A PROJECT REPORT ON

DISINVESTMENT POLICY OF INDIA

Submitted

In partial fulfilment of

POST GRADUATE DIPLOMA IN MANAGEMENT

2016-18

Submitted To Submitted By

Dr. P.CHAKRAVARTHI CH. NIKHIL SRINIVAS GUPTA

T-12025

Page | 1
 A PROJECT REPORT ON

DISINVESTMENT POLICY OF INDIA

Submitted

In partial fulfilment of

POST GRADUATE DIPLOMA IN MANAGEMENT

2016-18

Name of the Faculty Guide Dean

Dr. P.CHAKRAVARTHI Dr. SABYASACHI RATH

 DECLARATION

I CH. NIKHIL SRIINIVAS GUPTA Regd No: T=12025 hereby declare that this
project “DISINVESTMENT POLICY OF INDIA” is an original work carried out by me
under the guidance of Dr. P.CHAKRAVARTHI. The report submitted by me is a
bonafide work carried by me of my own efforts and it has not been submitted to any
other institute/ university/Conference or published any time before.

Date:

Place: Hyderabad CH.NIKHIL SRINIVAS GUPTA

T-12025
 FACULTY GUIDE CERTIFICATE

I Prof. Dr, P.CHAKRAVARTHI certify that CH.NIKHIL SRINIVAS GUPTA has carried
out “A PROJECT REPORT ON DISINVESTMENT POLICY OF INDIA” as
course project in the partial fulfilment for the award Of Post Graduate Diploma in
Management from Vishwa Vishwani Institute of Systems & Management,
Hyderabad. Further, I hereby declare that the report submitted by him here with is
genuine to the best of my knowledge and is acceptable

Date: Signature of Faculty Guide

Place: Hyderabad (Dr. P.Chakravarthi)

 ACKNOWLEDGEMENT

It is a great sense of satisfaction and a matter of privilege to me to complete this

project a part of course.

I sincerely record my appreciation to all, who have contributed in preparing this

report with crucial evaluation and suggestions.

I take this opportunity to thank our Dean, Dr. SABYASACHI RATH, for providing me
a chance to carry out this project.

I am very much grateful to my Faculty Guide, Dr. P.CHAKRAVARTHI, for his

valuable guidance provided to me in the completion of this project.

I am thankful to my family and friends for their moral support throughout the
completion of this project report.

Lastly I am thankful to my college, VVISM, Hyderabad that provided me this

opportunity.

CH.NIKHILSRINIVAS GUPTA

T-12025
 TABLE OF CONTENTS

CONTENTS PAGE NO.

Introduction and Definition 7
Objectives of Disinvestment 8
Importance of Disinvestment 9
Merits of Disinvestment 9
Demerits of Disinvestment 10
Salient Features of Disinvestment 11
Approaches in Disinvestment 12
Procedure followed in Disinvestment 13
Problems in Disinvestment 14
Indian scenario 16
Implication of Disinvestment on Indian 16
economy
Disinvestments- A Historical Perspective 17
Disinvestment of Public Sector Units in 38
India
Latest News about Disinvestment 40
National Investment Fund 42
Restructuring of NIF 43
Bibliography 44
 Disinvestment policy of India

Definition of Disinvestment
At the very basic level, disinvestment can be explained as follows:
“Investment refers to the conversion of money or cash into securities, debentures,
bonds or any other claims on money. As follows, disinvestment involves the
conversion of money claims or securities into money or cash.”
Disinvestment can also be defined as the action of an organisation (or government)
selling or liquidating an asset or subsidiary. It is also referred to as ‘divestment’ or
‘divestiture.’
In most contexts, disinvestment typically refers to sale from the government, partly or
fully, of a government-owned enterprise.
A company or a government organisation will typically disinvest an asset either as a
strategic move for the company, or for raising resources to meet general/specific
needs.
• Disinvestment involves sale of only part of equity holdings held by the
government to private investors.
• Disinvestment process leads only to dilution of ownership and not transfer of full
ownership. While, privatization refers to the transfer of ownership from
government to private investors.
• Disinvestment is called as ‘Partial Privatization’.
Objectives of Disinvestment
The new economic policy initiated in July 1991 clearly indicated that PSUs had
shown a very negative rate of return on capital employed. Inefficient PSUs had
become and were continuing to be a drag on the Government’s resources turning to
be more of liabilities to the Government than being assets. Many undertakings
traditionally established as pillars of growth had become a burden on the economy.
The national gross domestic product and gross national savings were also getting
adversely affected by low returns from PSUs.
About 10 to 15 % of the total gross domestic savings were getting reduced on
account of low savings from PSUs. In relation to the capital employed, the levels of
profits were too low. Of the various factors responsible for low profits in the PSUs,
the following were identified as particularly important:

 Price policy of public sector undertakings

 Under–utilisation of capacity
 Problems related to planning and construction of projects
 Problems of labour, personnel and management
 Lack of autonomy

Hence, the need for the Government to get rid of these units and to concentrate on
core activities was identified. The Government also took a view that it should move
out of non-core businesses, especially the ones where the private sector had now
entered in a significant way. Finally, disinvestment was also seen by the Government
to raise funds for meeting general/specific needs.
In this direction, the Government adopted the 'Disinvestment Policy'. This was
identified as an active tool to reduce the burden of financing the PSUs.
The following main objectives of disinvestment were outlined:
• To reduce the financial burden on the Government
• To improve public finances
• To introduce, competition and market discipline
• To fund growth
• To encourage wider share of ownership
• To depoliticise non-essential services
Importance of Disinvestment
Presently, the Government has about Rs. 2 lakh crore locked up in PSUs.
Disinvestment of the Government stake is, thus, far too significant. The importance
of disinvestment lies in utilisation of funds for:

 Financing the increasing fiscal deficit

 Financing large-scale infrastructure development
 For investing in the economy to encourage spending
 For retiring Government debt- Almost 40-45% of the Centre’s revenue receipts
go towards repaying public debt/interest
 For social programs like health and education

Disinvestment also assumes significance due to the prevalence of an increasingly

competitive environment, which makes it difficult for many PSUs to operate
profitably. This leads to a rapid erosion of value of the public assets making it critical
to disinvest early to realize a high value.

Merits of Disinvestment (Privatisation) Policy of India

 To obtain release of the large amount of public resources locked up in non-

strategic Public sector units for re-employment in areas that are much higher
on the social priority e.g. health, family, welfare etc. and to reduce the public
debt that is assuming threatening proportions.
 Privatization would help stemming further outflows of the scarce public
resources of sustaining the unviable non-strategic public sector unit.
 Privatisation would facilitate transferring the commercial risk to which the tax
payer’s money locked up in the public sector is exposed to the private sector
wherever the private sector is willing to step in.
 Privatisation would release tangible and intangible resources such as large
manpower locked up in managing PSU’s and release them for deployment in
high priority social sector.
 Disinvestment would expose privatized companies to market disciplines and
help them become self-reliant.
  Disinvestment would result in wider distribution of wealth by offering shares of
privatized companies to small investors and employees.
 Disinvestment would have a beneficial effect on the capital market. The
increase in floating stock would give the market more depth and liquidity, give
investors early exit options, help establish more accurate benchmarks for
valuation and raising of funds by privatized companies for their projects and
expansion.
 Opening up the public sector to private investment will increase economic
activity and have an overall beneficial effect on economy, employment and tax
revenues in the medium to long term.
 Bring relief to consumers by way of more choices and better quality of
products and services, e.g. Telecom sector.

Demerits/Criticism of Disinvestment

 The amount rose through disinvestment from 1991-2001 was Rs. 2051 crores
per year which is too meagre. Further, the way money released by
disinvestment is being used, remaining undisclosed.
 The loss of PSU’s is rising. It was 9305 crore in 1998 and 10060 crore in
2000.
 This is welcome but disinvestment of profit making public sector units will rob
the government of good returns. Further, if department of disinvestment wants
to get away with commercial risks, why should it retain equity in disinvested
PSU’s, e.g. Balco (49%), Modern Foods (26%) etc.
 The growth in social sector is not in any way hindered by non-availability of
manpower.
 This is true but only when the government, ensures that the market system
regulates and disciplines privatized firms taking care of public’s interest.
 Privatization programme is generally not been affected through the public
sales of shares. Earlier, sale of shares (1991-96) attracted the employees to a
limited extent and was not friendly to small investors and employees.
  In most cases, shares of disinvested PSU’s are by and large in the hands of
institutions with little floating stock. The present policy of privatization through
the strategic partner route would also not achieve these objectives.
 Hindustan Lever has categorically stated that it has no plans for any capital
infusion in Modern food industries acquired by it in January, 2002. The
supporter of disinvestment had thought that tax payer’s money would be
saved through private sector investment.
 No monopoly is good. Only fair and full competition can bring relief to
consumers.

What are the Salient features of Current Disinvestment Policy?

The policy of disinvestment has evolved since the early 1990s and now (budget
2016), the government has brought some changes including bringing back strategic
disinvestment (previously strategic sale). Budget 2016 has brought several notable
changes including renaming of Department of Disinvestment as Department of
investment and Public Asset Management (DIPAM). Following are the main features
of the current disinvestment policy.
(a) Public Sector Undertakings are the wealth of the Nation and to ensure this wealth
rests in the hands of the people, promote public ownership of CPSEs;
(b) In the case of disinvestment through minority stake (share) sale in listed CPSEs,
the Government will retain majority shareholding, i.e. at least 51 per cent of the
shareholding and management control of the Public Sector Undertakings;
(c) Strategic disinvestment by way of sale of substantial portion of Government
shareholding in identified CPSEs up to 50 per cent or more, along with transfer of
management control.
The government also separately mentioned disinvestment targets under the two
types: disinvestment target for the current financial year is Rs. 56,500 crore
comprising Rs. 36,000 crores from disinvestment of CPSEs and Rs. 20,500 crores
from “Strategic Disinvestment”.
Different Approaches to Disinvestments
There are primarily three different approaches to disinvestments (from the sellers’
i.e. Government’s perspective)
Minority Disinvestment
A minority disinvestment is one such that, at the end of it, the government retains a
majority stake in the company, typically greater than 51%, thus ensuring
management control.
Historically, minority stakes have been either auctioned off to institutions (financial)
or offloaded to the public by way of an Offer for Sale. The present government has
made a policy statement that all disinvestments would only be minority
disinvestments via Public Offers.
Examples of minority sales via auctioning to institutions go back into the early and mid-
90s. Some of them were Andrew Yule & Co. Ltd., CMC Ltd. etc. Examples of minority
sales via Offer for Sale include recent issues of Power Grid Corp. of India Ltd., Rural
Electrification Corp. Ltd., NTPC Ltd., NHPC Ltd. etc.
Majority Disinvestment
A majority disinvestment is one in which the government, post disinvestment, retains
a minority stake in the company i.e. it sells off a majority stake.
Historically, majority disinvestments have been typically made to strategic partners.
These partners could be other CPSEs themselves, a few examples being BRPL to
IOC, MRL to IOC, and KRL to BPCL. Alternatively, these can be private entities, like
the sale of Modern Foods to Hindustan Lever, BALCO to Sterlite, and CMC to TCS
etc. Again, like in the case of minority disinvestment, the stake can also be offloaded
by way of an Offer for Sale, separately or in conjunction with a sale to a strategic
partner.
Complete Privatisation
Complete privatisation is a form of majority disinvestment wherein 100% control of
the company is passed on to a buyer. Examples of this include 18 hotel properties of
ITDC and 3 hotel properties of HCI. Disinvestment and Privatisation are often loosely
used interchangeably. There is, however, a vital difference between the two.
Disinvestment may or may not result in Privatisation.
When the Government retains 26% of the shares carrying voting powers while
selling the remaining to a strategic buyer, it would have disinvested, but would not
have ‘privatised’, because with 26%, it can still stall vital decisions for which
generally a special resolution (three-fourths majority) is required.

Procedure followed in Disinvestment

The disinvestment process of individual CPSEs has evolved over time and is 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 current disinvestment process involves the following steps

a) In-principle consent by the Administrative Ministry of the CPSE concerned;

b) Approval of the proposal to disinvest by CCEA;

c) Constitution of an Inter-Ministerial Group (IMG) with the approval of the Finance

Minister to guide and oversee the disinvestment process;

d) IMG appoints Advisers for the transaction including Merchant Bankers/ Book
Running Lead Managers (BRLMs)/ Legal Advisers;

e) Presentation by BRLMs before High Level Committee (HLC) on valuation;

f) HLC recommends price band/ floor price to ‘Alternative Mechanism’ taking into
consideration the recommendation of the BRLMs;

g) Approval by ‘Alternative Mechanism’ of recommended price band/ floor price,

method of disinvestment, price discount for retail investors and employees, etc.
Problems in Disinvestment

Disinvestment was a very bold and important step initiated by the government as a
part of its reform measures. But the way it was handled has defeated its very
purpose. The challenges before investment are as follows-

Social Problem: Process of disinvestment is not favoured socially as it is against

the interest of socially disadvantageous people and society at large. This process will
definitely affect the social objectives of the government.

Political Problem: The coalition government at the centre with a number of parties
has posed a serious threat to this programme. Conflicting interest has made it
difficult to arrive at a national consensus.
Economic Problem: Most of the units identified for disinvestment are in a very
bad shape which does not offer good returns. The Government due to paucity of
funds is also not in a position to revive it.

Legality of the disinvestment process has been challenged on a variety of grounds

that slowed the sale of public assets. However, there were two significant judicial
rulings that broadly set the boundaries of the Disinvestment process. These are:

Privatisation is a policy decision, prerogative of the executive branch of the state;

courts would not interfere in it

Privatisation of the PSE created by an act of parliament would have to get the
parliamentary approval

While the first ruling gave impetus for strategic sale of many enterprises like
Hindustan Zinc, Maruti, and VSNL etc. since 2000, the second ruling stalled the
privatisation of the petroleum companies, as government was unsure of getting the
laws amended in the parliament.

Less inclination of organization towards Disinvestment- The number of bidders for

equity has been small not only in the case of financially weak PSUs, but also in that
of better-performing PSUs.

Besides, the government has often compelled financial institutions, UTI and other
mutual funds to purchase the equity which was being unloaded through
disinvestment. These organizations have not been very enthusiastic in listing and
trading of shares purchased by them as it would reduce their control over PSUs.
Instances of insider trading of shares by them have also come to light. All this has
led to low valuation or under-pricing of equity.
Indian Scenario

A large number of PSUs were set up across sectors, which have played a significant
role in terms of job creation, social welfare, and overall economic growth of the
nation; they rose to occupy commanding heights in the economy. Over the years,
however, many of the PSUs have failed to sustain their growth amidst growing
liberalization and globalization of the Indian economy. Loss of monopoly and a
protectionist regime, and rising competition from private sector competitors have
seen many of the government owned enterprises lose their market share drastically.
In many instances, many of the PSUs have found themselves unable to match up to
the technological prowess and efficiency of private sector rivals, although many have
blamed lack of autonomy and government interventions for their plight.

Implication of Disinvestment to Indian Economy

India is already confronting the challenges of fiscal deficit due to the huge
symphonizing of capital for the social sector specially flagship program of
government NREGA. The current account deficit is also the cause of concern for the
Indian government. The expenditure on different front namely defense (16% of GDP)
is larger in extent and worthwhile also. But the growing fiscal deficit and current
account deficit will not be bearable for longer span of time. There is immediate need
to tame this gap. The only way out is disinvestment of Public Sector Undertakings. It
results in efficient use of resources whereby scarce resources like land, capital and
machinery are put to more efficient use. The economy as a whole is benefited by
increase efficiency of the units and the fiscal mess is reduced by lessening of
liabilities. Inefficient PSU's were largely responsible for the macro-economic crisis
faced by India during 1980's although they were set up for the purpose of providing
employment and the same time generate revenue surplus. But they could not stand
to expectations. Hence steps for disinvestment had to be taken.
 Disinvestments-A Historical Perspective
For the first four decades after Independence, the country was pursuing a path of
development in which the public sector was expected to be the engine of growth.
However, the public sector overgrew itself and its shortcomings started manifesting
in low capacity utilisation and low efficiency due to over manning, low work ethics,
over capitalisation due to substantial time and cost over runs, inability to innovate,
take quick and timely decisions, large interference in decision making process etc.
Hence, a decision was taken in 1991 to follow the path of Disinvestment.
Periodic Analysis of Disinvestment PHASE
1 (1991-92 to 1995-96)
Phase one Started when Chandrasekhar government, while presenting the interim
budget for the year 1991-92 declared disinvestment up to 20%.The objective was to
broad-base equity, improve management, enhance availability of resources for these
PSEs and yield resources for exchequer.

Industries Reserved for Public sector prior to 1991

1. Arms and Ammunition and allied items of defence equipment.
2. Atomic energy.
3. Iron and steel.
4. Heavy castings and forgings of iron and steel.
5. Heavy plant and machinery required for iron and steel production, for mining.
6. Heavy electrical plants.
7. Coal and lignite.
8. Minerals oils.
9. Mining of iron ore, manganese ore, chrome ore, gypsum.
10. Mining and processing copper, lead, zinc, tin.
11. Minerals specified in the Schedule to the Atomic Energy.
12. Aircraft.
13. Air transport.
14. Rail transport.
15. Ship building.
16. Telephones, Telephone cables, Telegraph and Wireless apparatus (excluding radio
receiving sets).
17. Generation and distribution of electricity.
The Industrial Policy Statement of 24th July 1991 stated that the government would
divest part of its holdings in selected PSE’s, but did not place any cap on the extent
of disinvestment. Nor did it restrict disinvestment in favour of any particular class of
investors. During this Phase the sole was to generate revenue without following any
objective seriously.
Industries Reserved for Public Sector after July, 1991
• Arms and Ammunition and allied items of defence equipment, aircraft and warship.
• Atomic Energy.
• Coal and Lignite.
• Mineral Oils.
• Mining of iron ore, manganese ore, chrome ore, gypsum, sulphur, gold and
diamond.
• Mining of copper, lead, zinc, tin, molybdenum and wolfram.
• Minerals specified in the schedule to Atomic Energy Order, 1953.
• Railway Transport.
Disinvestment in 1991-92
A steering Committee was formed for selection of PSEs for disinvestments. The
Department of Public Enterprises (DPE) coordinated all activities under the Ministry
of Industry.
• First Tranche of Disinvestment (December, 1991)
Out of 244 public enterprises 41 were selected, but 10 were dropped on the grounds
of being consultancy firms, negative asset value or they incurred losses in previous
financial year.
The Remaining 31 were grouped into 3 categories “Very Good”, “Good” and
“Average” on the basis of net assets value per share vis-a-vis face value of Rs10 as
on March,1991. The total value of equity in each basket was Rs50 million.
Bids were invited from 10 financial institutions/ mutual funds which consisted of 825
bundles each consisting of 9 PSEs. A total of 710 bids for 533 bundles were
received from 9 mutual funds/institutions and 406 bundles for a total value of
Rs14.2billion were sold. Unit Trust of India was the major purchaser accounting for
Rs.7.75 billion of the sale.
 • Second Tranche of Disinvestment (February, 1992)
In second tranche DPE asked ICICI to evaluate and advice issue price equity of
selected PSEs. A List of 16 PSE’s was prepared and shares were grouped into 120
bundles as before. The reserve price fixed per bundle was Rs 10.08 crore. Bids were
invited from 36 institutions and banks. A total of Rs. 1611 crore were realised with
Unit Trust of India again being the major purchaser. The Shares of Metal Scrap
Trading Corporation remained unsold.

Details of firms disinvested in 1991-1992

Source: percentage disinvested from Public Enterprises Survey, 1995-96, VOL- I
and number of shares disinvested is from Public Accounts Committee 1993-94, 75th
report, 10th Lok Sabha.

The Narasimha Rao Government kick started this phase with small lots of
disinvestment of shares in 47 companies, a record. A sum of Rs 3,038 Crore was
generated against a target of Rs 2,500 Crore making 1991-92 one of only three
years in the last 13 when actual disinvestments receipts exceeded the target.
Disinvestment in 1992-93
As per the budget of 1992-93 Rs. 3500 crore were to be raised by disinvestment
during the year. Out of this Rs. 1000 crore was meant for National Renewal Fund
(NRF) which was set up in February, 1992 to protect the interest of workers and
provide asocial safety net for labour.
• First Tranche of Disinvestment (October, 1992)
In this phase auctioning of shares on individual PSE basis was done. Tenders were
invited for a total of 8 PSEs. The minimum bid limit was set at Rs. 2.5 crore. The
minimum reserve price was fixed on the basis of recommendations from merchant
bankers like ICICI, IDBI and SBCM (State Bank of Capital Market) The average of
their prices was set as the “Upset Price”. A total of 12.87 crore shares were sold for
a value of Rs 681.95 crore with 286 bids being received.
Details of PSE’s Disinvested in October 1992
 • Second Tranche of Disinvestment (December, 1992)
In November, 1992 the government invited bids for the purchase of 46.27 crore
shares of 14 PSEs. The minimum bid limit was reduced to Rs 1 crore from Rs 2.5
crore. The criterion was kept same as in first tranche. A total of 225 bids were
received and 31.06 crore shares of 12 PSEs were sold at a total amount of
Rs1183.83 crores.
Details of the firms disinvested in December, 1992.

• Third Tranche of Disinvestment (March, 1993)

Shares of 15 PSEs were offered for sale thorough auction. Out of 192 bids which
were received, 57 bids emerged successful on the basis of the reserve prices fixed
by the core group based on the recommendations of the merchant bankers. A total
amount of Rs 46.73 crore was realised through sale of 1.0096 crore shares of 9
PSEs.
Disinvestment in 1993-94
The target during this fiscal year was kept at Rs 3500 crore but the government
could not go in for further sale of shares due to unfavourable stock market conditions
through 1993-94.
Disinvestment in 1994-95
No divestment of PSE shares took place during 1993-94 due to adverse market
conditions. In spite of this an advertisement for sale of shares in some PSE’s was
released in March 1994. Actual realisation of funds took place from this round of
divestment took place in 1994-95. Changes effected in the procedure to encourage
divestment are: Bidding amount was lowered from Rs 1,00,000 to Rs 25,000 or
value of 100 shares(whichever higher) Registered FI ’s were permitted for auction of
PSE shares.
• First Tranche of Disinvestment (March – April1994)
Considering the stock market conditions, Government evaluating the
recommendations of two merchant bankers – Industrial Credit and Investment
Corporation of India, and Industrial Development Bank of India fixed the minimum
price to off-load shares of 7 PSE in March 1994.Out of these 7 PSE, only 1 PSE was
not sold as no bid had been received.
PSE’s Disinvested in March/April, 1994
 • Second Tranche of Disinvestment (October 1994)
Notice inviting tenders was issued in October 1994 for sale of shares in seven
PSE’s. Shares were not sold for MTNL as there was no bid. Non-Resident Indians
(NRIs) and Overseas Corporate Bodies (OCBs) were permitted to bid for the shares
for the first time.

PSE’s disinvested in October, 1994

• Third Tranche of Disinvestment (January 1995)

In January 1995 shares of 6 PSEs were offered for sale. Out of 556 bids received,
209 were accepted in respect to 5 companies and government decided not to sell
shares in VSNL.
PSE disinvested in January, 1995

Disinvestment in 1995 – 1996

Against the target of Rs 7000 crore, the government decided to disinvest from only 4
PSEs – MTNL, SAIL, CONCOR and ONGC in October 1995.
PSE Disinvested in October 1995

In addition, shares of Industrial Development Bank of India (IDBI) were disinvested

during the year and an amount of Rs 193 crore was realised. Although Public
Enterprises Survey does not reflect this amount but Ministry of Finance takes this
into account. So the total disinvestment receipts for the year was Rs 362 crore
(Rs.168.48 crore from disinvestment in 4 PSEs plus Rs 193 crore from disinvestment
in IDBI).
PHASE II (1996-97 to 1997-98): Disinvestment Commission
The government constituted Public Sector Disinvestment Commission under G. V.
Ramakrishna on 23 August, 1996 for a period of 3 years with the objective of
preparing an over-all long term disinvestment programme for public sector
undertakings.
The main terms of reference were:
A comprehensive overall long-term disinvestment programme (extent of
disinvestment, mode of disinvestment etc.) within 5-10 years for the PSUs referred to
it by the Core Group. To select the financial advisors for specified PSUs to facilitate
the disinvestment process.
By December 1997, the commission had given six reports included
recommendations in 34 enterprises. The commission also showed concern about
slow progress in implementation of its recommendations and it was particularly
critical of government’s going ahead with strategic sales leading to joint ventures in
some PSEs not referred to the commission.
However its power was axed later by the government. Out of 72 companies referred
to it the commission gave its recommendations on 58 PSEs and finally the
commission lapsed on 30 November, 1999.
Disinvestment Modalities Recommended by the Disinvestment Commission
Disinvestment in 1996-97
In 1996-97 a target of Rs. 5000 crore was fixed for mobilization of resources through
disinvestment of PSE shares. In order to do this, companies from petroleum and
communication sectors were chosen namely IOC and VSNL. But due to
unfavourable market conditions the GDR of only VSNL could be issued. In the GDR,
39 lakh shares of VSNL were disinvested resulting in an amount of Rs 380 crore.

Disinvestment in 1997-98
The budget for 1997-98 had taken a credit for an amount of Rs 4800 crore to be
realised from disinvestment of government held equity in PSEs. This was supposed
to be achieved by the disinvestment of MTNL, GAIL, CONCOR and IOC...
A GDR of 40 million shares held by the government in MTNL was offered in
international market in November, 1997. A total of Rs. 902 crore was collected but
due to highly unfavourable market conditions the GDR issue of GAIL, CONCOR, and
IOC was deferred.
Phase III (1998-99 to 2007-2008)
This phase marked a paradigm shift in the disinvestment process. First in the 1998 –
99 budgets BJP government decided to bring down the government shareholding in
the PSEs to 26%to facilitate ownership changes which were recommended by
Disinvestment Commission. In 1999 – 2000 government state that its policy would
be to strengthen strategic PSEs privatise non-strategic PSEs through disinvestment
and for the first time the term ‘privatisation’ were used instead of disinvestment. The
government later formed the Department of Disinvestment on 10 December 1999.
The following criteria were observed for prioritisation for disinvestment:
• Where disinvestments in PSEs would lead to large revenues to the
government
• Where disinvestment can be implemented with minimum impediments and in
relatively shorter time span; and
• Where continued bleeding of government resources can be stopped earlier.
Divestment in 1998 – 99
The government decided to disinvest through offer of shares in GAIL, VSNL,
CONCOR, IOC and ONGC. The budget for 1998– 99 had taken a credit for Rs 5,000
crore to be realised through disinvestment.

Disinvestment in 1999 -2000

The budget for 1999 – 2000 had taken a credit for Rs 10,000 crore to be realised
through disinvestment. The government disinvested from Modern Foods India Ltd
and did a strategic sale to their strategic partner – HLL for Rs 105, 45 crore for a 74
% equity stake. This was the first time government had sold more than 50% holding.
Further government adopted the following ways to raise money through
disinvestment:
Disinvestment in 2000 -2001
Against a target of 10,000 crore, the government realised Rs 1868.73 crore. The
details are:
Disinvestment in 2001 – 2002
Against a target of 12,000 crore, the government realised Rs 3130.94 crore during
the year. The highlight of this disinvestment was that strategic sales were affected in
CMC, HTL, IBP, VSNL and PPL. The details are:

Disinvestment in 2001 – 2002

Disinvestment in 2002 – 2003

Target of the government for disinvestment in the year was Rs 12,000 crore. The
major highlight was the two-stage sell off in Maruti Udyog Ltd with a Rs 400 crore
right issue at a price of Rs 3280 per share of Rs 100 each in which the government
renounced whole of its rights share (6,06,585) to Suzuki, for a control premium of Rs
1000 crore. Relative shareholding of Suzuki and government after completion of the
rights issue was 54.20 % and 45.54 % respectively. The second stage government
offloaded its holding in two tranches – first where government sold 27.5 % of its
equity through IPO in June 2003. The issue was oversubscribed by over 10 times.
Later keeping in view the overwhelming response from sale of Maruti, government
sold its remaining shares in the privatised companies of VSNL, CMC, IPCL, BALCO
and IBP to public through IPO’s. Strategic sale of IPCL was also finalised in May
2002.
The decision to disinvest IPCL was although taken in December 1998, it took three
and half years to finalise the deal. Reliance Petro industries Ltd (Reliance group)
was finally inducted as a strategic partner with a 26 % sale in IPCL. The details of
the disinvestment during 2002 – 2003 are:

From a summary of the Disinvestment from 1991-92 to 2002-2003 we can know

what targets were set by the government and how much was realised. Also the
various companies from which the government has disinvested are mentioned.

Disinvestment from 2003 – 2004 to 2007 - 08

The government had fixed a high target for the year 2003 – 04 as 14,500 crore. The
strategic sale of JCL, and offer sales of many PSEs like MUL, IBP, IPCL, CMC, DCI,
GAIL and ONGC has exceeded the target fixed by the government to a total receipt
of Rs 15,547.41 crore. Out of Rs 12,741.62 crore receipts through sale of minority
shareholding in CPSEs In 2004 – 05 the target was reduced to Rs 4,000 crore and
share sales of NTPC, ONGC spill overs and IPCL shares to employees pushed the
total receipts to Rs 2,764.87 crore. In the other 3 years of this phase – from 2005 –
06 till 2007 – 2008 the government fixed no targets and the total receipts were very
less to with the year 2006 – 07 yielding no receipts at all.
2008-09
The issue of PSU disinvestment remained a contentious issue through this period.
As a result, the disinvestment agenda stagnated during this period. In the 5 years
from 2003-04 to 2008-09, the total receipts from disinvestments were
only Rs. 8515.93 crore.

2009-10 to 2015-16

A stable government and improved stock market conditions initially led to a renewed
thrust on disinvestments. The Government started the process by selling minority
stakes in listed and unlisted (profit-making) PSUs. This period saw disinvestments in
companies such as NHPC Ltd., Oil India Ltd., NTPC Ltd., REC, NMDC, SJVN, EIL,
CIL, MOIL, etc. through public offers.
However, from 2011 onwards, disinvestment activity slowed down considerably.
As against a target of Rs.40, 000 crore for 2011-12, the Government was able to
raise only Rs.14, 000 crore.
However, the subsequent years saw some improvement and the Government was
able to raise Rs. 23,857 crore against a target of Rs. 30,000 crore (Revised Target :
Rs. 24,000 crore) in 2012-13 and Rs. 21,321 crore against a target of Rs. 54,000
(Revised Target : Rs. 19,027 crore) in 2013-14.
The achieved target dropped to Rs. 24,338 crore against a target of Rs. 58,425 crore
in 2014-15 and Rs. 18,409 crore against a target of Rs. 69,500 (Revised Target : Rs.
30,000 crore) in 2015-16.

2016-17
The NDA Government has set an ambitious disinvestment target of Rs. 56,500
crore. As such, 2016-17 is likely to see some big ticket disinvestments taking place.
The Union government aims to raise Rs.56,500 crore by selling stakes in state-
owned enterprises in 2016-17, out of which Rs.36,000 crore will come from minority
stake sales and Rs.20,500 crore from strategic stake sales.
This is 19% lower than the Rs.69,500 crore the government had targeted in the 2015-
16 budget. The target, though, was later scaled down.

The head of a domestic investment bank termed this year’s disinvestment target
“realistic”. He is not authorized to speak to reporters as his firm has been involved in
the government’s disinvestment programme.

Deven Choksey, managing director, KR Choksey Securities Pvt. Ltd, said the basic
intent of the government through disinvestment this year is to monetize land assets
of public sector units and is a positive move.

“The targets are the government’s intent but the numbers look realistic this year,”
Choksey said.

While setting the target for the new fiscal, the government also said that a new policy
for management of government investment in public sector enterprises, including
disinvestment and strategic sale, has been approved.

“We have to leverage the assets of CPSEs (central public sector enterprises) for
generation of resources for investment in new projects. We will encourage CPSEs to
divest individual assets like land, manufacturing units, etc., to release their asset
value for making investments in new projects,” said finance minister Arun Jaitley.

The government is likely to miss its FY16 disinvestment target, the sixth year running
and the 16th time in the 25-year history of disinvestment.

For FY16, the government had set a record target of raising Rs.69,500 crore through
disinvestment, comprising Rs.41,000 crore by way of minority stake sale and an
additional Rs.28,500 crore from strategic sales. The ministry later trimmed i ts target
by roughly 57% to Rs.30,000 crore, citing volatile market conditions. However, the
amount garnered was even lower.
 In 2015-16, the government was able to raise about Rs.18, 400 crore by selling
stakes in Rural Electrification Corp. Ltd (Rs.1, 608 crore), Power Finance Corp. Ltd
(Rs.1, 671 crore), Dredging Corp. of India Ltd (Rs.53.33 crore), Indian Oil Corp. Ltd
(Rs.9, 369 crore), Engineers India Ltd (Rs.643 crore), and NTPC Ltd
(estimated Rs.5, 050 crore), data from the department of disinvestment’s (DoD)
website shows.

Fears of a hard-landing of China’s economy, devaluation of the Yuan and an

increase in interest rates by the US Federal Reserve have muddied market
sentiment and dampened the prospects of share sales by public and private
companies this fiscal. Since the start of this fiscal year, the benchmark BSE Sensex
has fallen a little more than 17%.

Union Budget 2017: Disinvestment target at Rs 72,500 crore; 3 Rail PSUs to

be listed

Government on February 1st 2017 announced that it will raise Rs 72,500 crore
through disinvestment of PSUs, including listing of three railways PSUs IRCTC,
IRFC and IRCON, and proposed merger and consolidation to create globally
competitive public sector units. Finance Minister Arun Jaitley said the government
will put in place a revised mechanism and procedure to ensure time-bound listing of
identified CPSEs on stock exchanges as listing will foster greater public
accountability and unlock their true value.
“The shares of Railway public sector enterprises (PSEs) like IRCTC, IRFC and
IRCON will be listed stock exchanges,” Jaitley said in his 2017-18 Budget speech in
the Lok Sabha. As per the documents, the government has budgeted to raise Rs
72,500 crore through disinvestment in CPSEs in 2017-18, which is higher than the
Rs 45,500 crore raised in the current fiscal as per revised estimate (RE).Fiscal 2016-
17 is the seventh year in a row when the government would not be meeting the
disinvestment target fixed in the Budget. As Rs 56,500 crore was budgeted to be
raised through PSU disinvestment in 2016-17. Jaitley said there are opportunities to
strengthen CPSEs through “consolidation, mergers and acquisitions” so that they
can be integrated across the value chain of an industry.
“It will give them capacity to bear higher risk, avail economies of scale, take higher
investment decisions and create more value for stakeholders. Possibilities of such
restructuring are visible in the oil and gas sector. “We propose to create integrated
public sector oil major which will be able to match the performance of international
and domestic private sector oil and gas companies,” the Finance Minister said.
Jaitley said exchange traded fund (ETF) comprising shares of 10 CPSEs has
received overwhelming response. The government had raised Rs 6,000 crore
through the second tranche of CPSE ETF last month.
“We will continue to use ETF as a vehicle for further disinvestment of shares.
Accordingly, a new ETF with diversified CPSE stocks and other government holding
will be launched in 2017-18,” he said.

Disinvestment of Public Sector Units in India

The below table provides the data for divestment which started from 1991(Barring 2
small units CMC Limited and Patherele Concrete).

Total Receipts (Rs. crore)

Year
(Inflation adjusted to 2016
Prices)

1991-92 17,314

1992-93 9,868

1993-94 0

1994-95 23,387

1995-96 362

1996-97 1,399

1997-98 3,143

1998-99 16,624

1999-00 5,512
2000-01 5,261

2001-02 15,131

2002-03 8,662

2003-04 38,611

2004-05 6,614

2005-06 3590

2006-07 0

2007-08 8,469

2008-09 0

2009-10 38,748

2010-11 33,881

2011-12 19,418

2012-13 30,507

2013-14 18,304

2014-15 26,901

2015-16 33,690

2016-17 56,500 (Target)

 40000

35000

30000

25000

20000

15000

10000

5000
1991-92

0
year

1992-93

Disinvestment of Public Sector Units in India

Latest News about Disinvestment

After many years, Centre on course to meet disinvestment target

For the first time in many years, the Centre is expected to meet its disinvestment
target. It expects to rise close to ₹45,500 crore from its disinvestment programme.

Officials estimate that disinvestment would bring in receipts of at least ₹44,000 crore,
if not the full targeted amount.

The Centre’s total receipts from disinvestment are also estimated to be at an all-time
high this fiscal.
Buybacks, PSU funds
But, instead of going for pure disinvestment issues such as listing, follow on offers
and strategic sales that were expected to improve the functioning of public sector
units (PSU), the Centre has relied more heavily on share buybacks and the PSU
exchange traded fund.

It had raised ₹42,132 crore from stake sales of public sector units in 2015-16. The
Budget has set a target of ₹72,500 crore from disinvestment for the next fiscal.

Aiding this would be the share buyback announcements by public sector Oil India Ltd
and Engineer’s India Ltd that are expected to raise ₹1,527 crore and ₹658.8 crore
respectively.

Announced as part of the capital restructuring guidelines for state run firms in May
2016, share buybacks by PSUs including Nalco, NMDC and Coal India Ltd have
already helped bring in ₹15,585 crore.

According to data with the Department of Investment and Public Asset Management,
it has raised ₹39,368.7 crore this fiscal as disinvestment proceeds including stake
sale of SUUTI holdings in L&T and ITC.

Most recently, the third tranche of the government’s PSU-ETF received bids for over
₹9,200 crore as against the target of ₹2,500 crore.

With direct tax collections slightly subdued, meeting the disinvestment target would
also provide significant relief to the Exchequer in bridging the fiscal deficit that is
estimated at 3.5 per cent of the GDP in 2016-17.

In the Revised Estimates for 2016-17 that was presented along with the Union
Budget 2017-18, the Centre had lowered its disinvestment target from the earlier
estimate of ₹56,500 crore.

Despite plans, it has however, been unable to complete even one strategic
disinvestment in a PSU this fiscal.
National Investment Fund
The Government of India constituted the National Investment Fund (NIF) on 3rd
November, 2005, into which the proceeds from disinvestment of Central Public
Sector Enterprises were to be channelized. The corpus of the fund was to be of
permanent nature and the same was to be professionally managed in order to
provide sustainable returns to the Govt., without depleting the corpus. NIF was to be
maintained outside the Consolidated Fund of India.
The NIF was initialized with the disinvestment proceeds of two CPSEs namely
PGCIL and REC, amounting to Rs 1814.45 crore.
Salient features of NIF

 The proceeds from disinvestment of CPSEs will be channelized into the National
Investment Fund which is to be maintained outside the Consolidated Fund of
India.
 The corpus of the National Investment Fund will be of a permanent nature.
 The Fund will be professionally managed to provide sustainable returns to the
Govt., without depleting the corpus. Selected Public Sector Mutual Funds will be
entrusted with the management of the corpus of the Fund.
 75% of the annual income of the Fund will be used to finance selected social
sector schemes, which promote education, health and employment.

The residual 25% of the annual income of the Fund will be used to meet the capital
investment requirements of profitable and revivable CPSEs that yield adequate
returns, in order to enlarge their capital base to finance expansion/ diversification.

The NIF corpus was thus managed by three Public Sector Fund Managers. The
income from the NIF corpus investments was utilized on select social sector
schemes, namely the Jawaharlal Nehru National Urban Renewal Mission
(JNNURM), Accelerated Irrigation Benefits Programme (AIBP), Rajiv Gandhi
Gramin Vidyutikaran Yojana (RGGVY), Accelerated Power Development and
Reform Programme, Indira Awas Yojana and National Rural Employment
Guarantee Scheme (NREGS).
Restructuring of NIF

On 5th November 2009, CCEA approved a change in the policy on utilization of

disinvestment proceeds. In view of the difficult situation caused by the global
slowdown of 2008-09 and a severe drought in 2009-10, a one-time exemption was
accorded to disinvestment proceeds being deposited into NIF for investment; this
exemption was to be operational for period April 2009-March 2012. All disinvestment
proceeds obtained during the three year period were to be used for select Social
Sector Schemes allocated for by Planning Commission/ Department of Expenditure.
The three year exemption, mentioned above was extended by CCEA on 1st March
2012 by another year, i.e. from April 2012 – March 2013, in view of the persistent
difficult condition of the economy. The utilization of disinvestment proceeds were
thus continued for funding of Social Sector Schemes till 31st March, 2013.

The Govt. on 17th January, 2013 approved restructuring of the National

Investment Fund (NIF) and decided that the disinvestment proceeds with effect
from the fiscal year 2013-14 will be credited to the existing ‘Public Account’
under the head NIF and they would remain there until withdrawn/invested for
the approved purpose. It was decided that the NIF would be utilized for the
following purposes:

 Subscribing to the shares being issued by the CPSE including PSBs and Public
Sector Insurance Companies, on rights basis so as to ensure 51% ownership of
the Govt. in those CPSEs/PSBs/Insurance Companies is not diluted.
 Preferential allotment of shares of the CPSE to promoters as per SEBI (Issue of
Capital and Disclosure Requirements) Regulations, 2009 so that Govt.
shareholding does not go down below 51% in all cases where the CPSE is going
to raise fresh equity to meet its Capex programme.
 Recapitalization of public sector banks and public sector insurance companies.
 Investment by Govt. in RRBs/IIFCL/NABARD/Exim Bank.
 Investment in Bhartiya Nabhikiya Vidyut Nigam Limited and Uranium
Corporation of India Ltd.
Bibliography

Website:

 www.Dipam.gov.in
 www.thehindubusi nessli ne.com
 www.ukessays.com
 www.iosrjournals.org
 www.indianmba.com
 www.shareyouressays.com
 www.indianeconomy.net
 www.bsepsu.com
 www.wikepedia.com

Researches:

 Challenges and Impact of Disinvestment on Indian Economy

By Dr. M. K. Rastogi & Sharad Kr. Shukla