Examining the Disinvestment of Psus in India

These days government is using disinvestment as strategic tool to raise capital. Money collected from disinvestment is used to fill the fiscal deficit and is used for other purposes. This is helping other poor performing PSUs to revive. Government made mandatory to float at least 10% in 2009. In 2010 government has again mandated to float 25 % shares of listed company for retail investors. Here we will see what is disinvestment, how it is done what are the steps government has taken to use this money.

INTRODUCTION

Disinvestment of PSU means the sale of public sector equity leading to a dilution of the government's stake. In India the term disinvestment is used rather than privatization. Privatization means change in ownership resulting into change in management while disinvestment may or may not result into a change of management. A well designed disinvestment program helps in the long term growth process through increased foreign investment, technology transfer and the subsequent enhancements in the productivity.

Public sector undertakings are organizations started by Indian government as government companies under the companies act or as statutory corporation under specific statutes of parliament. PSUs do not have autonomy as most of their decisions relating to capital expenditure, acquisitions and investments have to be approved by the Public Investment Board , Cabinet Committee on Economic Affairs and the central government. The control on PSUs is also exercised through the CAG, Central Vigilance Commission and the CBI.

The public sector presence is predominant in public utilities and infrastructure, railways, post & telegraph, ports, airports and power are dominated by PSUs or department-owned enterprises. In the roads sector, while some roads are owned and maintained by the private sector, publicly owned and maintained roads dominate. Road freight capacity is almost entirely private, while road passenger traffic capacity is also significantly privately owned and managed. In telecom, the public sector continues to be dominant in the provision of fixed line telephone services, while private licensees are operating in some urban areas. Mobile services are predominantly private, particularly in urban areas, while inter-state and international linking services are significantly privately managed and owned.

There were 5 PSUs owned by the central government at the beginning of the first five year plan with a total investment of Rs.29 crore. By the end of the seventh plan in 1990, the number of PSUs had increased to 244 with a total investment of Rs.99,329 crore. Thereafter, though the capital invested increased to Rs.3,93,057 crore in 2005-06, the number of PSUs declined to 239.

At present there are35 PSUs in the BSE 200 index with market capitalization of 3,84,000 crore.

OBJECTIVE

Disinvestment was flagged off in 1991 without any clear cut objectives. The stated objective was to raise resources to finance fiscal deficit. Policy on disinvestment arose largely through statement of finance ministers in their budget speeches. In the budget 1991-92, this was announced by the government that disinvestment upto 20 per cent of equity in selected PSUs in the favor of mutual fund and other financial institution in the public sector to increase the base in shareholding, improvement in management, increase availability of resource for these PSUs .

In 2001, the government introduced a special provision for setting aside a quota for shares for small investors and workers. The government set out the following policies in respect of PSUs; bring down government shares in all non strategic PSUs to 26%. Initially in 1991-92 resorted to building operations wherein shares were offered only in bundles of good, very good, and average companies. This resulted in disinvestment at very low prices. The government then realized that framing proper strategies for disinvestment was essential.

The government of India then set up a committee under the chairmanship of the former RBI governor, C.Rangrajan, in 1993. The committee identified following objectives as a part of its long-term strategy;

1). To strengthen PSUs, where appropriate in order to facilitate disinvestment

2). To protect employees' interest

3). To broad base ownership

4). To augment receipts of the government.

DISINVESTMENT MACHINERY

From 1991-92, when it started and till 1996-97, disinvestment was handled by the Department of Public Enterprises and subsequently, from 1s t April, 1997 till 9th December, 1999, by the Department of Economic Affairs (Ministry of Finance). The Department of Disinvestment was started as a separate department on 10th December, 1999 and was subsequently renamed as Ministry of Disinvestment from 6th September, 2001. After 27th May, 2004, Department of Disinvestment is under the ministry of finance.

Rangarajan Committee produced report in April 1993 and recommended the percentage of equity shares for disinvestment should be below 49 per cent in the industry reserved for public sector and more than 74 per cent in others industries. According to Industrial Policy of July, 1991 the following industries were proposed to the public sector: -

(1) Arms and ammunitions and allied item of defense equipments, defense aircrafts and warship.

(2) Nuclear energy.

(3) Coal and lignite.

(4) Mineral oil.

(5) Mining of iron, manganese, chrome, gypsum, sulphur, gold and diamond.

(8) Railways

DISINVESTMENT PROCEDURES

The procedures followed for disinvestment have evolved over a period of time. These were based on decision-making through inter- ministerial consultations and involvement of professionals and experts, in view of the technical and complex nature of transactions and the need for transparency and fair play. The decision making process, the bidding procedure and the methods used for valuation of equity of PSUs sold are described below for the different modes of sales.

Government has adopted following methods to sell off shares in PSUs.

1). Bidding

2). Sale of shares in the Market

3). Global Depository Receipts (GDR) route

4.) Cross-holdings

5). Strategic Sales

1). BIDDING

In this method Government invites bid for a portion of its stake in PSUs. The Department of Public Enterprises invites closed bids from government financial institutions and mutual funds. The tendering process is driven by a reserve price based on valuation models such as net asset value, earning potential and previous realizations if available. The Government offered shares un bundles of very good, good, and average. The emphasis of the government in the initial years was on the disinvestment of the equity and retaining the controlling block.

2). SALE OF SHARES IN THE MARKET

During 1991-99 shares of companies like IOC, BPCL, HPCL, GAIL, and VSNL were sold in the market. The shares of these blue chip companies were sold at price-earnings between 4.5 and 6.0. The offer of sale of shares in the primary market increases the public ownership in these PSUs through retail participation resulting in better price discovery, increasing the floating stock of the company and deepening the capital market. The IPO route is suitable during strong secondary market conditions. The wealth created through this can be shared equitably with public at large. However public issue does not result into change in management style and functioning of the companies.

3). GLOBAL DEPOSITORY RECEIPTS ROUTE

The government decided to tap the overseas market for disinvestment due to sluggish capital market conditions. In, March 1997 VSNL disinvestment took place through the GDR issue which was priced at USD 13.93 and was oversubscribed 10 times. The disinvestment through domestic ADR or GDR market was not productive.

4.) CROSS-HOLDINGS

Here one big PSU were told to hold the share of another big PSU. This was done mainly for cash rich oil companies. The swapping of shares within oil companies took place just before the close of 1998-99. This cross-holding of IOC buying 10 percent government stake in ONGC and 5 percent stake in GAIL, ONGC buying 10 percent in IOC and 5 percent in GAIL and GAIL buying 2.5 percent in ONGC helped the government gather 4,867 crore at the end of the year.

5). STRATEGIC SALES

Strategic sale is sale of equity blocks of a PSU to a single buyer accompanied by the transfer of management to the private investor. Disinvestment commission in 1996 advocated strategic sales. Under strategic sale, the government transfers part of its holdings to a strategic partner who would control the operation and financial policy of the enterprise. The first strategic sale was of Modern Food where government offloaded 74 percent of its equity to Hindustan Lever.

RESOLUTION BY GOVERNMENT

In pursuance of the policy laid down in the National Common Minimum Program in 2005 the Government of India decided to constitute a separate fund, with the name and style of the 'National Investment Fund', with the following objectives, structure, investment strategy and administrative arrangements.

OBJECTIVE

(i) The proceeds from disinvestment of PSUs will be channelized into the National Investment Fund which will be maintained apart from the consolidated fund of India.

(ii) The corpus money of National Investment Fund will be of permanent nature.

(iii) Fund will be professionally managed to provide good return to Government, without eroding the corpus money. Few public sectors Mutual Fund will be equipped with the management of corpus money of fund.

(iv) 75% of the annual income of the fund will go to finance selected social schemes, which will promote education system, health care and employment. Rest 25% of the annual income of the fund will go to meet the capital investment requirement of profitable and revivable PSUs that produce good returns, in order to increase their capital base to finance expansion or diversification.

STRUCTURE AND ADMINISTRATIVE ARRANGEMENT

The National Investment Fund will be operated by the selected expert fund managers under 'discretionary mode' of portfolio management scheme, under the SEBI guidelines. The entire work of the National Investment Fund will be supervised by CEO of the fund, an officer of the rank of Joint Secretary or Additional Secretary of the Government of India. A part time advisory board of three best persons, with the required expertise to be appointed by the Government, would give advice the CEO on various aspect of the performance of the Fund.

INVESTMENT STRATEGY

(i) The broad investment strategy is to provide sustainable good returns without eroding the corpus money.

(ii) Investment strategy for funds will be designed by the CEO based on the opinion of the advisory board to ensure that government have good relationships in terms of actual investment done by fund manager.

(iii) Only major guidelines are to be given under the 'discretionary mode' to the fund managers, within which individual investment will be done independently by fund manager. Detail guidelines specifying investment instruments and limit for investment in such instruments will be separately given in the agreements entered into between fund manager and the CEO of the Fund on account of the Government.

(iv) Other operational detail such as allocation of money to selected fund manager, negotiation of management fees and charge to be paid to fund manager, etc. will also be decided by the CEO based on the opinion of the advisory board.

(v) Suitable mechanism for regular review and monitor of the performance of fund, coming market trends and forthcoming prospect will be made regularly.

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