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The public sector enterprises are at the crossroad.

A sector which was

to achieve commanding heights and was thought to be the correct path for
India’s economic growth , right from independence stands today condemned
not only by those whose tax paid money went into its expansion but also by
our policy makers. A sector which characterized as over invested but gives
poor returns, over employed but under- utilized capacity, excessive controls
but lower efficiency , abandoned assets but lack of resources and lots of talent
but under utilized . In 1990-91, 236 public sector enterprises were in
operation. Capital worth Rs 101702 Crore was lying invested in these units. Of
these, few enterprises were earning profit. Net profits of all the public sector
enterprises amounted to Rs 2368 Crore only. Moreover many public sector
units were running in loss. Hence Govern has to get rid off this sector. Policy
of privatization is the main feature of new economic reforms. Disinvestment is
another form of privatization. Disinvestment refers to sale of Government
equity , either wholly or partially to private sector.
. Disinvestment is the process in which certain percentage of shares of
public sector units is disinvested to private sector. It is also known as
privatisation. Through disinvestment government can withdraw its resources
invested in public sector undertaking (PSUs) and can use such resources for
development of the economy. When a PSU is disinvested government usually
keeps strategic control in to strategic and non strategic areas. Arms and
ammunition and the allied items of defence equipment, aircraft and warship
and atomic energy and railway transport are to be considered strategic areas
and all others are to be non-strategic areas. Government stake can be down
from 51% to 26%. While management control is shifted to private sector unit,
PSU can be disinvested by a single bidding or by a consortium bidding . in
single bidding a single private sector unit buys management control of PSU
from central government/state government. While in consortium bidding
group of private sector units purchases management control of PSU from
central government . The objective for disinvestment should be benefit the
public the consumer and investor, and at the same time, to improve
competitiveness and eliminate monopoly.
Disinvestment means opening the gates of public sector to private
sector. It enhances the importance of private sector because private sector
comes to play significant role in the economic development of the country.
So we can define disinvest as in a narrow sense , disinvestment implies
the private ownership of public enterprises .
In broader meaning of disinvestment or privatisation is to imply
transferring the ownership of public sector to private sector or managing and
controlling the public sector by private individuals without transferring the
In the words of Barbara Lee and John Nellis “privatisation is the
general process of involving the private sector in the ownership.
According to Dr. A. Peter. “Privatisation is the is the transfer of
function or activity or organization from public to the private sector.”
It is clear from the above description that privatisation not only means
passing of ownership right of public sector enterprises to private sector; but
even when the public enterprises which are managed and operated by the
private sector, without having their ownership , will also be called
Why Disinvestment/privatisation ?
1. Public Enterprises seldom take advantage of a competitive profit
maximizing market environment.
2. They are encountered with numerous non commercial objectives.
3. They operate in non-competitive markets.
4. Their management is more bureaucratic entrepreneurial
5. The executive, legislative and even the judiciary wings of the system in
day-to-day management
Mode of disinvestment

Concept of disinvestment
1. Releasing large amount of public resources: the primary objective of
disinvestment is to release public resources for deployment in areas that are much
higher on the social priority, such as, basic health, family welfare, primary education
and social and essential infrastructure.
2. Get rid off bureaucratic set up: management of public sector does not
have the independence to take decision. Most of decision of PSE is taken by the
ministers. Their decisions are politically motivated and are delayed. As a result,
production capacity is not fully utilized and there is fall in productivity.
3. Get rid of uneconomic price policy: price of public utility services
like electricity , irrigation, transport, water, etc. are determined on the basis of
political, social, and other non-economic consideration rather than on the basis
commercial principles. In some cases, prices are deliberately kept less than the cost of
production. Privatisation is advocated to avoid such losses.
4. Reduce burden on the government: at least 53 public sector units are
running at loss. This creates unnecessary economic burden on the government. The
management and any other person are indifferent to profit earned or losses incurred.
So government has promoted privatisation for reducing its economic burden.
5. Avail benefit of capitalism : capitalism is very successful countries
like Japan, USA, Hong Kong , Singapore, Korea etc. considering the benefits of
capitalism like increase in competition, increase in technology advancement, increased
efficiency the government has decided to adopt privatisation.
6. To Solve financial crisis of government: Government is falling shorts
of funds to develop infrastructure. This finance crisis could be solved by selling part of
government equity at remunerative prices and thereby getting funds from their sale.
7. For Promoting Industrial Growth : Government thought that
public sector will not be able to bear the burden of developing basic and heavy
industries alone, because of shortage of funds. So privatisation was promoted to
increase industrial growth

8. for promoting Globalization : Globalisation can only be promoted

through privatisation , because foreign entrepreneurs prefer to join hands with
private sector. By globalization benefits of foreign investment and foreign
technology can be availed.
In short the concept of privatisation has been gaining ground due to
increasing losses and inefficiencies of public sector enterprises.
Objectives of Disinvestment:
The objectives of privatisation are to increase efficiency and
competitiveness among industries, to increase profit, productivity and
efficiency of the enterprises. Main objectives are describe as under.
1. To achieve rapid economic development of nation
2. to reduce deficit financing by reducing government expenditure on
public enterprises.
3. To strengthen industrial management.
4. To make public sector units more competitive.
5. to make optimum use of economic resources.
6. to achieve rapid industrial development of the country .
7. To increase return on invested capital.
8. To enhance productivity in the industrial units.
9. To make maximum use of foreign investment and to attract its inflow.
10. To improve technology level.
11. To diversify the ownership and to widen entrepreneurship base i.e.
increasing involvement of private entrepreneurs in these enterprises.
12. To reduce the economic burden of government and to release large
amount of public resources blocked up in loss-making PSUs.
13. TO increase competition.
Advantages of privatisation/ Disinvestment
1. increase in efficiency
2. professional management
3. increase in competition
4. in line with international trends
5. reduction in economic burden of government
6. increase in financial Resources of Government
7. increase in responsibility
8. reduction in political interference
9. encouragement to New Inventions
10. Globalization of economy
11. increase in industrieal growth rate
12. increase in foreign investment
13. Reduction in loss of PSUs

Disadvantages / obstacles in disinvestment.

widespread industrial sickness
Lack of social welfare
Class struggle between capitalist and laborers
Increase in Inequality
Opposition by employees
Problem of financing
Political pressure
Increase in unemployment
Ignores weaker sections
Ignores enterprises of national importance
Increase in regional imbalance
acquired PSU. Invariably a low book value of the assets
will complicate the situation further since PSUs do not
enjoy the independence of settling the question of
receiving the sale proceeds of the assets in "black" or by
any other means of that nature. Further, closing of
branches or sales offices situated in the posh business
localities of the various Metros with the plea of cost control
is an area of orphic nature which should entice the
vigilant eyes of the auditors for proper dissection of each
case. Since the possibilities of transaction taking an untoward,
undesirable and wanton turn benefiting some
interested quarters rather than the PSU itself cannot be
ruled out. Therefore to provide proper safeguard to the
Government, shareholders, employees of the PSU and
to the nation at large, stock of the situation should be
taken without further delay and befitting guidelines and
standards be evolved. Then only we shall be able to fulfill
our professional commitment to the society.
In recent times disinvestment through strategic sale
has gained popularity with the Ministry of
Disinvestment since this process helps the Government
to retain the strategic control of the PSU even though its
day-to-day control of management is transferred to the
Strategic Partner. Transaction in strategic sale has two
important facets (a) Transfer of block of share to a suitable
Strategic Partner (b) Transfer of management control
of the PSU to that Strategic Partner.
It has been earlier observed by MOD that open market
route for disinvestment does not fetch a proper price
for the PSU because in that case the management
remains with the Government only. Such deprivation of
management control in the PSU deters the prospective
buyer to own the PSU shares at the justified rates leaving
aside the question of payment of premium. As a mode of
solution to this, sale through strategic route is followed.
This involves retainment of minimum 26% of shares of
the PSU by the Government and relinquishment of rest
of the share to the other concerned parties in such a way
so that an able responsible and worthful partner can be
strategically selected, who will be sold with atleast 25% of
shares of the PSU. Rest of the 49% of shares will be sold
and allocated in such a manner to suit the useful purpose
of the Government. The position can be diagrammatically
explained in the following manner. When the shareholding of the Union
Government in
a PSU falls below 51% it loses its entity as Government
Company. Government may hold 51% of shares after
selling 49% to the other parties. Now out of this 51%
Government may sell 25% stake to a Strategic Partner
retaining 26% under its own control. Strategic Partner or
a consortium, which bids for taking over the PSU may do
so through a Special Purpose Vehicle (SPV). SPV is basically
a new company formed by the Strategic Partner/consortium members for the
purpose of acquiring
the shares of the concerned PSU. In order to do so, a
document of agreement called Parent Guarantee
Agreement (PGA) is prepared for execution by the concerned
Doing away with the 74% of its share Central
Government however, does not strip itself off with all control aspects of the
PSU as the percentage 26 has a
very significant constituency of control in the
Companies Act, 1956. Through this magic figure of 26%
Government can be the most important player in controlling
the disinvested PSU even after handing over the
total management of the company to the Strategic
Partner, should the situation so warrant. Important decisions
like Reduction of Share Capital, change in the
Articles of Association, winding up of the Company etc.
require special resolutions to be passed by atleast 3/4th
majority (75%) in a General Meeting, which the Strategic
Partner and other consortium members (holder of 74%)
will not be able to do without the Government's participation.
Thus by simply holding the magic percentage of
26%, which is as worthful as having Golden Shares in
hand, Government can now pull the lever of control,
when important decisions are required to be taken without
interferring into the day-to-day management of PSU
once it is disinvested and controlled by the Strategic
Partner. Therefore at the end of the deal both the Central
Government and the Strategic Partner will be able to
exercise Strategic Control and Management Control of
the PSU separately by holding 26% and 25% of shares of
the PSU Respectively. This dispenses with the requirement
of holding 51% shares of the PSU at one go by any
particular party.