INTERNATIONAL RESEARCH JOURNAL OF MANAGEMENT AND COMMERCE

VOLUME-2, ISSUE-2 (February 2015) ISSN: (2348-9766)

DISINVESTMENT POLICY IN INDIA: PROGRESS AND CHALLENGES

Ritu,
Assistant Professor, S.A. Jain College, Ambala City

ABSTRACT

Public Sector Enterprises have been playing a dominant role in industrial growth and
development of Indian economy. In order to take apart the accumulated problems of
unemployment, technological backwardness and to set up a socialistic pattern of society in the
country establishment of Public Enterprises have been conceived. The role of the public sector
and private sector has been one of the major issues in development economics and policy. In a
mixed economy such as India, historically the public sector had been assigned an important role.
In the nineties, Indias budgeting, fiscal deficits and balance of payments problems kick started
the governments urge to unlock the huge investments chained in the public sector enterprises
(Pses). The major thrust for Disinvestment Policy in India came through the Industrial Policy
Statement 1991.The new policy of liberalization, privatization and globalization-emphasized the
role of the public sector in the nations economy. The policy stated that the government would
disinvest part of their equities in selected PSEs. The main objective was to improve overall
performance of the PSEs. In eighties the model of privatization/divestment was initiated by
Margaret Thatcher in UK and implemented by other countries including Germany (Unified), and
other socialist countries. The Four Ps of disinvestment are Policy, Promise, Prognosis and
Performance. In recent past, we have been witnessing a lot of debate on the disinvestments
scenario suggesting dynamic movement.
Balance of Payment position and increasing fiscal deficit led to adoption of a new approach
towards the Public Sector in 1991. Disinvestment of Public Sector Undertakings is one of the
policy measures adopted by the Government of India for providing financial discipline and
improve the performance of this sector in tune with the new economic policy of Liberalization,
Privatization and Globalization, (LPG) through the 1991 Industrial Policy Statement. Thus, the
paper aims to present a picture of the disinvestment in India based on the secondary literature
available.

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KEY WORDS: Public Sector Enterprises, Disinvestment, Privatization, Industrial Policy.

INTRODUCTION: Disinvestment refers to the action of an organization the government in

selling or liquidating an asset or subsidiary. It is also referred to as divestment or divestiture.
In simple words, disinvestment is the withdrawal of capital from a country or corporation. Some
of the salient features of disinvestment are:
1. Disinvestment involves sale of only part of equity holdings held by the Government to private
investors.
2. Disinvestment 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.
3. Disinvestment is called as Partial Privatization.
In India a large number of Psus were set up across sectors, which have played a significant role
in terms of job creation, social welfare, and overall economic growth of the nation; they rose to
occupy commanding heights in the economy. Over the years, however, many of the PSUs have
failed to sustain their growth through growing liberalization and globalization of the Indian
economy. It is also contended that the functioning of many public sector units (Psus) has been
characterized by low productivity, unsatisfactory quality of goods, excessive manpower
utilization, inadequate human resource development and low rate of return on capital. For
instance, between 1980 and 2002, the average rate of return on capital employed by PSUs was
about 3.4% as against the average cost of borrowing, which was 8.66%. Disinvestment (or
divestment) of the PSUs has been offered the solutions for this.

Definition of Disinvestment:
The term Disinvestment is the opposite of the term Investment. Investment is acquisition of
earning asset with the help of money. For example: if bonds are purchased or shares of
companies are purchased by spending money it is known as investment. In the case of
investment money is converted into earning asset to earn income. On the other hand in the case
of disinvestment an earning asset is converted into liquid cash. Here By disinvestment we mean
the sale of shares of public sector undertakings by the government. The shares of government

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companies held by the government are earning assets at the disposal of the government. If these
shares are sold to get cash, then earning assets are converted into cash. So it is referred to as
disinvestment.
Need for Disinvestment:
Disinvestment is needed to provide fiscal support. The demands on the Government,
both at the centre and State are increasing. There is compelling need to expand the
activities of the State are in areas such as education, health and medicine. It is, therefore,
legitimate that a part of the additional resources needed for supporting these activities
comes out of the sale of shares built up earlier by the Government out of its resources.
Disinvestment is needed to improve the efficiency of the working of the enterprise.
Leaving aside the extreme case of disinvestment where the dilution is of a lesser order
and where the Government control is still retained, the induction of public ownership can
have a salutary effect on the functioning of an enterprise. It increases the accountability
of those in charge of the enterprise. The shareholders would require to be compensated
and earn more profits. The induction of public into the ownership structure can also
create conditions in which there could be greater autonomy for the functioning of the
public sector enterprise. Disinvestment can, therefore, be regarded as a tool for
enhancing economic efficiency.
Another rational basis for privatization in the concept that private ownership leads to
better use of resources and their more efficient allocation. Throughout the world, the
preference for market economy received a boost after it was realized that the State could
no longer meet the growing demands of the economy and the State share holding
inevitably had to come down. The State in business thus lost out and so did the
presumption that direct and comprehensive control over the economic life of citizen from
the Central government can deliver results better than those of a more liberal system that
directly responds according to the market driven forces.
Privatization policy is needed around the globe gas was the inability of the Governments
to raise high taxes, pursue deficit / inflationary financing and the development of money
markets and private entrepreneurship.

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Technology and W.T.O. commitments have made the world a global village and unless
industries, including PSEs do not quickly restructure, they would not be able to survive.
Public enterprises, because of the nature of their ownership, can restructure slowly and
hence the logic of privatization gets stronger.

Objectives of Disinvestment:
Following objectives were stated in July, 1991 while propounding the disinvestment policy:
To meet the budgetary needs.
To improve overall economic efficiency.
To reduce fiscal deficit.
To diversify the ownership of PSU for enhancing efficiency of individual enterprise.
To raise funds for technological up gradation, modernization and expansion of PSUs.
To reduce the financial burden on the Government.
To improve public finances.
To introduce, competition and market discipline.
To encourage wider share of ownership.
Different Approaches to Disinvestments:
There are primarily three different approaches to disinvestments (from the sellers i.e.
Governments perspective)
Minority Disinvestment
A minority disinvestment is one such that, at the end of it, the government retains a majority
stake in the company, typically greater than 51%, thus ensuring management
control. Historically, minority stakes have been either auctioned off to institutions (financial)
or offloaded to the public by way of an Offer for Sale. The present government has made a
policy statement that all disinvestments would only be minority disinvestments via Public
Offers. Examples of minority sales via auctioning to institutions go back into the early and
mid 90s. Some of them were Andrew Yule & Co. Ltd., CMC Ltd. etc. Examples of minority
sales via Offer for Sale include recent issues of Power Grid Corp. of India Ltd., Rural
Electrification Corp. Ltd., NTPC Ltd., NHPC Ltd. etc.

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Majority Disinvestment
A majority disinvestment is one in which the government, post disinvestment, retains a
minority stake in the company i.e. it sells off a majority stake. Historically, majority
disinvestments have been typically made to strategic partners. These partners could be other
CPSEs themselves, a few examples being BRPL to IOC, MRL to IOC, and KRL to BPCL.
Alternatively, these can be private entities, like the sale of Modern Foods to Hindustan
Lever, BALCO to Sterlite, CMC to TCS etc.Again, like in the case of minority
disinvestment, the stake can also be offloaded by way of an Offer for Sale, separately or in
conjunction with a sale to a strategic partner.
Complete Privatisation
Complete privatisation is a form of majority disinvestment wherein 100% control of the
company is passed on to a buyer. Examples of this include 18 hotel properties of ITDC and 3
hotel properties of HCI. Disinvestment and Privatisation are often loosely used
interchangeably. There is, however, a vital difference between the two. Disinvestment may or
may not result in Privatisation. When the Government retains 26% of the shares carrying
voting powers while selling the remaining to a strategic buyer, it would have disinvested, but
would not have privatised, because with 26%, it can still stall vital decisions for which
generally a special resolution (three-fourths majority) is required.
Disinvestment Policy:
For the first four decades after Independence, the country was pursuing a path of development in
which the public sector was expected to be the engine of growth. However, the public sector
overgrew itself and its shortcomings started manifesting in low capacity utilisation and low
efficiency due to over manning, low work ethics, over capitalisation due to substantial time and
cost over runs, inability to innovate, take quick and timely decisions, large interference in
decision making process etc. Hence, a decision was taken in 1991 to follow the path of
Disinvestment.
Period from 1991-92 to 2000-01: The Industrial Policy Statement of 24th July,1991, stated that
the government would disinvest part of its holdings in selected PSEs, but the policy placed no
cap on the extent of disinvestment in favour of any particular class of investors. The objective for

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disinvestment was stated to be to provide further market discipline to the performance of public
enterprises. It was decided that in the case of selected enterprises, part of Government holdings
in the equity share of these enterprises will be disinvested in order to provide further market
discipline to the performance of public enterprises.
Report of the Rangrajan Committee on the Disinvestment of shares in PSEs : April 1993
The Rangarajan Committee recommendations emphasised the need for substantial disinvestment.
It stated that the percentage of equity to be disinvested could be up to 49% for industries
explicitly reserved for the public sector. It recommended that in exceptional cases, such as the
enterprises, which had a dominant market share or where separate identity had to be maintained
for. strategic reasons, the target public ownership level could be kept at 26%, i.e. disinvestment
could take place to the extent of 74%. In other cases, it recommended 100% disinvestment of
Government stake. Holding of 51% or more equity by the Government was recommended only
for 6 Scheduled industries, namely: Coal and Lignite; Mineral oils; Arms, Ammunition and
Defence equipment; Atomic Energy, Radioactive minerals & Railway transport. However, the
Government did not take any decision on the recommendations of the Rangarajan Committee.
The change process in India began in the year 1991-92, with 31 selected PSUs disinvested
for Rs.3,038 crore. The Department of Disinvestment was set up as a separate department in
December, 1999 and was later renamed as Ministry of Disinvestment from September, 2001.
From May, 2004, the Department of Disinvestment became one of the Departments under the
Ministry of Finance.
Against an aggregate target of Rs. 54,300 crore to be raised from PSU disinvestment from 1991-
92 to 2000-01, the Government managed to raise just Rs. 20,078.62 crore (less than half).
Interestingly, the government was able to meet its annual target in only 3 (out of 10) years. In
1993-94, the proceeds from PSU disinvestment were nil over a target amount of Rs. 3,500 crore.
This was the period when disinvestment happened primarily by way of sale of minority stakes of
the PSUs through domestic or international issue of shares in small tranches. The value realized
through the sale of shares, even in blue chip companies like IOC, BPCL, HPCL, GAIL & VSNL,
however, was low since the control still lay with the government.

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Most of these offers of minority stakes during this period were picked up by the domestic
financial institutions. Unit Trust of India was one such major institution.
Period from 2001-02 to 2003-04
This was the period when maximum number of disinvestments took place. These took the shape
of either strategic sales (involving an effective transfer of control and management to a private
entity) or an offer for sale to the public, with the government still retaining control of the
management. Some of the companies which witnessed a strategic sale included:

BHARAT ALUMINIUM CO.LTD.

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

The valuations realized by this route were found to be substantially higher than those from
minority stake sales.
During this period, against an aggregate target of Rs. 38,500 crore to be raised from PSU
disinvestment, the Government managed to raise Rs. 21,163.68 crore.
Period from 2004-05 to 2008-09

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The issue of PSU disinvestment remained a contentious issue through this period. As a result, the
disinvestment agenda stagnated during this period. In the 5 years from 2003-04 to 2008-09, the
total receipts from disinvestments were only Rs. 8515.93 crore.
Periodfrom2009-10to2013-14
A stable government and improved stock market conditions initially led to a renewed thrust on
disinvestments. The Government started the process by selling minority stakes in listed and
unlisted (profit-making) PSUs. This period saw disinvestments in companies such as NHPC Ltd.,
Oil India Ltd., NTPC Ltd., REC, NMDC, SJVN, EIL, CIL, MOIL, etc. through public offers.
However, from 2011 onwards, disinvestment activity slowed down considerably. As against a
target of Rs.40,000 crore for 2011-12, the Government was able to raise only Rs.14,000 crore.
However, the subsequent years saw some improvement and the Government was able to
raise Rs. 23,857 crore against a target of Rs. 30,000 crore (Revised Target : Rs. 24,000 crore) in
2012-13 and Rs. 21,321 against a target of Rs. 54,000 (Revised Target : Rs. 19,027 crore) in
2013-14.
2014-15onwards
The NDA Government has set an ambitious disinvesment target of Rs. 58,425 crore. As such,
2014-15 is likely to see some big ticket disinvestments taking place.
Challenges of Disinvestment before the Government:
Disinvestment was a very bold and important step initiated by the government as a part of its
reform measures. But the way it was handled has defeated its very purpose.
Social Problem Process of disinvestment is not favored socially as it is against the
interest of socially disadvantageous people and society at large. This process will
definitely affect the social objectives of the government.
Political Problem The government at the centre faces opposition from a number of
parties has posed a serious threat to this programme. Conflicting interest has made it
difficult to arrive at a national consensus.
Economic Problem Most of the units identified for disinvestment are in a very bad shape
which does not offer good returns. The Government due to paucity of funds is also not in
a position to revive it.

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Lack of transparency: The Government has failed to maintain transparency in the

various stages of disinvestment process which has decreased its reliability.
Lack of co-operation and co-ordination: Lack of coordination between disinvestment
ministry and other concerned ministries has also greatly affected the disinvestment
programme.

Progress of Disinvestment In India: The year wise targeted and actual disinvestment in the
Psus is as presented in table.
Table:1
Annual Cpse Disinvestment Target vs. Achievement Table since 1991-92
(as on 25 November 2014)

Year Target(Rs Crore) Achieved(Rs Crore)

1991-92 2,500 3,038
1992-93 2,500 1,913
1993-94 3,500 0
1994-95 4,000 4,843
1995-96 7,000 168
1996-97 5,000 380
1997-98 4,800 910
1998-99 5,000 5,371
1999-00 10,000 1,585
2000-01 10,000 1,871
2001-02 12,000 3,268
2002-03 12,000 2,348
2003-04 14,500 15,547
2004-05 4,000 2,765
2005-06 0 1,570
2006-07 0 0
2007-08 0 4,181
2008-09 0 0
2009-10 25,000 23,553
2010-11 40,000 22,763
2011-12 40,000 14,035
2012-13 30,000 23,857
2013-14 54,000 21,321
2014-15 58,425 61
Total 3,44,225 1,55,348
Revised Target for 2012-13: Rs. 24,000 Crore
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Revised Target for 2013-14: Rs. 19,027 Crore

The above table reveals that in 1991-92, total achievement in respect of disinvestment of PSE
shares was Rs. 3038 crores as against its targets of 2500 crores. In 1992-93 and 1993-94, the
achievement of disinvestment was only Rs. 1913 crores and zero respectively as against the
target of Rs.2500 crores and Rs.3500 crores respectively. Against the target of Rs. 40 00 crores
and Rs.7000 crores for 1994-95 and 1995-96 respectively, the Government raised Rs. 4843
crores and only Rs. 168 crores in respective year. In 1996-97 and 1997-98, the achievement in
respect of disinvestment was only Rs. 380 crores and Rs. 910 crores respectively as against
target of Rs.5000 crores and Rs. 4800 crores in respective year. Again 5371 crores and 1585
crores against a target of 5000 crores and 10000 crores in the years 1998-99 and 1999-2000
respectively. Against target of Rs.10000 crores and Rs.12000 crores in the year 2000-2001 and
2001-2002 the government raised Rs.1871 crores and Rs. 3268crores. Again, in 2002-2003 and
2003-04 the Government set a budgetary target of Rs.12000 crores and 14500 crores in respect
of disinvestment and the Government could raise Rs.2348 crores and Rs.15547 crores
respectively. In the year 2004-2005 against a target of Rs. 4000 crores government could achieve
Rs.2765 crores and in 2005-2006 no target was fixed even then government achieves Rs.1570
crores. In the year 2006-2007 no target was fixed by the government and no disinvestment took
place in this year. In 2007-2008and 2008-2009 also no target was fixed for disinvestment and
government achieved disinvestment of Rs.4181 in 2007-2008 and no disinvestment was made in
the year2008-2009.In 2009-2010 against a target of Rs.25000 crores government could achieve
Rs.23553 crores. In 2010-2011 and 2011-2012 against a target of Rs. 40000 crores government
could achieve Rs. 22763 crores and Rs. 14035crores respectively..In 2012-2013 and 2013-2014
against a target(revised) of Rs.24000 crores and Rs19027 crores government could achieve
23857crores andRs.21321 crores respectively. The Finance Minister Arun Jaitley has raised the
disinvestment target for 2014-15 to Rs.58425 crores from the Rs.51930 crores target set by the
former Upa government in the Interim Budget.
Conclusion:
Disinvestment is a process. The disinvestment process needs to be taken up more seriously by
the government. The Government should try to come out with a time bound programme to
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conduct the process with transparency in all the activities need to reach. Two points should be
noted in connection with the disinvestment policy. First, some restructuring of PSUs may be
needed before disinvestment to enhance the value of shares and increase sale proceeds. The three
broad areas of restructuring would be corporate governance, financial restructuring and business
and technological restricting. Secondly, the process of disinvestment has to take into account the
conditions in the capital market. Disinvestment should not result in crowding out resources
available for the private sector. This, therefore, calls for utmost care and meticulous planning.
The following points may be useful for policymakers.
1. Place administrative control in the hands of the Finance Minister: This would enable him to
complete the disinvestment process focusing on FDI which could be deposited in the
Disinvestments Fund.
2. Hand over companies that are a burden on the government to the employees: This could be
done on a token share price of one paisa per share. They may turn the company around or resell
it for scrap or close down the outfit.
3. Manage revivals: Any revivals must be professionally managed on a lease basis.
4. The process of disinvestment should be transparent so that public or private entities can come
to know fair process.

References:

Sri Santosh Koner1, Professor Jaydeb Sarkhel, Disinvestment of Public Sector in India:
Concept and Different Issues, IOSR Journal of Economics and Finance (IOSR-JEF)
Volume 3, Issue 6. (May-Jun. 2014).
Disinvestment Policy in India: Progress and Challenges, SHRINKHALA : VOL-II-
ISSUE-II, October-2014.
Kiran Kumar, Chetan Kumar, Disinvestment Policy in India: Progress and Challenges
INDIAN JOURNAL OF APPLIED RESEARCH, Volume : 3, Issue : 8 ,Aug 2013
Samuel Paul, "Privatisation and the Public Sector", Finance and Development,
December, 1985.
Administrative Reforms Commission (ARC) Report of the Study on Public Sector
Undertakings.
Majumdar S, Why disinvestment has not attracted Fdi\ Business Lines, June 11,2002.
Datt Ruddar and Kpm Sundram, "Indian Economy", S. Chand and Company Ltd., New
Delhi.

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Gupta K.K. Harvinder Kaur, "New Indian Economy and Reforms", Deep and Deep
Publications Pvt. Ltd. New Delhi.
www.divest.nic.in.
www.bsepsu.com.

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