Disinvestment of Indian Psu

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Disinvestment of Indian Psu

By | November 2010
Page 1 of 11
A Case study on:

Disinvestment of Public Sector Undertakings in India - An Impact Study

Pankaj Kumar
Enrolment No: 10810041
MBA Batch 2010 – 12
DoMS IIT Roorkee

Referenced from: Indian Journal of Finance August 2010
Authors: Dr. M.K. Ramakrishnan and Sandhya R.

In a mixed economy like India, historically the public sector had been assigned an important role. However, in the year 1991 the national economic policy underwent a radical transformation. The new policy of liberalization, privatization and globalization de-emphasized the role of the public sector in the nation’s economy. Privatisation in India generally goes by the name of “disinvestment” or “divestment of equity”. Disinvestment is a wider term extending from dilution of the stake of the Government to a level where there is no change in control to dilution that results in the transfer of management. The policy of promoting PSU’s took a paradigm shift with the announcement of industrial policy on July 24th 1991, in which the central government expressed its intention to bring the private sector participation through a system of disinvestment of PSU’s except in arms and ammunitions and allied item of defence equipment, atomic energy and minerals. It is contended that the functioning of many public sector units (PSUs) has been characterized by low productivity, unsatisfactory quality of goods, excessive manpower utilization, inadequate human resource development and low rate of return on capital. For instance, between 1980 and 2002, the average rate of return on capital employed by PSUs was about 3.4% as against the average cost of borrowing, which was 8.66%. This prompted the Government to adopt a new strategy keeping in line with the global trends to reform and improve the PSU’s performance. In the first round of divestment, the Government offered bundles of shares of various PSU’s (each bundle carrying notional reserve price) to local financial institutions. Later the...