Q. What is the Disinvestment Policy of Indian Government? Did it succeed to achieve its objectives? [45 BPSC/2002]

Q. What is the Disinvestment Policy of Indian Government? Did it succeed to achieve its objectives? [45 BPSC/2002] ©crackingcivilservices.com

Ans:
The New Industrial Policy 1991, talked of disinvestment. Disinvestment means sale or liquidation of assets by the government, usually Central and state public sector enterprises, projects, or other fixed assets.
In some cases, disinvestment may be done to privatise assets. However, not all disinvestment is privatisation. Mostly, in disivestment, there is no change in the management from public to private hands because either the government holds majorily equity (51%) or even if the government holds less than 51% of equity, rest of it is sold to various individuals and institutions none of whom holds enough to take over management. It is essentially money-raising exercise with some accompanying benefits.
If the Government sells chunk of equity to a single buyer- 26% or 51% or more- to whom the management is also handed over, it is called strategic sale and the buyer is called strategic partner. It is a case of privatisation.

The Disinvestment Policy of Indian Government:

• As a part of reforming the public sector enterprises, Government’s policy on disinvestment and privatization is evolving since the beginning of the reforms in 1991. the government of India adopted strategic sale as a policy measure in 1999-2000.
• Strategic disinvestment is guided by the basic economic principle that Government should discontinue its engagement in manufacturing/ producing goods and services in sectors where competitive markets have come of age.
• Its main elements are:
  • Divest to raise money and other advantages
  • Strategic sale is considered for loss making companies. NITI Aayog recommended
  • strategic disinvestment of 34 sick public sector units
  • List all unlisted public sector enterprises and sell a minimum of 25 percent of equity to the public as mandated by SEBI by 2017
  • Buyback of shares, for example, CIL and EIL in 2017
  • Profit-making PSUS will not be privatized.
    • However, now government has made it flexible and is disinvesting even profit making PSUs. e.g. Bharat Petroleum Corporation Limited (BPCL) disinvestment.
  • Restructure and revive potentially viable PSUS;
  • Close down PSUS which cannot be revived or sold
  • Fully protect the interests of workers.
  • Every year, the government fixes a target for disinvestment of PSEs. e.g. disinvestment target for 2020-21 at Rs 1.20 lakh crore.
• Various modes of disinvestment policy followed by the Government:
  • Disinvestment through minority stake sale in listed CPSEs to achieve minimum public shareholding norms of 25 per cent. While pursuing disinvestment of CPSEs, the Government will retain majority shareholding, i.e., at least 51 per cent and management control of the Public Sector Undertakings;
  • Listing of CPSEs to facilitate people’s ownership and improve the efficiency of companies through accountability to its stake holders – As many as 57 PSUs are now listed with total market capitalisation of over Rs 13 lakh crore.
  • Strategic Disinvestment involves sale of substantial portion of Government shareholding in identified Central PSEs (CPSEs) up to 50 per cent or more, along with transfer of management control.
    • NITI Aayog identifies PSUs for strategic disinvestment. For this purpose, NITI Aayog has classified PSUs into “high priority” and “low priority”, based on (a) National Security (b) Sovereign functions at arm’s length, and (c) Market Imperfections and Public Purpose. The PSUs falling under “low priority” are covered for strategic disinvestment.
  • Buy-back of shares by large PSUs having huge surplus;
  • Merger and acquisitions among PSUs in the same sector;
  • Launch of exchange traded funds (ETFs) – an equity instrument that tracks a particular index. The CPSE ETF is made up of equity investments in India’s major public sector companies like ONGC, REC, Coal India, Container Corp, Oil India, Power Finance, GAIL, BEL, EIL, Indian Oil and NTPC; and
  • Monetization of select assets of CPSEs to improve their balance sheet/reduce their debts and to meet part of their capital expenditure requirements.

Main objectives of Disinvestment:

• Reducing the fiscal burden on the exchequer
• Improving public finances
• Encouraging private ownership
• Funding growth and development programmes
• improve financial disciplin, facilitate modernisation and technology up-gradation
• Maintaining and promoting competition in the market, exposes the enterprises to market discipline => promote efficiency.
• Promote professionalism and profitability.
• Facilitate wider distribution of wealth through offering of shares to small investors and employees.
• Opening up the public sector to appropriate private investment would increase economic activity and benefits the economy, employment and tax revenues in the medium to long term.

Did it succeed to achieve its objectives?

• For arguments:
  • The proceeds of disinvestment are credited into National Investment Fund. And are utilized for asset creation, recapitalization of public sector banks, investment in metro projects etc.
  • The economic survey of 2019-2020 analysing the before-after performance of some of the CPSEs which had undergone strategic disinvestment from 1999-2000 to 2003-04, came to the following results:
    • Post privatisation, these privatized CPSEs, on an average, perform better than their peers in terms of their net worth, net profit, return on assets (ROA), return on equity (RoE), gross revenue, net profit margin, sales growth and gross profit per employee.
    • For example, on an average, the net worth of privatized firms increased from 700 crore before privatization to 2992 crore after privatization.
    • Individual performance: Each privatized CPSE witnessed improvement in net worth, net profit, gross revenue, net profit margin, sales growth in the post privatization period compared to pre privatization period.
    • Dynamic aspects of performance in comparision to peers: the performance of the privatized CPSE and its peers is quite similar during the period of 10 years before privatisation. However, post privatization, the performance of the privatized entity improves significantly over a period of 10 years when compared to the change in the peers’ performance over the same time period.
  • The disinvestment has also helped the government in moving towards the fiscal consolidation.
• However, some critics has pointed to some issues with this exercise:
  • Critics point out that the assets of PSEs have been undervalued and sold to the private sector. This means that there has been a substantial loss to the government.
  • the proceeds from disinvestment were used to offset the shortage of government revenues rather than using it for the development of PSEs and building social infrastructure in the country.
  • Government is selling even profit making PSUs which are long term asset of the government.
  • PSES check the private sector in the wider market place and so are crucial to economy. For example, if PSES are not there, private enterprises may cartelise etc.
  • The target of disinvestment for 2019-2020 was missed by huge margin. Target was 1.05 lakh crore and realised amount was only 65000 crore.

Thus there has been mixed success in achieving the objectives of disinvestment. The economic survey of 2019-2020 has suggested that aggressive disinvestment, through the route of strategic sale, should be utilized to bring in higher profitability, promote efficiency, increase competitiveness and to promote professionalism in management in CPSEs. This would, in turn, unlock capital for use elsewhere, especially in public infrastructure like roads, power transmission lines, sewage systems, irrigation systems, railways and urban infrastructure.

Many of the CPSEs are profitable but they have generally underperformed the market. The aim of any privatization or disinvestment programme should, therefore, be the maximisation of the Government’s equity stake value. For this the survey proposed a structure for Corporatisation of Disinvestment. ©crackingcivilservices.com

• Under it the Government can transfer its stake in the listed CPSEs to a separate corporate entity managed by an independent board. This entity would be mandated to divest the Government stake in these CPSEs over a period of time.
• This will lend professionalism and autonomy to the disinvestment programme.