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A PROJECT REPORT ON

DISINVESTMENT POLICY OF INDIA

Submitted

In partial fulfilment of

POST GRADUATE DIPLOMA IN MANAGEMENT

2016-18

Submitted To Submitted By

Dr. P.CHAKRAVARTHI CH. NIKHIL SRINIVAS GUPTA

T-12025

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A PROJECT REPORT ON

DISINVESTMENT POLICY OF INDIA

Submitted

In partial fulfilment of

POST GRADUATE DIPLOMA IN MANAGEMENT

2016-18

Name of the Faculty Guide Dean

Dr. P.CHAKRAVARTHI Dr. SABYASACHI RATH

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DECLARATION

I CH. NIKHIL SRIINIVAS GUPTA Regd No: T=12025 hereby declare that this

project “DISINVESTMENT POLICY OF INDIA” is an original work carried out by me

under the guidance of Dr. P.CHAKRAVARTHI. The report submitted by me is a

bonafide work carried by me of my own efforts and it has not been submitted to any

other institute/ university/Conference or published any time before.

Date:

Place: Hyderabad CH.NIKHIL SRINIVAS GUPTA

T-12025

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FACULTY GUIDE CERTIFICATE

I Prof. Dr, P.CHAKRAVARTHI certify that CH.NIKHIL SRINIVAS GUPTA has

carried out “A PROJECT REPORT ON DISINVESTMENT POLICY OF INDIA” as

course project in the partial fulfilment for the award Of Post Graduate Diploma in

Management from Vishwa Vishwani Institute of Systems & Management,

Hyderabad. Further, I hereby declare that the report submitted by him here with is

genuine to the best of my knowledge and is acceptable

Date: Signature of Faculty Guide

Place: Hyderabad (Dr. P.Chakravarthi)

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ACKNOWLEDGEMENT

It is a great sense of satisfaction and a matter of privilege to me to complete this

project a part of course.

I sincerely record my appreciation to all, who have contributed in preparing this

report with crucial evaluation and suggestions.

I take this opportunity to thank our Dean, Dr. SABYASACHI RATH, for providing me

a chance to carry out this project.

I am very much grateful to my Faculty Guide, Dr. P.CHAKRAVARTHI, for his

valuable guidance provided to me in the completion of this project.

I am thankful to my family and friends for their moral support throughout the

completion of this project report.

Lastly I am thankful to my college, VVISM, Hyderabad that provided me this

opportunity.

CH.NIKHILSRINIVAS GUPTA

T-12025

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TABLE OF CONTENTS

CONTENTS PAGE NO.

Introduction and Definition 7

Objectives of Disinvestment 8

Importance of Disinvestment 9

Merits of Disinvestment 9

Demerits of Disinvestment 10

Salient Features of Disinvestment 11

Approaches in Disinvestment 12

Procedure followed in Disinvestment 13

Problems in Disinvestment 14

Indian scenario 16

Implication of Disinvestment on Indian

economy

16

Disinvestments- A Historical Perspective 17

Disinvestment of Public Sector Units in

India

38

Latest News about Disinvestment 40

National Investment Fund 42

Restructuring of NIF 43

Bibliography 44

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Disinvestment policy of India

Definition of Disinvestment

At the very basic level, disinvestment can be explained as follows:

“Investment refers to the conversion of money or cash into securities, debentures,

bonds or any other claims on money. As follows, disinvestment involves the

conversion of money claims or securities into money or cash.”

Disinvestment can also 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.

• Disinvestment involves sale of only part of equity holdings held by the

government to private investors.

• Disinvestment process leads only to dilution of ownership and not transfer of full

ownership. While, privatization refers to the transfer of ownership from

government to private investors.

• Disinvestment is called as ‘Partial Privatization’.

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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 to

be more of liabilities to the Government than being 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.

In this direction, the Government adopted the 'Disinvestment Policy'. This was

identified as an active tool to reduce the burden of financing the PSUs.

The following main objectives of disinvestment were outlined:

• To reduce the financial burden on the Government

• To improve public finances

• To introduce, competition and market discipline

• To fund growth

• To encourage wider share of ownership

• To depoliticise non-essential services

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Importance of Disinvestment

Presently, the Government has about Rs. 2 lakh crore locked up in PSUs.

Disinvestment of the Government stake is, thus, far too significant. The importance

of disinvestment lies in utilisation of funds for:

Financing the increasing fiscal deficit

Financing large-scale infrastructure development

For investing in the economy to encourage spending

For retiring Government debt- Almost 40-45% of the Centre’s revenue receipts

go towards repaying public debt/interest

For social programs like health and education

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.

Merits of Disinvestment (Privatisation) Policy of India

To obtain release of the large amount of public resources locked up in non-

strategic Public sector units for re-employment in areas that are much higher

on the social priority e.g. health, family, welfare etc. and to reduce the public

debt that is assuming threatening proportions.

Privatization would help stemming further outflows of the scarce public

resources of sustaining the unviable non-strategic public sector unit.

Privatisation would facilitate transferring the commercial risk to which the tax

payer’s money locked up in the public sector is exposed to the private sector

wherever the private sector is willing to step in.

Privatisation would release tangible and intangible resources such as large

manpower locked up in managing PSU’s and release them for deployment in

high priority social sector.

Disinvestment would expose privatized companies to market disciplines and

help them become self-reliant.

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Disinvestment would result in wider distribution of wealth by offering shares of

privatized companies to small investors and employees.

Disinvestment would have a beneficial effect on the capital market. The

increase in floating stock would give the market more depth and liquidity, give

investors early exit options, help establish more accurate benchmarks for

valuation and raising of funds by privatized companies for their projects and

expansion.

Opening up the public sector to private investment will increase economic

activity and have an overall beneficial effect on economy, employment and tax

revenues in the medium to long term.

Bring relief to consumers by way of more choices and better quality of

products and services, e.g. Telecom sector.

Demerits/Criticism of Disinvestment

The amount rose through disinvestment from 1991-2001 was Rs. 2051 crores

per year which is too meagre. Further, the way money released by

disinvestment is being used, remaining undisclosed.

The loss of PSU’s is rising. It was 9305 crore in 1998 and 10060 crore in

2000.

This is welcome but disinvestment of profit making public sector units will rob

the government of good returns. Further, if department of disinvestment wants

to get away with commercial risks, why should it retain equity in disinvested

PSU’s, e.g. Balco (49%), Modern Foods (26%) etc.

The growth in social sector is not in any way hindered by non-availability of

manpower.

This is true but only when the government, ensures that the market system

regulates and disciplines privatized firms taking care of public’s interest.

Privatization programme is generally not been affected through the public

sales of shares. Earlier, sale of shares (1991-96) attracted the employees to a

limited extent and was not friendly to small investors and employees.

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In most cases, shares of disinvested PSU’s are by and large in the hands of

institutions with little floating stock. The present policy of privatization through

the strategic partner route would also not achieve these objectives.

Hindustan Lever has categorically stated that it has no plans for any capital

infusion in Modern food industries acquired by it in January, 2002. The

supporter of disinvestment had thought that tax payer’s money would be

saved through private sector investment.

No monopoly is good. Only fair and full competition can bring relief to

consumers.

What are the Salient features of Current Disinvestment Policy?

The policy of disinvestment has evolved since the early 1990s and now (budget

2016), the government has brought some changes including bringing back strategic

disinvestment (previously strategic sale). Budget 2016 has brought several notable

changes including renaming of Department of Disinvestment as Department of

investment and Public Asset Management (DIPAM). Following are the main features

of the current disinvestment policy.

(a) Public Sector Undertakings are the wealth of the Nation and to ensure this wealth

rests in the hands of the people, promote public ownership of CPSEs;

(b) In the case of disinvestment through minority stake (share) sale in listed CPSEs,

the Government will retain majority shareholding, i.e. at least 51 per cent of the

shareholding and management control of the Public Sector Undertakings;

(c) Strategic disinvestment by way of sale of substantial portion of Government

shareholding in identified CPSEs up to 50 per cent or more, along with transfer of

management control.

The government also separately mentioned disinvestment targets under the two

types: disinvestment target for the current financial year is Rs. 56,500 crore

comprising Rs. 36,000 crores from disinvestment of CPSEs and Rs. 20,500 crores

from “Strategic Disinvestment”.

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Different Approaches to Disinvestments

There are primarily three different approaches to disinvestments (from the sellers’

i.e. Government’s perspective)

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.

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, and 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.

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. 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.

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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.

Procedure followed in Disinvestment

The disinvestment process of individual CPSEs has evolved over time and is based on

decision-making through inter-ministerial consultations and involvement of professionals and

experts, in view of the technical and complex nature of transactions and the need for

transparency and fair play. The current disinvestment process involves the following steps

a) In-principle consent by the Administrative Ministry of the CPSE concerned;

b) Approval of the proposal to disinvest by CCEA;

c) Constitution of an Inter-Ministerial Group (IMG) with the approval of the Finance

Minister to guide and oversee the disinvestment process;

d) IMG appoints Advisers for the transaction including Merchant Bankers/ Book

Running Lead Managers (BRLMs)/ Legal Advisers;

e) Presentation by BRLMs before High Level Committee (HLC) on valuation;

f) HLC recommends price band/ floor price to ‘Alternative Mechanism’ taking into

consideration the recommendation of the BRLMs;

g) Approval by ‘Alternative Mechanism’ of recommended price band/ floor price,

method of disinvestment, price discount for retail investors and employees, etc.

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Problems in Disinvestment

Disinvestment was a very bold and important step initiated by the government as a

part of its reform measures. But the way it was handled has defeated its very

purpose. The challenges before investment are as follows-

Social Problem: Process of disinvestment is not favoured socially as it is against

the interest of socially disadvantageous people and society at large. This process will

definitely affect the social objectives of the government.

Political Problem: The coalition government at the centre with a number of parties

has posed a serious threat to this programme. Conflicting interest has made it

difficult to arrive at a national consensus.

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Economic Problem: Most of the units identified for disinvestment are in a very

bad shape which does not offer good returns. The Government due to paucity of

funds is also not in a position to revive it.

Legality of the disinvestment process has been challenged on a variety of grounds

that slowed the sale of public assets. However, there were two significant judicial

rulings that broadly set the boundaries of the Disinvestment process. These are:

Privatisation is a policy decision, prerogative of the executive branch of the state;

courts would not interfere in it

Privatisation of the PSE created by an act of parliament would have to get the

parliamentary approval

While the first ruling gave impetus for strategic sale of many enterprises like

Hindustan Zinc, Maruti, and VSNL etc. since 2000, the second ruling stalled the

privatisation of the petroleum companies, as government was unsure of getting the

laws amended in the parliament.

Less inclination of organization towards Disinvestment- The number of bidders for

equity has been small not only in the case of financially weak PSUs, but also in that

of better-performing PSUs.

Besides, the government has often compelled financial institutions, UTI and other

mutual funds to purchase the equity which was being unloaded through

disinvestment. These organizations have not been very enthusiastic in listing and

trading of shares purchased by them as it would reduce their control over PSUs.

Instances of insider trading of shares by them have also come to light. All this has

led to low valuation or under-pricing of equity.

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Indian Scenario

A large number of PSUs were set up across sectors, which have played a significant

role in terms of job creation, social welfare, and overall economic growth of the

nation; they rose to occupy commanding heights in the economy. Over the years,

however, many of the PSUs have failed to sustain their growth amidst growing

liberalization and globalization of the Indian economy. Loss of monopoly and a

protectionist regime, and rising competition from private sector competitors have

seen many of the government owned enterprises lose their market share drastically.

In many instances, many of the PSUs have found themselves unable to match up to

the technological prowess and efficiency of private sector rivals, although many have

blamed lack of autonomy and government interventions for their plight.

Implication of Disinvestment to Indian Economy

India is already confronting the challenges of fiscal deficit due to the huge

symphonizing of capital for the social sector specially flagship program of

government NREGA. The current account deficit is also the cause of concern for the

Indian government. The expenditure on different front namely defense (16% of GDP)

is larger in extent and worthwhile also. But the growing fiscal deficit and current

account deficit will not be bearable for longer span of time. There is immediate need

to tame this gap. The only way out is disinvestment of Public Sector Undertakings. It

results in efficient use of resources whereby scarce resources like land, capital and

machinery are put to more efficient use. The economy as a whole is benefited by

increase efficiency of the units and the fiscal mess is reduced by lessening of

liabilities. Inefficient PSU's were largely responsible for the macro-economic crisis

faced by India during 1980's although they were set up for the purpose of providing

employment and the same time generate revenue surplus. But they could not stand

to expectations. Hence steps for disinvestment had to be taken.

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Disinvestments-A Historical Perspective

For the first four decades after Independence, the country was pursuing a path of

development in which the public sector was expected to be the engine of growth.

However, the public sector overgrew itself and its shortcomings started manifesting

in low capacity utilisation and low efficiency due to over manning, low work ethics,

over capitalisation due to substantial time and cost over runs, inability to innovate,

take quick and timely decisions, large interference in decision making process etc.

Hence, a decision was taken in 1991 to follow the path of Disinvestment.

Periodic Analysis of Disinvestment

PHASE 1 (1991-92 to 1995-96)

Phase one Started when Chandrasekhar government, while presenting the interim

budget for the year 1991-92 declared disinvestment up to 20%.The objective was to

broad-base equity, improve management, enhance availability of resources for these

PSEs and yield resources for exchequer.

Industries Reserved for Public sector prior to 1991

1. Arms and Ammunition and allied items of defence equipment.

2. Atomic energy.

3. Iron and steel.

4. Heavy castings and forgings of iron and steel.

5. Heavy plant and machinery required for iron and steel production, for mining.

6. Heavy electrical plants.

7. Coal and lignite.

8. Minerals oils.

9. Mining of iron ore, manganese ore, chrome ore, gypsum.

10. Mining and processing copper, lead, zinc, tin.

11. Minerals specified in the Schedule to the Atomic Energy.

12. Aircraft.

13. Air transport.

14. Rail transport.

15. Ship building.

16. Telephones, Telephone cables, Telegraph and Wireless apparatus (excluding

radio receiving sets).

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17. Generation and distribution of electricity.

The Industrial Policy Statement of 24th July 1991 stated that the government would

divest part of its holdings in selected PSE’s, but did not place any cap on the extent

of disinvestment. Nor did it restrict disinvestment in favour of any particular class of

investors. During this Phase the sole was to generate revenue without following any

objective seriously.

Industries Reserved for Public Sector after July, 1991

• Arms and Ammunition and allied items of defence equipment, aircraft and warship.

• Atomic Energy.

• Coal and Lignite.

• Mineral Oils.

• Mining of iron ore, manganese ore, chrome ore, gypsum, sulphur, gold and

diamond.

• Mining of copper, lead, zinc, tin, molybdenum and wolfram.

• Minerals specified in the schedule to Atomic Energy Order, 1953.

• Railway Transport.

Disinvestment in 1991-92

A steering Committee was formed for selection of PSEs for disinvestments. The

Department of Public Enterprises (DPE) coordinated all activities under the Ministry

of Industry.

• First Tranche of Disinvestment (December, 1991)

Out of 244 public enterprises 41 were selected, but 10 were dropped on the grounds

of being consultancy firms, negative asset value or they incurred losses in previous

financial year.

The Remaining 31 were grouped into 3 categories “Very Good”, “Good” and

“Average” on the basis of net assets value per share vis-a-vis face value of Rs10 as

on March,1991. The total value of equity in each basket was Rs50 million.

Bids were invited from 10 financial institutions/ mutual funds which consisted of 825

bundles each consisting of 9 PSEs. A total of 710 bids for 533 bundles were

received from 9 mutual funds/institutions and 406 bundles for a total value of

Rs14.2billion were sold. Unit Trust of India was the major purchaser accounting for

Rs.7.75 billion of the sale.

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• Second Tranche of Disinvestment (February, 1992)

In second tranche DPE asked ICICI to evaluate and advice issue price equity of

selected PSEs. A List of 16 PSE’s was prepared and shares were grouped into 120

bundles as before. The reserve price fixed per bundle was Rs 10.08 crore. Bids were

invited from 36 institutions and banks. A total of Rs. 1611 crore were realised with

Unit Trust of India again being the major purchaser. The Shares of Metal Scrap

Trading Corporation remained unsold.

Details of firms disinvested in 1991-1992

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Source: percentage disinvested from Public Enterprises Survey, 1995-96, VOL- I

and number of shares disinvested is from Public Accounts Committee 1993-94, 75th

report, 10th Lok Sabha.

The Narasimha Rao Government kick started this phase with small lots of

disinvestment of shares in 47 companies, a record. A sum of Rs 3,038 Crore was

generated against a target of Rs 2,500 Crore making 1991-92 one of only three

years in the last 13 when actual disinvestments receipts exceeded the target.

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Disinvestment in 1992-93

As per the budget of 1992-93 Rs. 3500 crore were to be raised by disinvestment

during the year. Out of this Rs. 1000 crore was meant for National Renewal Fund

(NRF) which was set up in February, 1992 to protect the interest of workers and

provide asocial safety net for labour.

• First Tranche of Disinvestment (October, 1992)

In this phase auctioning of shares on individual PSE basis was done. Tenders were

invited for a total of 8 PSEs. The minimum bid limit was set at Rs. 2.5 crore. The

minimum reserve price was fixed on the basis of recommendations from merchant

bankers like ICICI, IDBI and SBCM (State Bank of Capital Market) The average of

their prices was set as the “Upset Price”. A total of 12.87 crore shares were sold for

a value of Rs 681.95 crore with 286 bids being received.

Details of PSE’s Disinvested in October 1992

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• Second Tranche of Disinvestment (December, 1992)

In November, 1992 the government invited bids for the purchase of 46.27 crore

shares of 14 PSEs. The minimum bid limit was reduced to Rs 1 crore from Rs 2.5

crore. The criterion was kept same as in first tranche. A total of 225 bids were

received and 31.06 crore shares of 12 PSEs were sold at a total amount of

Rs1183.83 crores.

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Details of the firms disinvested in December, 1992.

• Third Tranche of Disinvestment (March, 1993)

Shares of 15 PSEs were offered for sale thorough auction. Out of 192 bids which

were received, 57 bids emerged successful on the basis of the reserve prices fixed

by the core group based on the recommendations of the merchant bankers. A total

amount of Rs 46.73 crore was realised through sale of 1.0096 crore shares of 9

PSEs.

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Disinvestment in 1993-94

The target during this fiscal year was kept at Rs 3500 crore but the government

could not go in for further sale of shares due to unfavourable stock market conditions

through 1993-94.

Disinvestment in 1994-95

No divestment of PSE shares took place during 1993-94 due to adverse market

conditions. In spite of this an advertisement for sale of shares in some PSE’s was

released in March 1994. Actual realisation of funds took place from this round of

divestment took place in 1994-95. Changes effected in the procedure to encourage

divestment are: Bidding amount was lowered from Rs 1,00,000 to Rs 25,000 or

value of 100 shares(whichever higher) Registered FII’s were permitted for auction of

PSE shares.

• First Tranche of Disinvestment (March – April1994)

Considering the stock market conditions, Government evaluating the

recommendations of two merchant bankers – Industrial Credit and Investment

Corporation of India, and Industrial Development Bank of India fixed the minimum

price to off-load shares of 7 PSE in March 1994.Out of these 7 PSE, only 1 PSE was

not sold as no bid had been received.

PSE’s Disinvested in March/April, 1994

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• Second Tranche of Disinvestment (October 1994)

Notice inviting tenders was issued in October 1994 for sale of shares in seven

PSE’s. Shares were not sold for MTNL as there was no bid. Non-Resident Indians

(NRIs) and Overseas Corporate Bodies (OCBs) were permitted to bid for the shares

for the first time.

PSE’s disinvested in October, 1994

• Third Tranche of Disinvestment (January 1995)

In January 1995 shares of 6 PSEs were offered for sale. Out of 556 bids received,

209 were accepted in respect to 5 companies and government decided not to sell

shares in VSNL.

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PSE disinvested in January, 1995

Disinvestment in 1995 – 1996

Against the target of Rs 7000 crore, the government decided to disinvest from only 4

PSEs – MTNL, SAIL, CONCOR and ONGC in October 1995.

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PSE Disinvested in October 1995

In addition, shares of Industrial Development Bank of India (IDBI) were disinvested

during the year and an amount of Rs 193 crore was realised. Although Public

Enterprises Survey does not reflect this amount but Ministry of Finance takes this

into account. So the total disinvestment receipts for the year was Rs 362 crore

(Rs.168.48 crore from disinvestment in 4 PSEs plus Rs 193 crore from disinvestment

in IDBI).

PHASE II (1996-97 to 1997-98): Disinvestment Commission

The government constituted Public Sector Disinvestment Commission under G. V.

Ramakrishna on 23 August, 1996 for a period of 3 years with the objective of

preparing an over-all long term disinvestment programme for public sector

undertakings.

The main terms of reference were:

A comprehensive overall long-term disinvestment programme (extent of

disinvestment, mode of disinvestment etc.) within 5-10 years for the PSUs referred to

it by the Core Group. To select the financial advisors for specified PSUs to facilitate

the disinvestment process.

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By December 1997, the commission had given six reports included

recommendations in 34 enterprises. The commission also showed concern about

slow progress in implementation of its recommendations and it was particularly

critical of government’s going ahead with strategic sales leading to joint ventures in

some PSEs not referred to the commission.

However its power was axed later by the government. Out of 72 companies referred

to it the commission gave its recommendations on 58 PSEs and finally the

commission lapsed on 30 November, 1999.

Disinvestment Modalities Recommended by the Disinvestment Commission

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Disinvestment in 1996-97

In 1996-97 a target of Rs. 5000 crore was fixed for mobilization of resources through

disinvestment of PSE shares. In order to do this, companies from petroleum and

communication sectors were chosen namely IOC and VSNL. But due to

unfavourable market conditions the GDR of only VSNL could be issued. In the GDR,

39 lakh shares of VSNL were disinvested resulting in an amount of Rs 380 crore.

Disinvestment in 1997-98

The budget for 1997-98 had taken a credit for an amount of Rs 4800 crore to be

realised from disinvestment of government held equity in PSEs. This was supposed

to be achieved by the disinvestment of MTNL, GAIL, CONCOR and IOC...

A GDR of 40 million shares held by the government in MTNL was offered in

international market in November, 1997. A total of Rs. 902 crore was collected but

due to highly unfavourable market conditions the GDR issue of GAIL, CONCOR, and

IOC was deferred.

Phase III (1998-99 to 2007-2008)

This phase marked a paradigm shift in the disinvestment process. First in the 1998 –

99 budgets BJP government decided to bring down the government shareholding in

the PSEs to 26%to facilitate ownership changes which were recommended by

Disinvestment Commission. In 1999 – 2000 government state that its policy would

be to strengthen strategic PSEs privatise non-strategic PSEs through disinvestment

and for the first time the term ‘privatisation’ were used instead of disinvestment. The

government later formed the Department of Disinvestment on 10 December 1999.

The following criteria were observed for prioritisation for disinvestment:

• Where disinvestments in PSEs would lead to large revenues to the

government

• Where disinvestment can be implemented with minimum impediments and in

relatively shorter time span; and

• Where continued bleeding of government resources can be stopped earlier.

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Divestment in 1998 – 99

The government decided to disinvest through offer of shares in GAIL, VSNL,

CONCOR, IOC and ONGC. The budget for 1998– 99 had taken a credit for Rs 5,000

crore to be realised through disinvestment.

Disinvestment in 1999 -2000

The budget for 1999 – 2000 had taken a credit for Rs 10,000 crore to be realised

through disinvestment. The government disinvested from Modern Foods India Ltd

and did a strategic sale to their strategic partner – HLL for Rs 105, 45 crore for a 74

% equity stake. This was the first time government had sold more than 50% holding.

Further government adopted the following ways to raise money through

disinvestment:

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Disinvestment in 2000 -2001

Against a target of 10,000 crore, the government realised Rs 1868.73 crore. The

details are:

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Disinvestment in 2001 – 2002

Against a target of 12,000 crore, the government realised Rs 3130.94 crore during

the year. The highlight of this disinvestment was that strategic sales were affected in

CMC, HTL, IBP, VSNL and PPL. The details are:

Disinvestment in 2001 – 2002

Disinvestment in 2002 – 2003

Target of the government for disinvestment in the year was Rs 12,000 crore. The

major highlight was the two-stage sell off in Maruti Udyog Ltd with a Rs 400 crore

right issue at a price of Rs 3280 per share of Rs 100 each in which the government

renounced whole of its rights share (6,06,585) to Suzuki, for a control premium of Rs

1000 crore. Relative shareholding of Suzuki and government after completion of the

rights issue was 54.20 % and 45.54 % respectively. The second stage government

offloaded its holding in two tranches – first where government sold 27.5 % of its

equity through IPO in June 2003. The issue was oversubscribed by over 10 times.

Later keeping in view the overwhelming response from sale of Maruti, government

sold its remaining shares in the privatised companies of VSNL, CMC, IPCL, BALCO

and IBP to public through IPO’s. Strategic sale of IPCL was also finalised in May

2002.

Page | 34

The decision to disinvest IPCL was although taken in December 1998, it took three

and half years to finalise the deal. Reliance Petro industries Ltd (Reliance group)

was finally inducted as a strategic partner with a 26 % sale in IPCL. The details of

the disinvestment during 2002 – 2003 are:

From a summary of the Disinvestment from 1991-92 to 2002-2003 we can know

what targets were set by the government and how much was realised. Also the

various companies from which the government has disinvested are mentioned.

Disinvestment from 2003 – 2004 to 2007 - 08

The government had fixed a high target for the year 2003 – 04 as 14,500 crore. The

strategic sale of JCL, and offer sales of many PSEs like MUL, IBP, IPCL, CMC, DCI,

GAIL and ONGC has exceeded the target fixed by the government to a total receipt

of Rs 15,547.41 crore. Out of Rs 12,741.62 crore receipts through sale of minority

shareholding in CPSEs In 2004 – 05 the target was reduced to Rs 4,000 crore and

share sales of NTPC, ONGC spill overs and IPCL shares to employees pushed the

total receipts to Rs 2,764.87 crore. In the other 3 years of this phase – from 2005 –

06 till 2007 – 2008 the government fixed no targets and the total receipts were very

less to with the year 2006 – 07 yielding no receipts at all.

Page | 35

2008-09

The issue of PSU disinvestment remained a contentious issue through this period.

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.

2009-10 to 2015-16

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.

However, from 2011 onwards, disinvestment activity 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.

However, the subsequent years saw some improvement and the Government was

able to raise Rs. 23,857 crore against a target of Rs. 30,000 crore (Revised Target :

Rs. 24,000 crore) in 2012-13 and Rs. 21,321 crore against a target of Rs. 54,000

(Revised Target : Rs. 19,027 crore) in 2013-14.

The achieved target dropped to Rs. 24,338 crore against a target of Rs. 58,425 crore

in 2014-15 and Rs. 18,409 crore against a target of Rs. 69,500 (Revised Target : Rs.

30,000 crore) in 2015-16.

2016-17

The NDA Government has set an ambitious disinvestment target of Rs. 56,500

crore. As such, 2016-17 is likely to see some big ticket disinvestments taking place.

The Union government aims to raise Rs.56,500 crore by selling stakes in state-

owned enterprises in 2016-17, out of which Rs.36,000 crore will come from minority

stake sales and Rs.20,500 crore from strategic stake sales.

Page | 36

This is 19% lower than the Rs.69,500 crore the government had targeted in the

2015-16 budget. The target, though, was later scaled down.

The head of a domestic investment bank termed this year’s disinvestment target

“realistic”. He is not authorized to speak to reporters as his firm has been involved in

the government’s disinvestment programme.

Deven Choksey, managing director, KR Choksey Securities Pvt. Ltd, said the basic

intent of the government through disinvestment this year is to monetize land assets

of public sector units and is a positive move.

“The targets are the government’s intent but the numbers look realistic this year,”

Choksey said.

While setting the target for the new fiscal, the government also said that a new policy

for management of government investment in public sector enterprises, including

disinvestment and strategic sale, has been approved.

“We have to leverage the assets of CPSEs (central public sector enterprises) for

generation of resources for investment in new projects. We will encourage CPSEs to

divest individual assets like land, manufacturing units, etc., to release their asset

value for making investments in new projects,” said finance minister Arun Jaitley.

The government is likely to miss its FY16 disinvestment target, the sixth year running

and the 16th time in the 25-year history of disinvestment.

For FY16, the government had set a record target of raising Rs.69,500 crore through

disinvestment, comprising Rs.41,000 crore by way of minority stake sale and an

additional Rs.28,500 crore from strategic sales. The ministry later trimmed i ts target

by roughly 57% to Rs.30,000 crore, citing volatile market conditions. However, the

amount garnered was even lower.

Page | 37

In 2015-16, the government was able to raise about Rs.18, 400 crore by selling

stakes in Rural Electrification Corp. Ltd (Rs.1, 608 crore), Power Finance Corp. Ltd

(Rs.1, 671 crore), Dredging Corp. of India Ltd (Rs.53.33 crore), Indian Oil Corp. Ltd

(Rs.9, 369 crore), Engineers India Ltd (Rs.643 crore), and NTPC Ltd

(estimated Rs.5, 050 crore), data from the department of disinvestment’s (DoD)

website shows.

Fears of a hard-landing of China’s economy, devaluation of the Yuan and an

increase in interest rates by the US Federal Reserve have muddied market

sentiment and dampened the prospects of share sales by public and private

companies this fiscal. Since the start of this fiscal year, the benchmark BSE Sensex

has fallen a little more than 17%.

Union Budget 2017: Disinvestment target at Rs 72,500 crore; 3 Rail PSUs

to be listed

Government on February 1st 2017 announced that it will raise Rs 72,500 crore

through disinvestment of PSUs, including listing of three railways PSUs IRCTC,

IRFC and IRCON, and proposed merger and consolidation to create globally

competitive public sector units. Finance Minister Arun Jaitley said the government

will put in place a revised mechanism and procedure to ensure time-bound listing of

identified CPSEs on stock exchanges as listing will foster greater public

accountability and unlock their true value.

“The shares of Railway public sector enterprises (PSEs) like IRCTC, IRFC and

IRCON will be listed stock exchanges,” Jaitley said in his 2017-18 Budget speech in

the Lok Sabha. As per the documents, the government has budgeted to raise Rs

72,500 crore through disinvestment in CPSEs in 2017-18, which is higher than the

Rs 45,500 crore raised in the current fiscal as per revised estimate (RE).Fiscal 2016-

17 is the seventh year in a row when the government would not be meeting the

disinvestment target fixed in the Budget. As Rs 56,500 crore was budgeted to be

raised through PSU disinvestment in 2016-17. Jaitley said there are opportunities to

strengthen CPSEs through “consolidation, mergers and acquisitions” so that they

can be integrated across the value chain of an industry.

Page | 38

“It will give them capacity to bear higher risk, avail economies of scale, take higher

investment decisions and create more value for stakeholders. Possibilities of such

restructuring are visible in the oil and gas sector. “We propose to create integrated

public sector oil major which will be able to match the performance of international

and domestic private sector oil and gas companies,” the Finance Minister said.

Jaitley said exchange traded fund (ETF) comprising shares of 10 CPSEs has

received overwhelming response. The government had raised Rs 6,000 crore

through the second tranche of CPSE ETF last month.

“We will continue to use ETF as a vehicle for further disinvestment of shares.

Accordingly, a new ETF with diversified CPSE stocks and other government holding

will be launched in 2017-18,” he said.

Disinvestment of Public Sector Units in India

The below table provides the data for divestment which started from 1991(Barring 2

small units CMC Limited and Patherele Concrete).

Year

Total Receipts (Rs. crore)

(Inflation adjusted to 2016

Prices)

1991-92 17,314

1992-93 9,868

1993-94 0

1994-95 23,387

1995-96 362

1996-97 1,399

1997-98 3,143

1998-99 16,624

1999-00 5,512

Page | 39

2000-01 5,261

2001-02 15,131

2002-03 8,662

2003-04 38,611

2004-05 6,614

2005-06 3590

2006-07 0

2007-08 8,469

2008-09 0

2009-10 38,748

2010-11 33,881

2011-12 19,418

2012-13 30,507

2013-14 18,304

2014-15 26,901

2015-16 33,690

2016-17 56,500 (Target)

Page | 40

Disinvestment of Public Sector Units in India

Latest News about Disinvestment

After many years, Centre on course to meet disinvestment target

For the first time in many years, the Centre is expected to meet its disinvestment

target. It expects to rise close to ₹45,500 crore from its disinvestment programme.

Officials estimate that disinvestment would bring in receipts of at least ₹44,000 crore,

if not the full targeted amount.

The Centre’s total receipts from disinvestment are also estimated to be at an all-time

high this fiscal.

0

5000

10000

15000

20000

25000

30000

35000

40000

year

19

91-9

2

19

92-9

3

19

93-9

4

19

94-9

5

19

95-9

6

19

96-9

7

19

97-9

8

19

98-9

9

19

99-0

0

20

00-0

1

20

01-0

2

20

02-0

3

20

03-0

4

20

04-0

5

20

05-0

6

20

06-0

7

20

07-0

8

20

08-0

9

20

09-1

0

20

10-1

1

20

11-1

2

20

12-1

3

20

13-1

4

20

14-1

5

20

15-1

6

20

16-1

7

Page | 41

Buybacks, PSU funds

But, instead of going for pure disinvestment issues such as listing, follow on offers

and strategic sales that were expected to improve the functioning of public sector

units (PSU), the Centre has relied more heavily on share buybacks and the PSU

exchange traded fund.

It had raised ₹42,132 crore from stake sales of public sector units in 2015-16. The

Budget has set a target of ₹72,500 crore from disinvestment for the next fiscal.

Aiding this would be the share buyback announcements by public sector Oil India Ltd

and Engineer’s India Ltd that are expected to raise ₹1,527 crore and ₹658.8 crore

respectively.

Announced as part of the capital restructuring guidelines for state run firms in May

2016, share buybacks by PSUs including Nalco, NMDC and Coal India Ltd have

already helped bring in ₹15,585 crore.

According to data with the Department of Investment and Public Asset Management,

it has raised ₹39,368.7 crore this fiscal as disinvestment proceeds including stake

sale of SUUTI holdings in L&T and ITC.

Most recently, the third tranche of the government’s PSU-ETF received bids for over

₹9,200 crore as against the target of ₹2,500 crore.

With direct tax collections slightly subdued, meeting the disinvestment target would

also provide significant relief to the Exchequer in bridging the fiscal deficit that is

estimated at 3.5 per cent of the GDP in 2016-17.

In the Revised Estimates for 2016-17 that was presented along with the Union

Budget 2017-18, the Centre had lowered its disinvestment target from the earlier

estimate of ₹56,500 crore.

Despite plans, it has however, been unable to complete even one strategic

disinvestment in a PSU this fiscal.

Page | 42

National Investment Fund

The Government of India constituted the National Investment Fund (NIF) on 3rd

November, 2005, into which the proceeds from disinvestment of Central Public

Sector Enterprises were to be channelized. The corpus of the fund was to be of

permanent nature and the same was to be professionally managed in order to

provide sustainable returns to the Govt., without depleting the corpus. NIF was to be

maintained outside the Consolidated Fund of India.

The NIF was initialized with the disinvestment proceeds of two CPSEs namely

PGCIL and REC, amounting to Rs 1814.45 crore.

Salient features of NIF

The proceeds from disinvestment of CPSEs will be channelized into the National

Investment Fund which is to be maintained outside the Consolidated Fund of

India.

The corpus of the National Investment Fund will be of a permanent nature.

The Fund will be professionally managed to provide sustainable returns to the

Govt., without depleting the corpus. Selected Public Sector Mutual Funds will be

entrusted with the management of the corpus of the Fund.

75% of the annual income of the Fund will be used to finance selected social

sector schemes, which promote education, health and employment.

The residual 25% of the annual income of the Fund will be used to meet the capital

investment requirements of profitable and revivable CPSEs that yield adequate

returns, in order to enlarge their capital base to finance expansion/ diversification.

The NIF corpus was thus managed by three Public Sector Fund Managers. The

income from the NIF corpus investments was utilized on select social sector

schemes, namely the Jawaharlal Nehru National Urban Renewal Mission

(JNNURM), Accelerated Irrigation Benefits Programme (AIBP), Rajiv Gandhi

Gramin Vidyutikaran Yojana (RGGVY), Accelerated Power Development and

Reform Programme, Indira Awas Yojana and National Rural Employment

Guarantee Scheme (NREGS).

Page | 43

Restructuring of NIF

On 5th November 2009, CCEA approved a change in the policy on utilization of

disinvestment proceeds. In view of the difficult situation caused by the global

slowdown of 2008-09 and a severe drought in 2009-10, a one-time exemption was

accorded to disinvestment proceeds being deposited into NIF for investment; this

exemption was to be operational for period April 2009-March 2012. All disinvestment

proceeds obtained during the three year period were to be used for select Social

Sector Schemes allocated for by Planning Commission/ Department of Expenditure.

The three year exemption, mentioned above was extended by CCEA on 1st March

2012 by another year, i.e. from April 2012 – March 2013, in view of the persistent

difficult condition of the economy. The utilization of disinvestment proceeds were

thus continued for funding of Social Sector Schemes till 31st March, 2013.

The Govt. on 17th January, 2013 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. It was decided that the NIF would be utilized for the

following purposes:

Subscribing to the shares being issued by the CPSE including PSBs and Public

Sector Insurance Companies, on rights basis so as to ensure 51% ownership of

the Govt. in those CPSEs/PSBs/Insurance Companies is not diluted.

Preferential allotment of shares of the CPSE to promoters as per SEBI (Issue of

Capital and Disclosure Requirements) Regulations, 2009 so that Govt.

shareholding does not go down below 51% in all cases where the CPSE is going

to raise fresh equity to meet its Capex programme.

Recapitalization of public sector banks and public sector insurance companies.

Investment by Govt. in RRBs/IIFCL/NABARD/Exim Bank.

Investment in Bhartiya Nabhikiya Vidyut Nigam Limited and Uranium

Corporation of India Ltd.

Page | 44

Bibliography

Website:

www.Dipam.gov.in

www.thehindubusinessline.com

www.ukessays.com

www.iosrjournals.org

www.indianmba.com

www.shareyouressays.com

www.indianeconomy.net

www.bsepsu.com

www.wikepedia.com

Researches:

Challenges and Impact of Disinvestment on Indian Economy

By Dr. M. K. Rastogi & Sharad Kr. Shukla