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Disinvestme nt in India:
A Failure Story
The basic objective of starting Public Sector in India was to build infrastructure and
rapideconomic growth. However, a number of problems such as low productivity, over-manningand other economic
compulsions like deterioration of balance of payment position andincreasing fiscal deficit led to the adoption of new approach
B
ACKGROUND
:
1.L
OW
RODUCTIVITY OF INVESTMENT
but savings andinvestment rate more than doubled. From the table it can be seen that it was becauseof low productivity that
2.F
ISCAL
S
ITUATION
IN
1980
During 1980s the fiscal situation deteriorated rapidly. This
was largely due to anescalation of current expenditure of the government. The table below gives theconsolidated
Central and state government revenue, expenditure and deficit over the period 196061 to 1980-81, divided into five
year averages and expressed as percentage of GDP.Consolidate d finances of Central and state Government,
1960-61 to 198990 F M G 1 8 B , G R O U P I V P a
g 2
e 3
. 5 ( 0 . 5 ) ( 2 . 9 ) Capital Expenditure 6 . 6 6 . 0 5 . 1 6 . 9 7 . 5 7 . 1
3.
F
ISCAL
D
EFICIT OF
THE
C
ENTRAL
G
OVERNMENT
6 . . 8 3 1 2 . 1981-82 5 . . 9 4 0 2 .
2 4 . 6 4 3 . 0
1 . 5
0 . 2
1982-83 6 . . 9 8 0 1 . 1983-84 6 . . 7
0 3 . 9 3 4
0 . 7
0 .
0 1 1 . 1984-85 7 . . 6 0 1 2 . 1985-86
. 9 5 5 . 6
1 . 8
8 . . 0 5 2 2 . 1986-87 9 . . 8 8 2 2 .
3 5 . 4 0 5 . 4
2 . 2
2 . 7
1987-88 8 . . 7 7 2 2 . 1988-89 7 . . 4
1 4 . 0 8 4
1 . 7
1 .
2 2 1 . 1989-90 7 . . 3 9 2 3 . 1990-91
. 6 8 3 . 1
2 . 6
A significant factor was governments non-plan expenditure and an inefficient interest payment system.
Again the gulf war of 1990 brought the nation to the brink of international debt.
G R O U P I V P a g e 2 4
contractionary measures and had taken huge amounts fromInternationa l Monetary Fund in July, 1990 and January, 1991
Bank of England,London. Already 20 tons of gold were sold in International market through StateBank of
India.When India turned to IMF and World Bank for further support, they showed concerns over returns on State owned
enterprises and budgetary support provided to them. It was then adecision was taken in July, 1991 to bring about
T
IMELINE
ee on Political Affairs (CCPA) to approve the government intentions to disinvest upto 20% of its equity in selected public
sector undertakings.The disinvestment announcement was made on 4March, 1991 during the interim
budgetsession for 1991-92 under the Chandrashekhar government. The Policy of disinvestment hasevolved over
institutionalize the disinvestment pr ocess was undertaken on a firm footing by constituting the
DisinvestmentC ommission.
The third Phase 198-98-99 to 2007-08 where Department of Disinvestment (Now aMinistry)
and National investment fund was formed to look after the disinvestment pro cess and the funds generated from it.
F M G 1 8 B , G R O U P I V P a g e 2 5
where government is planning to sell its stake in NTPCL, SJVNL, RECL and NMDCL.
PHASE 1 (1991-92
TO
1995-96):
Phase one Started when Chandrashekhar 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
resourcesfor exchequer.
I
NDUSTRIES
R
ESERVED FOR
1991
1.
Arms and Ammunition and allied items of defence equipment.2.Ato mic 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.Minera ls oils.9.Mining
of iron ore, manganese ore, chrome ore, gypsum.10.Mini ng and processing copper, lead, zinc,
transport.15.Ship building. 16. Telephones, Telephone cables, Telegraph and Wireless apparatus
g 2
e 6
Industrial Policy Statement of 24th July 1991 stated that the government would divest part of its holdings in
selected PSEs, 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
I
NDUSTRIES
R
ESERVED FOR
J
ULY
, 1991
1.Arms and Ammunition and allied items of defence equipment, aircraft and warship.2.Atomi c Energy.3.Coal
and Lignite.4.Miner al Oils.5.Mining of iron ore, manganese ore, chrome ore, gypsum, sulphur, gold and
diamond.6.Minin g of copper, lead, zinc, tin, molybdenum and wolfram. 7. Minerals specified in the
R
ANGARAJAN
C
OMMITTEE
1992-1993
The government reconstituted the committee which it formed in February 1992 toinstitutionalize
the disinvestment process. The committee included Dr. C. Rangarajan, thethen Member Planning commission as
chairman and Dr. Y. Venugopal Reddy as Member Secretar y. The committee gave its report on April, 1993. The Highlights of the
committeereport are as follows:1. 49% of equity could be divested for industries explicitly reserved for the public sector 2. In
exceptional cases the public ownership level could be kept at26%.3. In all other cases it recommended 100 per cent
divestment of Government stake.4. Holding 51% or more equity by the Government was recommended only for six
Scheduleindustrie s, namely:
Mineral oils
defence equipment F M G 1 8 B , G R O U P I V P a
g 2
e 7
Atomic energy
Radioactive minerals
Railway transport
D
ISINVESTMENT IN
1991-92:
A steering Committee was formed for selection of PSEs for disinvestments. The Departmentof
Public Enterprises (DPE) coordinated all activities under the Ministry of Industry.
A
)F
IRST
T
RANCHE OF
D
ISINVESTMENT
(D
ECEMBER
, 1991):
Out of 244 public enterprises 41 were selected, but 10 were dropped on the grounds of beingconsultancy firms, negative
asset value or they incurred losses in previous financial year. TheRemaining 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
totalvalue 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 9mutual funds/ institutions and 406 bundles for a total value of Rs14.2billion were sold. UnitTrust of
India was the major purchaser accounting for Rs. 7.75 billion of the sale.
B
)S
ECOND
RANCHE OF
D
ISINVESTMENT
(F
EBRUARY
asked ICICI to evaluate and advice issue price equity of selectedPSEs. A List of 16 PSEs 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
institutionsand banks. A total of Rs. 1611 crore were realised with Unit Trust of India again being themajor purchaser. The
Shares of Metal Scrap Trading Corporation remained unsold.Details of the PSEs Divested in 199192
5 9 . 6 0 B h a r a t E a r t h M o v e r s L t d . ( B E M L ) 0 . 6 0 0 0 2 0 . 0 0
F M G 1 8 B , G R O U P I V P a g e 2 8
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Disinvestment in India
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