Public Sector Undertaking (PSU)

In India, public sector undertaking (PSU) is a term used for a government-owned corporation (company in
the public sector). The term is used to refer to companies in which the government (either the Union
Government or state or territorial governments, or both) owned a majority (51 percent or more) of the
company equity.
A Public Sector Undertaking is a corporation in the public sector in India, where management control of the
company rests with the Government, it can be Central Government or the State Governments.

Disinvestment
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.

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

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.

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, 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. 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.

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.

Period from 1991-92 - 2000-01

The change process in India began in the year 1991-92, with 31 selected PSUs disinvested for
Rs.3,038 crore. In August 1996, the Disinvestment Commission, chaired by G V Ramakrishna
was set up to advice, supervise, monitor and publicize gradual disinvestment of Indian PSUs. It
submitted 13 reports covering recommendations on privatisation of 57 PSUs.Dr R.H.Patil
subsequently took up the chairmanship of this Commission in July 2001.However, the
Disinvestment Commission ceased to exist in May 2004.

The Department of Disinvestment was set up as a separate department in December, 1999 and
was later renamed as Ministry of Disinvestment from September, 2001. From May, 2004, the
Department of Disinvestment became one of the Departments under the Ministry of Finance.

Against an aggregate target of Rs 54,300 crore to be raised from PSU disinvestment from 1991-
92 to 2000-01, the Government managed to raise just Rs 20,078.62 crore (less than half).
Interestingly, the government was able to meet its annual target in only 3 (out of 10) years. In
1993-94, the proceeds from PSU disinvestment were nil over a target amount of Rs 3,500 crore.

The reasons for such low proceeds from disinvestment against the actual target set were:

i. Unfavorable market conditions

ii. Offers made by the government were not attractive for private sector investors
iii. Lot of opposition on the valuation process
iv. No clear-cut policy on disinvestment
v. Strong opposition from employee and trade unions
vi. Lack of transparency in the process
vii. Lack of political will

This was the period when disinvestment happened primarily by way of sale of minority stakes of
the PSUs through domestic or international issue of shares in small tranches. The value realized
through the sale of shares, even in blue chip companies like IOC, BPCL, HPCL, GAIL & VSNL,
however, was low since the control still lay with the government.

Most of these offers of minority stakes during this period were picked up by the domestic financial
institutions. Unit Trust of India was one such major institution.

Period from 2001-02 - 2003-04

This was the period when maximum number of disinvestments took place. These took the shape
of either strategic sales (involving an effective transfer of control and management to a private
entity) or an offer for sale to the public, with the government still retaining control of the
management. Some of the companies which witnessed a strategic sale included:

• BHARAT ALUMINIUM CO.LTD.

 • CMC LTD.
• HINDUSTAN ZINC LTD.
• HOTEL CORP.OF INDIA LTD. (3 PROPERTIES: CENTAUR HOTEL,JUHU BEACH,
CENTAUR HOTEL AIRPORT,MUMBAI & INDO HOKKE HOTELS LTD.,RAJGIR)
• HTL LTD.
• IBP CO.LTD.
• INDIA TOURISM DEVELOPMENT CORP.LTD.(18 HOTEL PROPERTIES)
• INDIAN PETROCHEMICALS CORP.LTD.
• JESSOP & CO.LTD.
• LAGAN JUTE MACHINERY CO.LTD.,THE
• MARUTI SUZUKI INDIA LTD.
• MODERN FOOD INDUSTRIES (INDIA) LTD.
• PARADEEP PHOSPHATES LTD.
• TATA COMMUNICATIONS LTD.

The valuations realized by this route were found to be substantially higher than those from
minority stake sales.

During this period, against an aggregate target of Rs 38,500 crore to be raised from PSU
disinvestment, the Government managed to raise Rs 21,163.68 crore.

Period from 2004-05 - 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 onwards

A stable government and improved stock market conditions has led to a renewed thrust on
disinvestments. The Government has started the process by selling minority stakes in listed and
unlisted (profit-making) PSUs through public offers. As on 31st July 2010, Rs. 24615.47 crore had
been raised in this period.

The role of the State vs. Market has been one of the major issues in development economics
and policy. In a mixed economy such as 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. The faculty at IIT-Bombay has been
studying various aspects of the New Economic Policy such as financial sector reforms, fiscal
implications of reforms, and of globalization.
To date several arguments have been proffered by the apologists of market-oriented
economic structures:
 the government must not enter into those areas where the private sector can perform
better
 market-driven economies are more efficient than the state-planned economies
 the role of the state should be as a regulator and not as the producer
 government resources locked in commercial activities should be released for their
deployment in social activities.
It is also 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%. Disinvestment (or
divestment) of the PSUs has therefore been offered as one of the solutions in this context.
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, companies as well as individuals can buy disinvested shares / bonds.
Disinvestment is generally expected to achieve a greater inflow of private capital and
the use of private management practices in PSUs, as well as enable more effective monitoring
of management discipline by the private shareholders. Such changes would lead to an
increase in the operational efficiency and the market value of the PSUs. This in turn would
enable the much neededrevenue generation by the government and help reduce deficit
financing.
However, to date the market experience has been otherwise. The large national
budgetary deficit on revenue account has been increasing. The government has not used the
disinvestment proceeds to finance expenditure on capital account; i.e. the disinvestment
policy has resulted in capital consumption rather than generation. Administrative costs of the
disinvestment process have also been unduly high.
The actual receipts through disinvestment have often fallen far short of their target (see
figure). During the period 1991-92 to 2002-2003, the government had targeted the
mobilization of about Rs. 78,300 crores through disinvestment, but it could actually mobilize
only Rs. 30,917 crores.
Problems associated with Disinvestment
A number of problems and issues have bedevilled the disinvestment process. 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.
Further, in many cases, disinvestment has not really changed the ownership of PSUs, as
the government has retained a majority stake in them. There has been some apprehension
that disinvestment of PSUs might result in the �crowding out� of private corporates (through
lowered subscription to their shares) from the primary capital market.

An important fact that needs to be remembered in the context of divestment is that the
equity in PSUs essentially belongs to the people. Thus, several independent commentators
have maintained that in the absence of wider national consensus, a mere government decision
to disinvest is not enough to carry out the sale of people�s assets. Inadequate information
about PSUs has impeded free, competitive and efficient bidding of shares, and a free trading of
those shares. Also, since the PSUs do not benefit monetarily from disinvestment, they have
been reluctant to prepare and distribute prospectuses. This has in turn prevented the
disinvestment process from being completely open and transparent.
 It is not clear if the rationale for divestment process is well-founded. The assumption of
higher efficiency, better / ethical management practices and better monitoring by the private
shareholders in the case of the private sector � all of which supposedly underlie the
disinvestment rationale � is not always borne out by business trends and facts.
Total disinvestment of PSUs would naturally concentrate economic and political power in
the hands of the private corporate sector. The US economist Kenneth Galbraith had visualized
a role of �countervailing power� for the PSUs. While the creation of PSUs originally had
economic, social welfare and political objectives, their current restructuring through
disinvestment is being undertaken primarily out of need of government finances and economic
efficiency.
Lastly, to the extent that the sale of government equity in PSUs is to the Indian private
sector, there is no decline in national wealth. But the sale of such equity to foreign companies
has far more serious implications relating to national wealth, control and power, particularly if
the equity is sold below the �correct� price!
If the disinvestment policy is to be in wider public interests, it is necessary to examine
systematically, issues such as - the �correct� valuation of shares, the �crowding out�
possibility, the appropriate use of disinvestment proceeds and the institutional and other
prerequisites.
 Ministry Of Disinvestment

The Department of Disinvestment was set up as a separate Department on 10thDecember,1999 and was later renamed
as Ministry of Disinvestment from 6thSeptember,2001. From 27th May, 2004, the Department of Disinvestment is one of
the Departments under the Ministry of Finance.

ALLOCATION OF WORK (as on date)

1. (a) All matters relating to disinvestment of Central Government equity from

Central Public Sector Undertakings,

(b)All (b) All matters relating to sale of Central Government equity through offer for
sale or private placement in the erstwhile Central Public Sector Undertakings*

(inserted through amendment Notification dated 28th June, 2007)

2. Decisions on the recommendations of the Disinvestment Commission on the

modalities of disinvestment, including restructuring.

3. Implementation of disinvestment decisions, including appointment of advisers,

pricing of shares, and other terms and conditions of disinvestment.

4. Disinvestment Commission;

5. Central Public Sector Undertakings for purposes of disinvestment of

Government equity only.

6. Financial Policy in regard to the utilization of the proceeds of disinvestment

channelized into the National Investment Fund.

(inserted through amendment dated 12th January, 2006 to the Allocation of Business Rules)

* Note: All other post disinvestment matters, including those relating

to and arising out of the exercise of Call option by the Strategic partner in
the erstwhile Central Public Sector Undertakings, shall continue to be
handled by the administrative Ministry or Department concerned, where
necessary, in consultation with the Department of Disinvestment.
 CURRENT POLICY ON DISINVESTMENT

Current Government Policy

The President of India’s address on 4th June 2009 unveiled the agenda of the Congress- led
Government at the Centre. In keeping with the election manifesto of the Congress Party, the
President’s address mentioned: “Our people have every right to own part of the shares of public
sector companies while the Government retains majority shareholding and control. My
Government will develop a roadmap for listing and people-ownership of public sector
undertakings while ensuring that Government equity does not fall below 51%.”

In line with the Presidents’ address, the Economic Survey (2008-09) stated the following as the
Governments plan of action: "Revitalize the disinvestment program and plan to generate at least
Rs. 25,000 crore per year. Complete the process of selling of 5-10% equity in previously
identified profit making non-navratnas. List all unlisted public sector enterprises and sell a
minimum of 10% of equity to the public. Auction all loss making PSUs that cannot be revived. For
those in which net worth is zero, allow negative bidding in the form of debt write-off."

The subsequent Union Budgets have also taken disinvestment on the agenda of the
Government.

The Government has also announced its intentions of raising the minimum public shareholding in
listed companies to 25%. This figure was subsequently revised to 10%. This, besides bringing
more quality paper in the market, shall also lead to disinvestment as the Government shall have
to dilute its present holding to ensure the minimum public shareholding in the listed PSUs. At
current prices, this could mean a divestment amount of over Rs. 90484 crore, in case 25% public
shareholding were to be achieved and Rs. 7278 crore, in case 10% public shareholding were to
be achieved. Click here for details.

The policy on disinvestment has been articulated in paragraph 34 of

President’s Address to Joint Session of Parliament on 4th June, 2009 and
reads as under:

Our fellow citizens have every right to own part of the shares of public
sector companies while the Government retains majority shareholding
and control. My Government will develop a roadmap for listing and
people-ownership of public sector undertakings while ensuring that
Government equity does not fall below 51 %.

The above policy was reaffirmed by the Finance Minister in paragraph

37 of his Budget Speech on 6th July, 2009. Paragraph 37 of FM’s Budget
Speech reads as :
The Public Sector Undertakings are the wealth of the nation, and part of
this wealth should rest in the hands of the people. While retaining at
least 51 per cent Government equity in our enterprises, I propose to
encourage people’s participation in our disinvestment programme.
Here, I must state clearly that public sector enterprises such as banks
and insurance companies will remain in the public sector and will be
given all support, including capital infusion, to grow and
remain competitive.

The Government, on 5th November 2009 has approved the following action plan
for disinvesting Government equity in profit making CPSUs :

i) Already listed profitable CPSUs, not meeting the mandatory public shareholding
of 10%, are to be made compliant;

ii) All CPSUs having positive net worth, no accumulated losses and having earned
net profit for the three preceding consecutive years are to be listed through
Public Offerings, out of Government shareholding or issue of Fresh Equity by the
company or a combination of both; and

iii) The proceeds from disinvestment would be channelized into National

Investment Fund and during April, 2009 to March, 2012 would be available in full
for meeting the capital expenditure requirements of selected social sector
programmes decided by the Planning Commission / Department of Expenditure.
The status quo ante will be restored from April, 2012.

Approach to Disinvestment

The Department of Disinvestment to dialogue with Administrative Ministries to identify

CPSUs for disinvestment. As each CPSU has different capital structures, financial strength
and differing status in compliance with mandatory listing requirements, each disinvestment to
be considered on a case-by-case basis for approval by Government

EVOLUTION OF DISINVESTMENT POLICY IN INDIA:

Policy on Public Sector and Disinvestment

 The Industrial Policy Resolution of 1956 gave the public sector a strategic role in the economy. Massive investments
were made over the next four decades to build the public sector. Many of these enterprises successfully expanded
production, opened up new areas of technology and built up a reserve of technical competence in a number of areas.
Nevertheless, after the initial concentration of public sector investment in key infrastructure areas, public enterprises
began to spread into all areas of the economy including non-infrastructure and non-core businesses.

The Government announced on 24th July 1991 the ‘Statement on Industrial Policy’ which inter-alia included Statement
on Public Sector Policy. The statement contained the following decisions:

“Portfolio of public sector investments will be reviewed with a view to focus the public sector on strategic, high-tech and
essential infrastructure. Whereas some reservation for the public sector is being retained, there would be no bar for area
of exclusivity to be opened up to the private sector selectively. Similarly, the public sector will also be allowed entry in
areas not reserved for it.

Public enterprises which are chronically sick and which are unlikely to be turned around will, for the formulation of
revival/rehabilitation schemes, be referred to the Board for Industrial and Financial Reconstruction (BIFR), or other
similar high level institutions created for the purpose. Social security mechanism will be created to protect the interests
of workers likely to be affected by such rehabilitation packages.
In order to raise resources and encourage wider public participation, a part of the government’s shareholding in the
public sector would be offered to mutual funds, financial institutions, general public and workers.

Boards of public sector companies would be made more professional and given greater powers.

There will be a greater thrust on performance improvement through the Memorandum of Understanding (MOU) System
through which managements would be granted greater autonomy and will be held accountable. Technical expertise on
the part of the Government would be upgraded to make the MOU negotiations and implementation more effective.

To facilitate a fuller discussion on performance, the MOU signed between Government and the public enterprises would
be placed in Parliament. While focusing on major management issues, this would also help place matters on day-to-day
operations of public enterprises in their correct perspective”.

In accordance with the decision announced in the aforesaid statement on industrial policy on public sector and also as
per budget speech of July 1991, in order to encourage wider participation and promote greater accountability, the
Government equity in selected CPSEs was offered to mutual funds, financial institutions, workers and the general
public.

In the subsequent years, there have been constant policy changes. While on one hand, disinvestment as a policy has
been much debated, there have also been changes and disagreements in terms of the different approaches that can be
taken for disinvestment to happen.

The policy of disinvestment has largely evolved through the policy statements of
Finance Ministers in their Budget Speeches. The policy as evolved is enumerated
below:-

• In the Interim budget 1991-92, it was announced that Government would

divest upto 20% of its equity in selected PSU’s in favor of mutual funds, financial
and institutional investors in public sector.
• In the budget speech of 1992-93, the cap of 20% was reinstated and the list
of eligible investor was enlarged to include FII’s, employees and OCB’s.
• In April, 1993, Rangrajan committee recommended to divest upto 49% of
PSE’s equity for industries explicitly reserved for the public sector and over 74%
in other industries. But Government did not take any decision on
recommendations.
• In 1996, as per the Common Minimum Programme, the Budget Speech 1996-
97 announced the setting up of Disinvestment Commission for 3 years. CMP also
emphasized to add more transparency to disinvestment process and examine the
non core areas of public sector.
• In the Budget Speech of 1998-99, it was announced that Government
shareholding in CPSEs should be brought down to 26% on case to case basis,
excluding strategic CPSEs where Government would retain majority
shareholding. The interest of workers is to be protected in all cases. For this
purpose on 16th March, 1999, the Government classified the PSE’s into strategic
and non strategic areas. It was decided that Strategic PSE’s would be those in
areas of:

• Arms and ammunition and the allied items of defence equipment, defence
aircrafts and warships;
• Atomic energy (except in the areas related to the generation of nuclear power
and applications of radiation and radio-isotopes to agriculture, medicine and non-
strategic industries);
• Railway transport.

All other PSE’s were to be considered non strategic.

• In 1999-2000 Budget Speech it was announced that Government will

continue to strengthen the strategic units and “privatizing” the non-strategic ones
through gradual disinvestment or strategic sale and devise viable rehabilitation
strategies for weak units.
• The 2000-01 Budget Speech focused on restructure and revival of viable
CPSEs; close down PSEs which cannot be revived; bring down Government
shareholdings in non-strategic CPSEs to 26% or lower, if necessary; and protection of the
interest of workers. The receipts from disinvestment will be used for social sectors,
restructuring of CPSEs and for retirement of public debt.
• The suo-motu statement 2002, specific aim was given to the disinvestment
policy: modernization and upgradation of PSEs, creation of new assets, generation of
employment and retiring of public debt.
• In the Budget Speech for 2003-04, Government announced details regarding
the setting up of Disinvestment Fund and Asset Management Company to hold, manage
and dispose the residual holdings of Government.
• In 2004 with the change in the Government, there was a change in the
outlook of Disinvestment policy.

In May, 2004, Government adopted National Common Minimum Programme,

which outlines the policy of Government with respect to Public sector.
 “The UPA Government pledged to devolve full managerial control and
commercial autonomy to successful, profit-making companies operating in
competitive environment; they won’t be privatized ‘Navratna’ companies can
raise resources from the capital market. Efforts will be made to modernize and
restructure sick Public sector companies.

• It favoured sale of small proportions of Government equity through IPO/FPO

without changing the character of PSE’s. In regard to this, it approved listing of
unlisted profitable CPSE’s subject to residual equity of the Government remaining
atleast 51% and Government retaining the control of management.

• It also constituted the formation of ‘National Investment Fund’. The proceeds

from disinvestment of CPSE’s will be channelized into NIF. 75% of annual income
of NIF will be used to finance selected social sector schemes- education, health,
employment and the rest 25% to meet the capital investment requirements of
profitable and revivable CPSE’s.

• On 27th January, 2005 the Government, approved in principle:

a. listing of currently unlisted profitable CPSEs each with a Net Worth in

excess of Rs.200 crore, through an Initial Public Offering (IPO), either in
conjunction with a fresh equity issue by the CPSE concerned or
independently by the Government, on a case by case basis, subject to
the residual equity of the Government remaining at least 51 per cent
and the Government retaining management control of the CPSE;

b. the sale of minority shareholding of the Government in listed,

profitable CPSEs either in conjunction with a Public Issue of fresh equity
by the CPSE concerned or independently by the Government subject to
the residual equity of the Government remaining at least 51 per cent
and the Government retaining management control of the CPSE; and

c. Constitution of a “National Investment Fund”.

On 25th November, 2005, Government decided, in principle, to list large,
profitable CPSEs on domestic stock exchanges and to selectively sell small
portions of equity in listed, profitable CPSEs (other than the navratnas).

PSUs approved for Disinvestment:

ROAD AHEAD

1. Steel Authority of India Ltd.(SAIL)

PIB Press Release dated 8th April, 2010.

Raising of additional Equity by the Steel authority of India Limited(SAIL) and

disinvestment of a portion of government equity in SAIL through Offer for Sale.

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The Cabinet committee on Economic Affairs approved the proposal for raising
additional equity by the Steel Authority of India Ltd.(SAIL) to the extent of 10% of
the paid up equity and disinvestment of a portion of Government of India’s
shareholding in SAIL by an extent of 10% through offer for sale, to be carried out
in two separate tranches.

The further public offering(FPO) would comprise the first tranche of the fresh
issue of 5% pre-issue paid up equity of the company and offer for sale of 5% of
Government equity in SAIL. The CCEA has accorded permission for effecting the
first tranche and the second tranche, similar to the first, would be issued at an
appropriate time depending on prevailing market conditions.

The further offerings along with disinvestment would be carried out as per SEBI
regulations and procedure adopted by the Department of Disinvestment which is
the nodal agency for handling of disinvestment of Government public sector
units.

As a result of the further public offer, there would be enhanced public holding in
SAIL from the present level of 14.2% to 31% and it is expected that the enhanced
holding would lead to greater depth in the market. As a result of the secondary
offering and equity dilution, there would thus be larger public ownership of the
company, leading to greater public oversight and increased accountability.

Background:
 The disinvestment of Government’s equity in SAIL is in line with the overall
policy of the government that ownership of CPSEs would be shared with the
public as articulated in both the President’s speech to Parliament and FM’s
Budget speech. FPO of SAIL would allow for greater public accountability, and is
expected to lead to greater depth in the market.

The proceeds from fresh issue of equity by SAIL would help in filling the resource
gap in availability for funding SAIL’s capital expenditure emerging from the
increased pressure on steel prices and diminished margins. SAIL is presently
amidst massive expansion plans for increasing its installed hot metal production
capacity from existing 13.82 million tonnes per annum(MTPA) to 23.46 MTPA in
the current phase.

To facilitate easy reference to SAIL website,link is being provided here.Please

click here http://www.sail.co.in for the same

2.Engineers India Limited (EIL)

PIB Press Release dated 14th January, 2010.

Disinvestment of 10 Percent paid up equity capital in ENGINEERS INDIA LIMITED

(EIL) out of Government of India shareholding of 90.40 PERCENT

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CCEA Decision

The Cabinet Committee on Economic Affairs today decided to disinvest 10% paid
up equity capital of Engineers India Limited, out of Government’s shareholding, in
the domestic market through Public Offering. After this disinvestment
Government shareholding in the company would come down to 80.40%.

It has also been decided that before the Public Offering the company will take the
following steps:

(a) Issue bonus two shares for every one share;

(b) Split one share of the face value of Rs.10 into two the face value of Rs.5 each;
and
(c) Declare special dividend of 1000 percent of the paid up equity capital

Engineers India Limited is a Public Sector Undertaking under the Ministry of

Petroleum & Natural Gas and is engaged in providing engineering and related
technical services for petroleum refineries and other industrial projects.
Government of India is holding 90.40% paid up equity capital of the company and
the balance is held by the general public. The shares of the company are listed
on the stock exchanges with less than 10% mandatory public shareholding.
To facilitate easy reference to EIL website,link is being provided here. Please click
here http://www.engineersindia.com for the same

3.Hindustan Copper Limited(HCL)

PIB Press Release dated 15th June, 2010.

Disinvestment of 10 Percent paid up equity capital of Hindustan Copper Limited

out of Government of India's shareholding along with issue of fresh

equity of equal size by the Company in the domestic market

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The Cabinet Committee on Economic Affairs approved the proposal for

disinvestment of 10% paid up equity capital of Hindustan Copper Limited out of
Government of India’s shareholding along with issue of fresh equity of equal size
by the Company in the domestic market. The divestment will be done in the
following manner:

(i) Issue of fresh equity by Hindustan Copper Limited to the extent of 10% of the
pre-issue paid up capital of the company equivalent to 9,25,21,800 shares of face
value of Rs.5 each in the domestic market as per SEBI rules and regulation.

(ii) In conjunction with the issue of fresh equity as at (i) above; Government to
disinvest its 10% of pre issue paid up capital of the company, equivalent to
9,25,21,800 shares of face value of Rs.5 each.

(iii) Reservation of shares for employees of HCL will be on a discount of 5%, which
will also be available to retail investors as per the guidelines of SEBI.

Background:

The paid up equity capital of the company is Rs.462.61 crore. Government of

India is holding 99.59% paid up equity capital of the Company at present. The
face value of the share is Rs.5 each.

To facilitate easy reference to HCL website,link is being provided here. Please

click here http://www.hindustancopper.com for the same

4.Coal India Limited (CIL)

PIB Press Release dated 15th June, 2010.

Disinvestment of 10 Percent paid up equity capital in COAL INDIA LIMITED (CIL)

out of Government of India shareholding of 100 %
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The Cabinet Committee on Economic Affairs today gave its approval to divest
10% equity of the Coal India Limited out of its holding of 100% through book
building process in the domestic market. One percent of the equity will be offered
to the employees of CIL and its eight subsidiaries. The CCEA has also decided to
allow 5% price concession to the retail investors in order to encourage greater
public ownership of the public sector companies.

The CCEA also approved a 5% concession to the employees of the company and
its subsidiaries to encourage their becoming stakeholders in the company. After
this disinvestment, Government of India’s shareholding in the company would
come down to 90%..

Coal India Ltd. (CIL), a Central Public Sector Enterprise, is a Navratna Company
engaged in production and marketing of coal and coal products. At present, the
paid up equity capital of the company is Rs.6316.36 crore and the Government of
India holds 100% of the equity in the company.

To facilitate easy reference to CIL website,link is being provided here. Please click
here http://www.coalindia.in for the same

5.Power Grid Corporation of India Limited (PGCIL)

PIB Press Release dated 22nd July, 2010.

Follow-on Public Offer for Power Grid Corporation of India Limited

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The Cabinet Committee on Economic Affairs today approved the Follow-on Public
Offer (FPO) of Power Grid Corporation of India Limited (PGCIL) of 84,17,68,246
(Eighty Four crore seventeen lakh sixty eight thousand two hundred forty six)
Equity shares of Rs.10 each constituting 20% of existing paid-up capital. This
comprises fresh issue of 42,08,84,123 Equity Shares (10% of existing paid-up
capital) and offer for Sale (Disinvestment) of 42,08,84,123 Equity Shares (10% of
existing paid-up capital) by selling Shareholder i.e. the President of India.

Additional resources generated through the issue of an FPO will be utilized by

PGCIL in its investment programmes.

PGCIL will be required to approach the capital market for raising funds through
issue of fresh equity for funding its investment programme commencing from
Financial Year 2010-11. The requirement of funds to be raised through issue of
fresh equity for funding the capital expenditure for the balance XI plan period will
be in the order of Rs 4200 crore. The fresh issue of FPO would result in the PGCIL
meeting with the CERC allowed norms of 30% equity contributions during the XI
Plan period.
PGCIL went for a maiden Initial Public Offering (IPO) of equity shares consisting of
issue of fresh equity shares with 10% of paid up capital and disinvestment of
Government of India equity holding of 5% of paid up capital in October 2007
through the book building process and the issue was subscribed 64.50 times. The
shares of the PGCIL got listed in the National Stock Exchange and Bombay Stock
Exchange on 5.10.2007. PGCIL raised Rs. 2984 crore at the issue price of Rs. 52/-
per share out of which Rs. 995 crore was paid to the Government of India towards
the disinvestment proceeds and the balance amount, after meeting the issue
expenses, was utilized for capital expenditure of identified projects during the
financial year 2007-08 and 2008-09.

GUIDELINES

Guidelines for Bidders

No. 6/4/2001-DD-II
Government of India
Department of Disinvestment
Dated 13th July, 2001
OFFICE MEMORANDUM

Subject: Guidelines for qualification of Bidders seeking to acquire stakes in Public

Sector Enterprises through the process of disinvestment

Government has examined the issue of framing comprehensive and transparent

guidelines defining the criteria for bidders interested in PSE-disinvestment so that
the parties selected through competitive bidding could inspire public confidence.
Earlier, criteria like net worth, experience etc. used to be prescribed. Based on
experience and in consultation with concerned departments, Government has
decided to prescribe the following additional criteria for the qualification /
disqualification of the parties seeking to acquire stakes in public sector
enterprises through disinvestment:-
(a) In regard to matters other than the security and integrity of the country, any
conviction by a Court of Law or indictment / adverse order by a regulatory
authority that casts a doubt on the ability of the bidder to manage the public
sector unit when it is disinvested, or which relates to a grave offence would
constitute disqualification. Grave offence is defined to be of such a nature
that it outrages the moral sense of the community. The decision in regard to
the nature of the offence would be taken on case to case basis after
considering the facts of the case and relevant legal principles, by the
Government.
(b) In regard to matters relating to the security and integrity of the country, any
 charge-sheet by an agency of the Government / conviction by a Court of Law
for an offence committed by the bidding party or by any sister concern of the
bidding party would result in disqualification. The decision in regard to the
relationship between the sister concerns would be taken, based on the
relevant facts and after examining whether the two concerns are substantially
controlled by the same person/persons.
(c) In both (a) and (b), disqualification shall continue for a period that
Government deems appropriate.
(d) Any entity, which is disqualified from participating in the disinvestment
process, would not be allowed to remain associated with it or get associated
merely because it has preferred an appeal against the order based on which
it has been disqualified. The mere pendency of appeal will have no effect on
the disqualification.
(e) The disqualification criteria would come into effect immediately and would
apply to all bidders for various disinvestment transactions, which have not
been completed as yet.
(f) Before disqualifying a concern, a Show Cause Notice why it should not be
disqualified would be issued to it and it would be given an opportunity to
explain its position.
(g) Henceforth, these criteria will be prescribed in the advertisements seeking
Expression of Interest (EOI) from the interested parties. The interested
parties would be required to provide the information on the above criteria,
along with their Expressions of Interest (EOI). The bidders shall be required
to provide with their EOI an undertaking to the effect that no investigation by
a regulatory authority is pending against them. In case any investigation is
pending against the concern or its sister concern or against its CEO or any of
its Directors/Managers/employees, full details of such investigation including
the name of the investigating agency, the charge/offence for which the
investigation has been launched, name and designation of persons against
whom the investigation has been launched and other relevant information
should be disclosed, to the satisfaction of the Government. For other criteria
also, a similar undertaking shall be obtained along with EOI.

(A.K. Tewari)
Under Secretary to the Government of India.
.
 No. 6/4/2001-DD-II
Government of India
Department of Disinvestment

Dated 13th July, 2001

OFFICE MEMORANDUM

Subject: Guidelines for qualification of Advisors for disinvestment process

Government has examined the issue of framing comprehensive and transparent guidelines defining the
criteria for selection of Advisors, so that the parties selected through competitive bidding inspire public
confidence. Earlier, a set of criteria like sector experience, knowledge, commitment etc. used to be
prescribed. Based on experience and in consultation with concerned departments, Government has
decided to prescribe the following additional criteria for the qualification / disqualification of the parties to
act as Advisors to the Government for the disinvestment transactions:-
(a) Any conviction by a Court of Law or indictment / adverse order by a regulatory authority for a grave
offence against the Advising concern or its sister concern would constitute a disqualification. Grave
offence would be defined to be of such a nature that it outrages the moral sense of the community.
The decision in regard to the nature of offence would be taken on a case to case basis after
considering the facts of the case and relevant legal principles by the Government. Similarly, the
decision in regard to the relationship between the sister concerns would be taken, based on relevant
facts and after examining whether the two concerns are substantially controlled by the same
person/persons.
(b) In case such a disqualification takes place, after the entity has already been appointed as Advisor,
the party would be under an obligation to withdraw voluntarily from the disinvestment process, failing
which the Government would have the liberty to terminate the appointment / contract.
(c) Disqualification shall continue for a period that Government deems appropriate.
(d) Any entity, which is disqualified from participating in the disinvestment process, would not be allowed
to remain associated with it or get associated merely because it has preferred an appeal against the
order based on which it has been disqualified. The mere pendency of appeal will have no effect on
the disqualification.
(e) The disqualification criteria would come into effect immediately and would apply to all the Advisors
already appointed by the Government for various disinvestment transactions, which have not yet
been completed.
(f) Before disqualifying a concern, a Show Cause Notice why it should not disqualified would be issued
to it and it would be given an opportunity to explain its position.
(g) Henceforth, these criteria will be prescribed in the advertisements seeking Expressions of Interest
(EOI) from the interested parties to act as Advisor. Further, the interested parties shall be required to
provide with their EOI an undertaking to the effect that no investigation by a regulatory authority is
pending against them. In case any investigation is pending against the concern or its sister concern
or against the CEO or any of its Directors/Managers/Employees, full details of such investigation
including the name of the investigating agency, the charge/offence for which the investigation has
been launched, name and designation of persons against whom the investigation has been launched
and other relevant information should be disclosed, to the satisfaction of the Government. For other
criteria also, similar undertaking will be obtained along with EOI. They would also have to give an
undertaking that if they are disqualified as per the prescribed criteria, at any time before the
transaction is completed, they would be required to inform the Government of the same and
voluntarily withdraw from the assignment.
(h) The interested parties would also be required to give an undertaking that there exists no conflict of
interest as on the date of their appointment as Advisors in handling of the transaction and that, in
future, if such a conflict of interest arises, the Advisor would immediately intimate the Government of
the same. For disinvestment proposes, 'conflict of interest' is defined to include engaging in any
activity or business by the Advisor in association with any third Party, during the engagement, which
would or may be reasonably expected to, directly or indirectly, materially adversely affect the interest
Benefits of Disinvestment

Some overall benefits of Disinvestment, irrespective of the approach used are as follows:

For the Government

1. Raising valuable resources for the government, which could be used to bridge the fiscal
deficit for one, but also for various developmental projects in key areas such as
infrastructure. The Financial Times (20th May 2009) quotes a report brought out by the
French securities firm CLSA to state: “A reduction in shareholding to hypothetically 51%
across all the state-owned entities could bring in USD 62 bn (Rs. 2.9 lakh crore
approximately) at current market prices (thus valuing the government holdings in listed
state-owned companies at Rs 8.8 lakh crore). Even a 10% stake sale in the ten large public
state undertakings that are likely disinvestment candidates can bring in USD 17 bn (Rs.
80000 crore approximately)". Another such estimate by Delhi-based PRIME Database
suggests that if the Government follows up on its promise of bringing down its equity stake
in listed CPSEs to 86%, it can mobilise Rs. 7248 crore going by the current market
valuations.
2. Apart from generating a one-time sale amount, a lot of these stake sales would also result
in annual revenues for the government, as has been shown in the past.
3. The government can focus more on core activities such as infrastructure, defense,
education, healthcare, and law and order.
4. A leaner government with reduction in the number of ministries and bureaucrats.

For the Markets and Economy

1. Brings about greater efficiencies for the economy and markets as a whole

For the Taxpayers

1. Letting go of these assets is best in the long term interest of the tax payers as the current
yield on these investments in abysmally low. Even if the funds from the sale are not utilised
for bridging fiscal deficit, a much better utilisation of these ‘stuck’ funds would be into critical
sectors such as healthcare, education and infrastructure
2. Unlocking of shareholder (in this case the citizens of India) value

For the Employees

1. Monetary gains through ESOPs and preferential issue of shares

2. Pay rises, as has been seen in past divestments
3. Greater opportunities and avenues for career growth- further employment generation

For the PSUs

1. Greater autonomy leading to higher efficiencies

Benefits specific to each approach used for Disinvestment

Complete Privatisation

In most parts of the world, it has been proven that Privatisation brings the maximum returns to the
tax payer, thus making it the best form of Disinvestment. Since complete control is given off by the
government, the reforms are immediate, and the results start showing soon.

Majority Sale

A majority stake sale to a strategic buyer has its positives in getting a superior valuation (though
sometimes not as good as an outright sale) for the government purely due to market dynamics. With
some of the PSUs being virtual monopolies, private players have a lot of interest in acquiring stakes
in them. It was because of this reason that this became the chosen vehicle for Disinvestment in the
early 2000's.

Minority Sale

Given the current political and social compulsions, complete privatisation may not be a solution in
the Indian context. Even a majority stake sale would be met with opposition.
Offloading a part of the government’s equity by way of a minority stake sale is the only workable
option, as in this case, the control would still be with the government. Minority stakes can be sold
either to selected private players, or to the public by way of a Public Offer or auctioned off to
financial institutions. Offloading minority stakes to private players does not make sense for the
government since valuations would be driven down by the fact that the government still retains
control/ decision making of the company. This has been proven in transactions in the past wherein
the P-E ratios typically accompanying such a sale were found to be low.

On the other hand, a minority stake sale via a Public Offer has several benefits.

For the Government

1. Minority Stake sales via Public Offers provide benefits of long term capital appreciation-
Disinvestment done in a staggered manner can help the government realize the real ‘value’
of these PSUs, as has been shown by recent PSU IPOs wherein the valuation that the
market has given to the PSUs is far higher than the original offer price. For example, in the
case of NTPC, the Government sold each share at Rs. 62 in its IPO in October 2004. In its
FPO in February 2010, the Government was able to realise Rs. 201 for the same share!

For the PSU

1. Listing leads to better and timely disclosures, bringing in greater transparency and
professionalism, thus protecting the interest of the investors
2. Greater efficiency by way of being accountable to thousands of shareholders
3. Listing provides an opportunity to raise capital to fund new projects/undertake
expansions/diversifications and for acquisitions. An initial listing increases a company's
ability to raise further capital through various routes like preferential issue, rights issue,
Qualified Institutional Placements and ADRs/GDRs/FCCBs, and in the process attract a
wide and varied body of institutional and professional investors.
4. Listing raises a company's public profile with customers, suppliers, investors, financial
institutions and the media. A listed company is typically covered in analyst reports and may
also be included in one or more of indices of the stock exchanges.

For the Employees

1. Though there could be opposition from employees of some PSUs, this can be countered
and also turned into a favourable situation by offering ESOPs/preferential issue of shares to
them. This would provide tangible monetary benefits to them, and also make them an
interested party in better performance of their companies.

For the Markets and Economy

1. These PSU IPOs present the best opportunity of widening the equity investing retail base by
providing greater and safer investment opportunities. Curbs and measures, however, would
need to be put in place to ensure that institutional investors do not run away with the bulk of
this sale and only retail participation is allowed in these issues. Public offers have been one
of the frequently used techniques in the UK to transfer state assets and businesses to
private ownership. The method has been fairly successful, having increased the
shareholding population from 4% to 25%. For example, British Telecom alone created 2.1
million shareholders in the UK, when privatized.
 2. Listed PSUs already form about 30% of the total market capitalisation. With more PSUs
being listed, this would provide a greater depth and width to our capital market

A minority stake sale via Auctioning to financial institutions also has certain benefits:

1. Bidding by a group of large, informed investors would provide the highest likelihood of the
assets receiving the
best valuation
2. The process takes relatively little time as the modalities are less demanding than those for a
full-scale public offer
process that can take many months.
3. This will provide a direct conduit for interested foreign investors
4. Retail participation can come in through the mutual funds, Provident Funds and the NPS.

Arguments against Disinvestment (and Defenses)

There have been several arguments that have been raised against disinvestment, both specific as
well as general in nature. Some of them are listed below, with their counter-arguments (in bold
italics):

-The Government will forego dividends on the equity holdings by selling off its stakes. According to
the Public Enterprises Survey 2007-08, the Central PSUs taken together contributed Rs. 19,423
crore to the central exchequer in 2007-08 as dividends, witnessing an increase of over Rs. 4,000
crore from 2005-06. Considerable disinvestment of government’s stakes in CPSEs would squeeze
this important source of revenue for the Government.

Apart from generating a one-time sale amount, a lot of these stake sales have also resulted
in higher annual revenues for the government, thus nullifying the effect of loss of
dividends. More so, while they were dividend yielding, there were annual outgoes
associated with them, thus again nullifying the effect of dividends. Moreover, the loss of
dividends, if any, is well compensated by gains in capital appreciation.

-A nationwide survey conducted by the NCAER in 2007-08 revealed that only 0.5% of Indian
households invest in equities. A recent article in The Economist (21st May 2009) estimates this
section to be 0.7% of Indian households. Thus, in case the public offer route is followed, it would
imply transferring the common ownership of the PSUs by all Indians into the private ownership of
0.5-0.7% of Indians. Thus essentially implying that the real beneficiaries would not be the ordinary
retail investor but institutional investors.

While the current equity penetration remains low, it is precisely these PSU IPOs
themselves that present the best opportunity of widening the retail base. To also ensure
that institutional investors do not run away with the bulk of this sale, curbs and measures
can be put in place that ensure only retail participation in these issues.

-Using funds made available from disinvestment to bridge the fiscal deficit is an unhealthy and a
short term practice. It is said that it is equivalent of selling ‘family silver’ to meet short term
monetary requirements. Borrowing which is the currently used practice for bridging fiscal deficit,
should continue to be used since while borrowing, the government has to make interest payments
in the future against a one-time borrowing from the market, in the case of disinvestment, future
streams of income from dividends are forgone against a one-time receipt from the sale of stakes.

Letting go of these assets is best in the long term interest of the tax payers as the current
yield on these investments in abysmally low. Even if the funds from the sale are not
utilised for bridging fiscal deficit, a much better utilisation of these funds would be
investments into critical sectors such as healthcare, education and infrastructure or for
retiring government debt rather than letting the low yielding capital remain locked in these
assets.

-Effective tax rate for the CPSEs taken together in 2006-07 was 30.78%, while the average
effective tax rate for private sector companies in the same year was 19.5% only (as per the
Statement on Revenue Forgone, Receipts Budget, 2008-09). Criticism stems from the fact that
while not only a major tax revenue source will be lost, the private sector which ideally should be
paying an equivalent tax rate is exempted due to tax concessions.

As mentioned above, while there will be a loss in terms of dividend and tax income, this
shortfall would be more than adequately compensated by revenues and capital gains. More
so, the returns on capital employed for the entire PSU sector is very low and the
government can find alternate avenues for deploying this capital which would yield far
better returns, both monetarily and otherwise. All the same, revisions need to be made in
tax laws to ensure that all such loopholes currently being exploited by the corporate sector
are closed.

-Profit making PSUs should not be disinvested as they are performing well in any which way

A good example against this criticism would be BALCO which was a profit making
company that earned the Government an average dividend (over eight years) of Rs. 5.69 cr
every year on the equity sold. The Government post-disinvestment, however started
getting Rs. 82.65 crore every year. Similarly, CMC was a very well managed and profitable
company, yet the average dividend was only 0.80 crore. The Government's benefit, post-
disinvestment however was Rs. 15.2 crore annually. Similarly, Maruti Udyog Ltd. gave
average returns to the tune of Rs. 13 crore annually to the Govt. and IPCL gave Rs. 16.24
crore on equity sold against Rs. 242 crore and 149 crore respectively post-disinvestment.
There can possibly be no justification of maintaining public sector character in such
companies, especially them being non-core sectors.

-Employees of PSUs would lose jobs

Past privatisations have shown that these fears are totally unfounded. Some of the
companies started the process of restructuring and accepted some voluntary retirement
applications but no retrenchments were made. These companies gave VRS to the
employees, at scales, which were normally higher than the Government VRS. Shareholders
Agreement with private companies normally have a provision that employees interest
would be protected by ensuring VRS, which is higher or equal to the Government VRS, if
there is a need for restructuring in the number of employees. More so, such exercises were
done during the public sector regime also. It has been reported that the response to VRS
offered to employees before disinvestment was also sometimes lukewarm as the
employees expected a better package after privatisation by the strategic buyer, if and when
VRS was offered to them. Very often additional recruitment also took place in privatised
companies and the wages increased. To give an example, wages increased by an average
of Rs. 1600 per employee in Modern Food Industries Limited in spite of the fact that the
company had to approach BIFR within months of being privatised. Hindustan Levers took
measures to financially restructure the company and bring it out of BIFR, at their own
expense. Had Modern Foods remained a Government Company, the tax payer would have
paid for financial restructuring of the company perhaps repeated by another restructuring
a couple of years later, as is usual in the public sector. In BALCO, wages had not been
increased after April 1999, even though a revision was due. In spite of a loss of about Rs.
200 crore due to the strike which happened as a result of the privatisation exercise, an ex-
gratia payment of Rs. 5,000/- was paid to all employees and a long term wage agreement
for a period of five years was entered into by the Management with the employees in
October 2001, which guaranteed benefits of 20% of basic pay to each employee, besides
increase in a number of allowances.

-Complete Privatisation may result in public monopolies becoming private monopolies, which
would then exploit their position to increase costs of various services and earn higher profits

It needs to be ensured that Privatisation leads to greater competition in all cases

-Complete Privatisation results in a situation where political compulsions may make companies
being sold cheap to preferred parties

The process followed for Privatisation needs to be very fair and transparent to ensure a
situation such as this does not arise
-A majority stake sale done to another CPSE results in no real change in ownership, and is thus
just hogwash

This is fair to some extent, though it must be realized that some of the CPSEs are very well
run, competitive and profit making. Thus, a sale of a loss making CPSE to a well
performing CPSE can be a proposition well worth considering.

-Public Offer being the chosen approach for Disinvestments does not yield the best realisation on
the assets and is a far too time consuming process. Auctioning to financial institutions (QIBs)
should be the preferred modus operandi since it gives the best realisation on the assets, and has
minimal transaction cost

While the realisation on assets might be higher in case of an auctioning process, it must
be remembered that the Government is not a private enterprise and hence should not be
looking at short-term gains. It should look at the greater good and sell these stakes by
public offers to increase retail participation in the capital markets as well as to increase the
depth and width of the capital markets. In any case, the loss is minimal as very small
stakes are being sold. The real gains for the government lie in the appreciation post-listing.
Let us look at the PSU IPOs since 2004 with a trading period of over 1 year. The value of
the government holding, courtesy the market, has gone up nearly 3 times from Rs. 90467
crore on the issue date to Rs.249227.14 crore (as on 17 August 2010).

Is this the right time for Disinvestment?

With the equity markets having come off their historic lows in March 2009, there are certain signs of recovery.
However, this should not be of any concern to the Government as PSUs, being high quality paper, would always
find ready investors if the pricing is reasonable. PSU disinvestment of 10% as per the Government’s announced
intentions, at attractive prices to retail investors, could ensure a strong message to the investment community
about the Government’s resolve to continue with reforms.