Managing the Transitional Period.

There are other business issues such as price decontrol, banking, finance and capital market procedures, removal of unnecessary barriers and export policy etc

Also some experts prefer that the government should deregulate industries prior to their disinvestment to encourage competition, since a sudden sale out could be an economic and cultural shock and could make or break an institution. Even they government can start with contracts,leasing and joint ventures before they go in for a full fledged disinvestment.

Bankruptcy Procedures, Labour Policy, Land Policy, Competition Policy(Anti-trust and Competition Legislation),Foreign Investment policy,Guarantees,the overall Legal Framework for Disinvestment, the overall procedures of Disinvestment, the issues of Valuation and Financing pattern of Disinvestment, Sale Structure, Sale and Deal procedures.

According to policy experts and economists the Sequencing of the disinvestment should be planned well. Also it should be transparent since the credibility of the government and the policy makers is at stake.

Let us look at some more examples form the India,

Some of the companies which are disinvested in India are

Modern Food Industries Ltd. (MFIL), MFIL , Lagan Jute Machinery Corporation, BALCO, CMC, CMC, HTL, VSNL , IBP, PPL, Jessop, HZL, IPCL, Maruti

Udyog,State Trading Corporation of India (STC), MMTC Ltd, HCI (3 Hotels), ITDC (19 Hotels), ICI, DCI, GAIL, ONGC.

Out of 38 disinvested enterprises examined, six recorded losses; they include Hindustan Photo films, Hindustan Machine Tools (HMT), ITI and the Steel Authority of India Limited (SAIL). On the other hand, ONGC, IOC, the Gas Authority of India Limited (GAIL), VSNL, Neyveli Lignite,Bharat Heavy Electricals Limited

According to some economists, instead of trying to monopolise production, or attempt what the private sector can do equally well, the state should focus on tasks that it alone can do: providing basic education and health, rural development, fair regulation, a decent police, a decent judiciary and a decent administration.

The best reason for disinvestment is to put an end to this, and change the role of the state. Selling government equity will produce two lesser gains also.

First, it will generally improve the management of public sector enterprises (though there could be exceptions).

Second, the sale will provide funds which can be used to improve social services or reduce the public debt or both.

A weak reason for disinvestment is to raise some money in desperation to stave off bankruptcy in a mismanaged economy. Yet this is the key reason why budget after budget proposes disinvestment. If indeed the government wanted to change the role of the state, it would have sold three quarters of public sector companies by now. In fact ministers are very reluctant to let go of their sources of money and patronage.Bankruptcy is finally forcing changes, but in inconsistent ways that often means depressed sale prices.

But there are economists, trade unions and some political parties which oppose the process of disinvestment itself. According to them these arguments are not valid since many public sector undertakings (PSUs)are not loss-making. Many of these PSUs are highly profitable companies. The oil majors, HPCL and BPCL, which have already repaid the government''s investment on them several times over. Nalco, which the government is looking to sell, is one of the lowest cost aluminium producers in the world and earns gross profits equivalent to 50 percent of its revenue.Moreover, most of the PSUs that have been sold or are being sold now,such as VSNL, IPCL, HPCL, BPCL and even Nalco are in sectors where disinvestment is likely to lead to the creation of private monopolies or oligopolies.

In India,the sectors in which some PSUs have been privatised, such as telecom (VSNL) or petrochemicals (IPCL), and some in which PSUs are on the block, such as oil (HPCL and BPCL) and aluminium (Nalco) are inherently prone to monopolistic or oligopolistic competition.

It has been argued in India that privatisation is necessary to reduce the malevolent influence of a corrupt state. But this is a simplistic view of the role of state, since the government plays a crucial role in shaping the economy and business in any nation. Moreover if the government is corrupt, there is every reason to suppose that disinvestment will also proceed corruptly in a corrupt manner.

Companies such as HPCL, BPCL, IPCL, VSNL and Nalco, which have sizeable assets,are enormously profitable and offer opportunities to private companies to acquire monopoly positions. These firms are star performers of the public sector and are being greedily eyed by the private sector.Nalco,which is now on the selling block, has 40 per cent share of the market.It has a gross profit margin of 50 per cent. These amounts to annual gross profits in excess of one thousand crores and these profits are going up every year. Nalco has large bauxite reserves (with enough mineral supply for more than a hundred years) and also owns captive power plants of 960 MW. Nalco is probably the lowest cost producer of aluminium in the world.

To quote noted economist Joseph Stiglitz "However, there are some important preconditions that have to be satisfied before privatisation can contribute to an economy''s growth. And the way privatisation is accomplished makes a great deal of difference. The IMF argue that it is far more important to privatise quickly; one can deal with the issues of competition and regulation later. But the danger here is that once a vested interest has been created, it has an incentive, and the money, to maintain its monopoly position, squelching regulation and competition, and distorting the political process along the way privatising the monopoly before an effective competition or regulatory authority was in place might simply replace a government monopoly with a private monopoly, even more ruthless in exploiting the consumer."

Unquote
Thus the policy makers should devote more of their time, intelligence and energy to reforming our regulatory and judicial institutions while pursuing the disinvestment process and they should  concentrate on providing laws that guarantee transparency and accountability in the functioning of government institutions.

Disinvestment Policies in India

Industrial Policy Statement 1991

Rangarajan Committee Report, 1993

• The disinvestment of government equity in PSEs could be up to 49% for industries exclusively reserved for public sector
• In exceptional cases, such as the enterprises which had a dominant market share or industries of strategic importance, the disinvestment would be up to 74%
• In all other cases, the committee recommended 100% disinvestment.

Budget 1998-99

The BJP government decided to reduce government shareholding in PSUs to 26%i n non strategic units. Government would retain majority holdings in PSEs of strategic importance. The budget also stated that workers interest would be protected in all cases.

New privatization policy, 1998

On august 7, 1998 a new privatization policy was announced. Features were as follows

• Sell above 51% of equity in strategic units. The new cap was fixed at 74%
• Share price to be market driven not pre-determined
• Structural mechanism to speed up disinvestment procedure was to be put in place.Under this mechanism PSUs would be freed from administrative control of the parent ministry and placed under a new body, to be created for monitoring the disinvestment process.

Strategic & Non-strategic Classification March 1999

• 3 industries were strategic industries and rest all the industries were non strategic.
• Strategic would include arms and ammunition, atomic energy and railways.
• All other PSEs would be considered as non strategic units and disinvestment of up to 74% would be taken up on a case to case basis. 

Budget 2001-01

• Percentage of disinvestment change in government stake going down to less 51% or up to 26% would be case to case.
• Social Sector Development
• Restructuring of PSEs and repayment of public debt
• Close down PSEs that cannot be revived
• Lower govt equity in non strategic units to 26% or below
• TO fully protect the interest of workers.
• To establish a new department of Disinvestment in order to systematically handle disinvest matters

Budget 2002-03

• Announced the completion of 7 PSU and hotels of HCI & ITDC
• Would complete disinvestment of another 6 PSUs and other hotels of HCI & ITDC

Budget 2003-04

• Target of disinvestment was fixed at Rs 14500 crores
• Decided to make public offers in ONGC, GAIL, IPCL etc

Industries reserved for PSU before 1991

• Mining of iron ore, manganese ore, chrome ore, gypsum, sulphur, gold and diamond.
• Mining and processing copper, lead, zinc, tin molybdenum and wolfram
• Minerals specified in the Schedule to the Atomic Energy (Control of Production and Use) Order 1953.
• Aircraft
• Air transport
• Rail transport
• Ship building
• Telephones and telephone cables, telegraph and wireless apparatus (excluding radio receiving sets)
• Generation and distribution of electricity
• Arms and Ammunition and allied items of defence equipment
• Atomic energy
• Iron and Steel
• Heavy casting and forging of steel items
• Heavy plant and machinery required for iron and steel production, for mining for machine tool manufacture and such other industries as may be specified by the Central Government.
• Heavy electrical plant including large hydraulic and steam turbines
• Coal and lignite
• Minerals oils
• Industries reserved for PSU''s post 2002
• Atomic Energy
• Minerals specified in schedule to atomic Energy (Control of Production and Use) Order, 1953
• Railway Transport

Prof.M.Guruprasad
Aicar Buisiness School