Disinvestment of Indian Psu

Topics: Financial ratios, Balance sheet, Inventory Pages: 11 (3289 words) Published: November 30, 2010
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 bidding process was opened to foreign investors and the public at large. The method of disinvestment was widened in 1996-97 when disinvestment was affected through both the GDR (Global Depository Receipts) route and public issue in the domestic market. After initial round of disinvestment in 1991-92, it was further guided by recommendation made by a committee on Disinvestment set up in 1993. Later, realizing the sensitivity in political terms of whole process, the government constituted in 1996, an independent body called “The Disinvestment commission”. The disinvestment commission was asked to advice on such matters as to the extent of disinvestment, mode of disinvestment and selection of financial advisor to facilitate the process and so forth to strengthen the disinvestment program. The two methods of disinvestment form the backbone of the disinvestment strategy of the Government. They are minority sale and strategy sale. The difference between two mode lie with the extent of dilution of control in PSU’s. Strategic sale involves transfer of control to private entrepreneurs where as minority sale involves dilution of government stake without transfer of control. The early period (i.e. 1991 to 1999) of privatisation was marked by only minority sale. It took 10 years to introduce strategic sale into disinvestment strategy. This clearly shows conservative approach of the Government in the implementation of disinvestment policy. Disinvestment involves the sale of equity and bond capital invested by the government in PSUs. It also implies the sale of government’s loan capital in PSUs through securitization. However, it is the government and not the PSUs who receive money from disinvestment. The fixation of share/bond price is an important aspect of disinvestment. Now, the Disinvestment Commission determines the share/bond price. Disinvested shares are listed, quoted and traded on the stock market. Indian and foreign financial institutions, banks, mutual funds,...
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