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    Public Sector Undertakings (PSUs)

    The public sector is the part of economic and administrative

    life that deals with the delivery of goods and services by and

    for the government.

    After independence and with the advent of planning, Indiaopted for a public sector oriented planning.

    It was believed that a dominant public sector would reduce

    the inequality of income and wealth, and advance thegeneral prosperity of the nation, 'trickle down' of growth.

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    Objectives of PSUs

    To help in the rapid economic growth and Industrialization of the

    country and create necessary infrastructure for economicdevelopment.

    To earn return on investment and utilize generated resources fordevelopment.

    To promote redistribution of income and wealth.

    To create employment opportunities.

    To promote balanced regional development.

    To promote import substitutions, save and earn foreign exchangesfor the economy.

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    Problems faced by PSUs

    The most important criticism levied against public sector undertakings has

    been that in relation to the capital employed, the level of profits has been

    too low. Factors responsible for the low level of profits are :

    Low Productivity

    Low capacity utilization and low efficiency

    Low rate of return on capital

    Large number of loss making firms

    Poor work ethics and quality of services

    Over capitalization due to substantial time and cost overruns

    Bureaucratic controls

    Most of the PSUswere monopolies in their industries due to tight

    governmental controls, and hence they were not very efficient

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    Disinvestment

    Disinvestment : It is a process in which the public undertakingreduces its portion in equity by disposing its shareholding.

    Disinvestment as per SEBI guideline, means the sale by the

    central government/state government, of its shares or voting rights

    and control, in PSUs. The disinvestment reduces governmentparticipation in the company.

    A company or a government organisation will typically disinvest an

    asset either as a strategic move for the company, or for raisingresources to meet general or specific needs.

    Disinvestment is called as Partial Privatisation.

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    The following are the main objectives of the

    disinvestment policy of the government :

    To reduce financial burden on the government

    To encourage wider share of ownership

    To introduce competition and market discipline

    To help public enterprise upgrade their technology to become

    competitive

    To rationalize and retain their workforce

    To improve efficiency and productivity in public enterprise

    through new industrial policies.

    Objectives of Disinvestment

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    There are primarily three different approaches to

    disinvestments (from the sellers i.e. Governmentsperspective)

    1. Minority Disinvestment

    2. Majority Disinvestment

    3. Complete Privatization

    Different Approaches to Disinvestment

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    Privatisation :

    It implies a change in ownership, resulting in a change inmanagement.

    The privatization of public sector enterprises will occur only

    when govt. sells more than 51% of its ownership to private

    entrepreneurs.

    Disinvestment :

    It could either involve dilution of govt. staketo a level that result

    in a transfer of management or could also be limited to such a

    level as would permit govt. to retain control over the

    organization. Disinvestment beyond 50% involves transfer of management,

    where as disinvestment below 50% would result in the govt.

    continuing to have a major say in the undertaking.

    Privatization and Disinvestment

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    In order to achieve the various objectives and goals of

    disinvestment many methods have been formulated andimplemented. These includes:

    1. Public Offer : Offering shares of public sector enterprises at a

    fixed price through a general prospectus, the offer is madeto the general public through the medium of recognized

    market intermediaries.

    2. Cross Holding : In the case of cross holding, the govt. would

    simply sell part of its share of one PSU to one or more PSUs.

    3. Golden Share : In this model, the govt. retains a 26 percent

    share in the PSU. This 26 percent share will continue to give

    the govt. the status of majority share holder.

    Types of Disinvestment

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    4. Warehousing : Under this model, the govt. owned financial

    institutions were expected to buy the govt.s share inselected PSUsand holding them until third buyer emerged.

    5. Strategic Sale: Under this model, govt. sells a major portion

    (51% and above) of its stake to the strategic buyer and alsogives over the management control.

    6. FPO : An issuing of shares to investors by a public company

    that is already listed on an exchange. Retail participation ismostly high.

    Types of Disinvestment

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    There are certain arguments which are favoring for the

    disinvestment of public sector undertakings.

    Poor Performance of the Public Sector Units.

    The government must not enter into those areas where the

    private sector can perform better. Government resources locked in commercial activities should

    be released for their deployment in social activities.

    There is a huge amount of debt overhang, which needs to be

    serviced and reduced before money is available to invest ininfrastructure.

    Criteria for Disinvestment

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    Whether there is decrease in number of beneficiaries . Whether serving the national interest will be affected

    because of disinvestment .

    Whether private sector can efficiently operate and manage

    the undertaking. Whether the original rate of return targeted could not be

    possible to achieve.

    Criteria for Disinvestment

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    Disinvestment A Historical Perspective

    Period from 2004-05 to 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 fromdisinvestments were only Rs. 8515.93 crore.

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    Disinvestment A Historical Perspective

    2009-10 onwards

    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., REC, NMDC, SJVN, EIL, CIL, MOIL, etc. throughpublic offers.

    However, from 2011 onwards, disinvestment activity has

    slowed down considerably. For the financial year 2012-13,

    there would be a target of Rs. 30,000 crore and the

    Government was able to raise only Rs. 23,956 crore.

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    Disinvestment A Historical Perspective

    Chart below shows various disinvestments done by GOI during

    FY 13 and FY 14

    0

    2000

    4000

    6000

    8000

    10000

    12000

    14000

    NBCC

    HCL

    NMDC OIL

    NTPC

    RCF

    NALCO

    SAIL

    MMTC

    HCL

    NFL

    ITDC S

    TCNLC

    NHPC

    PGCIL EIL

    BHEL

    2012-2013 2013-2014

    Amount Realized

    Amount Realized

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    Recent Disinvestments

    Metals and Minerals Trading Corporation of India (MMTC) :

    At the floor price of Rs. 60 apiece, a 9.33 per cent stake sale in MMTC

    has garnered Rs. 571 crore to the exchequer.

    The 9.33 crore shares, or 9.33 per cent, stake sale of the trading giant

    through the Offer For Sale (OFS)route.

    MMTC disinvestment would be the first stake sale of the government

    in the current fiscal. The government aims to raise Rs. 40,000 crore

    from PSU stake sale in 2013-14.

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    Recent Disinvestments

    Hindustan Copper Limited (HCL) :

    At the floor price of Rs. 70 apiece, a 4.00 per cent stake sale in

    HCL has garnered Rs. 260 crore to the exchequer.

    Stake sale of HCL could be done through the Offer ForSale(OFS)route. This mechanism is just like an auction, where

    every investor bids on the floor price or above that.

    HCL is the second public sector divestment in the current

    fiscal.

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    Why Low Disinvestment ?

    Unfavorable market conditions

    Offers made by the government were not attractive for private

    sector investors

    Lot of opposition on the valuation process

    No clear-cut policy on disinvestment

    Strong opposition from employee and trade unions

    Lack of transparency in the process

    Lack of political will

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    C i i i f Di i

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    Criticisms of Disinvestments

    Disinvestment has always been a very politically sensitive

    issue, with different parties taking different views in differentpositions.

    Mainly to fill fiscal deficits of the government. Generated

    capital has not been utilized for the benefit of the disinvestedPSU.

    Targets Unachieved :

    o Some of the years the Govt. has failed to raise even 20%of the

    budgetary disinvestment targets.

    o The Government has measurably failed to attract various parties

    for buying the PSU's.

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    C iti i f Di i t t

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    Criticisms of Disinvestments

    Strategic Mistakes :

    o Monopolies created by privatization(?).o E.g.: Selling of IPCL to reliance despite the fact that it held 60% of

    market share already.

    o Possibility of concentration of shares in few hands.

    o E.g.: ONGC disinvestment, Claim by left party activist that large

    number of shares were being bought over by Canadian firm.

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    S ti

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    Suggestions

    The primary objective of disinvestment should be to increase

    efficiency, not to maximize revenue.

    Avoid large new investments in privatisation candidates, the

    risks usually outweigh the rewards. Rather prepare for sale by

    carrying out legal, managerial and organisational changes.

    Experience shows that labour does not lose in privatisation, if

    governments pay attention to easing the social cost of

    unemployment through adequate pay, unemployment benefits,

    retraining and job search assistance.

    C l i

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    Conclusion

    Disinvestment in India has never been an attractive idea simply

    because successive governments have treated disinvestmentmerely as a tool to raise resourcesrather than as one designed

    to restructure the massive public sector.

    Government should stop setting up of the targets in every yearannual budget and should have a long-term plan.

    The privatization policy that the government adopted was

    closely related to efficient channelization and utilization of

    resources, but process was notthat satisfactory.

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    R f

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    References

    Dr. Ajay Verma : DISINVESTMENT PROCESS IN INDIA, Shodh, Samiksha aur

    Mulyankan (International Research Journal), Vol. 2, Issue-6 Dr. M. K. Rastogi, Sharad Kr. Shukla : Challenges and Impact of

    Disinvestment on Indian Economy, IJMBS Vo l . 3, Issue 4, Oct-Dec 2013

    URL :o http://www.bsepsu.com/o http://www.thehindubusinessline.com/markets/hind-copper-divestment-

    today-at-base-price-of-rs-70share/article4873314.ece

    o http://www.thehindubusinessline.com/economy/govt-to-sell-764-stake-in-

    national-fertilizers-to-meet-norms/article4859688.ece

    o http://www.thehindu.com/business/Economy/govt-clears-disinvestment-of-stc-itdc/article4904904.ece

    o http://www.hindustantimes.com/business-news/nhpc-share-buyback-to-

    add-rs-2-200-cr-to-divestment-kitty/article1-1153325.aspx

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