Disinvestment is to identify CPSEs in consultation with
respective administrative Ministries and submit proposal to Government in cases
requiring Offer for Sale of Government equity

3.5.5 2011-2014:
However, in the 2011-14 period Disinvestment process slowed down and the targets could not be met
due to inter-ministerial disputes, lukewarm response from investors and external and internal market
conditions.
The Government has also announced its intentions of raising the minimum public shareholding in listed
companies to 10 %. From 2009-10 to 2012-2013, Rs. 81,095 crore was realised by disinvesting minority
stake in NHPC, OIL, NTPC, REC, SJVN, EIL, Coal India, etc. However, from 2011 onwards,
disinvestment activity has slowed down considerably. As against a target of Rs.40,000 crore for 2011-12,
the Government was able to raise only Rs.14,000 crore. In 2012-13, disinvestment proceeds wasRs.
21,504 crore. Target amount to be realised by disinvestment for the year 2013-14 had been fixed at Rs.
30,000 crore.

3.5.6 2014 - present

Even though the moratorium that the UPA govt had placed on strategic sales in 2009 had been lifted,
the new disinvestment policy PM Modi’s cabinet approved in February is bound to increase
government control over public sector enterprises.The intent of the new policy is not to shrink the public
sector but to rejig it so that assetsof public sector companies, including land and cash balances, can be
hived off and used for investment in new projects. In line with the announcement of the Hon’ble Finance
Minister in his Budget Speech of 2016-17, the Department of Disinvestment has been re-named as
Department of Investment and Public Asset Management (DIPAM) from 14th April, 2016, with focus of
the Government on management of its investment in Central Public Sector Enterprises (CPSEs) for
accelerating economic development as well as augmenting Government resources for higher
expenditure.

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 The Modi government is pursuing disinvestment, not to vacate the public sector, but to enhance its
efficiency. The new disinvestment mantra is to
i) minimize interference
ii) allow public sector undertakings to function along commercial principles
iii) grant managerial autonomy in decision-making, such as in appointments.
The new policy clearly highlights a distinction between privatisation and disinvestment. In a course
correction, the new disinvestment policy provides for land to be valued at market price for inclusion in
sales. This will help prevent any scope for rent seeking and reduces discretionary powers and thus
enables bureaucrats to do away with status-quo. NITI Aayog has been entrusted to come up with fresh
recommendations about loss-making units that can be sold, their assets valued and disposed of, and to
carry out possible strategic sales. The task of identifying PSU’s for strategic sales and of reframing of
the policy objective itself got farmed out to NITI Aayog under the new disinvestment policy. Financial
parameters of public sector companies, such as borrowings and operating profits, are being closely
monitored to identify possibilities of share buybacks, a new kind of disinvestment the government has
recently come up with.

3.6 Approaches to Disinvestment: The period since the first disinvestment that happened in 1991-1992 to
the current period, disinvestment has undergone a sea change both in approach and the policy changes
implemented to make the process more functional. There are primarily three different approaches to
disinvestments (from the sellers’ i.e. Government’s perspective)
3.6.1 Minority Disinvestment:A minority disinvestment is one such that, at the end of it, the
government retains a majority stake in the company, typically greater than 51%, thus
ensuring management control. Historically, minority stakes have been either auctioned off
to institutions (financial) or offloaded to the public by way of an Offer for Sale. The
present government has made a policy statement that all disinvestments would only be
minority disinvestments via Public Offers. Examples of minority sales via auctioning to
institutions go back into the early and mid 90s. Some of them were Andrew Yule & Co.
Ltd., CMC Ltd. etc. Examples of minority sales via Offer for Sale include recent issues of
Power Grid Corp. Of India Ltd., Rural Electrification Corp. Ltd., NTPC Ltd., NHPC Ltd.
etc.
3.6.2 Majority Disinvestment:A majority disinvestment is one in which the government, post
disinvestment, retains a minority stake in the company i.e. it sells off a majority stake.
Historically, majority disinvestments have been typically made to strategic partners. These
partners could be other CPSEs themselves, a few examples being BRPL to IOC, MRL to
IOC, and KRL to BPCL.Alternatively, these can be private entities, like the sale of
Modern Foods to Hindustan Lever, BALCO to Sterlite, CMC to TCS etc. Again, like in
the case of minority disinvestment, the stake can also be offloaded by way of an Offer for
Sale, separately or in conjunction with a sale to a strategic partner.
3.6.3 Complete Privatisation:Complete privatisation is a form of majority disinvestment
wherein 100% control of the company is passed on to a buyer. Examples of this include 18
hotel properties of ITDC and 3 hotel properties of HCI.

3. Issues of Privatisation and Disinvestment

A number of problems and issues have bedeviled the disinvestment process.
To move ahead in privatization a consensus is required among various actors like political parties, pressure
groups, trade unions and managements of PSUs; the track record of India is particularly poor. This issue has
faced stiff resistance from various political parties (especially Left parties) and trade unions. The present

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establishment has provided lip service to the concept. It has undertaken, at best, a lacklustre attempt at
privatisation. The major issues of disinvestment and privatisation are discussed below.
4.1 Lack of Political Commitment: Given the lack of a clear political majority to govern, the
various governments since 1991 have had to play a balancing game in satisfying various
political constituencies about whether to privatise. Between 1996 and 1999 India had four
prime ministers. The prime minister, the finance and disinvestment ministers may have had a
keen interest in seeing privatisation succeed, but the other coalition members, mainly left
parties, had opposing views.
4.2 Bureaucratisation of the disinvestment process:Many considerations, other than economic,
lay behind the creation of government enterprises in India. The same set of considerations is
possibly at play when it comes to privatisation. Since the process is cumbersome and time-
consuming, with decisions guided by administrative and political considerations, rather than
economic, it is no wonder that the amounts raised by privatisation are small.
Decisions on privatisation are taken by a large group of bureaucrats who are not at the
cutting edge of economic thought or business practice. Problems of collective action remain,
since there are a variety of bodies, each taking part in the process of decision-making. Also,
there are so many involved in the process that there are tendencies to free-ride. No civil
servant has tenure long enough to be held accountable for a decision.
4.3 Inappropriate Complex Institutional Framework
A corollary to commitment is the creation of an institutional framework, so that policies
needed to transform an economy can be implemented. The overall commitment to the cause
of privatisation has been diluted and appropriate institutional mechanisms have not been
evolved to meet global standards
First, the ministry or department concerned, under whose charge the company falls gives its
views. Next, these recommendations are processed by a Department of Disinvestment,
which is the administrative body consisting of a group of serving civil servants. These are
then further debated on by a Core Group of Secretaries on Disinvestment headed by the
Cabinet Secretary. This is the bureaucratic body that ultimately decides what ought to be
done. The final decision on whether a company is to be privatised is taken by a Cabinet
Committee on Disinvestment, consisting of ministers who are, in almost all instances, senior
politicians.
To add to the list of this large collection of administrative bodies is an alphabet soup of
bodies. There is also the Bureau of Public Enterprises within the ministry of Heavy Industry
and Public Enterprises. To deal with almost `terminally’ ill government companies, of which
there are several, there are the Board for Industrial and Financial Reconstruction, the
Appellate Authority for Industrial and Financial Reconstruction and a Board for
Reconstruction of Public Sector Enterprises.
Text for Voice Narration Chunk Text
A number of problems and issues have Issues of Privatisation and Disinvestment
bedeviled the disinvestment process.  Lack of Political Commitment
 Bureaucratisation of the disinvestment process
 Inappropriate Institutional Framework
 Employee Unrest
 Improper Valuation of PSEs
 Ignores Public Welfare Motive
 Profit making PSEs should not be disinvested

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  Loss making units do not attract investment easily
 Uncertainty and Delays in Privatisation
 Ideological Dimension of the Privatisation Policy

4.4 Employee Unrest: The issue is sensitive because of the apprehension of downsizing and
rightsizing after privatization which could result in the loss of livelihood of the workers
without giving them their legitimate dues and compensation. There are also apprehensions
that privatization of PSE would change the service conditions in the favour of the private
players and the workers would lose the bargaining power. National Renewal Fund has been
set up to protect the interest of employees but the trade unions do not favourprivatization
though the experience of VRS has been in favor of the leaving employees and.
Past privatisations have shown that these fears are totally unfounded. Some of the companies
started the process of restructuring and accepted some voluntary retirement applications but
no retrenchments were made.To give an example, wages increased by an average
of Rs. 1600 per employee in Modern Food Industries Limitedin spite of the fact that the
company had to approach BIFR within months of being privatised. Hindustan Levers took
measures to financially restructure the company and bring it out of BIFR’s purview, at their
own expense
4.5 Improper Valuation of PSEs:Valuation is a sensitive issue as it is affected by various
assumptions and considerations.According to the critics of privatization, because of lack of
transparency in the evaluation and the privatization procedure and rampant corruption, the
government might sell the PSE at “throw away” prices. The privatization of Santoor Hotel
case was a case in point. PSEs should be properly valued by some government agency as
well as private agency.
4.6 Ignores Public Welfare Motive:Complete privatisation may result in public monopolies
becoming private monopolies, which would then exploit their position to increase costs of
various services and earn higher profits.
It needs to be ensured that privatisation leads to greater competition in all cases.
4.7 Profit making PSEs should not be disinvested:Another argument is that profit making PSEs
with sound track record should not be privatised as they are performing well in any which
way.A good example against this criticism would be BALCO which was a profit making
company that earned the Government an average dividend (over eight years) of Rs. 5.69
crore every year on the equity sold. The Government post-disinvestment, however started
getting Rs. 82.65 crore every year. Similarly, CMC was a very well managed and profitable
company, yet the average dividend was only 0.80 crore. Similarly, MarutiUdyog Ltd. gave
average returns to the tune of Rs. 13 crore annually to the Govt. And IPCL gave Rs.16.24
crore on equity sold against Rs. 242 crore and 149 crore respectively post-disinvestment.
There can possibly be no justification of maintaining public sector character in such
companies, especially them being non-core sectors.
4.8 Loss making units do not attract investment easily:More than 25 percent of the Central PSEs
have a negative worth, and many of these are out of the turn-around zone. The revival and
rehabilitation by BIFR route has proved a failure in many cases. Procrastination at the
government level is enormous and largely unavoidable because of governmental procedures
and involvement of a number of agencies in the process. Moreover, loss making PSEs do not
attract investment easily.

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 4.9 Uncertainty and Delays in Privatisation:The progress of the government on the privatisation
front has been tardy. The Department of Disinvestment needs a clear road map, with
perspective planning. The sale process of BALCO started in late 1997 and ended in March
2001, taking about three and a half years. Earlier the much simpler privatisation of Modern
Foods and Lagan Jute Machinery Company also took more than two years respectively. The
strategic sale should ideally not take more than six to nine months.
4.10 Ideological Dimension of the Privatisation Policy:Article 39 (b) and (c) of the Constitution
of India state that “ownership and control of the material resources of the community are so
distributed as best to subserve the common good” and “ that the operation of the economic
system does not result in the concentration of wealth and means of production to the
common detriment.” The Left party has characterised the privatisation policy as an
ideological assault. There is incompatibility between the market-driven system and the
constitutional imperatives.

6. Conclusion
To have a consensus in the sensitive issue like privatization, that too in the large and vibrant democracy
like India, will take some time. In other countries also privatization has been a gradual process, in some
of the countries this process has even taken decades for completion. Privatization is not the only aspect
of the economic reform. Till a consensus is achieved, the government should carry on with “softer
reforms” like disinvestment, regulatory framework, providing level playing fields etc. Also privatization
should not be seen as a panacea for all economic pathologies. It will at the best create an efficient
growing industrial base and augment the overall growth. However to make it people friendly and
inclusive a strong regulatory framework is required.

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