Over the years the public sector has played a central role in enabling India to accomplish the national objective of self-reliance. It is therefore natural to feel uncanny about the idea of disinvesting, specifically, when the issue is of disinvesting profitable Public Sector Undertakings (“PSUs“). Those who support the idea of disinvestment in public sector enterprises claim that dis-investing a portion of government undertakings not only adds to the government coffers but also adds transparency by putting a spotlight on the role of corporate governance in the functioning of the dis-invested entity. Particularly those companies which are poorly managed and have become a liability for the government should be disinvested.

In this article I try to highlight how the process works and how the government of India decides on enterprises that are fit for disinvestment. Let me go back for some background first.

Scenario Prior To 1990’s
When India got Independence in 1947, a need was felt to build a strong nation, with a government socialistic in some measure, which was attentive to the needs of its people and would work for their betterment and prosperity. It was hoped that a strong government would own undertakings that would create employment, and work towards the eradication of poverty amongst other problems. The decades between independence and the 90’s witnessed enormous industrialization. The government set up enterprises, and built a strong infrastructure. During this time a lot of the industry sectors were almost entirely run by the government with private players needing a license to carry out any undertaking (i.e. the period now referred to as “license raj”).

Post 1990’s
By the advent of the 1990’s, the Government had stretched its hands in almost every sector – iron and steel, agriculture, telecommunications and automobiles. While many of these government undertakings were doing well, few others were not performing as the government had hoped for. The idea of divesting was first brought up in the year 1991 with the government outlining its objectives as follows:

  • It would broad base the equity;
  • Improve management;
  • Enhance the availability of resources for these enterprises;
  • Generate income for the exchequer.

While initially, the idea was to disinvest not more than 20% of government equity in select PSUs, a major transformation happened in 1996. The broad aspects of the policy of disinvestment as laid down at this time were:

  • To classify the non-core strategic areas in public sector for the purpose of disinvestment;
  • To set up a commission to deal with disinvestment related matters;
  • To take and implement decisions of disinvestment in a transparent manner;
  • To assure workers and employees of job security or, in the alternative, opportunities for re-training and re-deployment.

The next important step was taken in 1999 when the government classified, public sector into strategic and non-strategic areas. Following were included in the list of Strategic Public Sector Enterprises:

  • Arms and ammunition and allied items of defense equipment, defense air-crafts and warships;
  • Atomic energy (except in areas related to generation of nuclear power and applications of radiation and radio-isotopes to agriculture, medicine and non-strategic industries);
  • Railway transport.

All other Public Sector Enterprises were to be considered non-strategic. Over the years the policy of the government has undergone a sea change. From the initial idea of disinvesting up to 20% stake, today the government is considering giving up its entire stake in non-strategic areas where establishments are running in losses.

Disinvestment Commission (“DC”)

  • DC was set up in 1996 to perform the following functions:
  • Facilitating the withdrawal of public sector from non-core strategic areas;
  • To assure workers and employees of job security;
  • Ensuring opportunities for re-training and re-deployment of workers/employees;
  • Ensuring transparency in decisions.

DC was the main body governing matters related to disinvestment in public sector units until it was wound up at the end of 2004. Since then, the process being followed for Disinvestment in Public Sector Enterprises has been streamlined and been made a lot more transparent with a focus on:

  1. Giving part ownership of PSUs to the people.
  2. Maintaining a majority shareholding by the government (i.e. 51%) in the management and control of PSUs.

Currently, all processes starting from the selection of the PSU to be divested, right up to filing of the offer document with SEBI, are handled by The Department of Disinvestment (under the Ministry of Finance). The decisions are made on a case by case basis in consultation with the respective administrative ministries.

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