RESEARCH, PUNE.
Assignment
on
by
Srinath Vijaysampath (PP14114)
Pronoy Banerjee (PP14090)
Deepankar Sahu (PP14107)
Ankush Shama (PP14100)
Disinvestment
Investment refers to the conversion of money or cash into securities, debentures, bonds or any
other claims on money. As follows, disinvestment involves the conversion of money claims
or securities into money or cash. Disinvestment can also be defined as the action of an
organisation (or government) selling or liquidating an asset or subsidiary. It is also referred to
as divestment or divestiture.
In most contexts, disinvestment typically refers to sale from the government, partly or fully,
of a government-owned enterprise.
A company or a government organisation will typically disinvest an asset either as a strategic
move for the company, or for raising resources to meet general/specific needs.
2.
Citizens have every right to own part of shares of public sector undertakings.
Public Sector Undertakings are the wealth of the Nation and this wealth should
3.
Objectives of Disinvestment
The new economic policy initiated in July 1991 clearly indicated that PSUs had shown a very
negative rate of return on capital employed. Inefficient PSUs had become and were
continuing to be a drag on the Governments resources turning to be more of liabilities to the
Government than being assets. Many undertakings traditionally established as pillars of
growth had become a burden on the economy. The national gross domestic product and gross
national savings were also getting adversely affected by low returns from PSUs. About 10 to
15 % of the total gross domestic savings were getting reduced on account of low savings
from PSUs. In relation to the capital employed, the levels of profits were too low. Of the
various factors responsible for low profits in the PSUs, the following were identified as
particularly important:
Underutilization of capacity
Lack of autonomy
Hence, the need for the Government to get rid of these units and to concentrate on core
activities was identified. The Government also took a view that it should move out of noncore businesses, especially the ones where the private sector had now entered in a significant
way. Finally, disinvestment was also seen by the Government to raise funds for meeting
general/specific needs.
In this direction, the Government adopted the 'Disinvestment Policy'. This was identified as
an active tool to reduce the burden of financing the PSUs. The following main objectives of
disinvestment were outlined:
To fund growth
For retiring Government debt- Almost 40-45% of the Centres revenue receipts go
towards paying public debts.
Already listed profitable CPSEs (not meeting mandatory shareholding of 10%) are
to be made compliant by Offer for Sale by Government or by the CPSEs through
issue of fresh shares or a combination of both.
2.
Unlisted CPSEs with no accumulated losses and having earned net profit in three
preceding consecutive years are to be listed.
3.
Follow-on public offers would be considered taking into consideration the needs
for capital investment of CPSE, on a case by case basis, and Government could
simultaneously or independently offer a portion of its equity shareholding.
4.
In all cases of disinvestment, the Government would retain at least 51% equity
and the management control.
5.
6.
7. The Cabinet Committee on Economic Affairs today gave its approval for sale of 10%,
5% and 5% of the pre-issue paid up equity of Rural Electrification Corporation
Limited (REC), Power Grid Corporation of India Ltd. (PGCIL) and National
Hydro-electric Power Corporation Limited (NHPC) respectively.
The number of bidders for equity has been small not only in the case of financially
weak PSUs, but also in that of betterperforming PSUs. Financial institutions have not
been very enthusiastic in listing and trading of shares purchased by them as it would
reduce their control over PSUs. Instances of insider trading of shares by them have
also come to light. All this has led to low valuation or under pricing of equity.
Further, in many cases, disinvestment has not really changed the ownership of PSUs,
as the government has retained a majority stake in them. There has been some
apprehension that disinvestment of PSUs might result in the crowding out of private
Conclusion
Since independence PSUs are the main pillars of the Indian economy, which includes central,
state and local bodies. It is due to many reasons the performance of PSUs was poor over the
years and caused for monitory losses, over capitalization, wrong policies, faulty control and
inefficient management. The privatization policy that the government adopted was closely
related to efficient channelization and utilization of resources, but the progress often was not
that satisfactory. Finally the privatization root was led to the concept of Disinvestment that
had reflection over the needs of economy for the both productive and non productive entities.
However, Disinvestment has not yielded desired results in majority of dimensions which may
be virtually due to variety of problems faced by PSEs even after disinvestment, such as
inefficient, high cost and non-competitive industrial structure, operational inefficiency due to
high governmental interference, environment restrictions (delegation of operational and
functional autonomy to the managers through performance contracts), less proportion of
disinvestment and capital market discipline.
Therefore, it is recommended that the government henceforth should aim for strategic
disinvestment; as small and modest sizes of disinvestment are not likely to be fruitful. Also,
keeping in view the global experience as a cusion and caution agent, the government should
aim to improve the efficiency of inefficient units and create competitive market in the present
bloodthirsty environment to enable the PSUs to work efficiently for the good health of the
economy and in turn the nation.