Disinvestment in India

BUSINESS ENVIRONMENT
A PROJECT REPORT ON
DISINVESTMENT IN INDIA A FAILURE STORY

"While the case for economic reforms may take good note of the diagnosis that India has too much government interference in some fields, it ignores the fact that India also has insufficient and ineffective government activity in many other fields, including basic education, health care, social security, land reforms and the promotion of social change. This inertia, too, contributes to the persistence of widespread deprivation, economic stagnation and social inequality
.......Amartya Sen
Submitted To Dr. K. L. Ch !" ,ORE S-hoo" o. M / 0eme/t Ne! De"hi
Submitted By # ur $ Vi% y Sh h &'()*)+ 1 ri2h Mitt " 1 r2h L 3hoti 1im /i A0 r! " Jite2h Ke%ri! " K r / So/i &'()*(+ &'()*4+ &'()*5+ &'()*6+ &'()*7+
Disinvestment in India: A Failure Story
A-3/o!"ed0eme/t
Intuition and concepts constitute ... the elements of all our knowledge, so that neither concepts without an intuition in some way corresponding to them, nor intuition without concepts, can yield knowledge. In a similar way the credit of developing this project goes to many others who helped us in building both our concepts and intuitions. We are indebted to our project guide Dr K. L. Ch !" for providing us with a challenging & interesting project. We owe the credit of developing this project to him. Without his guidance realization of this project would not have been possible. We would also like to thank our batch mates for the discussions that we had with them. All these have resulted in the enrichment of our knowledge and their inputs have helped us to incorporate relevant issues into our project.
egards !aurav "ijay #hah $%&'(%) *arish +ittal *arsh -akhotia *imani Agrawal 0itesh 1ejriwal 1aran #oni $%&',&) $%&',.) $%&',/) $%&',2) $%&',3)
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E8e-uti$e Summ ry
4rivatization, a key component of economic liberalization remained dormant for the nearly the entire first decade of significant economic reforms in India. 5he usual e6planations have been that weak governments could not overcome the many vested interests or that there has been ideological resistance to economic reforms among India7s elites. Indian privatization came out of the shadows, however, !he/ the .ormer I/di / Pre2ide/t Dr. A.P.J. Abdu" K " m 2t ted9 :It i2 e$ide/t th t di2i/$e2tme/t i/ ;ub"i- 2e-tor e/ter;ri2e2 i2 /o "o/0er m tter o. -hoi-e but / im;er ti$e < The ;ro"o/0ed .i2- " h emorrh 0e .rom the m %ority o. the2e e/ter;ri2e2 - //ot be 2u2t i/ed /y "o/0er9: in his opening address to 4arliament in the .''. budget session. *ow does one e6plain both the gradualism during the &%%'s and the recent episodic acceleration of privatization in India and what does it reveal both about state capabilities and the strength of societal actors8 5his report argues that it was not 9vested interests: alone, but institutional structures, in particular those embedded in the judiciary, parliament and India7s financial institutions, that account for the lag between the onset of economic liberalization and privatization and its episodic nature. ;hanges in the perceived costs of the status <uo of state=owned enterprises also played a role in the timing of reforms. 0ust as the e6ternal debt crisis forced the initial round of economic reforms, the growing internal debt problem and the fiscal crisis of the Indian state has increased the opportunity cost of state=owned enterprises $#>?s). 5he passage of time has also resulted in significant changes in Indian policymakers and citizens7 attitudes regarding the relative effectiveness of state and markets in commercial activities, as well as their assumptions about the Indian state being a 9guardian of the public interest.:
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T b"e o. Co/te/t2
Ch ;ter ( = A b -30rou/d
>bjective elevance of study +ethodology -iterature review 4ublic sector performance since &%3' by @agaraj 9Aisinvestment in India: by #udhir @aib Aisinvestment in 4rivatisation in India, Assessments and options by @agaraj Aisinvestment in India, I loose and you gain by 4radeep Baijal Brief Introduction
Ch ;ter 4 = Pub"i- Se-tor i/ I/di

?volution of 4ublic sector >bjective of formation of 4#C7s 4roblem of 4ublic sector undertakings !rowth in 4ublic sector
Ch ;ter 5 = Di2i/$e2tme/t>De.i/itio/9 Method2 /d Pro-e22e2

Aefinition Indian scenario 5ypes of disinvestment >bjectives Aisinvestment process +ethods adopted in India -egal issues
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Ch ;ter 6 > Di2i/$e2tme/t i/ I/di >Po"i-ie29 ;ro-edure /d ;ro-eed2
Background 5imeline 4hase & $&%%& D %. to &%%3 D %E) Industrial reforms angarajan committee, &%%/ Fear wise disinvestment 4hase . $&%%E D %( to &%%( D %,) Aisinvestment commission, &%%E eview of recommendations given by Aisinvestment commission Fear wise disinvestment 4hase / $&%%, D %% to .''( D ',) Fear wise disinvestment @ational investment fund 4hase 2 $ .'', D '% to present) Fear wise disinvestment 5he line up for disinvestment @ational Investment Gund,.''3 #ummary of disinvestment
Ch ;ter 7> C 2e 2tudie2

+odern food industries $India) -td BA-;> "#@4ower sector reform in >rissa Aivestiture in +aruti Cdyog compared to other disinvestments -agan 0ute +achinery ;ompany -imited
Ch ;ter ? = Criti- " A/ "y2i2

eview of Aisinvestment in 4rivatisation 4erformance of 4#Cs after 4rivatisation 4roblems of ;orporate governance Aisinvestment D @ot a great piece of reform ;omparative e6perience 4#Cs are not that bad Gacts >pportunities at present in 4#Cs 4erformance of 4#Cs
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Ch ;ter @ = Su00e2tio/2
Bib"io0r ;hy
BACK#ROUND
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OBJECTIVEA
&. 5o Analyze the Aisinvestment process in Indian 4ublic #ector. .. 5o study the disinvestment done was a #uccess or a Gailure for the Indian ?conomy.
RELEVANCE O, STUDBA
5he report aims to study the evolution of disinvestment in India from the scratch and in thorough detail so as to, not only understand the need and the procedure of the same, but also to be able to critically evaluate the strategy and its several implementations till date. 5he project enables us to discover and highlight several instances and facts and conclude that the disinvestment was not efficiently conducted. We also conclude that the objectives behind disinvestment, stated by the government way back in &%%&have failed miserably. After such an insightful analysis, we are in a position to say that though disinvestment in India had several bounding objectives, it has been a failure story and much has to be done to
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realize the benefits. 5he group could even come up with some solutions and alterations that can be implemented to help the citizens of India reap the benefits of the strategy of disinvestment to a greater e6tent.
MET1ODOLO#BA
5he report tries to study and analyze the disinvestment in India from its very scratch. We begin studying the post independence era, understanding the strategy of 4ublic #ector Cnits used by the government for common good, then pin=pointing the loop holes and the conse<uent shortcomings of this strategy, thus identifying an emergent need for disinvestment. We further study the objectives of disinvestment and the process followed for the same. A detail study over a timeline of eighteen years is done, dividing this entire span into three phases. 5his study has helped us to cortically evaluate the disinvestment in several sectors and comment on the current situation i.e. .'', onwards. #everal legendary cases of disinvestment like the +GI-, BA-;>, "#@-, +aruti Cdyog -td., -agan 0ute +ill etc have been developed to sheer details. 5his has enabled us to study the situation then and comment upon their worthiness. We have gone one step ahead to state several in depth facts and conclude that neither, the disinvestment was not carried out the way it must have been nor have the funds realized been used for the purposes intended.
LITERATURE REVIEC
(. PUBLIC SECTOR PER,ORMANCE SINCE ('7)9 A ,RES1 LOOK >BBA R. NA#ARAJ
5he paper elicits that since the mid=&%,'s, the public sector7s share in domestic investment has been nearly halved, but its output share has remained roughly constant at about a <uarter of !A4, suggesting a sustained rise in productivity over nearly two decades. 5he paper defines three major evidences for the improvement in performance. a rise in physical efficiency in electricity generation a fall in public sector employment growth
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an increase in central public sector enterprises7 profitability $even after e6cluding the petroleum sector) 5he author then goes ahead to <uestion why then the public sector finances remained adverse. In electricity, passenger road transport and railways the revenue=cost ratio is less than one, and has declined since the early &%%'s. +oreover, over the last 2' years, the public sector price deflator declined by &( percentage points, relative to the !A4 deflator. *ence, the author concludes that correct pricing and collecting user charges are probably key to setting public sector finances right.
4. DISINVESTMENT IN INDIA BBA SUD1IR NAIB

5welve years after it was started, the liberalization of the Indian economy remains an ideological and operational battleground. 5here is mainstream national consensus on the need and irreversibility of reforms, but widespread disagreement about its pace and the sharing of its benefits. A basic aspect of the withdrawal of the state from the economic sphere has been the divestment to private parties of the shares $and in some cases control) of public sector enterprises $4#Cs) or state=owned enterprises $#>?s)H. 5his has affected thousands of Indians, and triggered fierce political debates. 5he book gives a comprehensive roundup of the why and how of #>? privatization. It provides a perspective on the past, present and future of 4#C divestment from someone who has studied the process up close. Before the commentary on the Indian e6perience, the book touches on the historical development of the idea of private enterprise in public works, and the major theoretical positions on the state versus private ownership debate. It provides a comprehensive review of the disinvestment process followed by India and analyses the impact of performance of the disinvested enterprises.
5. DISINVESTMENT NA#ARAJ
AND PRIVATIDATION IN
INDIA9
ASSESSMENT AND OPTIONS>
BBA R
5he author studies close to .3' public sector enterprises $4#?s) owned and managed by the central government, mostly in industry and services $e6cluding the commercial banks and financial institutions). 5he study suggests an alternative institutional arrangement for
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improving 4#?s7 financial performanceI mutual stock holding among complementary enterprises tied around a public sector bank to minimise problems of soft budget constraint, dysfunctional legislative and bureaucratic interference, and to encourage close interaction between banks and firms to promote long term economic development.
6. DISINVESTMENT IN INDIA9 I LOSE AND BOU #AIN> BBA PRADIP BAIJAL

5he process of disinvestment in India has been fraught with challenges and controversies. Aisinvestment in IndiaI I lose and Fou !ain, written by one who has been at the centre of all privatization debates and controversies, brings to light the facts that surround the disinvestment story. It underlines the most compelling rationales behind privatizationI relief to the ta6payer and the simultaneous need for funds for infrastructure development and social=sector investment. 5his book traces privatization cycles across the globe through a historical perspective by looking at the privatization models and processes adopted in different countries. It also includes case studies of companies like BA-;>, +aruti, *industan Jinc, "#@-, 0essop and ;+;, providing an insight into the different aspects of disinvestment. 5his book discusses the impact of privatization and disinvestment on companies, economies and other stakeholders, and serves to initiate a healthy and well= informed debate on the basis of facts.
INTRODUCTION
In macroeconomics, especially after the -atin American debt and inflationary crisis in the &%,'s, privatization was widely advocated as a <uick and sure means of restoring budgetary balance, to revive growth on a sustainable basis. At the micro level, the change in ownership is often advocated to increase domestic competition, hence efficiencyK and encourage public participation in domestic stock market D all of which is believed to promote Lpopular7 capitalism that rewards risk taking and private initiative, that is e6pected to yield superior economic outcomes. ?mploying about &% million persons, 4ublic #ector currently contributes about a <uarter of India7s measured domestic output. Administrative departments $including defence) account
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for about .M3th of it, the rest comes from a few departmental enterprises $like railways and postal services), and a large number of varied non=departmental enterprises producing a range of goods and services. 5hese include, close to .3' public sector enterprises $4#?s) owned and managed by the central government, mostly in industry and services $e6cluding the commercial banks and financial institutions). At the state level, production and distribution of electricity and provision of passenger road transport form the principal activities under public sector, run mostly by autonomous boards and statutory corporations. 5hough public investment in irrigation would perhaps rank ne6t only to electricity in most states, it is generally viewed as public service, hence counted as part of public administration. Besides, there are about &,&'' state level public enterprises $#-4?s) that are relatively small in size. While the contribution of all these varied publicly owned and managed entities to national development is widely acknowledged, their poor financial return has been a matter of enduring concern D especially since the mid=&%,'s when, for the first time, the central government7s revenue account turned negative D an imbalance that has persisted ever since. In &%%&, a small fraction of the e<uity in selected central 4#?s was sold to raise resources to bridge the fiscal deficit. 5hough <uantitatively modest $as will be seen later), the Ldisinvestment7 signalled a major departure in India7s economic policy. While there have been instances of sale of publicly owned enterprises as running concerns on pragmatic considerations, it is only in the last decade that such sales $and sale of limited e<uity) ac<uired the status of public policy.
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PUBLIC SECTOR IN INDIA
EVOLUTION O, PUBLIC SECTORA

4rior to Independence, there were few L4ublic #ector7 ?nterprises in the country. 5hese included the ailways, the 4osts and 5elegraphs, the 4ort 5rusts, the >rdinance Gactories, All India adio, few enterprises like the !overnment #alt Gactories, Nuinine Gactories, etc. which were departmentally managed.
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Independent India adopted planned economic development policies in a democratic, federal polity. 5he country was facing problems like ine<ualities in income and low levels of employment, regional imbalances in economic development and lack of trained manpower. India at that time was predominantly an agrarian economy with a weak industrial base, low level of savings, inade<uate investments and infrastructure facilities. In view of this type of socio=economic set up, our visionary leaders drew up a roadmap for the development of 4ublic #ector as an instrument for self=reliant economic growth. 5his guiding factor led to the passage of Industrial 4olicy esolution of &%2, and followed
by Industrial 4olicy esolution of &%3E. 5he &%2, esolution envisaged development of core sectors through the public enterprises. 4ublic #ector would correct the regional imbalances and create employment. Industrial 4olicy esolution of &%2, laid emphasis on the e6pansion of production, both agricultural and industrialK and in particular on the production of capital e<uipment and goods satisfying the basic needs of the people, and of commodities the e6port of which would increase earnings of foreign e6change. In early years of independence, capital was scarce and the base of entrepreneurship was also not strong enough. *ence, the &%3E Industrial 4olicy esolution gave primacy to the role of the #tate which was directly responsible for industrial development. ;onse<uently the planning process $3 year 4lans) was initiated taking into account the needs of the country. 5he new strategies for the public sector were later outlined in the policy statements in the years &%(/, &%((, &%,' and &%%&. 5he year &%%& can be termed as the watershed year, heralding liberalisation of the Indian economy. 5he public sector provided the re<uired thrust to the economy and developed and nurtured the human resources, the vital ingredient for success of any enterpriseK public or private.
OBJECTIVES ,OR T1E ,ORMATION O, PSUS

5he main objectives for setting up the 4ublic #ector ?nterprises as stated in the Industrial 4olicy esolution of &%3E wereI
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5o help in the rapid economic growth and industrialization of the country and create the necessary infrastructure for economic development 5o earn return on investment and thus generate resources for development 5o promote redistribution of income and wealth 5o create employment opportunitiesK 5o promote balanced regional development 5o assist the development of small=scale and ancillary industries 5o promote import substitutions, save and earn foreign e6change for the economy
PROBLEMS O, PUBLIC SECTOR UNDERTAKIN#S

5he most important criticism levied against public sector undertakings has been that in relation to the capital employed, the level of profits has been too low. ?ven the government has criticised the public sector undertakings on this count. >f the various factors responsible for low profits in the public sector undertakings, the following are particularly importantI = &. 4rice policy of the 4ublic #ector undertakings. .. Cnderutilization of capacity. /. 4roblem related to planning and construction of projects 2. 4roblems of labour, personnel and management 3. -ack of autonomy
#ROCT1 IN PUBLIC SECTOR

5he investment in public sector enterprises has grown from s..% crore as on &.2.&%3& to s.., 3.,332 crore as on /&./..'''. 5he details are summarized in the table belowI
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DISINVESTMENTA DE,INITION9 MET1ODS9 PROCESSES
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DE,INITIONA
Aisinvestment refers to the action of an organization or the government in selling or li<uidating an asset or subsidiary. In simple words, disinvestment is the withdrawal of capital from a country or corporation. Some o. the 2 "ie/t .e ture2 o. di2i/$e2tme/t reA Aisinvestment involves sale of only part of e<uity holdings held by the government to private investors. Aisinvestment process leads only to dilution of ownership and not transfer of full ownership. While, privatization refers to the transfer of ownership from government to private investors. Aisinvestment is called as L4artial 4rivatization7.
INDIAN SCENARIOA
A large number of 4#Cs were set up across sectors, which have played a significant role in terms of job creation, social welfare, and overall economic growth of the nationK they rose to occupy commanding heights in the economy. >ver the years, however, many of the 4#Cs have failed to sustain their growth amidst growing liberalization and globalization of the Indian economy. -oss of monopoly and a protectionist regime, and rising competition from private sector competitors have seen many of the government=owned enterprises lose their market share drastically. In many instances, many of the 4#Cs have found themselves unable to match up to the technological prowess and efficiency of private sector rivals, although many have blamed lack of autonomy and government interventions for their plight.
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Gew factors that have prohibited Indian 4#Cs from performing upto the standards laid down for them at their incorporation include among othersI 5he first order issue is that of competition policy. When the government hinders competition by blocking entry or GAI, this is deeply damaging. >nce competitive conditions are ensured, there are, indeed, benefits from shifting labour and capital to more efficient hands through privatisation, but this is a second order issue.
5he difficulties of governments that run businesses are well=known. 4#Cs face little Qmarket disciplineQ. 5here is neither a fear of bankruptcy, nor are there incentives for efficiency and growth. 5he government is unable to obtain efficiency in utilising labour and capitalK hence the !A4 of the country is lowered to the e6tent that 4#Cs control labour and capital.
When an industry has large 4#Cs, which are able to sell at low prices because capital is free or because losses are reimbursed by periodic bailouts, investment in that entire industry is contaminated. 5his was the e6perience of 0apan, where the Qzombie firmsQ = loss=making firms that were artificially rescued by the government = contaminated investment in their industries by charging low prices and forcing down the profit rate of the entire industry.
Gurther, in many areas, the government faces conflicts of interest between a regulatory function and an ownership function. As an e6ample, the +inistry of 4etroleum crafts policies which cater for the needs of government as owner, which often diverge from what is best for India.
5here is a fundamental loss of credibility when a government regulator faces 4#Cs in its sectorI there is mistrust in the minds of private investors, who demand very high rates of return on e<uity in return for bearing regulatory risk.
5hen the problem of corruption and misappropriations are all well known in India.
5hus, privatization was accepted in Indian conte6t.
TBPES O, DISINVESTMENT
5here are various types of disinvestment. #ome of them are as followsI
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(. O,,ER
,OR SALE TO
PUBLIC
AT ,IEED PRICEA
In this type of disinvestment, the
government holds the sale of the e<uity shares to the public at large at a pre determined price. ?6amplesI=+GI-, BA-;>, ;+;, *5-, IB4, *J-, 44-, and I4;-.
4. STRATE#IC
SALEA
In this type, significant management rights are transferred to the
investor i.e. majority of e<uity holdings are divested. ?6amplesI =>ffer of & million shares of "#@-, listing of >@!; I4>.
5. INTERNATIONAL
O,,ERIN#A
5his is essentially targeted at the GII $foreign institutional
investors). ?6I=!A of "#@-, +5@- etc.
6. ASSET SALE AND CINDIN# UPA 5his is normally resorted to in companies that are either
sick or facing closure. 5his is done by the process of auction or tender. ?6I=Auction of sick 4#C7s.
OBJECTIVES O, DISINVESTMENTA
4rivatization intended to achieve the followingI
eleasing large amount of public resources educing the public debt 5ransfer of ;ommercial isk eleasing other tangible and intangible resources ?6pose the privatised companies to market discipline Wider distribution of wealth ?ffect on the ;apital +arket Increase in ?conomic Activity
DISINVESTMENT PROCESSA
MET1ODS ADOPTED IN INDIAA
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5he following are the three methods adopted by the !overnment of India for disinvesting the 4ublic sector undertakings. 5here are three broad methods involved, which are used in valuation of shares.
(. NET ASSET MET1ODA

5his will indicate the net assets of the enterprise as shown in the books of accounts. It shows the historical value of the assets. It is the cost price less depreciation provided so far on assets. It does not reflect the true position of profitability of the firm as it overlooks the value of intangibles such as goodwill, brands, distribution network and customer relationships which are important to determine the intrinsic value of the enterprise. 5his model is more suitable in case of li<uidation than in case of disinvestment.
4. PRO,IT EARNIN# CAPACITB VALUE MET1ODA

5he profit earning capacity is generally based on the profits actually earned or anticipated. It values a company on the basis of the underlying assets. 5his method does not consider or project the future cash flow.
5. DISCOUNTED CAS1 ,LOC MET1ODA

In this method the future incremental cash flows are forecasted and discounted into present value by applying cost of capital rate. 5he method indicates the intrinsic value of the firm and this method is considered as superior than other methods as it projects future cash flows and the earning potential of the firm, takes into account intangibles such as brand e<uity, marketing & distribution network, the level of competition likely to be faced in future, risk factors to which enterprises are e6posed as well as value of its core assets. >ut of these three methods the discounted cash flow method is used widely though it is the most difficult.
LE#AL ISSUES IN T1E DISINVESTMENT PROCESSA

-egality of the disinvestment process has been challenged on a variety of grounds that slowed the sale of public assets. *owever, there were two significant judicial rulings that broadly set the boundaries of the A=4 process. 5hese areI
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&. 4rivatisation is a policy decision, prerogative of the e6ecutive branch of the stateK courts would not interfere in it. .. 4rivatisation of the 4#? created by an act of parliament would have to get the
parliamentary approval. While the first ruling gave impetus for strategic sale of many enterprises like *industan Jinc, +aruti, and "#@- etc. since .''', the second ruling stalled the privatisation of the petroleum companies, as government was unsure of getting the laws amended in the parliament.
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DISINVESTMENT PROCEEDS
IN
INDIA> POLICB9 PROCEDURE
AND
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5he basic objective of starting 4ublic #ector in India was to build infrastructure and rapid economic growth. *owever, a number of problems such as low productivity, over=manning and other economic compulsions like deterioration of balance of payment position and increasing fiscal deficit led to the adoption of new approach toward the public sector in &%%&.
BACK#ROUNDA
(. LOC PRODUCTIVITB O, INVESTMENT
Grom &%3'=3& to &%,'=,&, India7s growth rate was roughly constant but savings and investment rate more than doubled. Grom the table it can be seen that it was because of low productivity that India7s growth was slow. Investment and #avings as a percentage of !A4
Be r I/$e2tme/t &Curre/t Pri-e29F #DP+ I/$e2tme/t &Co/2t /t ('*)>*( ;ri-e29 F#DP+ Dome2ti- S $i/02 &Curre/t Pri-e29 F#DP+ ('7)>7( &'.. &2.( &'.2 ('?)>?( &3.( &,.& &..( ('@)>@( &E.E &,.( &3.( ('*)>*( ...( ...( .&.. ('*'>') .2.& .&., .&.(
#ourceI Aisinvestment in India, #udhir @aib
4. ,ISCAL SITUATION IN ('*)

Auring &%,'7s the fiscal situation deteriorated rapidly. 5his was largely due to an escalation of current e6penditure of the government. 5he table below gives the consolidated ;entral and state government revenue, e6penditure and deficit over the period &%E'=E& to &%,'=,&, divided into five year averages and e6pressed as percentage of !A4. ;onsolidated finances of ;entral and state !overnment, &%E'=E& to &%,%=%'
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Be r ('?)>?( to('?6> ?7 &..( &&., '.% E.E &,.2 3.( 3./ ('?7>?? to ('?'>@) &/.2 &..% '.3 E.' &,.% 3.3 3.. ('@)>@( to ('@6 >@7 &2.E &2.. '.2 3.& &%./ 2.( 2.. ('@7>@? to ('@'> *) &(., &E./ &.3 E.% ./.. 3.2 2.( ('*)>*( to ('*6> *7 &,.& &,.E $'.3) (.3 .E.& ,.' E., ('*7>*? to ('*'> ') .'.' ./.' $..%) (.& /'.' &'.' (.3
Re$e/ue Curre/t E8;e/diture Curre/t Re$e/ue B " /-e C ;it " E8;e/diture Tot " E8;e/diture ,i2- " De.i-it Prim ry ,i2- " De.i-it
#ourceI Aisinvestment in India, #udhir @aib
5. ,ISCAL DE,ICIT O, T1E CENTRAL #OVERNMENT 5he fiscal deficit of the central govt rose consistently from 2O in mid D &%('7s to ,O of !A4 in &%,3=,E. Giscal Aeficit of !overnment &%(3=(E to &%%'=%&
Be r ('@7>@? ('*)>*( ('*(>*4 ('*4>*5 ('*5>*6 ('*6>*7 ('*7>*? ('*?>*@ ('*@>** ('**>*' ('*'>') ('')>'( ,i2- " De.i-it 2.& E.. 3.2 E.' E./ (.3 ,./ %.' ,.& (., (., ,.2 Bud0et Prim ry Re$e/ue Mo/eti2ed De.i-it De.i-it De.i-it De.i-it '.3 ..3 &.& '.' &., 2./ &.3 ..E '.% /.2 '.. ..' '.% /., '.( &.% '.( 2.' &.. &.% &.E 3.' &., ..E ..' 3.3 ... ..2 .., 3., ..( ..2 &.( 2.( ..( ..' &.2 2.. ..( &.E ../ /.% ..E /.& ..& 2.2 /.3 .., #ourceI ?conomic #urvey, &%%.=%/, !overnment of India
A significant factor was government7s non=plan e6penditure and an inefficient interest payment system. Again the gulf war of &%%' brought the nation to the brink of international debt. 5here were huge net outflows of @ I deposits from >ctober &%%' and continued till mid &%%&.
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BI adopted sharp contractionary measures and had taken huge amounts from International +onetary Gund in 0uly, &%%' and 0anuary, &%%& amounting to R..2 billion.
Goreign ?6change weeks imports.
eserves were reduces R & Billion which could support only two
Inflation was staring at &2O >n 0ulyE, &%%& 2( tons of gold were transferred from Bank of India. BI to Bank of ?ngland, -ondon. Already .' tons of gold were sold in International market through #tate
When India turned to I+G and World Bank for further support, they showed concerns over returns on #tate owned enterprises and budgetary support provided to them. It was then a decision was taken in 0uly, &%%& to bring about macroeconomic stabilisation and structural reforms of industrial and trade policy.
TIMELINEA
In Gebruary, &%%& the Aepartment of ?conomic Affairs submitted a paper to ;abinet ;ommittee on 4olitical Affairs $;;4A) to approve the government intentions to disinvest up to .'O of its e<uity in selected public sector undertakings. 5he disinvestment announcement was made on 2+arch, &%%& during the interim budget session for &%%&=%. under the ;handrashekhar government. 5he 4olicy of disinvestment has evolved over the years. 5his period can be broadly divided into 2 phases.
5he first phase being &%%&=%. to &%%3=%E where partial disinvestment was taken in piecemeal manner. #econd 4hase &%%E=%( to &%%(=%,, an effort to institutionalize the disinvestment process was undertaken on a firm footing by constituting the Aisinvestment ;ommission.
5he third 4hase &%,=%,=%% to .''(=', where Aepartment of Aisinvestment $@ow a +inistry) and @ational investment fund was formed to look after the disinvestment process and the funds generated from it.
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Gourth phase, the ;urrent one where government is planning to sell its stake in @54;-, #0"@-, ?;- and @+A;-.
P1ASE ( &(''(>'4 TO (''7>'?+A

4hase one #tarted when ;handrashekhar government, while presenting the interim budget for the year &%%&=%. declared disinvestment up to .'O.5he objective was to broad=base e<uity, improve management, enhance availability of resources for these 4#?s and yield resources for e6che<uer.
INDUSTRIES RESERVED ,OR PUBLIC SECTOR PRIOR TO (''(

1. Arms and Ammunition and allied items of defence e<uipment.
.. Atomic energy. /. Iron and steel. 2. *eavy castings and forgings of iron and steel. 3. *eavy plant and machinery re<uired for iron and steel production, for mining. E. *eavy electrical plants. (. ;oal and lignite. ,. +inerals oils. %. +ining of iron ore, manganese ore, chrome ore, gypsum. &'. +ining and processing copper, lead, zinc, tin. &&. +inerals specified in the #chedule to the Atomic ?nergy. &.. Aircraft. &/. Air transport. &2. ail transport. &3. #hip building.
16. 5elephones, 5elephone cables, 5elegraph and Wireless apparatus $e6cluding radio
receiving sets).
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&(. !eneration and distribution of electricity. 5he Industrial 4olicy #tatement of .2th 0uly &%%& stated that the government would divest part of its holdings in selected 4#?7s, but did not place any cap on the e6tent of disinvestment. @or did it restrict disinvestment in favour of any particular class of investors. Auring this 4hase the sole was to generate revenue without following any objective seriously.
INDUSTRIES RESERVED ,OR PUBLIC SECTOR A,TER JULB9 (''(

&. Arms and Ammunition and allied items of defence e<uipment, aircraft and warship. .. Atomic ?nergy. /. ;oal and -ignite. 2. +ineral >ils. 3. +ining of iron ore, manganese ore, chrome ore, gypsum, sulphur, gold and diamond. E. +ining of copper, lead, zinc, tin, molybdenum and wolfram.
7. +inerals specified in the schedule to Atomic ?nergy >rder, &%3/.
,.
ailway 5ransport.
RAN#ARAJAN COMMITTEE (''4>(''5

5he government reconstituted the committee which it formed in Gebruary &%%. to institutionalize the disinvestment process. 5he committee included Ar. ;. then +ember 4lanning commission as chairman and Ar. F. "enugopal report are as followsI &. 2%O of e<uity could be divested for industries e6plicitly reserved for the public sector .. In e6ceptional cases the public ownership level could be kept at.EO. /. In all other cases it recommended &'' per cent divestment of !overnment stake. 2. *olding 3&O or more e<uity by the !overnment was recommended only for si6 #chedule industries, namelyI
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angarajan, the
eddy as +ember
#ecretary. 5he committee gave its report on April, &%%/. 5he *ighlights of the committee
;oal and lignite +ineral oils Arms, ammunition and defence e<uipment
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Atomic energy adioactive minerals ailway transport
DISINVESTMENT IN (''(>'4A
A steering ;ommittee was formed for selection of 4#?s for disinvestments. 5he Aepartment of 4ublic ?nterprises $A4?) coordinated all activities under the +inistry of Industry.
A+
,IRST TRANC1E O, DISINVESTMENT &DECEMBER9 (''(+A
>ut of .22 public enterprises 2& were selected, but &' were dropped on the grounds of being consultancy firms, negative asset value or they incurred losses in previous financial year. 5he emaining /& were grouped into / categories 9"ery !ood:, 9!ood: and 9Average: on the basis of net assets value per share vis=a=vis face value of s&' as on +arch,&%%&. 5he total value of e<uity in each basket was s3' million. Bids were invited from &' financial institutionsM mutual funds which consisted of ,.3 bundles each consisting of % 4#?s. A total of (&' bids for 3// bundles were received from % mutual fundsM institutions and 2'E bundles for a total value of s&2..billion were sold. Cnit 5rust of India was the major purchaser accounting for s. (.(3 billion of the sale.
B+
SECOND TRANC1E O, DISINVESTMENT &,EBRUARB9 (''4+A
In second tranche A4? asked I;I;I to evaluate and advice issue price e<uity of selected 4#?s. A -ist of &E 4#?7s was prepared and shares were grouped into &.' bundles as before. 5he reserve price fi6ed per bundle was s &'.', crore. Bids were invited from /E institutions and banks. A total of s. &E&& crore were realised with Cnit 5rust of India again being the major purchaser. 5he #hares of +etal #crap 5rading ;orporation remained unsold. Aetails of the 4#?s Aivested in &%%&=%.
N me o. the E/ter;ri2e Andrew Fule $AF) Bharat ?arth +overs -td. $B?+-) FM !" #$ ROU%&IV No. O. Sh re2&i/ -rore+ '.&'&3 '.E''' F o. Di2i/$e2tme/t %.E' .'.'' %a'e ("

Bharat ?lectronic -imited $B?-) Bharat *eavy ?lectricals -imited $B*?-) Bharat 4etroleum ;orporation -imited $B4;-) Bongaigaon efinery and 4etrochemicals -td. $B 4-) ;ochin efineries -td. $; -) ;omputer +aintenance ;orporation $;+;) Aredging ;orporation of India -td. $A;I) Gertilizers and ;hemicals -td. $GA;5) *industan +achine 5ools -td. $*+5) *industan >rganic ;hemicals -td. $*>;-) *industan 4etroleum ;orp. -td. $*4;-) *industan 4hoto Gilms +fg. ;o. -td. $*4G) *industan Jinc -td. $*J-) *industan ;ables -td. $*;-) Indian 4etrochemical ;orp. -td. $I4;-) Indian ailway ;onstruction, ;o. -td. $I ;>@) Indian 5elephone Industries -td. $I5I) +adras efineries -td. $+ -) +ahanagar 5elephone @igam -td. $+5@-) +inerals & +etals 5rading ;orp. $++5;) @ational Aluminium co. -td. $@A-;>) @ational Gertilizers -td. @eyveli -ignite ;orp. -td. $@-;) ashtriya ;hemicals and Gertilizers -td. $ ;G-) #hipping ;orp. >f India -td. $#;I) #tate 5rading ;orp. >f India -td. $#5;) #teel Authority of India -td. $#AI-) "idesh #anchar @igam -td. $"#@-) 5otal FM !" #$ ROU%&IV &.E''' 2.,%3. &.'''' /.%%E& '.2.&% '..3., '.'2'. '.3./. '.2.E, '.%,(' &..(E, &.%&%' ,.'(2E '.&EE% /.(.'' '.''&/ &.(3/, &.%/&E &..'''' '.'//2 /.3&'' &.&&E/ (.&(%& /.&&/E 3...2E '../%/ &%.%'(3 &..''' ,(..&.3 %a'e (. .'.'' .'.'' .'.'' .'.'' &'.'& &E.E% &.22 &.32 3.2/ .'.'' .'.'' &E.'3 .'.'' /.E2 .'.'' '..( .'.'' .'.'' .'.'' '.E( ..(. ..., 3.'' 3.E2 .'.'' (.%, 3.'' .'.''

#ourceI percentage disinvested from 4ublic ?nterprises #urvey, &%%3=%E, ">-= I and number of shares disinvested is from 4ublic Accounts ;ommittee &%%/=%2, (3th report, &'th -ok #abha.
5he @arasimha
ao !overnment kick started this phase with small lots of disinvestment of
shares in 2( companies, a record. A sum of s /,'/, ;rore was generated against a target of s .,3'' ;rore making &%%&=%. one of only three years in the last &/ when actual disinvestments receipts e6ceeded the target.
DISINVESTMENT IN (''4>'5A
As per the budget of &%%.=%/ s. /3'' crore were to be raised by disinvestment during the year. >ut of this s. &''' crore was meant for @ational enewal Gund $@ G) which was set up in Gebruary, &%%. to protect the interest of workers and provide a social safety net for labour.
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,IRST TRANC1E O, DISINVESTMENT &OCTOBER9 (''4+A
In this phase auctioning of shares on individual 4#? basis was done. 5enders were invited for a total of , 4#?s. 5he minimum bid limit was set at s. ..3 crore. 5he minimum reserve price was fi6ed on the basis of recommendations from merchant bankers like I;I;I, IABI and #B;+ $#tate Bank of ;apital +arket) 5he average of their prices was set as the 9Cpset 4rice:. A total of &..,( crore shares were sold for a value of s E,&.%3 crore with .,E bids being received.
Aetails of the 4#?s Aivested in >ctober, &%%.

N me o. the E/ter;ri2e Bharat 4etroleum ;orporation -imited $B4;-) *industan 4etroleum ;orp. -td. $*4;-) FM !" #$ ROU%&IV No. O. Sh re2 So"d&i/ -rore+ F o. Tot " /umber o. 2h re2 o. the PSE
Amou/t o. S "e&i/ R2 Crore+ &E%.3/ &(,.&'

%a'e )/
'..3'' './&%.
3.'' 3.''

*industan Jinc -td. $*J-) *industan +achine 5ools -td. $*+5) @ational Aluminium co. -td. $@A-;>) @eyveli -ignite ;orp. -td. $@-;) ashtriya ;hemicals & Gertilizers -td. $ ;G-) #teel Authority of India -td. $#AI-) Tot " #ourceI 4ublic ?nterprise #urvey, &%%3=%E, ">-=I
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&.'2&E './%., E.22/& &.2%E% '.,E,3 ..'3E( (4.*?**
..3, 3.'' 3.'' &.'2 &.3( '.3.
22.// .&.%, &.2.&/ /3.'/ .E./E ,..2% ?*(.'7
SECOND TRANC1E O, DISINVESTMENT &DECEMBER9 (''4+A
In @ovember, &%%. the government invited bids for the purchase of 2E..( crore shares of &2 4#?s. 5he minimum bid limit was reduced to s & crore from s ..3 crore. 5he criterion was kept same as in first tranche. A total of ..3 bids were received and /&.'E crore shares of &. 4#?s were sold at a total amount of s &&,/.,/ crore. Aetails of the 4#?s Aivested in >ctober, &%%.
No. O. Sh re2 So"d&i/ -rore+ F o. Tot " /umber o. 2h re2 o. the PSE
N me o. the E/ter;ri2e
Amou/t o. S "e&i/ R2 Crore+ &E&.E3 2..&, &./' &3/.(3 /E.2( &'.(, &&,.&% '.(. /2.%2
%a'e )!
Bharat 4etroleum ;orporation -imited $B4;-) Bongaigaon efinery & 4etrochemicals -td. $B 4-) Gertilizers and ;hemicals -td. $GA;5) *industan 4etroleum ;orp. -td. $*4;-) *industan Jinc -td. $*J-) Indian 5elephone Industries -td. $I5I) @ational Aluminium co. -td. $@A-;>) @ational Gertilizers -td. @eyveli -ignite ;orp. -td. $@-;)
'..3'' &.'' '.'3 './. &.'/ '.&' E.22 '.'/ &.(/
3.'' 3.'' '.&3 3.'' ..32 &.&2 3.'' '.'E &..'
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ashtriya ;hemicals & Gertilizers -td. $ ;G-) #tate 5rading ;orp. >f India -td. $#5;) #teel Authority of India -td. $#AI-) Tot " #ourceI 4ublic ?nterprise #urvey, &%%3=%E, ">-=I
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'.&3 '.'/ &%.%/ 5(.)?
'.., '.&' 3.''
2.'' ...3 E&(.E' ((*5.*5
T1IRD TRANC1E O, DISINVESTMENT &MARC19 (''5+A
#hares of &3 4#?s were offered for sale thorough auction. >ut of &%. bids which were received, 3( bids emerged successful on the basis of the reserve prices fi6ed by the core group based on the recommendations of the merchant bankers. A total amount of crore was realised through sale of &.''%E crore shares of % 4#?s. 4#? Aisinvested in +arch, &%%/
No o. 2h re2 2o"d &i/ -rore+ Bharat *eavy ?lectricals -imited Bongaigaon efinery & 4etrochemicals -td *industan ;opper -td *industan Jinc -td *industan +achine 5ools -td Indian 5elephone Industries -td @ational Aluminium ;ompany -td @ational +ineral Aevelopment ;orp. -td @eyveli -ignite ;orp -td Tot " '.&&&( '.','' './2&& '.'/'' '.'/'' '.'('' '.&'./ '..&2' '.'/'3 (.))'? F o. tot " /o o. 2h re2 o. the PSE '.23 '.2' &.&. '.'( './2 '.(% '.', &.3% '.'. Amou/t o. 2 "e &i/ R2 -rore+ ,..& /... ,.'( '.(3 &.2& 2.,3 &.,, &(.,, '.2E 6?.@5
s 2E.(/
N me o. the e/ter;ri2e
#ourceI ?nterprise=wise details regarding number of shares and amount realised obtained by author from Aepartment of 4ublic ?nterprises, 4ercentages of e<uity disinvested worked out by author based on paid up e<uity. Amount realised from divestment in &%%. D %/ FM !" #$ ROU%&IV %a'e )(

Mo/th >ct %. Aec %. +ar %/ 5otal No o. PSE di2i/$e2ted , &. % &E No o. 2h re2 2o"d &i/ -rore+ &..,( /&.'E &.'& 22.%2 Amou/t re "i2ed &i/ -rore+ E,&.%3 &&,/.,/ 2E.(/ &%&..3&
5hus a total of &%&..3& crore was realised during &%%.=%/ against the target of s .3'' crore.
5he target during this fiscal year was kept at s /3'' crore but the government could not go in for further sale of shares due to unfavourable stock market conditions through &%%/=%2.
@o divestment of 4#? shares took place during &%%/=%2 due to adverse market conditions. In spite of this an advertisement for sale of shares in some 4#?7s was released in +arch &%%2. Actual realisation of funds took place from this round of divestment took place in &%%2=%3. ;hanges effected in the procedure to encourage divestment areI
A+
Bidding amount was lowered from shares$whichever higher)
s &,'',''' to
s .3,''' or value of &''
egistered GII7s were permitted for auction of 4#? shares.
,IRST TRANC1E O, DISINVESTMENT &MARC1 = APRIL (''6+A
;onsidering the stock market conditions, !overnment evaluating the recommendations of two merchant bankers D Industrial ;redit and Investment ;orporation of India, and Industrial Aevelopment Bank of India fi6ed the minimum price to off=load shares of ( 4#? in +arch &%%2.>ut of these ( 4#?, only & 4#? was not sold as no bid had been received. 4#? Aivested in +archMApril, &%%2
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N me o. the e/ter;ri2e Bharat ?lectronics -imited Bharat ?arth +overs -td Bharat *eavy ?lectricals -td *industan 4etroleum ;orp -td +ahanagar 5elephone @igam -td @ational Aluminium ;ompany -td. No. O. 2h re2 2o"d &i/ -rore+ './/& '.&3' ..E%. '.22( (.E%2 '.''/ F o. tot " /umber o. 2h re2 o. the PSE 2.&2 2.'( &&.(2 (.'' &..,. '.'2 Amou/t o. 2 "e &R2 i/ -rore+ 2(.&( 2,..( /'&./2 3E/.&& &/...&( '.'%E
Tot " ((.5(@ 44*4.(7? #ourceI Aetails of total number of shares sold and amount realised as per 4ublic ?nterprises #urvey, &%%3=%E, ">-=I 4ercentage of e<uity disinvested worked out by author based on paid=up e<uity.
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SECOND TRANC1E O, DISINVESTMENT &OCTOBER (''6+A
@otice inviting tenders was issued in >ctober &%%2 for sale of shares in seven 4#?7s. #hares were not sold for +5@- as there was no bid. @on= esident Indians $@ Is) and >verseas ;orporate Bodies $>;Bs) were permitted to bid for the shares for the first time. 4#? Aivested in >ctober, &%%2
No o. 2h re2 2o"d &i/ -rore+ &..%% &.22/ '.''( '.E,E './(. './,( F o. tot " /o o. 2h re2 o. the PSE .'.'' /.(( '.'& ..'' '.2& &./( Amou/t o. 2 "e &i/ -rore+ %%.(& &'.,.&& '.., &'3&.3. ...EE .,.',
N me o. the E/ter;ri2e ;ontainer ;orporation of India Indian >il ;orporation @ational Gertilizers -td. >il and @atural !as ;o -td #teel Authority of India #hipping ;orporation of India -td.
Tot " 6.('6 445).5? #ourceI Aetails of total number of shares sold and amount realised as per 4ublic ?nterprise #urvey, &%%3=%E, ">-=I. 4ercentage of e<uity disinvested worked out by author based on paid up e<uity.
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T1IRD TRANC1E O, DISINVESTMENT &JANUARB (''7+A

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In 0anuary &%%3 shares of E 4#?s were offered for sale. >ut of 33E bids received, .'% were accepted in respect to 3 companies and government decided not to sell shares in "#@-. 4#? Aivested in 0anuary, &%%3
N me o. the e/ter;ri2e ?ngineers India -td !as Authority of India -td I5A; Indian >il ;orporation -imited 1udremukh Iron >re ;ompany -td Tot " No o. 2h re2 2o"d &i/ -rore+ '.&', ..,3/ '.E(3 '.'', '.E&E 6.4?) F o. Tot " /o o. 2h re2 o. the PSE 3.%% /./( &'.'' '.'/ '.%( Amou/t o. 2 "e &i/ R2 -rore+ E(.3.E &%2.&.' 3&.%,3 3.3/, &&./%% 55).7?*
#ourceI Aetails of number of shares sold and amount realised as per 4ublic ?nterprises #urvey, &%%3= %E, ">-=I. 4ercentage disinvested worked out by author on the basis of paid=up e<uity.
Mo/th +archMApril &%%2 >ctober &%%2 0anuary &%%3 Tot "
No o. PSE2 Di2i/$e2ted E E 3 (@
No o. 2h re2 2o"d &i/ -rore+ &&./&( 2.&%2 2..E' ('.@@(
Amou/t re "i2ed &i/ -rore+ ..,..&3E ../'./E' //'.3E, 6*65.)*6
DISINVESTMENT IN (''7 = (''?A

Against the target of s (''' crore, the government decided to disinvest from only 2 4#?s D +5@-, #AI-, ;>@;> and >@!; in >ctober &%%3. Aetails areI 4#? Aivested in >ctober, &%%3
N me o. the e/ter;ri2e No o. 2h re2 2o"d &I/ -rore+ Amou/t re "i2ed &i/ -rore+ %a'e )+
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+ahanagar 5elephone @igam -td $+5@-) #teel Authority of India -td $#AI-) ;ontainer ;orp of India -td $;>@;> ) >il & @atural !as ;orporation -td $>@!;) Tot " @oteI All these 4#?s were partially disinvested earlier also. #ourceI 4ublic ?nterprises #urvey, &%%3=%E, ">-=I. '.,( '.22 '..' '.'. (.75 &/3.%' &/./' &2.&. 3.&E (?*.6*
In addition, shares of Industrial Aevelopment Bank of India $IABI) were disinvested during the year and an amount of s &%/ crore was realised. Although 4ublic ?nterprises #urvey does not reflect this amount but +inistry of Ginance takes this into account. #o the total disinvestment receipts for the year was s /E. crore $ s. &E,.2, crore from disinvestment in 2 4#?s plus s &%/ crore from disinvestment in IABI).
P1ASE II &(''?>'@ TO (''@>'*+A

DISINVESTMENT COMMISSIONA
5he government constituted 4ublic #ector Aisinvestment ;ommission under !. ". amakrishna on ./ August, &%%E for a period of / years with the objective of preparing an over=all long term disinvestment programme for public sector undertakings. 5he main terms of reference wereI A comprehensive overall long=term disinvestment programme $e6tent of disinvestment, mode of disinvestment etc.) within 3=&' years for the 4#Cs referred to it by the ;ore !roup.
5o select the financial advisors for specified 4#Cs to facilitate the disinvestment process. 5o monitor the progress of disinvestment process and take necessary measures and report periodically to the !overnment. 5he 9core: group industries=telecommunications, power, petroleum etc that are capital=intensive and where the market structure could be an oligopoly.
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By Aecember &%%(, the commission had given si6 reports which included recommendations in /2 enterprises. 5he commission also showed concern about slow progress in implementation of its recommendations and it was particularly critical of government7s going ahead with strategic sales leading to joint ventures in some 4#?s not referred to the commission. *owever its power was a6ed later by the government. >ut of (. companies referred to it the commission gave its recommendations on 3, 4#?s and finally the commission lapsed on /' @ovember, &%%%.
REVIEC O, T1E RECOMMENDATION #IVEN BB T1E DISINVESTMENT COMMISSIONA

5he disinvestment ;ommission did not follow an ideological approach. It e6amined each 4#? and classified it as strategic and non=strategic. #trategic units are those engaged in defence and security related production. In such companies the government holding could be maintained at &''O. 5he non=strategic were classified as core or non=core. 5he classification of 4#? into core and non=core was made by taking into account the structure of the industry, the competitiveness of the market in which it operates its market share and the public purpose served by it. 5he commission opined that the core group is one which is capital intensive and there is tendency towards oligopolistic market structure. ?6amples were telecom, power generation and transmission, petroleum e6ploration and refining industries. 5he commission recommended disinvestment up to 2%O in core area. @on=core areas were those in which private investments had grown considerably and markets were fully contestable. 5he commission suggested disinvestment up to (2O in non core areas. ;lassification of ?nterprises as ;ore and @on=;ore by Aisinvestment ;ommission
I/du2try &Core+ 4etroleum #teel +inerals and metals No / & . Pub"i- Se-tor E/ter;ri2e2 >il and @atural !as ;orporation -td $>@!;) >il India -td $>I-) !as Authority of India -td $!AI-) #teel Authority of India -td $#AI-) @ational Aluminium ;ompany -td $@A-;>) @ational +ineral Aevelopment ;orp $@+A;) %a'e )-
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5ransport services Ind. Aev. And 5ech. ;onsultancy services ;oal and -ignite 4ower 5elecommunication 5otal . . & . & &2 Air India $AI) ;ontainer ;orporation of India -td $;>@;> ) ail India 5echnical and ?conomic #ervices -td. $ I5?#) 4ower !rid ;orp of India -td $4>W? ! IA) @eyveli -ignite ;orp -td $@-;) @ational 5hermal 4ower ;orp $@54;) @ational *ydro ?lectric 4ower ;orp. $@*4;) +ahanagar 5elephone @igam -td.$+5@-)
I/du2try &No/>Core+ 4etroleum #teel
No . .
Pub"i- Ser$i-e E/ter;ri2e2 Bongaigaon efineries and 4etro ;hemicals -td $B 4-) IB4 -td #ponge Irol India $#II-) ashtriya Ispat @igam -td $ I@-) *industan Jinc -td $*J-) *industan ;opper -td $*;-) Bharat Aluminium ;o $BA-;>) 1udremukh Iron >re ;o -td $1I>;-) +anganese >re India -td $+>I-) 4awan *ans *elicopters -td $4*-) #hipping ;orporation of India $#;I) ?ngineers India -td $?I-) ?ngineering 4rojects $I) -td $?4I-) +etallurgical and ?ngg ;onsultants $India) -td. $+?;>@) Indian 4etrochemicals ;orp -td $I4;-) *industan Insecticides $*I-) *industan >rganic ;hemicals -td $*>;-) Gertilizers and ;hemicals $5ravancore) -td $GA;5) @ational Gertilizers -td $@G-) +adras Gertilizers -td $+G-) 4yrites, 4hosphates and ;hemicals -td $44;-) ashtriya ;hemicals and Gertilizers -td $ ;G-) 4aradeep 4hosphates -td $44-)
+ineral and +etals
5ransportation services
Ind Aev and 5ech consultancy services
;hemicals and pharmaceuticals
Gertilizer
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+edium and -ight ?ngineering *eavy ?ngineering / & *industan 5eleprinters $*5-) Indian 5elephone Industries $I5I) ;entral ?lectronics -td. $;?-) Bharat *eavy ?lectronics -td $B*?-) Indian 5ourism Avp ;orp $I5A;) *otel ;orp of India -td $*;I-) anchi Ashok, Ctkal Ashok *industan -ate6 -td $*--) +odern Good Industries -td $+GI-) *industan "egetable >ils -td $*">;) @orth ?astern 4apers $@?4A -td) ehabilitation Industries ;orp -td $ I;-) ?lectronic 5rade and 5echnology Aevp ;orp $?5&5) #tate 5rading ;orp $#5;) +inerals and +etals 5rading ;orp $++5;) 4rojects and ?<uipments ;orp $4?;) +etal #crap 5rading ;orp $+#5;) *industan 4refab -td $*4-) *industan #teel Works ;onstruction $*#;-) +ineral ?6ploration ;orp -td $+?;-)
5ourist #ervices
;onsumer goods
5rading and +arketing #ervices
;ontract and construction services
5otal $@on=;ore) 22 !rand 5otal 3, #ourceI Aisinvestment ;ommission eports
Aisinvestment +odalities ecommended by the Aisinvestment ;ommission Mod "itie2 o. Di2i/$e2tme/t No o. PSE2 N me o. PSE2
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Involving change in ownershipMmanagement #trategic sale /& *5-, I5I, BA-;>, B 4-, 1I>;-, +G-, ?I-, *4-, IB4, @?4A, *J-, 44;-, @G-, GA;5, I4;-, *;-, #;>, *--, AI, *#;-, #5;, ++5;, 44-, +?;>@, B*?-, *industan Insecticides, *>;-, ;G-, I@-, @-;, +>I-
I5A;, +GI-, *;I-, =Ashok C=Ashok, 4*-, #II-, +#5; 5rade sale ,
Involving no change in ownershipMmanagement >ffer of shares E , 2 & 7* !AI-, ;>@;> , +5@-, @A-;>, @+A;, I5?# >I-, >@!;, @54;, @*4;, 4>W? ! IA, #AI-, ;?-, +?;?4I-, ?5&5, *">;, I;4?;
@o change disinvestment deferred ;losureMsale of assets +anagement employee buyoutMstrategic saleMclosure Tot "
#ourceI Aisinvestment ;ommission eports $& to &/)
DISINVESTMENT IN (''?>'@
In &%%E=%( a target of s. 3''' crore was fi6ed for mobilization of resources through disinvestment of 4#? shares. In order to do this, companies from petroleum and communication sectors were chosen namely I>; and "#@-. But due to unfavourable market conditions the !A of only "#@- could be issued. In the !A , /% lakh shares of "#@were disinvested resulting in an amount of s /,' crore.
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DISINVESTMENT IN (''@>'*
5he budget for &%%(=%, had taken a credit for an amount of s 2,'' crore to be realised from disinvestment of government held e<uity in 4#?s. 5his was supposed to be achieved by the disinvestment of +5@-, !AI-, ;>@;> and I>;.. A !A of 2' million shares held by the government in +5@- was offered in international market in @ovember, &%%(. A total of s. %'. crore was collected but due to highly unfavourable market conditions the !A issue of !AI-, ;>@;> , and I>; was deferred.
P1ASE III &(''*>'' TO 4))@>4))*+

5his phase marked a paradigm shift in the disinvestment process. Girst in the &%%, D %% budgets B04 government decided to bring down the government shareholding in the 4#?s to .E Oto facilitate ownership changes which were recommended by Aisinvestment ;ommission. In &%%% D .''' government state that its policy would be to strengthen strategic 4#?s privatise non=strategic 4#?s through disinvestment and for the first time the term Lprivatisation7 were used instead of disinvestment. 5he government later formed the Aepartment of Aisinvestment on &' Aecember &%%%. 5he following criteria were observed for prioritisation for disinvestmentI Where disinvestments in 4#?s would lead to large revenues to the government Where disinvestment can be implemented with minimum impediments and in relatively shorter time spanK and Where continued bleeding of government resources can be stopped earlier.
DIVESTMENT IN (''* = ''A

5he government decided to disinvest through offer of shares in !AI-, "#@-, ;>@;> , I>; and >@!;. 5he budget for &%%, D %% had taken a credit for s 3,''' crore to be realised through disinvestment. 5he details of the various transactions areI 4#?s Aisinvested in &%%, = %%
N me o. the E/ter;ri2e Mode o. Di2i/$e2tme/t No o. 2h re2 2o"d &i/ -rore+ Re-ei;t2 &i/ -rore+
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;>@;> Aomestic issue '.%''' /.'E&' !AI AivestedMsold to institutional investors ;ross holding by >@!; ;ross holding by I>; ..&.E3 &,&.(,
2.',2' 2.',2'
.23.'2 .23.'2 &.',.%E .'/2.%E 23'.'' (,/.E, 75@(.((
I>; >@!; "#@Tot "
;ross holding by >@!; ;ross holding by I>; ;ross holding by !AI!A issue
/.&.(. &..3/2% ..((&% &.'''' 5(.7?5)
@oteI All these 4#?s were partially disinvested earlier also #ourceI 4ublic ?nterprises #urvey, &%%, D %%, ">-=I gives total amount realised as s 3,/(& crore. ?nterprise=wise details are obtained from +inistry of Aisinvestment
DISINVESTMENT IN (''' >4)))A

5he budget for &%%% D .''' had taken a credit for s &',''' crore to be realised through
disinvestment. 5he government disinvested from +odern Goods India -td and did a strategic sale to their strategic partner D *-- for s &'3, 23 crore for a (2 O e<uity stake. 5his was the first time government had sold more than 3' O holding. Gurther government adopted the following ways to raise money through disinvestmentI Aisinvestment in &%%% =.'''
N me o. the e/ter;ri2e !AII>; Mode o. di2i/$e2tme/t No o. 2h re2 2o"d &i/ -rore+ !A issue ;ross holding by >@!; &/.3''' '.2.&. Re-ei;t2 &i/ -rore+ %23.'' &E..(%
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>@!; "#@+odern Good Industries -td Tot " ;ross holding by I>; ;ross holding by !AIAomestic +arket #trategic sale of (2 O e<uity &.&(&, '.E32, '.&''' '.'%.' (7.'5'* &%'.&% &'E..% (3.'' %2.3& (7@5.@*
@oteI >ther than +GI-, all other enterprises were partially disinvested earlier also. #ourceI ?nterprise D wise details obtained from +inistry of Aisinvestment.
DISINVESTMENT IN 4))) >4))(A

Against a target of &',''' crore, the government realised s &,E,.(/ crore. 5he details areI Aisinvestment in .''' D .''&
N me o. the e/ter;ri2e BA-;> B 4- and ;hennai efineries 1ochi efinery Tot " Mode o. Di2i/$e2tme/t #trategic sale of 3&O 5aken over by I>; 5aken over by B4;Re-ei;t2 &i/ -rore+ 33&.3' E3,.&/ E3%.&' (*?*.@5
@oteI >ther than BA-;>, all other enterprises were partially disinvested earlier also. #ourceI +inistry of Aisinvestment
DISINVESTMENT IN 4))( = 4))4A

Against a target of &.,''' crore, the government realised s /&/'.%2 crore during the year. 5he highlight of this disinvestment was that strategic sales were affected in ;+;, *5-, IB4, "#@- and 44-. 5he details areI Aisinvestment in .''& D .''.
N me o. the E/ter;ri2e ;+; *5FM !" #$ Mode o. Di2i/$e2tme/t #trategic sale of 3& O #trategic sale of (2 O ROU%&IV Re-ei;t2 &i/ -rore+ &3..'' 33.'' %a'e *)
IB4 "#@44I5A; Tot "
#trategic sale of //.3, O #trategic sale of .3 O #trategic sale of (2 O #ale of , hotels and long term lease of one hotel
&&3/.E, &2/%.'' &3&.(' &(%.3E 5(5).'6
@oteI >ut of these si6 4#?s, three D ;+;, "#@- and I5A; were partially disinvested earlier also. #ourceI +inistry of Aisinvestment website
DISINVESTMENT IN 4))4 = 4))5A

5arget of the government for disinvestment in the year was s &.,''' crore. 5he major
highlight was the two=stage sell off in +aruti Cdyog -td with a s 2'' crore right issue at a price of s /.,' per share of s &'' each in which the government renounced whole of its rights share $E,'E,3,3) to #uzuki, for a control premium of s &''' crore. elative share holding of #uzuki and government after completion of the rights issue was 32..' O and 23.32 O respectively. 5he second stage government offloaded its holding in two tranches D first where government sold .(.3 O of its e<uity through I4> in 0une .''/. 5he issue was oversubscribed by over &' times. -ater keeping in view the overwhelming response from sale of +aruti, government sold its remaining shares in the privatised companies of "#@-, ;+;, I4;-, BA-;> and IB4 to public through I4>7s. #trategic sale of I4;- was also finalised in +ay .''.. 5he decision to disinvest I4;- was although taken in Aecember &%%,, it took three and half years to finalise the deal. sale in I4;-. 5he details of the disinvestment during .''. D .''/ areI
Aisinvestment in .''. D .''/ N me o. the E/ter;ri2e Mode o. Di2i/$e2tme/t #trategic sale of .E O &.2E O e<uity disinvested in favour of employees Re-ei;t2 &i/ -rore+ 223.'' E.&, &'''.'' %a'e **
eliance
4etro industries -td $ eliance group) was finally inducted as a strategic partner with a .E O
*J+aruti Cdyog -td FM !" #$ ROU%&IV
;ontrol premium for sell off to #uzuki
I4;I5A; +GI;+; Tot "
#trategic sale of .E O #ale of &' properties esidual sale of .E O e<uity E.'E O e<uity disinvested in favour of employees
&2%&.'' .(..,& 22.', E.'( 54?7.(@
@oteI >ther than +aruti Cdyog -td, other 4#?s were partially disinvested earlier. #ourceI +inistry of Aisinvestment reply to -ok #abha. Cnstarred <uestion no. &/3& answered on .E Geb .''/.
Grom a summary of the Aisinvestment from &%%&=%. to .''.=.''/ we can know what targets were set by the government and how much was realised. Also the various companies from which the government has disinvested are mentioned.
DISINVESTMENT ,ROM 4))5 = 4))6 TO 4))@ > )*A

5he government had fi6ed a high target for the year .''/ D '2 as &2,3'' crore. 5he strategic sale of 0;-, and offer sales of many 4#?s like +C-, IB4, I4;-, ;+;, A;I, !AI- and >@!; has e6ceeded the target fi6ed by the government to a total receipt of crore. >ut of this ;4#?s. In .''2 D '3 the target was reduced to s &3,32(.2& s &.,(2&.E. crore receipts through sale of minority shareholding in s 2,''' crore and share sales of @54;, s .,(E2.,(
>@!; spillovers and I4;- shares to employees pushed the total receipts to
crore. In the other / years of this phase D from .''3 D 'E till .''( D .'', the government fi6ed no targets and the total receipts were very less to with the year .''E D '( yielding no receipts at all.
NATIONAL INVESTMENT ,UND

>n .(th 0anuary .''3, the !overnment had decided to constitute a 9@ational Investment Gund: $@IG) into which the realisation from sale of minority shareholding of the !overnment in profitable ;4#?s would be channelised. 5he Gund would be maintained outside the ;onsolidated Gund of India. 5he income from the Gund would be used for the following broad investment objectivesI =
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$a) Investment in social sector projects which promote education, health care and employmentK $b) ;apital investment in selected profitable and revivable 4ublic #ector ?nterprises that
yield ade<uate returns in order to enlarge their capital base to finance e6pansionM diversification.
SALIENT ,EATURES O, NI,A

$i) 5he proceeds from disinvestment of ;entral 4ublic #ector ?nterprises will be channelised into the @ational Investment Gund which is to be maintained outside the ;onsolidated Gund of India. $ii) 5he corpus of the @ational Investment Gund will be of a permanent nature. $iii) 5he Gund will be professionally managed to provide sustainable returns to the !overnment, without depleting the corpus. #elected 4ublic #ector +utual Gunds will be entrusted with the management of the corpus of the Gund. $iv) (3 per cent of the annual income of the Gund will be used to finance selected social sector schemes, which promote education, health and employment. 5he residual .3 per cent of the annual income of the Gund will be used to meet the capital investment re<uirements of profitable and revivable ;4#?s that yield ade<uate returns, in order to enlarge their capital base to finance e6pansionMdiversification.
,UND MANA#ERS O, NI,A

5he following 4ublic #ector +utual Gunds have been appointed initially as Gund +anagers to manage the funds of @IG under the Ldiscretionary mode7 of the 4ortfolio +anagement #cheme which is governed by #?BI guidelines. i)
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ii) #BI Gunds +anagement ;ompany $4vt.) -td.
iii) 0eevan Bima #ahayog, Asset +anagement ;ompany -td.
CORPUS O, NI,A
5he corpus of the Gund is 4ower !rid ;orporation and s.&,&2.23 crore being the proceeds from the disinvestment in ural ?lectrification ;orporation. 5he pay out on @IG was s..'%..2
s.,2.,& crores in the first year. 5he payout received in the second year was &'.'.O. 5hus, the average income was %..23O against the hurdle rate of %..3O.
crores. Average income of first year was ,.2(O. Average income of second year was
RESTRUCTURIN# O, NI,A
In view of the deceleration of !A4 growth due to global economic downturn coupled with unprecedented drought this summer, we are facing a reduced budgetary resource generation possibility. 5o ensure that this does not negatively impact the growth of economyK !overnment has approved $on 3th @ovember, .''%) one=time e6emption permitting full utilization of disinvestment proceeds deposited in the @ational Investment Gund, over this and the ne6t two Ginancial Fears, in meeting the capital e6penditure re<uirements of selected social sector programmes decided by the 4lanning ;ommissionMAepartment of ?6penditure. 5he status quo ante will be restored from April .'&..
P1ASE IV &Curre/t S-e/ rio+

T1E LINE>UP ,OR DISINVESTMENT
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It i2 Guite -"e r th t the #o$er/me/t doe2 h $e di$e2tme/t o. it2 2t 3e2 i/ PSU2 hi0h o/ it2 0e/d .or the /e r .uture. Chi-h -om; /ie2 re "i3e"y - /did te2H 1ereI2 "i/e>u;A
5he I4>s that may flag off the divestment process may well be @*4;, I5?# and >il India, which have already filed their respective draft prospectuses with #?BI over the past two years. N1PCA @*4; is the country7s largest hydro power generator, engaged in planning, development and implementation of hydro=electric projects. Based on the offer document, the government stake will come down to ,E./ per cent post=issue. 5he earnings per share $?4#) for the GF'% is s &.'&.
RITESA
I5?#, under the +inistry of
ailways, provides transport infrastructure
consultancy, engineering and project management services. 5he 4#C plans a fresh issue, bundled with an offer for sale that may bring down the !overnment7s stake to (. per cent. 5he book valueMshare and ?4# for the year ended GF'( were s &// and s /' respectively.
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OIL I/di A >il India is engaged in the e6ploration, development, production and
transportation of crude oil and natural gas onshore. 5he company comes under +inistry of 4etroleum and @atural !as. 5he ;entre7s stake will fall to ,% per cent post=issue. 5he offer document mentions an ?4# of s (/.E for the last financial year. -ong on the stake sale shortlist, the following 4#Cs are possible candidates which may seek listing through an I4>Moffer for sale route.
Co " I/di is among the largest coal=producing companies in the world and is the only un=
listed navaratna 4#C $e6cept for *A-, which comes under strategic area). ;I- had a turnover of s /,E/& crore in .''(=',. It is e6pected to hit the I4> market in near future. 5elecom major, B#@- and steel maker, I@- $"izag steel), ;ochin #hipyard,
5elecommunications ;onsultants India and +anganese >re are the other likely candidates that may tap the market. 5hese entities have been on the divestment shortlist for <uite a while.
St 3e di"utio/ is also possible in listed 4#Cs with a high proportion of government

holdings. A 3=&' per cent stake sale in these companies will bring huge gains for the government, even without losing the management control. @+A;, B*?-, @54;, #AI-, @eyveli -ignite, ++5;, ;G are likely follow=on offer candidates. At current market prices, a 3 per cent stake sale in @54; would fetch the government around s ,,,E2 crore. In case of @eyveli -ignite, #AI-, B*?-, ++5; and @+A;, the receipts would be around s &,&E, crore, s /,3(' crore, s 3,/.& crore, s E,,'' crore and s ,,%'' crore respectively.
Pub"i- 2e-tor b /32 that have a high proportion of government holdings are ripe for a
dilution of stake, given their capital needs. While the stake dilution in 4#Bs will not help the government in terms of receipts, as fresh issues may be needed to bolster the banks7 capital ade<uacy re<uirements, it will save the government e<uity infusion from time to time.
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Ce/tr " B /3 o. I/di $,' per cent), ;anara Bank $(/ per cent), Indian Bank $,' per
cent) and Bank of +aharashtra $(E per cent) are banks with high government stake. 5he unlisted Cnited Bank of India is also considering an I4> in the near future.
Pro;o2 " u/der im;"eme/t tio/ duri/0 4))'>()

i+NTPC LimitedA>!overnment on &%th >ctober .''%, approved disinvestment of 3O
e<uity of the company out of !overnment shareholding through 4ublic >ffering in the domestic market.
ii+SJVN Limited &S t"u% J " Vidyut Ni0 m Limited+ >!overnment on &%th
>ctober .''% approved disinvestment of &'O e<uity of the company out of !overnment shareholding through 4ublic >ffering in the domestic market.
iii+ Rur " E"e-tri.i- tio/ Cor;or tio/ Limited &REC+ > !overnment on .%th
>ctober .''%, approved disinvestment of 3O e<uity of the company out of !overnment shareholding in conjunction with the issue of fresh e<uity of &3O by the company
i$+ NMDC Limited > !overnment on /rd Aecember .''%,approved disinvestment of

,./,O paid up e<uity of @+A; -td. out of !overnment shareholding through 4ublic offering in domestic market. #ummary of Aisinvestment till &%%. D .'&'
Fear 5arget amount $in crore) &%%& D %. .,3'' Amount realised $in crore) /'/,.'' ?nterprises disinvested S +ethodology
/' $/')
+inority shares sold by auction method in bundles of Lvery good7, Lgood7, and Laverage7 companies. Bundling of shares abandoned. #hares sold separately for each company by auction method. ?<uity of ( companies sold by open auction but proceeds received in &%%2 D %a'e +/
&%%. D %/
..3''
&%&..3&
&E $.)
&%%/ D %2
/.3''
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%3 &%%2 D %3 2,''' 2,2/.', &E $() #ale through auction method, in which @ Is and other persons legally permitted to buy, hold or sell e<uity. ?<uities of 2 companies auctioned and government piggy=backed in the IABI fi6ed price offering for the fifth company. !A $"#@-) in international market. !A $+5@-) in international market !A $"#@-)M Aomestic offerings with the participation of GIIs $;>@;> , !AI-). ;ross purchase by / oil sector companies i.e., !AI-, >@!; & I>;. !A $!AI-) in international market, "#@- domestic issue, cross D holding in I>; and >@!;, and strategic sale of +GI-. BA-;>, 1 - $; -) & + - through strategic saleMac<uisition #trategic sale of ;+;, *5-, IB4, "#@and 44-. #ale of eight hotels and long term lease of one hotel of I5A;. #trategic sale of *J-, I4;-, +aruti Cdyog -td. #ale of &' properties of I5A; and residual e<uity of +GI-. #trategic sale of 0;-, call option of *J-, offer for sale of +C-, IB4, I4;-, ;+;, A;I, !AI-, and >@!;K sale of share of I;I -td. >ffer sale of @54; and spillover of >@!;K sale of shares to I4;employees. #ale of +C- shares to Indian 4ublic #ector financial institutions and banks and employees.
&%%3 D %E
(,'''
/E..''
2 $=)
&%%E D %( &%%( D %, &%%, D %%
3,''' 2,,'' 3,'''
/,'.'' %'..'' 3/(&.&&
& $=) & $=) 3 $=)
&%%% D ''
&','''
&3(/.(,
3 $&)
.''' D '& .''& D '.
&',''' &.,'''
&,E,.(/ /&/'.%2
/ $&) E $/)
.''. D '/
&.,'''
/.E3.&2
3 $&)
.''/ = '2
&2,3''
&3,32(
&'
.''2 = '3
2,'''
.,(E2.,(
.''3 = 'E
@o target fi6ed
&,3E%.E,
&
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.''E = '( .''( = ', @o target fi6ed @o target fi6ed @o target fi6ed @o target fi6ed = .,/EE.%2 = & = #ale of +C- shares to public sector financial institutions, public sector banks, and Indian mutual funds. = s..'&..,3 = @*4; and s...2(.'3 = >I-)
(
.'',='% .''%=.'&' 5otal
= 2,.3%.%' =
--
/(,,'/.2E
$E')
@oteI S?nterprises disinvested for the first time given in brackets. S >ut of s.3/(&.&&, s. 2&,2 crore constitute receipts from cross purchase of shares of >@!;, !AI- and I>;. SS >ut of s.&2(%..(, s.23%..( crore constitutes receipts from cross purchase of shares of >@!;, !AI- and I>;.
;A#? #5CAI?#
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MODERN ,OOD INDUSTRIES &INDIA+ LIMITEDA

+odern Good Industries was incorporated as +odern Bakeries $India) -td. in &%E3. It had .'2. employees as on/& 0anuary, .'''. It went through minor restructuring when its Cjjain plant was closed, the #ilchar project was abandoned and the production of asika drink was curtailed. 5he company was referred to Aisinvestment ;ommission in &%%E. In Gebruary &%%(, the ;ommission recommended &''O sale of the company, treating it in the non=core sector. As per the Aisinvestment ;ommission the major problems at +GI- were under= utilization of the production facilities, large work force, low productivity and limited fle6ibility in decision=making.
PRE = DISINVESTMENT SCENARIOA

+GI-I 4re=Aisinvestment 4erformance
Det i"2 S "e2> Bre d E/er0y .oodJ No/>B 3ery FM !" #$ ROU%&IV (''7>'? %3.' 23.. (''?>'@ &'2.' E.., (''@>'* &'/.3 (,.' (''*>'' ,%.' (&.' ('''>4))) (,.' (&.' %a'e +)

O;er tio/2 Tot " &2'.. &EE., &,&.3 (.E3 &E'.' $(.'') &2%.' $2,.'') Net Pro.itJ"o22 &&.3. &E.23 #ourceI +inistry of Aisinvestment, !overnment of India
Auring &%%3=%E to &%%(=%, +GI- recorded profits as wheat was provided to it at a subsidised rate but once that was withdrawn it started making losses as the increased costs could not be passed on the consumers. Also the high overhead cost of s &.%' per loaf against the industry norm of s.'.%' per loaf added to the problem. In #eptember, &%%( the government approved 3'O disinvestment of +GI- to strategic partner through competitive global bidding. In >ctober &%%,, A@J investment Bank was appointed as the global advisor for assisting in disinvestment. In 0anuary, &%%% the government decided to raise the disinvestment level to (2 O and an advertisement inviting e6pression of interest from perspective strategic partners was issued in April, &%%%.
DISINVESTMENT PROCESSA
In a response to the advertisement &' parties submitted ?6pressions of Interest. >ut of these, 2 conducted the due diligence of the company, which included visits to Aata oom, interaction with the management of the +GI-, and site visits. In >ctober, &%%% post due diligence, . parties remained in the field, and on the last day for submission of the financial bid $&3.&'.%%), the only bid received was that from *industan -ever -imited $*--). Ginally in 0anuary, .''', the !overnment approved the selection of *-- as the strategic partner in and the deal was closed on /&.&..'''.
VALUATION O, M,ILA
5he &''O value of +GI- by different methodologies is give belowI +GI-I "aluation under different +ethods
V "u tio/ Di2-ou/ted C 2h ,"o! Key A22um;tio/ 9As is Where is:& V "ue &i/ R2 -rore+ @egligible
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!rowth in +arket #hare Tr /2 -tio/ Mu"ti;"e B " /-e Sheet A22et V "u tio/ M r3et V "ue o. L /d K Bui"di/02 #ales +ultiple @et Worth -i<uidation Cnrestricted use /..&& (,.33 .,.3& E,.&, &'%.''
#ourceI +inistry of Aisinvestment, !overnment of India
#ales realization for (2O e<uity was s. &'3.23 crore. 5his corresponds to s. &2..3' crore for sale of &''O e<uity. 5he agreement with *-- provided for post=closing adjustments D difference between net working capital as on /&st, +arch, &%%% and net working capital on closing date /&st 0anuary, &%%% and increase in debt amount on closing date /&st, 0anuary, &%%%. Aue to reduced working capital and increase in debt amount, the government paid back s. &'.%2 crore. 5hu the net realisation was s. %2.3& crore for (2O e<uity.
POST>DISINVESTMENT PROCESSA
+GI-I 4ost Aisinvestment 4erformance Aetails Fear #ales =Bread ?nergy Good 5otal @et 4rofit M -oss 4re= Aisinvestment &%%,=&%%% ,% (& &E' $() &%%%=.''' (, (& &2% $2,) 4ost=Aisinvestment .'''=.''& &'. EE &E, $.')
5he decline in the sales of +odern Bread, which continued till the beginning of .''', was arrested. Weekly sales in Aecember .''' were around 22 lakh #-, which is a &''O increase over the figure of April .'''.
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As on /&.&...''', *-- has e6tended secured corporate loans to +GI- to the e6tent of s. &E.3 crore for meeting the re<uirement of funds for working capital and capital e6penditure.*-- has provided a corporate guarantee to +GI-Ts banker, viz., 4unjab @ational Bank, which has helped the ;ompany in getting the interest rate reduced considerably to the e6tent of /=2O of its earlier borrowing cost.
#teps were taken to improve the <uality of bread, its packaging and marketing with trade=promotion activities, and to train the manpower in <uality control systems. In @ovember, .''. wages have increased by an average of /' crore was spent for " #. Again purposes at various manufacturing locations s.&,'' per employee. s. s. ( crore were infused for safety & hygiene
The #o$er/me/t ! 2 "2o e/tit"ed to LPutI it2 2h re o. rem i/i/0 eGuity o. 4? F t , ir M r3et V "ue .or 4 ye r2 .rom 5(2t J /u ry )( to 5)th J /u ry )5. The #o$er/me/t e8er-i2ed thi2 o;tio/ /d thereby re-ei$ed R2. 66.)@ -rore o/ 4*th No$ember )4.
T1E ,AILUREA
Aespite *C-7s best efforts +GI- continued to make losses, *C- had invested &3( crore in +GI-7s e<uity. In .''3, its losses were s &3 crore and accumulated losses were s (% crore. At the operating profit level, before interest and depreciation, it did make a profit though of s .. crore compared to a loss of s ( crore in the previous year. Bread sales grew by about (O. 5he company suffered as it lost some lucrative government contracts and changed its operational structure. *ence overall sales declined by /3O to s %3 crore. *owever, *C- did enjoy ta6 benefits as +GI- was a sick industrial unit. 5he company put +GI- on the block in .''E but failed to clinch a deal *owever, *C- still was unsuccessful in turning around the business and due to high employment costs and low margins. As per the company, the culture of +GI- was a complete misfit with its own. 5he company has committed a mistake while conducting the due diligence process.
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Disinvestment in India: A Failure Story BALCO = DISINVESTMENT STORB

COMPANB PRO,ILEA
Bharat Aluminium ;ompany -imited, set up in &%E3 at 1orba in +adhya 4radesh to manufacture aluminium rods and semi=fabricated products, is today the third largest player in the Indian aluminium industry. BA-;> has its corporate office in @ew Aelhi. Its main plant and facilities are situated in 1orba $;hhattisgarh), which includes bau6ite mines, an alumina refinery, a smelter and a fabrication unit, besides a .(' +W power plant which meets a substantial part of the unitTs power re<uirements. It also has another fabrication unit in Bidhanbagh $West Bengal). 5he refining capacity of BA-;> is ., '',''' tonnes per year and its smelting capacity is &, '',''' tonnes per year. BA-;> also curtails a fully built township of over &3,''' acres where over 2,''' families live.
T1E DISINVESTMENT DECISIONA

5he !overnment of India had &''O stake in BA-;> prior to disinvestment. In &%%(, the Aisinvestment ;ommission classified BA-;> as non=core for the purpose of disinvestment and recommended immediate divestment of 2'O of the !overnment stake to a strategic partner, and reduction of the !overnment stake to .EO within . years through a domestic public offering. It further recommended divestment of the entire remaining stake at an appropriate time thereafter. 5he ;abinet accepted the recommendation of the Aisinvestment ;ommission for divestment of 2'O stake through a strategic sale and further divestment through the capital market. -ater, in &%%,, the Aisinvestment ;ommission revised its recommendation and advised the !overnment to consider 3&O divestment in favour of a strategic buyer along with transfer of management, which was accepted by the ;abinet. 5he !overnment thereupon appointed +Ms
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0ardine Gleming as Advisor to assist in the sale of its 3&O stake in BA-;> to a strategic buyer. 5his was followed by BA-;>Ts e<uity being reduced by 3'O thereby reducing the subscribed share capital to s..22 crore from s.2,, crore. As a result, the !overnment received s. .22 crore from the capital restructuring of BA-;> and another s. /& crore as ta6 on this amount, prior to disinvestment. 5he strategic sale process for BA-;> started in late &%%(, after the first decision of the !overnment, and finally came to end in .nd +arch .''&. 5he 3&O stake was sold to #terlite Industries, the highest bidder, and fetched the !overnment privatization. BA-;>I 4re= Aisinvestment 4erformance
Det i"2 (''@ > '*
s. 33&.3' crore. 5he government thus recovered
s ,.(.3' crore from this
(''* > '' ,('.%' E,.,2 %/%.,' (3,..2 &,&.3E &2'.E2 &/2./2 (E./. ./.''
(''' = 4))) ,%E.E2 ('.', %EE.(. ,'E.., &E'.22 &...'& &&E.&% 33.,% &,.''
S "e2 Other i/-ome Tot " i/-ome &(M4+ Tot " e8;e/diture Pro.it be.ore de;re-i tio/9 i/tere2t K t 8e2 &PBDIT+ Pro.it be.ore i/tere2t K t 8e2 &PBIT+ Pro.it be.ore t 8 &PBT+ Pro.it .ter t 8 &PAT+ Di$ide/d
#ourceI 4ublic ?nterprises #urvey, &%%% D .'''
,2,.3& 2,.&' ,%E.E& (&2.', &,..3/ &2&.3/ &/2.,( (%.,2 .'.''
VALUATION O, 7(F STAKEA

5here were three bidders viz the C#=based Alcoa and Indian market leader *indalco and #terlite. #terlite7s financial bid was the highest among the bidders, according to an official release by the government. 5he company was valued by three different methodsI
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Aiscounted cash flow ;omparative valuation Balance sheet and asset valuation
BA-;>I "aluation under Aifferent +ethods V "u tio/ method Di2-ou/ted - 2h ."o! &DC,+ &-om;uter2 "i3e"y e r/i/02 i/ -omi/0 ye r2+ Com; r b"e2 &"oo32 t ;eer 0rou; -om; /ie2+ B " /-e 2heet method &"oo32 t /et !orth .rom b " /-e 2heet+ A22et $ "u tio/ &re;" -eme/t -o2tJ2 "e $ "ue o. 22et2+ #ourceI +inistry of Aisinvestment, !overnment of India. 3,(.' to %'%.' 3%(.. to E,&.% &'32.% to &'(... V "ue &i/ R2 -rore+ E3&.. to %%2.(
5he valuation was applied by the official valuer 0 4 +organ. 5he reserve price of s 3&2.2' crore was reached by marking up the valuation, arrived at by using the discounted cash flow $A;G) techni<ue, by .3 per cent, used as the control premium.
SCENARIO POST SALEA

4ost sale, a number of doubts have been raised by various <uarters on the disinvestment of BA-;>, especially with regard to 5ransparency "aluation 4rotection of employees7 interests
@o sooner was the BA-;> deal announced than it created a furore within and outside 4arliament. 5he opposition raised eyebrows. 5here was distrust from state government and the workers of BA-;> went on a E( days strike. It seemed as if the #terlite management had to sweat a lot before it actually got the right over the catch it craved for. 5his finally came to an end when the new management stroke a deal with the employees. #everal new steps were undertaken, some of which areI
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5he new management had introduced " # ie "oluntary etirement #cheme from /&.'(.'& to &E.',.'&. %,& applications $&3& e6ecutives and ,/' workers) were received. E%2 old " # applications were pending. A total of %3E applications were accepted mostly where units were lying closed.
In spite of losses of s. .'' crore due to the strike, an e6gratia payment of s. 3''' was made to all employees. -ong=term wage agreement for a period of 3 years was entered intoM Workmen get a guaranteed benefit U .'O of basic pay. An Increase in allowances was also announcedI @ight shift allowanceI s.&' to s..' per shift. ;anteen allowanceI s.2'' p.m. $instead of subsidised canteen facilities) ?ducation allowanceI s. 3' to s. (3 per month *ostel allowanceI s.&3' to s..'' per month #cholarship amount to meritorious children doubled. -eave 5ravel Assistance of around s. E''' as cash every year. ;onveyance allowanceI #cooter users s. 2'' to s. 3'' pm, +oped users s. .2' to s. /3' pm, others users s. &3' to s. .E' pm.
#everal new practices introduced. Gew wereI 0ob rotation Appraisal system
The new management is proposing an investment of Rs. 6000 crore which will increase production 2 times.
T1E REAL PICTUREA

5he disinvestment of 3&O stake in BA-;> by the government of India towards a strategic partner was backed by two justificationsI
Grom a market share of around &( per cent in &%%3=%E in the primary aluminum business, BA-;>7s share had dropped to &2 per cent in &%%,=%%. #everal reasons were mentioned that were responsible for hindering its growth. 5hey wereI -ack of economies of scale
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>ld age technology >verstaffing >perational bottlenecks -ack of managerial autonomy 5hus, a complete review and restructuring was urgent to enable the company to stand a better chance to stake its claim in the globally competitive Indian aluminium industry. Although there were three bidders, #terlite7s financial bid was the highest among the bidders, according to an official release by the government. Intact, government claimed that it was getting a price greater than e6pected. *owever, there are certain facts from the other angle that demand attention. 5he following tries to uncover some of themI #o$er/me/t h d /o moder/i2 tio/ "umi/ium 0i /tA To Guote the Di2i/$e2tme/t Commi22io/A :BALCO 2 h 2 bee/ -"e red PSU h 2 2u..ered .rom /d e8; /2io/ u/der -o/2ider tio/ .or the
;ro-edur " bott"e/e-32 /d " -3 o. m / 0eri " uto/omy. The CRM ;ro%e-t t Korb .ter ei0ht ye r2 !ith /e r>doub"i/0 o. the - ;it " out" y. The re2u"t9 the -om; /y h d to de;e/d o/ hi0h -o2t ;o!er -om; /y ! 2 /ot b"e to 0et -"e r /-e .rom the 0o$er/me/t .or 2etti/0 u; ())F - ;ti$e ;o!er 0e/er tio/. A2 .rom the St te E"e-tri-ity Bo rd !hi-h re2u"ted i/ $oid b"e -o2t i/-re 2e2. The de" y2 /d the " -3 o. uto/omy h $e -ert i/"y ..e-ted it2 o;er ti/0 ;ro.it2 !hi-h !ou"d h $e bee/ mu-h hi0her h d it bee/ b"e to im;"eme/t the2e ;ro%e-t2 e r"ier.: 5hus even the Aisinvestment ;ommissionTs recommendation that the government should resort to a strategic sale of 2' per cent of BA-;> e<uity can be seen as misplaced. What was re<uired instead was a reorganisation aimed at allowing BA-;> the freedom to use its own capacity to mobilise resources to modernise, e6pand its captive power facility and raise its profitability. In practice, as a prelude to the privatisation process, in +arch .''' the subscribed share capital of BA-;> was brought down to s..22 crore from s.2,, crore, by
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appropriating part of the s.2/( crores into the governmentTs account. 5his was a clear indication that modernisation and e6pansion was not even under consideration.
BALCO9
;ro.it m 3i/0 PSU9 ! 2 $ "ued t !h t i2 -o/2idered
thro! ! y ;ri-eA
C 2h ."o!2 determi/ed by u/dermi/i/0 ;ro.it bi"ityA 5his also implies that BA-;>Ts profitability has been undermined by the governmentTs own role in stalling modernization and e6pansion at 1orba. *ence, the then profit performance of the unit cannot be the basis on which the future profile of profits could be estimated. *owever, the tendency for Arun #hourie, the +inister for Aisinvestment, to emphasize repeatedly that profits earned by BA-;> had fallen from s.&E/ crore in &%%E=%( to s..3 crore in .'''='& suggests that this stream of profits has entered into assessments of the future profile of profits that have been discounted to value the worth of the company. 5his amounts to s<ueezing the profits of a public sector unit and then using that to undervalue the firm, consciously or otherwise. BALCOI2 22et2 !ere u/der$ "uedA It is still being argued that a direct valuation of BA-;>7s assets was worth around &' times the value paid by #terlite. In fact, officials from the power sector have argued that the captive power plant alone would cost more than the sum being paid by #terlite. According to reports, a senior official held that if #terlite were to invest in a captive power plant of the kind owned by BA-;>, it could cost s.&, .&3 crore and this figure matters, for the value of the plant at 1orba $set up in &%,,=,%) is still substantial, since a thermal power plant has a lifespan of around /3 years.
BALCO ! 2 2e".>2u..i-ie/t to .u/d it2 ;ro%e-t2A

#ince BA-;> was a profitable and cash=rich public sector corporation with an e6tremely low debt to e<uity ratio, it would have been possible for it to finance its proposed modernisation plan $estimated to cost s.&, ''' crore) without recourse to
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budgetary funds. 5he project was to include the setting up of a cold rolling mill, the e6pansion of captive power generation and modernisation of e6isting facilities. 5his would have allowed the corporation to improve its profitability and increase the dividend it pays to the e6che<uer.
No tr /2; re/-y i/ the de "A

5he valuation procedure that yielded the undeclared reserve price below which the government was not willing to sell has neither been transparent nor undertaken by <ualified valuers capable of valuing the plant and machinery of the company and the bau6ite mines that it has on lease. 5he whole procedure had been gone through in haste. ?ven though the bids had been invited some time back, the valuation of the firm, the setting of the reserve price and the acceptance of #terliteTs bid were all allegedly done within the span of a month. -eaked evidence of undue haste has accumulated and this further puts a <uestion mark over the governmentTs claims of transparency in the e6ecution of the deal.
TO CONCLUDEA
A combination of inappropriate procedure, undue haste and unwarranted secrecy had created a veritable mess. 5his was followed by a roar and strike amongst the company workers. 5here was an opposition from the state government to the e6tent of throwing an offer to buy the ;entre7s 3& O stake at continued till date. As stated by 5he 5imes of India, Aecember .,, .''%, in response to an 5I <uery filed by advocate Arjun *arkauli, the ;entral Information ;ommission $;I;) observed that the tender documents and minutes pertaining to the the ministries concerned. BA-;> marks the first ever disinvestment deal in the history of India and is stained with several <uestion marks and pointing fingers. 5he deal certainly did not occur the way it was meant to, did not bring the profits to the e6tent possible, nor was it intended towards any
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s 3.3. bn. 5he claims on the lack of transparency are being
s 33&.3=crore divestment of Bharat Aluminium
;ompany $BA-;>) in ;hhattisgarh7s 1orba district eight years ago could not be traced by

social cause. ;orruption and lack of accountability still remain the two worms eating away the Indian economy.
POCER SECTOR RE,ORM IN ORISSA

>rissa was the first #tate in the country to embark upon reforms in the power sector. #upported by both the World Bank and AGIA, it went in for the full packageI unbundling, corporatisation, and privatisation. -et us look at the genesis and the process of the reforms and identify the winners and losers and highlight the lessons learnt.
#ENESIS
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>rissa #tate ?lectricity Board $>#?B) was established in &%E& to undertake generation, transmission, and distribution of electricity in the #tate. >ver the years, >#?B7s financial health deteriorated due to various factors. crore. 5he gap between peak demand and supply had reached almost 23 per cent by &%%/=%2. 5hough, the consumer strength increased to more than ten lakh, the overall financial performance deteriorated. 5able=&/.2 below shows the comparative position of >#?B for &%%2=%3.
Retur/ o/ Net ,i8ed A22et2 OSEB KEB CBSEB MSEB TNEB RSEB PSEB =&E.2O =&&.,/ =&..(% 2.(2 ='.', =&E.. =&/./ (O No/ Te-h/i- " Lo22e2 .(O Debtor2 i/ S "e2 Mo/th2 (.E E.& (.' 2.E &.E 2.. &.,/ T ri.. 2 F o. Co2t ,..,O ,(., ,'./ %%.E %(.. (&.E (2 PL, Cu2tomer2 ;er Em;"oyee /, &3/ 3/ %/ %% ,' E'
It survived due to subsidy from the #tate s./E%
!overnmentK in &%%3=%E, the #tate subsidy payable had gone into arrears totaling
/2.%O 3/.& /(., 3E.3 2,./ 3&.2 3..%
#ourceI Annual eports of the respective #?Bs.
Aue to >#?B7s overall pathetic performance, the !overnment of >rissa commenced, in &%%/, an e6tensive reform programme of the electricity sector. 5he reform programme was intended at improving the <uality of electricity supply and stimulates economic growth in the region.
BROAD OBJECTIVES O, T1E RE,ORM PRO#RAMME CERE AS ,OLLOCSA
5o give the power sector autonomy by keeping it away from governmental control.
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5o attract large amounts of private finance into the power sector. 5o introduce competition in the power sector.
TO
AC1IEVE T1E ABOVE OBJECTIVES9 T1E
ORISSA POCER SECTOR RE,ORM PROJECT
CAS DESI#NED TO UNDERTAKE T1E ,OLLOCIN#A
5o establish a separate act $5he >rissa ?lectricity eform Act) 5o un=bundle and corporatize >#?B 5o develop an autonomous power sector regulatory body 5o privatise the generation and distribution businesses
PROCESSA
5he reforms process started with the enactment of 5he >rissa ?lectricity eform Act in &%%3. 5he Act was designed to address the fundamental issues responsible for the poor performance of the power sector in the #tate. 5he new legislation was aimed at restructuring the electricity industry, taking measures conducive to increasing the efficiency of generation, transmission, and distribution of electricity, opening avenues for private participation, and establishing a egulatory ;ommission. 5he Act allowed for transfer of the assets, liabilities, staff, and statutory obligations of the >#?B to successor companies. ;hart=. below gives a pictorial representation of the change in the structure of the industry.
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Gridco >*4; >#?B Wesco >4!; #outhco @esco $Aistr.) ;esco $Aistribution) $Aistr.) Transmission Transmissio n! and Distribution
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!st Sta'e
(nd Sta'e
#ome of the important steps taken after the enactment of the >? Act are as followsI
UNBUNDLIN# AND CORPORATISATIONA

?lectricity business was divided into three separate activitiesI !eneration, 5ransmission, and Aistribution. 5he business of generating of hydel power was transferred to >*4;. 5he thermal power stations were transferred to the e6isting >rissa 4ower !eneration ;orporation $>4!;). 5he transmission and distribution businesses were transferred to !ridco. 5hough, >*4; and !ridco began operation on I April &%%E as government owned entities, corporatisation agreements were signed with the >rissa !overnment. Cnder the agreement, !overnment reiterated its commitment to distance itself from their operation and management and to give them autonomy as commercial organisations. >*4; continues to be !overnment ;ompanyK !ridco, however, took long strides in the direction of full privatisation.
INSTITUTION STREN#T1ENIN# PROJECT &ISP+9 PRIVATISATIONA
T1E
PREPARATORB
STA#E
,OR
5o ensure that privatisation leads to efficiency gains, !ridco had to bring changes in the internal environment variables like management, labour relations, and communication and
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reporting. 5owards this end, !ridco initiated a comprehensive programme known as I#4 to address many of its weaker areas. 5his programme was undertaken by the consultants. 5hree important steps taken under I#4 were as followsI (. INTRODUCTION O, COMMERCIAL ,UNCTION AT T1E ,IELD LEVEL >#?B was managed principally by engineers, and it was standard practice for the engineers to undertake commercial, administration, and other non=engineering jobs. 5he management, thus, had a strong technical bias. >ne of the major organisational changes introduced during the I#4 was therefore to bifurcate the field level activities into ;ommercial and ?ngineering. 5he commercial function comprised of +anagement. evenue +anagement, Accounting, and ;ustomer epairs and 5he engineering function comprised of #ystem >peration,
+aintenance, and other technical activities. ;oupled with the bifurcation, commercial procedures were implemented. 5his small intervention improved the business environment at the division level. 4. INTRODUCTION O, PRO,IT CENTRE ACCOUNTIN# !ridco was divided into ;ost ;entres and 4rofit ;entres. 5ransmission divisions were treated as cost centres and distribution divisions as profit centres. 5o ensure proper control and reporting system, the entire distribution business was divided as shown belowI Ch rt
r id c o T r a n s m W e s t Z o n e N is s io n o r t h C 4 3 S D E D a s t I is t r ib u t io n Z o n eS o u t h C D ir c le Z o n e I I C C D e n t r a l ir c le Z o n e
ir c le
I I I
iv is io n s
iv is io n s
iv is io n s
u b d iv is io n s
?ach distribution division was managed by a divisional manager $?6ecutive ?ngineer) who reported to the circle manager $#uperintending ?ngineer). 5he latter, in turn, reported to the
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Jonal !eneral +anager $;hief ?ngineer), who reported to the Board of Airectors at the corporate office. ?ach divisional manager was re<uired to attend the monthly performance review meeting chaired by the ;+A $;hairman=cum=+anaging=Airector) of !ridco. Auring these meetings, a detailed discussion on billing, distribution losses, collection, and other related matters used to take place and an action plan used to be prepared. 5his was a successful intervention during the pre=privatisation period, which helped in the followingI #tressed the commercial aspect of the utility business, Aeveloped interrelationship between technical and finance e6ecutives, ?nabled the divisional managers to understand the financial implications of the various activities undertaken, Involved the field personnel in various managerial decisions, and ?stablished an authentic database for important business parameters like billing, collection, 5&A loss, etc. through a well=developed +anagement Accounting #ystem. 5. INTRODUCTION O, REVENUE IMPROVEMENT ACTION PRO#RAMME &RIAP+ 5his programme focused on the reduction of non=technical losses and concomitant improvement on the financial position of !ridco. >ne of the major contributions of IA4 was the <uantification of the actual 5&A losses. >n the basis of field studies, the magnitude of non= technical loss and causes of the different types of losses were established. 5he energy lost and energy billed in the year &%%E=%(
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%& #
$" # 1" #
5his finding of high 5&A losses against the reported .. per cent figure in various forums and published sources was an eye opener to both the shareholders and the management. 5he programme established that, though the reduction of technical losses re<uires huge capital
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investment, the non=technical losses can be reduced without any major investment and capital outflows. ?fforts were made to reduce the non=technical losses by managing the revenue= cycle efficiently, by understanding each of the following activities and identifying and addressing problem areas.
'nerg( Deliver(
)eter Reading
*ill
*ill Distribution
,ollection
+reparation
,redit ,ontrol
In the process, even before the privatisation, !ridco improved its performance in the following areasI $&) egularisation of un=authorised connections, $.) Increase in bills based on actual meter reading, $/) Increase in billing as a percentage of input, $2) Increase in collection as a percentage of billing, and $3) Improvement in customer relationship. *owever, IA4 could not be e6tended to all the divisions of !ridco. As a result, the financial and operational performance of most of the divisions could not be improved.
CINNERS AND LOSERS

eform and privatisation changed the way one looked at electricity, from a universally available product to a commercial one. But, the moot <uestion is, 9Who gained and who lost8: ?ntities affected by the reform were the !overnment of >rissa, suppliers of power, investors, consumers, and the electricity sector as a whole. It would be interesting to check how each fared under the restructuring e6ercise.
#OVERNMENT
!overnment is major winner in this reform, which allowed it to reduce its e6posure to this volatile sector at a time when its financial position was precarious. It realized s.&3% crore by divesting 3& per cent of its stake in the distribution companies and around s.E'' crore by divesting its stake in >4!;. It also got s./3E crore by selling 554# $5alcher 5hermal 4ower #tation) to @54;, which was adjusted against erstwhile >#?B7s overdue payments to @54;. But, more important, the !overnment has already saved more than s.&.'' till now by stopping subsidy to the electricity sector.
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SUPPLIERS O, POCER
>ne of the drivers of the reforms was the intention to reduce the financial burden on generators. It was e6pected that, after reforms, !ridco would make timely payments to >4!;, >*4;, and @54;. *owever, it has not happened.
INVESTORS
5able below shows the parties who have ac<uired stakes in the newly formed distribution companies. Ne! I/$e2tor Ce2-o Ce2-o Ne2-o South-o A?# B#?# B#?# B#?# St 3e -Guired 3&O 3&O 3&O 3&O Mo/ey ; id &R2. i/ -rore+ 2..'' ,,.&% .,.,'
#ourceI Based on the !overnment of >rissa !azette.
5he balance=sheets of !ridco $which remained as a transmission company) and the four distribution companies highlight the benefit that has been e6tended to the investors. ;ommon size balance sheet of these companies is as follows.
#rid-o Ce2-o Ce2-o Tot " ,u/d2 C ;it " /d .'O &/ &, Re2er$e2 A--umu" ted Pro.it =.EO ' ' &> .or Lo22+ Lo/0 Term Lo /2 E%O 2,O 3'O Curre/t Li bi"itie2 /(O 2'O //O Tot " A22et2 ,i8ed A22et2 E&O E'O E(O Curre/t A22et2 /%O 2'O //O #ourceI Based on the !overnment of >rissa !azette. Ne2-o &/O ' 3'O /(O E/O /(O South-o &/O ' 3(O /'O ('O /'O
It is interesting to note that the entire loss of transmission and distribution business was retained in the balance=sheet of !ridco, resulting in a negative book net=worth of !ridcoK the distribution companies were not re<uired to share it. +oreover, the capital structure of
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!ridco was also highly leveraged, with long=term loans accounting for E% per cent of the total sources. 5he lop=sided balance sheet created li<uidity problems for !ridco, which, in turn, affected its suppliers. 5he generous balance=sheets doled out to distribution companies and the handing over of three companies to one player shows the !overnment7s obsession with completing the privatisation process rather than reforming the sector.
CONSUMERS
;onsumers can be divided into three broad categories, namely, -5, *5, and ?*5. As the reforms endeavour to reduce the cross=subsidization there is every possibility of the large consumers to benefit from the process. ;onsumers, irrespective of the category, benefit if the tariff reduces and the service improves. But, the tariff has already been revised four times. And, what is more important, the increase in tariff has far surpassed the rate of inflation, as depicted by Gigure=2 below. +oreover, though the overall power available has increased over the years, the <uality of service has not improved to the e6tent it was e6pected. #ince the distribution companies have decided not to make any capital e6penditure, the <uality of the service that was offered by them has been affected. ;onsumers clearly have, so far, borne the brunt of the reforms and privatisation.
1.
#ourceI Based on the !overnment of >rissa !azette.
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VIDES1 SANC1AR NI#AM LTD.

ABOUT VSNL
In &%2(, the >verseas ;ommunication #ervice $>;#) was established in the Aepartment of 5elecommunications $Ao5). "idesh #anchar @igam -td $"#@-) was created from the >;# as a government owned corporate in &%,E. 5he government felt that corporatization would enable it to raise financial resources, an activity that would not have been possible under the government framework. It was envisaged that this would also enable greater freedom to managers to plan, operate, develop and accelerate the international telecommunication services. In the initial years, "#@- offered voice telephone, tele6, telegraph, television, bureaufa6 etc. ?fforts had started to increase India7s connectivity through investments in projects like submarine cables. ;ompared with ..E% billion telephone minutes in .'''=&, in &%,E=( the figure was '.&/ billion minutes. 5able & gives some comparative figures of "#@-7s performance over the years. #ome Aspects of the 4erformance of "#@#r. Item @o. & 5elephone 4aid +inutes $billions) . Internet Access ;ustomers $numbers) / 5otal evenue $ s crore) 2 @et 4rofit $ s crore) 3 Aividends$ s crore) E @etwork ;harges $ s crore) #ourceI "#@- Annual eports &%%.=/ '.E& '.' (2(.E &&..2 .2.' /'(.E &%%E=( &./, .,,'2..' 3,.,3./ 3'2.( .,.' /,E'2.( .'''=& ..E, E/',%('.' (,%E3.' &,((,., (E.' 2,3E..'
VSNL TRA,,IC
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In .''&, the world international telephone traffic was &E( billion minutes V "oice Aata, April &, .''.H. IndiaTs was &.EO of this global traffic. In comparison with "#@-, the two largest I-A carriers in the world, World;om and A5&5 carried &E., and &2./ billion minutes respectively in .'''. When ;ompared with a worldwide average of &23 outgoing international minutes per person, the figure for India works out to &,. ;orresponding figures for developing countries and low income countries are &'' and &33 respectively Vwww.worldbank.orgH. 5able . compares "#@-7s international minutes with that of the world. "#@- during the period averaged a much higher growth rate. International outgoing calls="#@- and World $billion minutes)
Be r &%%2 &%%3 &%%E &%%( &%%, &%%% .''' ;A! &%%2 to .''') VSNL '.(2. '.%2. &.&2( &./,2 &.E,2 &.%/3 ...23 .'./O Cor"d 32.E E&.E (&.( ,..3 %/ &',.% &/..( &3.%O
#ourceI "#@- annual reports 5he ratio of inbound to outbound calls had been 2I& in .''&. >ne important reason for this is the discriminatory pricing by "#@-. Another factor is that India is a much poorer than the typical countries to which it connects $C.#., ?urope and !ulf), so that inbound calls are bound to be more than outbound calls. Gor the year .'''=&, the total revenue for "#@- was stood at s E,2/'.( crore. 5he profit after ta6 s E..2& out of which s
s &,((,., crore. 5his resulted in earnings per share of
3'.'' was declared as the dividend per share. "#@- had no debt. Its 4M? ratio of each "#@share was 2.E,.It is seen that a large part of the costs is the network and transmission charge. +uch of this was charges paid out to the A>5 as traffic costs. In this fi6ed revenue agreement, "#@- paid s .,(/2 crore to A>5 and s &,/,E crore to foreign operators during .'''=& V"#@- Annual eport, .'''=&H.
DISINVESTMENT IN VIDES1 SANC1AR NI#AM LIMITED

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1. !overnment had approved sale of .3O e<uity share holding out of a total government
share holding of 3..%(O in "idesh #anchar @igam -imited $"#@-) on 3.'...''.. 5he total paid=up capital of "#@- is s..,3 crore, the !ovt. holding being s.&3&crore. s.(&..3crore of this e<uity is being sold to +Ms 4anatone $5ata !roup) at a price of s. &2/% crore.. .. !overnment had decided to disinvest in "#@- in 0anuary .''& and the advertisement for inviting ?6pression of Interest was issued in Gebruary .''&. #everal interested parties had submitted their ?6pression of Interest. After the process of due diligence was completed and the transaction documents frozen, financial bids were invited from the bidders on &....''.. 5wo bids were received. /. #BI ;apital +arkets -td. and ;#GB were appointed as the advisors at a fee of '.&%O of the transaction value. +Ms ;rawford Bayley & ;o. is the legal advisor and the asset valuer is 4rice Waterhouse ;oopers -td. After considering the AdvisorTs report, the ?valuation ;ommitteeMI+!M;!A submitted their recommendations regarding acceptance of the higher bid to the ;;A. 2. 5he !overnment has in the process of disinvestment in "#@- received appro6imately s. /E,% crore, s. &2/% crore as the bid price, s. &,,( crore as dividend and s. /E/ crore as dividend ta6 $table attached). 5hus, the !overnment has sold its shares at a price of s. .'. per share, taken additional amount as dividend, special dividend and dividend ta6. Besides the !overnment has also taken measures to take out surplus, yet very valuable land $value s. ((, crore) from "#@-, and also restrict useMsale of land through provisions in transaction documents. 3. 5he market price of "#@- shares as on &....''. was earned s.&3,M=. 5he !overnment had
s.&'.2 crore per year on .3O of its e<uity in the last eight years. 5his year the
!overnment has earned s. /E,% crore from sale of "#@- and if this money is kept in the bank it would earn an interest of /E,.% crore, i.e. the !overnment would gain more than s. /3' crore every year. E. 5he strategic partner has been provided a call option for the 3th year subject to the condition that the !overnment would be retaining at least one share and hence one vote
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position to enforce its affirmative vote on assets. In addition, &.%(O share were given to employees, at concessional rates. After partial disinvestments through sale of shares, "idesh #anchar @igam -imited $"#@-) underwent a strategic sale to the 5ata !roup in April .''.. #ubse<uent to the sale, the government holding became .EO and the 5ata !roupTs 23O. 5he sale was followed by "#@-Ts decision $taken by its new owners the 5ata7s) to invest s &,.'' crore in 5ata 5eleservices -imited $55-), a wholly owned subsidiary of the 5ata group. 5his led to concerns regarding the appropriateness of the decision, since it involved a cash outflow of s &.'' crore to a fledging private company in the telecom sector.
REASONS ,OR DISINVESTMENT

5he +inistry of Aisinvestment cited the non availability of funds for critical areas like education, health and social infrastructure because of fiscal burden in the flow of government funds into 4#Cs, as a strong argument for the disinvestment. 5here was also a need to stem further outflow of resources into unviable, non=strategic 4#Cs. 5he divestment was also e6pected to reduce the unmanageable public debt.
PRIOR TO DIVESTMENTA
When the privatization process of "#@- began in &%%&=., there was no blueprint for the same. In retrospect, there have been three phases. 5he offloading of shares to domestic investorsK 5he offloading of shares in the international marketK #trategic sale. s. &. crore in favour of various
In &%%&=., "#@- disinvested e<uity of the face value of capital of
financial institutions, mutual funds and banks. As of +arch &%%/, out of a paid up e<uity s ,' crore, the !overnment of India $!oI) held ,3O and financial institutions, banks and the public held another &3O. 5he shares were listed in the stock e6changes of +umbai, 1olkata, Aelhi and ;hennai. As of &%%3, the share of the !>I had come down to
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,..'.O. 5his accompanied the transfer of shares from the !>I as a bonus offer. 5he Indian investor7s share holding remained around &E.3O in &%%%=' which came down to %.%(O $including the &.%EO held by employees) as on +arch /&, .''&.
#DR ISSUES
5he !lobal Aepository eceipt $!A ) issue for "#@- was the first of its kind by the !>I . It helped "#@- to raise a substantial surplus that was earmarked for investments for its growth. 5he first !A issue $listed on the -ondon #tock ?6change) was offered in &%%E=%(. It fetched C#R 3.E.E million in the market. At that time, it was the largest !A issue from India. 5he offer was oversubscribed, drawing EE. investors from ., countries. 5he second !A issue was completed in Gebruary &%%%. It involved a divestment of &'
million shares by the government of India to international investors. 4riced at C#R %..3 it was at a &3O premium on the last closing domestic price of s. E,. and a &'O discount to the ten=day average !A price of C#R &'..(3. 5he government realized C#R &,3 million from the sale of .' million !A s with each !A being e<uivalent to half a share. 5he organizational problems in "#@- around the time of the second !A issue could have been one of the factors that led to lower valuations. Auring the process of the second !A issue, the "#@- staff had threatened a walkout owing to the pending issue of allotting shares to employees. Aue to delays in the government processes, "#@- did not have a chief e6ecutive and many other crucial director level posts were vacant. 5he first !A 7s investment promises were not fulfilled and a promised domestic offering had not been made. 5he sanctions against India also created an environment of high perceived country risk, which lowered "#@-Ts valuation.
T1E VALUATION
5he government had fi6ed a reserve price of s &,.&,./(3 crore for its .3O stake in "#@-. In an effort to bolster the "#@- valuation, the !>I intended to compensate the loss of monopoly through special concessions. 5he government owned +5@- and B#@- would have to use "#@- as their I-A carrier for two years on the condition that it would offer the most competitive terms in the market. "#@- would also get a free license to provide @-A,
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and a nationwide I#4 license. In addition, "#@- possessed prime real estate in +umbai and Aelhi and also cable capacities to facilitate international traffic. >ne of the major assets was the cash stockpile of s 3,&,. crore which was considerable even after disbursement of the special dividends. Among the concerns were the loss of monopoly and the uncertainty of the loyalty of B#@- and +5@- to continue to use "#@- for their international traffic, the dipping share prices of "#@- and the falling accounting rates that could lead to lower revenues. >ne of the major issues involved during the valuation process included the management of real estate owned by "#@-. 5he disinvestment process stipulated that at least four "#@surplus properties valued at s ((, crore would not be available and were to be disassociated from "#@- after the disinvestment. ?ven so, real estate value that would accompany "#@was around s &,.'' crore V?conomic 5imes, Gebruary &3 .''.H.
CONCLUSIONA
5he privatisation of "#@- is seen as leading to public e6penditure accountability through a realisation of higher return on the government7s asset formation. It also leads to an appreciation of the remaining shares that are held by the government. 5o the citizen, the process is a step towards the provision of better <uality communication services at the most competitive prices. 4ublic flotation of stock might have led to better values for "#@-Ts stock, had the company been correctly WpreparedT for privatisation. 5hus, disinvestment of "#@- was clouded with controversies and speculations and this fact further indicates the failure of the disinvestment policy adopted in the case of "#@-, and also highlights the wrong reasons for which the disinvestment of "#@- took place and its ultimate failure to match the re<uired e6pectation of such a step. 5his case on "#@- further corroborates to the fact, that the disinvestment policies adopted in India have been a failure so far.
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MARUTI DIVESTITURE IN COMPARISON OT1ER DISINVESTMENTSA
CIT1
In +ay .''., a two=stage sell off began in +aruti Cdyog -td $+C-) with a s 2'' crore $2 billion) rights issue at a price of s /,.,' per share of s &'' each $&.,&%,3&. shares) in which the government renounced whole of its rights share $E,'E,3,3) to #uzuki, for a control premium of s &''' crore. elative share holding of #uzuki and government after completion of the rights issue was 32..' O and 23.32 O respectively. 5he second stage government offloaded its holding in two tranches D first where government sold /E lakh shares out of then e6isting E3.,' lakh shares in +arch .''/. After the public offer, governments share had been down to .3O.
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5hereafter in the second tranche, the government sold off its remaining e<uity by public offer and <uit from +C-. 5he government sold shares at s ./'' per share in the first tranche and at s .''' in the second tranche. In other cases of disinvestment, the strategic partner did not have any control before ac<uiring government e<uity. But in the case of +C-, even before disinvestment, the share of government was 2%.(2 O and that of #uzuki was 3'O. 5his was due to #uzuki being technology suppliers. 5herefore at the time of disinvestment the government had a minority holding vis=a=vis #uzuki. In an agreement it was decided that only after #uzuki7s approval could government sell its share to third party. #o the disinvestment in +aruti started with certain constraints. In &%,. and &%%. #uzuki7s shareholding was allowed to be increased from .E percent to 2' percent and then 3' percent respectively. Gor this no control premium was paid by #uzuki when the control passed to them. -ater after hard negotiation a control premium was agreed upon to be s &''' crore. It started with an initial offer of s &(' crore by #uzuki. #imilarly #uzuki was not willing to incorporate any underwriting of the public issue by government. #ince +aruti Cdyog -td was not a listed company, the government agreed to determine the fair value of +C- shares through valuation by three independent valuers and then take the average D 14+!, ?rnst & Foung, and #. B. Billimoria were appointed as valuers. 5he recommended value per share was s /,.'' by 14+!, s /&2..&, by ?rnst & Foung, and s /3'' by #. B. Billimoria. 5hus average came out to be s /.,'. 5he fair value of governments stake comes down to s .&3, crore but the book value $&''' crore s .2.2 crore. #o for the
control premium and &2.2 additional tranche undertaking) was a value more than .2.2 crore than the initial .&3, crore.
government to get ma6imum receipt it should sell to public in such a manner that they can get
5he significant aspect of the +aruti divestiture plan is the prima facie decision of the government to e6it from +aruti completely by +arch .''2. >ther than hotel properties, +aruti was the first enterprise where government had completely e6ited.
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5he issue was oversubscribed by over &' times. -ater keeping in view the overwhelming response from sale of +aruti, government sold its remaining shares in the privatised companies of "#@-, ;+;, I4;-, BA-;> and IB4 to public through I4>7s.
LA#AN JUTE MAC1INERB COMPANB LIMITED &LJMC+

-agan 0ute +achinery ;ompany -imited $-0+;) was run by a private company $0ames +ackie & ;o) from &%33 till it was nationalised in &%(,. In &%,E it became a wholly owned subsidiary of Bharat Bhari Cdyog @igam -td $BBC@-), a centra 4#?. 5he manufacturing
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works of the company are situated near 1olkata. It is engaged in the manufacture and marketing of jute spinning and drawing frames and alswo spare parts for the same. 5he authorised and paid=up capital as on /& +arch .''' were s 2.'' crore $3' million) and s &.'3 crore $&'.3 million) respectively. 5he number of employees as on /& +arch .''' was /%E.
PRE DISINVESTMENT SCENARIOA

Initially -0+; made marginal profits, but from &%%E D %(, it started making losses. 5here was mounting arrears of salaries and high level of inventory. -0+; re<uired investment to modernise and renovate the plant and machinery as most of the machines were installed before &%E'. 5he operational and financial performance of -0+; prior to disinvestment is I
-0+;I 4re D Aisinvestment 4erformance
Det i"2
(''@ > '*
(''* = ''
(''' > 4)))
4))) = 4))( &Ar; = Ju/e 4)))+
M -hi/ery 2o"d &/o2+ E8;ort2 o. 2; re2 &i/ R2 -rore+ #ro22 tur/o$er &R2 i/ -rore+ Lo22 & i/ R2 -rore+
3, '.&&
3% '.&(
3& '..(
2 '.'3
3.(( =&.'2
E.2( ='.(2
E./. ='.2.
'.E' =&.''
5he government decided in 0uly &%%( to disinvest (2 O of the e<uity of -0+;. +Ms A. G. Gerguson & ;o were appointed in +ay &%%, as advisors to e6ecute the transaction. Accordingly, the advertisements inviting ?>5s were issued in 0anuary &%%% and financial bids were invited in +ay &%%%. 5he cabinet approval the disinvestment in Aecember &%%% and e6ecution of the transaction documents and receipt of final payment was effected in +ay
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.'''. 5hereafter sharesMmanagement control was transferred to the strategic partner +Ms +urlidhar atanlal ?6ports -td. in 0une .'''. 5he disinvestment of (2 O e<uity stake was effected through sale of E//' e<uity shares $face value s &''' per share) at the rate of s 2''' per share by BBC@- for s .3/ lakhs. Also fresh issue of 3E,' e<uity shares $face value s &''' per share) at the rate of s .E2' per share was made by -0+; for s &3' lakhs. As per the deal, the strategic partner was to provide -0+; interest free loan of s /3./E lakhs to repay the dues to BBC@- in eight <uarterly instalments. It was provided in the agreement that all employees of the company on the date of disinvestment would continue in the employment of the company after disinvestment.
POST DISINVESTMENT SCENARIOA

5he strategic partner has retained the same senior management team and there has been no retrenchment of workers. 5he performance of -0+; post privatisation $0uly D #eptember .'''), as compared to pre privatisation period $April D 0une .''') isI
-0+;I 4ost D Aisinvestment 4erformance Det i"2 Pre = Di2i/$e2tme/t (''' = 4))) M -hi/e 2o"d &/o2+ E8;ort2 o. 2; re2 #ro22 tur/o$er Pro.itJLo22 Order2 boo3ed 3& '..( E./. ='.2. /.&( A;r = Ju/e 4))) 2 '.'3 '.E' =&.'' &..' Po2t = Di2i/$e2tme/t 4))) = 4))( 32 '.2, E.E/ '.2, /.,(
#ourceI +inistry of Aisinvestment, !overnment of India.
5here was no retrenchment of employees but there was reduction due to resignationMnatural separation. *owever, change in employee service condition was made by rolling back retirement age from E' to 3, years.
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;ritical Analysis
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REVIEC O, DISINVESTMENT AND PRIVATIDATION

Aisinvestment was initiated by selling undisclosed bundles of e<uity shares of selected central 4#?s to public investment institutions $like the C5I), which were free to dispose of these shares in the booming secondary stock market. 5he process however came to an abrupt halt when the market collapsed in the aftermath of *arshad +ehta led scam, as the asking prices plummeted below the reserve prices. #ince the stock market remained subdued for much of the &%%'s, the disinvestment targets remained largely unmet. 5he change of government at the ;entre in &%%E led to some rethinking about the policy, but not a reversal. A Aisinvestment ;ommission was constituted to advise the government on whether to disinvest in a particular enterprise, its modalities and the utilization of the proceeds. 5he commission, among other things, recommended $Aisinvestment ;ommission, &%%()I X estructuring and reorganization of 4#?s before disinvestment, X #trengthening of the well=functioning enterprises, and X 5o utilize the disinvestment proceeds to create a fund for restructuring of 4#?s. 5he new government that came to power in &%%, preferred to sell large chunks of e<uity in selected enterprises to 9strategic: partners D a euphemism for transfer of managerial control to private enterprises. A separate ministry was created to speed up the process, as it was widely believed that the operating ministries are often reluctant to part with 4#?s for disinvestments as it means "o22 o. ;o!er .or the -o/-er/ed mi/i2ter2 /d -i$i" 2er$ /t2. 5he sales were organized through auctions or by inviting bids, bypassing the stock market $which continued to be sluggish), justified on the grounds of better price realization. @otwithstanding the serious discussion on the utilization of disinvestment proceeds, they continued to be used o/"y to brid0e the .i2- " de.i-it.
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#trategic sale in many countries have been -o/tro$er2i " as it is said to 0i$e ri2e to "ot o. -orru;tio/9 di2-rediti/0 the ;o"i-y ;ro-e22. Aware of such pitfalls, efforts were made to be transparent in all the stages of the processI selection of consultants to advice on the sale, invitation of bids, opening of tenders and so on. Between &%%% and .''/, much greater <uantum of public assets were sold in this manner, compared to the earlier process, though the realized amounts were consistently less than the targets D e6cept in .''/.
@onetheless, there are series of allegations of corruption and malpractice in many of these deals that have been widely discussed in the press and the parliament. Instances of under pricing of assets, favouring preferred buyers, non=compliance of agreement with respect to employment and retrenchment, and many incomplete contracts with respect to sale of land, and assets have been widely reported. 5hus, during the last &/ years s. .%,3.' crore were realized by sale of e<uity in selected central government 4#?s, $in some cases) relin<uishing managerial control as well.
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5his formed less than one per cent of central government7s cumulative fiscal deficit in this period.
PER,ORMANCE O, PSES A,TER DISINVESTMENT K PRIVATIDATIONA

In principle, disinvestment is unlikely to affect economic performance since the state continues to be the dominant shareholder, whose conduct is unlikely to be influenced by share prices movements $or return on e<uity). 4rivatization can be e6pected to influence
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economic outcome provided the firm operates in a competitive environmentK if not, it would be difficult to attribute changes performance sole or mainly to the change in ownership.
ASSESSIN#
PROCESSA
T1E PRINCIPLES9 PREMISES AND PER,ORMANCE O, T1E DISINVESTMENT
Instead of seeking the reasons for privatization, one could instead ask why a certain firm should remain in public sector. #ome would contend that with rapid technological change, natural monopoly, as a powerful argument for public ownership has simply disappeared. #uch an argument would surely hold for telecommunications, not but for the rest of public monopolies. Based on studies of privatization of natural monopolies, some important implications that can be carried out areI
#ectors such as railways, however, are h rder to re0u" te .ter ;ri$ tiN tio/. 5he regulatory task can be especially difficult in sectors such as highways, or water or sewage, where competition is weak or totally absent, investments are lumpier, e6ternalities are much more important, and pay back periods run ,=&' years or more, thereby increasing uncertainty and risk for contracting parties. opportunism on the part of investors or governments. enegotiations are likely to be the rule, brought on by unanticipated developments or simply
But in the twentieth century, with the separation of ownership from control in modern industry, there is a serious 0e/-y ;rob"em regardless of its ownership. 5he view that the secondary capital market and the market for managers provide ade<uate discipline on a firm7s performance is at variance with evidence.
C1AT
IS T1E EVIDENCE ON T1E E,,ICIENCB E,,ECTS O, PRIVATIDATIONH
IT
IS 1I#1LB
MIEED9 TO PUT IT MILDLB.
In fact, one of the authors of the study, 4ankaj 5andon, in an independent paper was more categorical in rejecting the hypothesis of efficiency gains from privatization in less developed
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countries. If this selective review of evidence is anything to go by, then one should have a modest e6pectation from whatever privatization that has happened in India. Britain, the cradle of modern capitalism, has witnesses the public policy pendulum swing from nationalization to privatization $or denationalization) many times over, in the .'th century. While the C# has a model of private ownership, and control with public regulation, continental ?urope and 0apan have, by and large, stayed steady with greater public ownership in such industries. Although there have been some privatization in these economies, such attempts have remained relatively modest with limited changes in ownership and control of national assets. 5hus, there seems to be no uni<ue Lmodel7 that is universally sound for promoting efficiency of resource use. 4erhaps it has a lesson for usI we have to search for a solution suited for our conditions that are broadly consistent with economic reasoning. Before seeking evidence on the effects of the disinvestment in India, perhaps it would be useful to ask ho! $ "id the ;remi2e2 o. the di2i/$e2tme/t ;o"i-y !ere to be0i/ !ith. It i2 !ide"y be"ie$ed9 2 " r0e /d 0ro!i/0 2h re o. the .i2- " de.i-it ! 2 o/ --ou/t o. PSE2I .i/ /-i " "o22e2 0etti/0 rid o. them !ou"d re2tore the .i2- " b -3 to he "th. 1o! $ "id ! 2 2u-h di 0/o2i2H
Csing a widely accepted a methodology that 4#?s7 .i/ /-i " "o22e2 !ere /ot the ;ri/-i; " - u2e o. the 0ro!i/0 .i2- " de.i-it in the &%,'s, and in fact 4#?s7 share in the fiscal deficit had steadily declined in the decade. In other words, the 0o$er/me/t ;er 2e ! 2 " r0e"y re2;o/2ib"e .or the 0ro!i/0 .i2- " de.i-it, not the enterprises owned by it.
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#ource IAisinvetment +inistery eport
Cpdating these estimates for the &%%'s using a more refined method, the estimated deficits of the general government confirmed our previous findings. &E !overnment7s share $in terms of e<uity and debt) as a proportion of 4#?s7 total fi6ed investment shows a steady decline since the mid=&%('s, suggesting a gradual tightening of their budget constraint. 5he decline in government7s contribution is being met increasingly by a rise in internal resources.
5hese long=term trends indicate, contrary to the widely held views, the growing fiscal deficit since the &%,'s is not on account of financial losses of the enterprises. 5he above evidence suggests that the popularly used indicator of net profit as a proportion of total e<uity does not ade<uately reflect 4#?s7 financial performance. While such a measure may be useful for a private shareholder, it has many shortcomings to gauge the return on public investment. Gor many reasons, 4#?s tend to be over capitalized. While these enterprises are e6pected to develop infrastructure on their own using budgetary resources, state government agencies usually vie with each other to provide larger and better infrastructure for private firms, thus reducing their capital cost. 5herefore, depreciation charges for 4#?s tend to be much larger.
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;apital structure of 4#?s is seldom designed to ma6imize returns for the shareholder, namely the government. Csually 4#?s are granted large loans in the initial yearK when they are unable to service the loans, these are often converted into e<uity to reduce their debt repayment burden. 5hus, many 4#?s have high e<uity, not by design but by default, adversely affecting the net profitability ratio. +oreover, from an economic viewpoint, capital structure of an enterprise is of secondary importance compared to return on capital employed.
It is widely believed that 4#?s7 respectable profitability ratio $gross profits to capital employed) is mainly on account of the surpluses of the petroleum sector enterprises whose pricing includes an element of ta6ation. Interestingly, as shown in Gigure, the profitability ratio has improved since the &%,'s even e6cluding the petroleum sector enterprises D clear evidence on improvements in 4#?s financial performance. But could it be merely due a faster rise in administered prices of 4#?s7 output8 5his is not so, as evident from the fact that the ratio of deflators of public sector output and !A4 has declined since the mid=&%,'s. 4ublic sector !A4 deflator, relative to !A4 deflator, &%,.=%E
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I, PSESI
,INANCIAL PER,ORMANCE 1AS IMPROVED AS S1OCN ABOVE9 C1AT T1EN
ACCOUNTS ,OR T1E #ROCIN# DE,ICITSH
5he problem seems to lay in poor financial returns in electricity boards, road transport corporations and railways, which are probably not ade<uately reflected in the above measures. Gor instance, revenue=to=cost ratio in #?Bs has remained less than one for much of the &%%'s, a decade of much talked about reforms, despite a steady rise in physical efficiency of thermal power plants.
.
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If the above reasoning and evidence is persuasive, then they suggest that the empirical premises for the ownership reforms were rather thin. While undoubtedly public sector7s financial performance needed an improvement, they were not, in the main, on account of the central 4#?s that were the targets of the disinvestment. 5hey mainly lay inI $i) 5he growing e6penditure and subsidies of the government. $ii) 4oor return on investment in electricity, irrigation and road transport. In all these cases, the re " ;rob"em is not so much public ownership, but ;ri-i/0 o. ;ub"iuti"itie2 /d 0o$er/me/t I2 i/ bi"ity to -o""e-t u2er -h r0e2, for a variety of political and social reasons. 5o sum up, as the sale of e<uity has been <uantitatively a modest, in relation to the size of public sector in India, it is hard to judge the efficacy of the reform effort. +oreover, it is perhaps too early to be definitive about the outcomes. Analytical bases of the policy reform were fragile to begin with, and comparative e6perience does not give much optimism for measurable efficiency gains from these changes in ownership of industrial assets. Above all9 i. the e$ide/-e re;orted i2 /ythi/0 to 0o by9 the ;remi2e2 o. the D>P ;o"i-y !ere r ther !e 3.
-n principle. disinvestment without a change in management is unli/el( to ma/e much difference to efficienc(. -t ma( help raise limited resources from the capital mar/et. mainl( reflecting the government monopol( in the industr(. *ut this is a costl( source of finance with high transaction costs. Given e0cess li1uidit( currentl( in the financial s(stem it would be cheaper to sell bonds domestically to raise
the re<uired finances.
PROBLEM O, CORPORATE #OVERNANCEA

In the evolution of modern capitalism, with separation of ownership from control as firms grow in size and comple6ity, agency problem arisesI how to ensure that the managers $9promoter: in Indian parlance) work to ma6imize return on shareholders7 capital. !iven the
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information asymmetry, managers could pursue their private goal disregarding the shareholders7 interests. 5his is at the heart of the problem of modern literature on corporate governance. "arious institutional and contractual mechanisms have evolved in the last century to grapple with this problem. In the conte6t of efficiency of resource use in a socialist economy, to solve the problem of how to ensure that managers of public firms ma6imized efficiency consistent with the goals set by the central planners. *owever, looking at the microeconomics of firms in a socialist economy, it has been argued that they were unlikely to be efficient because of the soft budget constraintI that is, firms do not go bankrupt or managers do not lose their jobs for their poor performance. Girms can always renegotiate their contracts with the planners to hide their inefficiency. In India public sector firms are often face with multiple objectives, and multiple owners or monitors D central government, state governments, legislators, public auditors and so on. +anagers may not necessarily ma6imise profits as they could always highlight a particular achievement to suit their convenience. +anagers may be risk averse as they face constitutionally mandated procedural audit by the ;A! if an enterprise is majority government owned. +anagers7 efficiency objectives may come in conflict with dysfunctional political interference in operational matters $at the e6pense of policy issues) to meet narrow political goals. *owever, at the same time, poor performance by managers does not involve any punishment as they can re=negotiate the output prices, budgetary support, or have access to soft andMor government guaranteed loansK in other wards they do not face a hard budget constraint. 5hus, the agency problem is endemic to all economic systems. +oreover, problem of soft budget constraint is not restricted to socialist economies but evident in market economies as well when the firm is <uestion is large and considered of strategic importance for the economy, though perhaps too much lesser e6tent. escue of ;hrysler ;orporation D the third largest automotive firm in the C# D in the late &%('s and Cnited Airlines after 9%M&&: in the
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C# are clear instances of state support for failing companies. #uch support is more common in financial sector, where failure of firms can have significant systemic risk.
DISINVESTMENT IS NOT A #REAT PIECE O, RE,ORM

Aisinvestment is considered desirable for two sets of reasons. >ne has to do with the money that flows into the government7s coffers as a result of the stake sale, augmenting the government7s non=borrowed receipts and, thereby, reducing the fiscal deficit. 5he other set of arguments of disinvestment has to do with efficiency. Aisinvestment would bring in shareholders who would, it is hoped, <uestion arbitrary decisions by the government that harm the finances of these public enterprises. Both benefits are e6aggerated. -ook at the reduction in the government7s fiscal deficit brought about by disinvestment. 5he effect of selling shares to the public is not materially different from the effect of selling government bonds, as far as the <uantity of the public7s savings mopped up by the government is concerned. In the year in which the disinvestment takes place, the private sector would feel s<ueezed for funds e6actly as it would if the government were to raise the same amount by issuing bonds. 5he public ends up holding shares, in one case, and bonds, in the other. In either case, the public7s savings stand transferred to the government, rather than to the private sector looking for funds to invest. 5hat said, the future effect of selling shares would prove superior, from a budgetary point of view, to the future effect of issuing bonds. By issuing bonds, the government takes on the obligation to pay interest, year after year. By selling shares, the government forgoes dividend receipts on the shares sold. Both widen the fiscal deficit in the subse<uent years. *owever, the interest payment obligation taken on to get one rupee from selling bonds would be significantly higher than the dividend forgone per rupee received from selling shares in public enterprises. 5his is because these shares would be valued significantly higher, in terms
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of asset price per rupee of income accruing from that asset, than the bonds sold to fill the fiscal gap. What about the efficiency gains at the enterprise level by inducting non=government shareholders into the ownership structure, and possibly onto the board of directors8 5here is likely to be some additional benefits, given the political culture that treats public enterprises as sources of revenue for the minister $and officials) in charge of the controlling ministry. *owever, the overall reform project entails improving corporate governance across the board to a level where the running of any company seeks to ma6imise the returns to shareholders regardless of who the shareholders are, whether the state or private shareholders. If this goal is realised9 e..i-ie/-y r0ume/t2 .or di2i/$e2tme/t !ou"d "o2e 2te m. +ore germane is to what end the government keeps some enterprises under its ownership and control. If it wants to own nuclear power companies because of the risks involved, or if it wants to own the Good ;orporation of India to ensure food security, the companies in <uestion sub serve public goals outside the calculus of commercial profit and loss. It does not make sense to privatize such public enterprises. +any other public enterprises were set up at a time when the private sector was too weak to create production capacity in areas considered vital for the economy7s long=term dynamism. #teel, or machine tools, for e6ample. @ow, every 4unj, +ittal and 0indal makes steel, of the highest <uality and lots of it. Is there any strategic goal being served by retaining steel production in the public sector, anymore than is served by keeping hotels and ban<uet halls in the public sector8 #atellite, aero plane and rocket manufacture, in contrast, are still be=yond the Indian private sector7s capacity. It might arguably make sense for the government to own enterprises in these sectors. What are strategic sectors would change, with time. 5he government should ideally e6it from areas that are no longer strategic, and use the re=sources to build new strategic capability. *owever, we don7t live in an ideal world. ?ven if the government continues to own some companies in non=strategic sectors, but these companies are professionally run as commercial
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enterprises, there would be little efficiency loss to the economy as a whole. 5herefore, disinvestment is not any key reform.
COMPARATIVE EEPERIENCEA
?6perience of the last century shows how different economic systems have sought to solve this problem in a variety of ways with varying degrees of success. 5he #oviet system was perhaps <uite capable of solving the problem in the initial phases of Le6tensive growth7 with a clear objective of ma6imization of national output. *owever the system began to falter, as the economy got more comple6, in the phase of Lintensive growth7 when objective was to increase productivity of resources. 5he command economy was unable to resolve the agency and incentive problems at the micro level because of the soft budget constraint. As noted earlier, in the Anglo #a6on economies, the secondary stock market acted as the disciplining device on corporate performance and as market for managers. In principle, stock prices that summarize all publicly available information on the firm performance should provide ade<uate signals for managers to act optimally. 5he system is also seems capable of providing risk capital to spur rapid technological progress, as witnessed in the role that venture capital funds played in promoting the Internet revolution. *owever, given the agency problem, there is enormous scope for abuse of the system, adversely affecting the shareholders7 interests and possibly hurting economic efficiency in the aggregate. *ostile takeovers and leveraged buyouts have e6posed the inefficiency of such a disciplining mechanism. 5he recent implosion of some of the world7s biggest companies, astronomical rise in managerial remuneration disproportionate to performance of firms, and widespread abuse of stock options by top managements in firms like ?nron and 5yco by the turn of the last century have seriously dented the credibility of the stock market based principles of corporate governance.
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PSUIS ARE NOT T1AT BAD
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SOME ,ACTS
E out of 5op &' companies in India are 4ublic #ector ;ompanies. >f the 3' companies which make up the @IG5F, &' companies are 4#Cs. In many businesses 4#Cs are virtual monopolies. 5op &, 4#C companies $called L@avratnas7) total income is e<ual to &3O of India7s !A4. In .'',, 4ublic #ector ;ompanies paid over //.3O of their net profits as dividends.
T1E OPPORTUNITB AT PRESENT IN PSUIS

X #trong Gundamentals = +ost of the 4#C companies are leaders in their category and in many cases have a virtual monopoly in business X +ost of the 4#C companiesS are present in sectors, which are core to the India !rowth #tory. X !overnment focus on -isting of 4ublic #ector ;ompanies and further divestment of stake in e6isting companies. X 4#C companies are currently available at reasonable valuations compared to broader markets X 5he e6pected re=rating of these companies in future in the event of !overnment divesting stakes in 4#C companies, can lead to above average gains over a period of time.
PSUS = STRON# ,UNDAMENTALSA

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It is only due to the strong fundamentals of the 4#C7s that they are among the most profitable companies in India. 5he strong fundamentals of these companies provided a substantially high growth of &%./(O in the past &' years. #omething private companies envy upon. It is only due to the strong fundamentals of the 4#C7s that they are among the most profitable companies in India. 5he strong fundamentals of these companies provided a substantially high growth of &%./(O in the past &' years. #omething private companies envy upon.
Source !loomberg" #rowess. !S$ India " %ata as on &'()*(+)),
PSUS = MORE RESILIENT IN CASE O, ECONOMIC DOCNTURN

X Balance #heet virtually debt free X Ability to show greater resilience in an economic downturn D less vulnerable to a slowdown in earnings growth X *uge cash on books puts them in an advantageous position when it comes to funding their e6pansion plans
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PSUS> BELON# MORE TO CORE SECTORS
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X +any of the 4#C companies belong to sectors, which are core to the India !rowth #tory X 5hese sectors will benefit from the ongoing !overnment focus on infrastructure and reforms
PSUSAT1E DIVESTMENT A#ENDA

4ranab +ukherjee, in his budget speech said 95he average public float in Indian listed companies is less than &3 per cent. Aeep non=manipulable markets re<uire larger and
diversified public shareholdings. 5his re<uirement should be uniformly applied to the private sector as well as listed public sector companies. I propose to raise, in a phased manner, the
threshold for non=promoter public shareholding for all listed companies.: -ooking at the growth story of India and the optimism of future growth as well, the govt. of India has already planned and finalized its e6pansion projects. It has planned to come out in a big way in infrastructure development projects.
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X !overnment could raise more than C#R&E'bn from divestment. 5o reduce holding as per norms by the Indian ;apital +arket egulator. Aivestments of around C#R2=3 billion $estimate) in GF.'&', which would give the !overnment some fle6ibility on the fiscal front 4rivatization of companies could lead to wealth creation.
CANDIDATES ,OR DIVESTMENT

-n these companies. the average Government shareholding is more than 7%#
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,andidates for $nd round of divestment Source : Bloomberg; Prowess. BSE India ; Data as on 31/0 /!00"
PSUS = ,AVOURED BB T1E MARKETS

Another point in favor of 4#Cs is that these companies are among those most liked by the stock markets. It is only due to the confidence in the functionality and stability of the 4#Cs that a commen investor is willing to invest in these companies and hence is affected by the positive sentiments in the stock market. 5he recent performance of 4#Cs isI
Divestment 2 3ta/e 3ale 4 +ost -+5 +erformance
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PSUS = CEALT1 CREATORS

B#? 4#C Inde6 which consists of 2( public sector companies have outperformed leading companies, which are represented as part of the #ense6 in both short term and long term.
PSUS = CEALT1 CREATORS K BOU T1OU#1T T1ESE CERE BORIN#

COMPANIES
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#ome of the 4#Cs have outperformed many big private firms in terms of financial performance in a big way. 5hese companies are among the top profit makers and top gainers in India. 5hey includeI B*?B+?@54; ;;I
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PSUS = CONTRIBUTION TO INDEE PER,ORMANCE
X A portfolio of these &' stocks $e<ual weighted) has outperformed the @ifty in the last & year, by generating returns of 46.5?F vis=Y=vis @ifty return of ?.*'F X B#? 4#C Inde6 $an aggregate of 2( 4#C companies) has appreciated by 46.)'F over the last & year, as against B#? #ense67s return of @.74F
PSUS = DIVIDENDS IN #OOD TIMES K BAD TIMES
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A SU##ESTION ,OR RE,ORMA

>n the basis of the above, if we accept that the real problems facing 4#?s are, $i) Aysfunctional political interference $ii) ;onstitutionally mandated procedural audit $iii) #oft budget constraint 5hen following measures can be suggestedI X educe the government holding in 4#?s to less than 3' per cent by transferring share to
mutually complementary firms by creating 0apanese style, tied around a public sector bank or financial institution. Gor instance, interlocking of e<uity holding among steel, coal and electricity firms or petroleum e6ploration, refining and petrochemical comple6es. #uch a measure would eliminate the procedural audit as well as political interference on the day=to= day operational matters. *owever, to ensure public accountability managers may be asked to make presentations to the parliamentary sub=committees on efficiency of resource use. At the same time, managers
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should have clearly defined security of tenure for say / or 3 years to ensure continuity and to show measurable performance. X *arden the budget constraint for 4#?s by a clear sunset clause on budgetary support or government guarantee for loans, e6cept for specific public purpose oriented investments. !iven that banks provide substantial e<uity and loans, they would, in principle, have incentive to monitor 4#?s performance to retain their reputational capital. *owever, <uestion would still remain who will monitor the banks8 5here are no easy answers to it. !iven the increasing independence of the eserve Bank, it is conceivable to device a system to where the central bank and other regulatory authorities are given the responsibility of appointing top managers of banks. #uch a scheme of delegated monitoring is in principle is better for efficiency. #uch a monitoring could focus on long term corporate goals such as productivity growth market shares, and &A outcomes. X 5o ensure that 4#?s do not abuse their oligopolistic position in the domestic market, reasonably open trade and investment regime could impart the discipline of the world market.
BIBLIO#RAP1B
RESEARC1 PAPERS

Aisinvestment and 4rivatisation in India Assessment and >ptionsZByI Aisinvestment in India, I lose and you gain...ByI 4radip Baijal 4ublic #ector performance since &%3', a fresh look... ByI . @agaraj
@agaraj
4 I"A5IJA5I>@ I@ IndiaI 5*? I+4? A5I"?# A@A ;>@#?NC?@;?# >G ! AACA-I#+ byI Aevesh 1apur and avi amamurti World ?conomic GorumI India ?;>@>+I; #C++I5 Indian ?conomic eformsI A #tocktaking ByI 5. @. #rinivasan 4lanning ;ommssion eport Aisinvestment ;ommission eport, &%%% 4ublic enterprise #urvey eport &%%E=&%%(,.''.=.''2 "ol=&. Annual eport of "#@!" #$ ROU%&IV %a'e !!/

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Annual eport eleased by !ovt. >f >rissa ?conomic #urvey, &%%&=.'', Aisinvestment in India...By #udhir @aib Business ?nvironment...By #haikh #aleem
BOOKS
INTERNET

www.divest.nic.in !!!.i/di .gov.inMsectorsMfinanceMdi2i/$e2tme/t www.ircc.iitb.ac.in www.livemint.com www. e-o/omi-time2.indiatime2.com www.indiastat.com Aepartment of disinvestment, +inistry of Ginance , www.divest.nic.in www.cmie.com www.planningcommission.nic.in httpIMMindia.gov.inMsectorsMagricultureMinde6.php
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Disinvestment in India

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Disinvestment in India

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BUSINESS ENVIRONMENT

DISINVESTMENT IN INDIA A FAILURE STORY

Submitted To Dr. K. L. Ch !" ,ORE S-hoo" o. M / 0eme/t Ne! De"hi

Disinvestment in India: A Failure Story

Disinvestment in India: A Failure Story

Disinvestment in India: A Failure Story

Ch ;ter 4 = Pub"i- Se-tor i/ I/di

Ch ;ter 5 = Di2i/$e2tme/t>De.i/itio/9 Method2 /d Pro-e22e2

Disinvestment in India: A Failure Story

Ch ;ter 7> C 2e 2tudie2

Ch ;ter ? = Criti- " A/ "y2i2

Disinvestment in India: A Failure Story

Disinvestment in India: A Failure Story

Disinvestment in India: A Failure Story

Disinvestment in India: A Failure Story

4. DISINVESTMENT IN INDIA BBA SUD1IR NAIB

ASSESSMENT AND OPTIONS>

Disinvestment in India: A Failure Story

6. DISINVESTMENT IN INDIA9 I LOSE AND BOU #AIN> BBA PRADIP BAIJAL

Disinvestment in India: A Failure Story

Disinvestment in India: A Failure Story

PUBLIC SECTOR IN INDIA

EVOLUTION O, PUBLIC SECTORA

Disinvestment in India: A Failure Story

OBJECTIVES ,OR T1E ,ORMATION O, PSUS

Disinvestment in India: A Failure Story

PROBLEMS O, PUBLIC SECTOR UNDERTAKIN#S

#ROCT1 IN PUBLIC SECTOR

Disinvestment in India: A Failure Story

Disinvestment in India: A Failure Story

DISINVESTMENTA DE,INITION9 MET1ODS9 PROCESSES

Disinvestment in India: A Failure Story

Disinvestment in India: A Failure Story

5hus, privatization was accepted in Indian conte6t.

Disinvestment in India: A Failure Story

In this type of disinvestment, the

In this type, significant management rights are transferred to the

5his is essentially targeted at the GII $foreign institutional

investors). ?6I=!A of "#@-, +5@- etc.

MET1ODS ADOPTED IN INDIAA

Disinvestment in India: A Failure Story

(. NET ASSET MET1ODA

4. PRO,IT EARNIN# CAPACITB VALUE MET1ODA

5. DISCOUNTED CAS1 ,LOC MET1ODA

LE#AL ISSUES IN T1E DISINVESTMENT PROCESSA

Disinvestment in India: A Failure Story

Disinvestment in India: A Failure Story

INDIA> POLICB9 PROCEDURE

Disinvestment in India: A Failure Story

#ourceI Aisinvestment in India, #udhir @aib

4. ,ISCAL SITUATION IN ('*)

Disinvestment in India: A Failure Story

#ourceI Aisinvestment in India, #udhir @aib

Disinvestment in India: A Failure Story

Goreign ?6change weeks imports.

Disinvestment in India: A Failure Story

P1ASE ( &(''(>'4 TO (''7>'?+A

INDUSTRIES RESERVED ,OR PUBLIC SECTOR PRIOR TO (''(

Disinvestment in India: A Failure Story

INDUSTRIES RESERVED ,OR PUBLIC SECTOR A,TER JULB9 (''(

RAN#ARAJAN COMMITTEE (''4>(''5

Disinvestment in India: A Failure Story

,IRST TRANC1E O, DISINVESTMENT &DECEMBER9 (''(+A

SECOND TRANC1E O, DISINVESTMENT &,EBRUARB9 (''4+A

2.'' ...3 E&(.E' ((5.5

Amou/t re "i2ed &i/ -rore+ ..,..&3E ../'./E' //'.3E, 665.)6

P1ASE III &(''>'' TO 4))@>4))+