Volume : 4 | Issue : 4 | April 2015 ISSN - 2250-1991

Research Paper Commerce

Disinvestment and Performance of Profit And

Loss Making Central Public Sector Enterprises of
India

Assistant Professor Department of Commerce School of Man-

Dr. Gagan Singh agment Studies & Commerce Uttarakhand Open University
Haldwani-Nainital Uttarakhand-263139
Economic compulsions led to the adoption of new approach towards the public sector in the early nineties. Disinvestment
involves the sale of equity and bond capital invested by the government in PSUs. Disinvestment of minority shares in
ABSTRACT

CPSEs has become an important source of raising resource for the Government. The main focus of the present paper is to
examine the impact of disinvestment on the financial and operating performance of profit and loss making central public
sector enterprises. April 2009 onwards, there are fourteen public sector enterprises in which government has undertaken
disinvestment recently. After having partial disinvestment in both profit and loss making CPSEs, there has been improvement
in the efficiency of the employees in the utilization of their resources. But the profitability of the profit making CPSEs has
declined in the post-disinvestment period.

KEYWORDS Disinvestment, Enterprises, Liquidity, Operating, Usage.

Introduction Government. In the present study an attempt has been made

Public sector undertakings in India were viewed as a mech- to examine the impact of disinvestment on the performance
anism for structural transformation of the economy and of profit and loss making Central Public Sector Enterprises.
for growth with equity and social justice. The Central Public This will throw light on whether the envisaged goal of im-
Sector Enterprises (CPSEs) are engaged in large scale pro- provement in performance was in fact achieved. The present
duction and supply of a wide range of products and servic- study has been confined to study the impact of disinvestment
es. They Public sector enterprises have been set up to serve on financial and operating performance of Oil and Natural
the broad macro-economic objectives of higher economic Gas Corporation Ltd, Steel Authority of India Ltd. (Top
growth, self-sufficiency in production of goods and services, Ten Profit Making CPSEs-2011-12), Mahanagar Telephone
long term equilibrium in balance of payments and low and Nigam Ltd. and Shipping Corporation Ltd. (Top Ten Loss
stable prices. Disinvestment is a process whereby the Govern- Making CPSEs-2011-12).
ment withdraws a portion or the total of its equity in public
enterprises. Huge amount of public resources are blocked in Objectives of the Study
several non-strategic PSEs giving meager return. Government The following objective has been visualized for the present
has announced its policy that the main objective of disinvest- study:
ment is to put national resources and assets to optimal use
and in particular to unleash the productive potential inherent • to study the impact of disinvestment on the financial and
in our public sector enterprises. Disinvestment is always a part operating performance of profit and loss making Central
of privatization. There are 16 sectors of Indian public sector Public Sector Enterprises in terms of investment, employ-
enterprises in which Government has undertaken disinvest- ment, financial strength and corporate liquidity and asset
ment. The current policy on disinvestment envisages people’s usage.
ownership of CPSEs while ensuring that the Government equi-
ty does not fall below 51% and Government retains manage- Hypothesis
ment control. (Public Sector Enterprises Survey, 2011-12) To achieve the objective the following hypothesis has been
tested:
Literature Review
Rao (1985), find out that pubic enterprises significantly in- • there is no significant change in the financial and oper-
fluence the economic development of our country. Mathur ating performance of the profit and loss making Central
(1993), revealed in his study that Public Sector Enterprises Public Sector Enterprises after disinvestment.
(PSEs) performance is far from satisfactory. Majumdar (1995),
while evaluating the relative performance of public, joint and Methodology
private sector opined that private sector is more efficient than For the purpose of the present study, secondary data have
public and joint sector. Nanjundappa (1998), concluded that been used. The secondary data have been collected from pub-
the process of disinvestment can be meaningful when the test lished reports of selected Indian public sector enterprises and
of public purpose is applied and when the manner of utilizing records of Government of India. Statistical test has also been
the proceeds of disinvestment is clearly stated to be in the na- applied in appropriate context. Ratio analysis, mean, stand-
tional interest. Chundawat, Bhanawat and Mehta (2005), ard deviation, co-efficient of variation, and student ‘t’ test are
study the impact of the disinvestment on the corporate per- used to analyze the data.
formance of the public sector undertakings (PSUs).
Results and Discussion
Need And Scope of The Study An attempt has been made to study the impact of disinvest-
Economic compulsions led to the adoption of new approach ment in Oil and Natural Gas Corporation Ltd, Steel Authority
towards the public sector in the early nineties. Disinvestment of India Ltd., Mahanagar Telephone Nigam Ltd. and Shipping
is a measure towards privatisation step by step with a view to Corporation Ltd. with the help of certain identified indicators
pass on the control of the entire undertaking in the hands of such as operating performance based on sales, investment
the private sectors. Disinvestment of minority shares in CPSEs and employment and corporate liquidity, financial strength
has become an important source of raising resource for the and asset usage.

4 | PARIPEX - INDIAN JOURNAL OF RESEARCH

Volume : 4 | Issue : 4 | April 2015 ISSN - 2250-1991

Table -1
Financial and Operating Performance of Profit Making CPSE
Pre-disinvestment Era Post-disinvestment Era
Ratio t-value P
Mean S.D. C.V. Mean S.D. C.V.
OPERATING PERFORMANCE BASED ON SALES
Gross Profit Ratio 26.15 18.29 69.94 25.32 17.72 69.98 0.14 0.886
Net Profit Ratio 16.56 14.10 85.14 12.66 14.79 116.82 0.84 0.031**
Operating Profit Ratio 24.40 11.89 48.73 26.35 9.31 35.33 0.76 0.454
Material Cost/Net Sales 31.23 23.84 76.34 36.12 19.29 53.41 -0.59 0.556
Manpower Cost/Net 6.52 6.48 99.39 11.40 7.88 69.12 -2.04 0.049**
Sales
R&D Expenditure/Net 0.36 0.05 13.89 0.37 0.09 24.32 -0.27 0.788
Sales
Excise Duty/Net Sales 28.40 21.82 76.83 19.37 16.47 85.03 1.49 0.143
OPERATING PERFORMANCE BASED ON INVESTMENT
Return on Total Assets 8.48 5.61 66.16 12.35 10.29 83.32 -1.40 0.169
Return on Net Capital 18.01 12.73 70.68 21.74 17.11 78.70 -0.76 0.454
Employed
OPERATING PERFORMANCE BASED ON EMPLOYMENT
Net Profit Per Employee 184.35 171.84 93.21 655.09 997.02 152.20 -1.39 0.171
Gross Profit Per 277.21 229.58 82.82 1086.39 1520.94 140.00 -1.70 0.097
Employee
Net Sales Per Employee 876.74 481.36 54.90 2839.01 3212.65 113.16 -2.01 0.052
FINANCIAL STRENGTH
Debt Equity Ratio 1.26 0.40 31.75 2.56 2.71 105.86 -1.96 0.057
Proprietary Ratio 47.07 7.25 16.51 45.97 22.72 56.20 0.61 0.547
Solvency Ratio 52.93 6.31 11.92 54.03 23.36 43.24 -0.18 0.851
Fixed Assets to Net 131.77 28.12 21.34 224.16 178.69 79.72 -2.10 0.042**
Worth
Interest Coverage Ratio 8.23 9.81 119.20 51.89 124.79 240.49 -1.60 0.117
CORPORATE LIQUIDITY
Current Ratio 1.80 0.38 21.11 1.93 0.58 30.05 -0.78 0.436
Liquid Ratio 1.21 0.57 47.11 1.28 0.66 51.56 -0.36 0.723
ASSET USAGE
Inventory Turnover Ratio 4.06 1.32 32.51 6.85 5.65 82.48 -1.99 0.054
Inventory Conversion 100.38 34.94 34.81 92.51 62.09 67.12 0.47 0.641
Ratio
Debtors Turnover Ratio 7.75 4.84 62.45 9.06 2.85 31.46 -1.07 0.291
Average Collection 79.38 66.76 84.10 46.15 24.45 52.98 2.20 0.034**
Period
Fixed Assets Turnover 0.68 0.23 33.82 0.89 0.43 48.31 -1.78 0.082
Ratio
Working Capital 2.93 1.23 41.98 -96.82 483.31 -499.18 0.84 0.402
Turnover Ratio
Capital Turnover Ratio 78.95 25.80 32.68 90.03 35.89 39.86 -1.10 0.278
* Significant at 0.01 level
** Significant at 0.05 level
Source: Public Sector Enterprises (PSE’s) Survey, Various Issues.

Table -2
Financial and Operating Performance of Loss Making CPSE
Pre-disinvestment Era Post-disinvestment Era
Ratio t-value P
Mean S.D. C.V. Mean S.D. C.V.
OPERATING PERFORMANCE BASED ON SALES
Gross Profit Ratio 24.23 12.05 49.73 26.13 9.50 36.36 -0.54 0.592
Net Profit Ratio 10.78 8.38 77.74 16.83 7.75 46.05 -2.23 0.031**
Operating Profit Ratio 24.40 11.89 48.73 26.35 9.31 35.33 -0.56 0.578
Material Cost/Net Sales 2.80 0.29 10.36 2.97 0.57 19.19 -0.69 0.494
Manpower Cost/Net Sales 10.87 2.72 25.02 14.23 6.31 44.34 -1.75 0.087
R&D Expenditure/Net Sales - - 0.00 - - 0.00 - -
Excise Duty/Net Sales - - 0.00 - - 0.00 - -
OPERATING PERFORMANCE BASED ON INVESTMENT

5 | PARIPEX - INDIAN JOURNAL OF RESEARCH

Volume : 4 | Issue : 4 | April 2015 ISSN - 2250-1991

Return on Total Assets 9.09 2.46 27.06 10.05 3.07 30.55 -0.98 0.335
Return on Net Capital Employed 12.80 3.93 30.70 14.93 3.82 25.59 -1.62 0.114
OPERATING PERFORMANCE BASED ON EMPLOYMENT
Net Profit Per Employee 45.68 35.20 77.06 1194.77 2829.26 236.80 -1.39 0.171
Gross Profit Per Employee 103.37 52.17 50.47 1410.80 2638.48 187.02 -1.70 0.097
Net Sales Per Employee 543.36 410.10 75.47 6309.61 9850.02 156.11 -2.01 0.052
FINANCIAL STRENGTH
Debt Equity Ratio 5.85 4.90 83.76 2.06 1.33 64.56 3.72 0.001*
Proprietary Ratio 21.86 10.09 48.70 38.72 12.21 32.73 -4.22 0.000*
Solvency Ratio 78.14 10.21 13.07 61.28 12.95 21.13 4.09 0.000*
Fixed Assets to Net Worth 498.78 467.90 93.81 144.73 67.69 46.77 3.82 0.000*
Interest Coverage Ratio 3.29 2.20 66.87 36.59 74.24 202.90 -1.60 0.117
CORPORATE LIQUIDITY
Current Ratio 1.84 0.87 47.28 1.90 0.61 32.11 0.22 0.829
Liquid Ratio 1.73 0.83 47.98 1.85 0.58 31.35 0.53 0.601
ASSET USAGE
Inventory Turnover Ratio 31.82 23.76 74.67 47.80 30.44 63.68 -1.65 0.107
Inventory Conversion Ratio 24.39 19.87 81.47 13.37 10.87 81.30 2.24 0.031**
Debtors Turnover Ratio 9.18 2.44 26.58 7.23 3.06 42.32 1.98 0.054
Average Collection Period 42.67 12.29 28.80 59.08 24.38 41.27 -2.27 0.029
Fixed Assets Turnover Ratio 0.67 0.08 11.94 0.88 0.14 15.91 -4.97 0.000*
Working Capital Turnover Ratio 15.01 44.39 295.74 3.13 2.42 77.32 1.38 0.176
Capital Turnover Ratio 59.36 17.72 29.85 61.88 17.65 28.52 -0.41 0.679

* Significant at 0.01 level rent and liquid ratios. It shows that after partial disinvestment
** Significant at 0.05 level in profit and loss making CPSEs, the management of these
Source: Public Sector Enterprises (PSE’s) Survey, Various enterprises is able in meet out its current obligations in time.
Issues.
Asset Usage: The examination of the asset usage reveals that
Operating Performance (Based on Sales): It has been ob- the efficiency of the utilization of the assets of profit mak-
served from the table that there is decline in the gross and net ing CPSEs has improved significantly during the post-disin-
profit of the profit making CPSEs after disinvestment. But on vestment period. But the management of loss making CPSEs
the other hand, the profitability of the loss making CPSEs has failed in the efficiently management of its debtors. In other
improved in the post-disinvestment period as compared to the words, management of these enterprises failed in the timely
pre-disinvestment period. It shows that the management of collection of its debts during the post-disinvestment.
these enterprises efficiently controlled their various expendi-
tures after disinvestment. After partial disinvestment in the Oil and Natural Gas Corpo-
Operating Performance (Based on Investment): While ration Ltd, Steel Authority of India Ltd., Mahanagar Telephone
studying the operating performance based on investment, it Nigam Ltd. and Shipping Corporation Ltd., the profitability of
has found that there is an improvement in the mean scores of the loss making CPSEs has been improved in the post-disin-
return on total assets and return on capital employed of both vestment period. But the dependence of profit making CPSEs
profit and loss making CPSEs after disinvestment. It shows on outsiders’ funds has increased after disinvestment.
that the management of the selected units of both profit and
loss making CPSEs utilized their resources efficiently in the Conclusion
post-disinvestment period. Public sector reforms in India are the need of the hour. The
preliminary results of the disinvestment experience shows that
Operating Performance (Based on Employment): It is no- with the movement from public to private led to improvement
ticed form the above table that the contribution of the em- in the profitability of the loss making CPSEs and the contri-
ployees in the net profit, gross profit and net sales of these bution of the employees of all these sample units has also
units has shown remarkable improvement after disinvestment. been increased. It is suggested that in profitable enterprises,
It may be possible due to the increased competition in these equity should also be offered to the public and employees.
units and make more provision for the development pro- This will give the disinvestment process better acceptability.
grammes of the employees. However the change is not sig- Disinvestment can lead to increase the efficiency through bet-
nificant. ter utilization of resources but reckless privatization may not
provide the ultimate solution for longer period of time. The
Financial Strength: It is exhibit form the table that the de- stress should be on making PSU’s work more efficiently rath-
pendence of the profit making CPSEs on outsiders’ funds er than reducing public ownership in the economy. Efficiency
has increased in the post-disinvestment period. It shows that may also be achieved by changing the quality of management
the management of these units is utilizing more debt in their and not only by changing the ownership. Before initiating an-
various financial plans during the post-disinvestment. On the other round of disinvestment, the government should deeply
other hand there is decline in the dependence of loss making consider the recommendation of Rangarajan Committee on
CPSEs on outsiders’ funds. The change is significant at 1 per- privatization.Bottom of Form.
cent level of significance except interest coverage ratio.
• The public sector units those who are sick should be
Corporate Liquidity: As far as the corporate liquidity of the closed down and their assets should be transferred to
profit and loss making CPSEs is concerned, it has been found the asset management companies to get a right price for
that there an upward movement in the mean scores of cur- the assets.

6 | PARIPEX - INDIAN JOURNAL OF RESEARCH

Volume : 4 | Issue : 4 | April 2015 ISSN - 2250-1991

• To compete in this global competition and to improve

their efficiency in financial control, cost control, quality
control, there should be more provision for the R&D and
training and development programmes of the PSEs.
• Professional management and full autonomy should be
given in the matter of pricing, investment and employ-
ment of the public sector enterprises.
• There should be check on the excessive use of debt/out-
siders funds and central public sector enterprises should
arrange the funds from their internal resources.
• The proceeds from disinvestment should be utilized part-
ly for restructuring PSUs which can become viable and
another part is to be used for investment in the social
sectors like education, health, water supply and the like.

REFERENCES

Chundawat D.S., Bhanawat, S. Shurveer, and Mehta, Banu, (2005), “Disinvestment and Corporate Performance”, The Indian Journal of Commerce, Vol. 58, No. 4, Oct.- Dec.
PP. 52-61. | Mathur, B.P. (1993), “Public Sector Enterprises (PSEs) Management”, Mcmillan India Ltd., New Delhi. | Majumdar, K. Sumit (1995), “Public, Joint and Private
Sector in Indian Industry Evaluating Relative Performance Difference”, Economic and Political Weekly, Bombay, Feb. | Naib, Sudhir, (2004), “Disinvestment in India – Policies,
Procedures, Practices,” Sage Publication, New Delhi. | Nanjundappa, D.M. (1998), “Disinvestment and Policy Imperatives”, Yojna, December, P. 8. | Rao, Nageshwar, (1985)
“Evaluation of Profitability Performance in Public Sector Enterprises (PSEs),” Indian Journal of Commerce, Vol. XXXVIII, Part 3, No. 144, July-Sep. , PP. 19-27. | vol. 1 | Standing
Conference of Public Enterprises (SCOPE), Public Enterprises Survey, 2011-12, vol. 1 | Web Resources: www.divest.nic.in

7 | PARIPEX - INDIAN JOURNAL OF RESEARCH