Economics
Disinvestment
Disinvestment in India
·
Disinvestment: When Government sells its shares of a PSU, to
private sector company / individual.
·
Privatization: when Government sells so many shares, that it no
longer remains the majority shareholder of the given PSU.
1991
|
Interim budget, Government announced 20%
disinvestment in selected PSUs.
Their shares were sold to Mutual funds and
financial institutions (UTI, EPFO, LIC etc.)
|
1992
|
Government decides to sells shares to FIIs, PSU
employees and banks.
|
1993
|
Rangarajan Committee suggests:
49% disinvestment in PSUs reserved for public
sector
74% disinvestment in all other PSUs
Government did not implement.
|
1996
|
Disinvestment commission under GV Ramakrishna. It
was a non-statutory, advisory body (similar to UPA’s NAC).
|
1998-2000
|
Vajpayee Government classifies PSUs into two parts
(1) Strategic: arms-ammunition, railway, nuke
energy etc.=> here we won’t do disinvestment
(2) Non-strategic: those not in above
category.=> here we will do disinvestment in a phased manner. Hindustan
Zinc, BALCO, Maruti Disinvestment taken up.
To implement above policy, Department of
disinvestment setup under Finance ministry.
|
2004
|
UPA comes into power, Common Minimum program (CMP)
updates disinvestment policy
* Sick PSUs will be revived
* No disinvestment in profit making PSUs
* PSUs will get commercial autonomy
|
2005
|
Whatever Money Government earns from selling its
PSU shares- it’ll goto National investment fund (NIF).
|
2005-2009
|
Disinvestment remains stagnant because Left allies
of the UPA Government stonewall everything.
|
2009 onwards
|
UPA-2 without left parties. Government resumes
disinvestment process.
All PSUs can be disinvested, but upper limit: 49%
Disinvestment Method: only public offer.
|
2013-2014
|
Chiambaram wanted to earn 40,000 crores via
disinvestment of Indian Oil, BHEL, NHPC, Neyveli lignite etc. but hardly
managed to get ~16,000 crores. Main reasons for #EPICFAIL:
* Oil ministry, mining ministry, trade unions
opposed the move, files were delayed.
* Lukewarm response from investors because
sharemarket was down due to internal & external factors.
|
2014
|
Modi cabinet approves disinvestment in NHPC, Coal
India, ONGC
6 failed PSUs will be closed down.
5 loss making but viable PSUs will be revived.
|
Methods of Disinvestment:
Via IIP
|
Via Stock Exchange
|
Via Institutional placement program. Directly
selling the shares to another company / institution / mutual fund or other
large player.
|
Directly selling shares on stock exchange
|
Requires more clearances.
|
Faster, needs less clearances.
SEBI requires in each PSU, minimum 25% shares be
held by public.
Hence Government using this method to quickly
comply with SEBI norms.
|
Friendly to institutional investors (Mutual funds,
pension /insurance funds etc.)
|
Friendly to retail investors.
|
Pro and Anti arguments for Disinvestment:
Against
|
Favour
|
Socialist / leftist ideology: private sector cannot
achieve equal distribution of resources for all classes.
Private enterprises only focus on profit
maximization. They won’t cater poor people.
Therefore Government needs to control all or some
industrial sectors.
|
Such Government controlled units cannot compete in
free market economy due to political interference and price control
mechanisms.
Ultimately more public money is wasted in running
these loss making entities.
|
Government’s dividend income will decline. (Because
they’ll have less shares).
Consequently, Fiscal deficit will increase.
|
Whatever “dividend” Government earned so far-
compared to that, Government has spent far more crores rupees to revive these
PSUs.
There is no point in throwing good money after bad
money.
|
A survey indicated 0.5% retail participation (i.e.
Aam Admi investment) in equity market.
Meaning, only Large corporates and financial
institutions will benefit from this drive.
It’ll not help in “financial inclusion”
|
Absurd logic, that just because corporates will
benefit, we shouldn’t begin disinvestment.
Government already taken plenty of initiatives on
financial inclusion front.
|
The funds received from disinvestment are used to
finance fiscal deficit. This is unhealthy practise, like selling family gold
to buy daily dose of desi liquor.
|
Need amendments in FRBM act to ensure this doesn’t
happen.
|
After disinvestment employees of PSUs will loss
their jobs
If board of directors have many private sector
experts- they may approve plans to reduce staff strength, to increase
profitability.
|
Overstaffing = One of the main reasons why PSUs
don’t make optimum profit. At some point we’ve to swallow the bitter pill.
Besides, such employees are given attractive VRS
offers.
|
Disinvestment would lead to private monopolies
|
That used to happen in 90s era, when Government
sold shares to specific private companies at an arbitrary price.
But, Unlikely to happen if shares directly sold via
stock exchange. + CAG, Media very active these days.
|
To complete the disinvestment targets, Government
asks one PSUs to buy shares of another PSU.
e.g. ordering LIC to buy ONGC’s shares…. In such
cases, disinvestment doesn’t decrease Government control over those
companies.
|
Need for a clear policy on disinvestment to stop
this practice.
|
Modi’s disinvestment:
Org
|
Under Ministry
|
Govt Shareholding
|
Approved Disinvestment
|
Issue
|
NHPC
|
Power
|
86%
|
11.36%
|
Has 20 hydroelectric power stations.
Unable to recover dues from electricity utility
companies => company making huge losses.
Hence it share price won’t fetch truckload of cash
to Government.
|
CIL
|
Coal
|
90%
|
10%
|
Labour union strike may bring down share price. So
Government may not earn truckload of cash from selling these coal
|
ONGC
|
Petroleum
|
69%
|
5%
|
Maharatna PSU
If Government clears the gas price policy, ONGC’s
share prices will go up (And after that Government should sell it- to earn
truckload of cash).
|
Note:
in PSUs, Government owns the shares, in the name of President of
|
||||
Union Government finished reviewing 11 PSUs: 5 worth
savings and 6 worth closing.
5 worth saving
|
6 Failed ones
|
(1) HMT Machine Tools
(2) Heavy Engineering Corporation
(3) NEPA
(4) Nagaland Paper & Pulp Co
(5) Triveni Structurals
|
(1)
(2) HMT Bearings
(3) HMT Watches
(4) HMT Chinar Watches
(5)
(6) Tungabhadra Steel Products Ltd
|
These will be given 1000 crore rupees to give VRS
to employees then shut down operations. Total employees ~3600
|
HMT watches in news, because they’ve tied up with
flipkart.com to sell away the remaining stock of wrist watches.
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