Mrunal Disinvestment in India - Timeline, Criticism, Modi's New Policy

10/15/2014 Mrunal Disinvestment in India: Timeline, Criticism, Modi' s new Policy
http://mrunal.org/2014/10/disinvestment-india-timeline-methods-pro-anti-arguments-modi-policy.html/print/ 1/7
- Mrunal - http://mrunal.org -
[Disinvestment] Timeline, Methods, Pro & Anti Arguments,
Modi Policy on PSU reforms and Disinvestment
1. Prologue
2. Disinvestment Timeline in India
3. Two methods of disinvestment
4. Retail investors participation? Hardly!
5. Disinvestment: arguments in favor and against
6. Modi-Reform1: Disinvesting NHPC, Coal India, ONGC
7. Modi Reform2: Revive 5 and shut down 6
8. Mock Questions
Prologue
Combining Disinvestment theory and current affairs topics scattered around
1. Akshay Dhadda and Ashok Charans entries under the erstwhile write2win competition.
2. Sept.Week2: Disinterment in NHPC, Coal India and ONGC
3. Sept. Week3: Two Methods of disinvestment- benefits and limitations.
4. Sept. Week4: Government to shut down 5 PSUs and revive 6.
Disinvestment Timeline in India
Disinvestment: When Government sells its shares of a PSU, to private sector company
/ individual.
Privatization: when Government sells so many shares, that it no longer remains the
majority shareholder of the given PSU.
1991
Interim budget, Government announced 20% disinvestment in selected
PSUs.
Their shares were sold to Mutual funds and financial institutions (UTI,
EPFO, LIC etc.)
1992 Government decides to sells shares to FIIs, PSU employees and banks.
1993
Rangarajan Committee suggests:
1. 49% disinvestment in PSUs reserved for public sector
2. 74% disinvestment in all other PSUs
Government did not implement.
1996 Disinvestment commission under GV Ramakrishna. It was a non-statutory,
advisory body (similar to UPAs NAC).
1998-
2000
Vajpayee Government classifies PSUs into two parts
1. Strategic: arms-ammunition, railway, nuke energy etc.=> here we wont do
disinvestment
2. Non-strategic: those not in above category.=> here we will do
disinvestment in a phased manner. Hindustan Zinc, BALCO, Maruti
Disinvestment taken up.
To implement above policy, Department of disinvestment setup under Finance
ministry. (first there was disinvestment ministry, then department.not going into
all ball by ball commentary)
2004
UPA comes into power, Common Minimum program (CMP) updates
disinvestment policy
Sick PSUs will be revived
No disinvestment in profit making PSUs
PSUs will get commercial autonomy
2005
Whatever Money Government earns from selling its PSU shares- itll goto
National investment fund (NIF). Click me to read more about it.
2005-
09
Disinvestment remains stagnant because Left allies of the UPA Government
stonewall everything.
2009
onwards
UPA-2 without left parties. Government resumes disinvestment process.
All PSUs can be disinvested, but upper limit: 49%
Disinvestment Method: only public offer.
2013-
14
Chindu wanted to earn 40,000 crores via disinvestment of Indian Oil, BHEL,
NHPC, Neyveli lignite etc. but hardly managed to get ~16,000 crores. Main
reasons for #EPICFAIL:
1. Oil ministry, mining ministry, trade unions opposed the move, files were
delayed.
2. Lukewarm response from investors because sharemarket was down due to
internal & external factors.
2014
Modi cabinet approves disinvestment in NHPC, Coal India, ONGC
6 EPICFAIL PSUs will be closed down.
5 loss making but viable PSUs will be revived.
Two methods of disinvestment
IIP Via stock exchange
Via Institutional placement program. Directly selling
the shares to another company / institution / mutual fund
or other large player.
Directly selling shares on stock
exchange
Requires more clearances.
Faster, needs less
clearances.
SEBI requires in each PSU,
minimum 25% shares be
held by public.
Hence Government using
this method to quickly
comply with SEBI norms.
Friendly to institutional investors (Mutual funds,
pension /insurance funds etc.)
Friendly to retail investors.
Retail investors participation? Hardly!
So, In theory, disinvestment via stock exchange = retail investors should be able to
purchase those sarkaari shares.
But, after disinvestment, the market price and issue price of the company shares start
converging.
Therefore, a retail investor cannot reap the benefit (by selling it to third party at higher
price). Hell have to wait for medium to long term before company share prices begin to
rise again.
But retail investors dont like to wait that long, hence disinvestment doesnt generate
interest of retail investors.
Solution: ETF exchange traded funds. Click me to learn more about it.
Disinvestment: arguments in favor and against
Against In Favour
Socialist / leftist ideology: private
sector cannot achieve equal distribution
of resources for all classes.
Private enterprises only focus on profit
maximization. They wont cater poor
people.
Therefore Government needs to control
all or some industrial sectors.
Such Government controlled units
cannot compete in free market
economy due to political interference
and price control mechanisms.
Ultimately more public money is
wasted in running these loss making
entities.
Governments dividend income will
decline. (Because theyll have less
shares).
Consequently, Fiscal deficit will
increase.
Whatever dividend Government
earned so far- compared to that,
Government has spent far more
crores rupees to revive these PSUs.
There is no point in throwing good
money after bad money.
A survey indicated 0.5% retail
participation (i.e. Aam Admi
investment) in equity market.
Absurd logic, that just because
corporates will benefit, we shouldnt
Meaning, only Large corporates and
financial institutions will benefit from
this drive.
Itll not help in financial inclusion
begin disinvestment.
Government already taken plenty of
initiatives on financial inclusion
front.
The funds received from disinvestment are
used to finance fiscal deficit. This is unhealthy
practise, like selling family gold to buy daily
dose of desi liquor.
Need amendments in FRBM act to ensure
this doesnt happen.
After disinvestment employees of PSUs
will loss their jobs
If board of directors have many private
sector experts- they may approve plans
to reduce staff strength, to increase
profitability.
Overstaffing = One of the main
reasons why PSUs dont make
optimum profit. At some point weve
to swallow the bitter pill.
Besides, such employees are given
attractive VRS offers.
Disinvestment would lead to private
monopolies
Dragging the logic too far. Unlikely to
happen in todays world. CCI is always
watching and punishing the firms that try to
create monopoly or oligopoly.
Allegations that PSEs are sold cheap to
preferred parties e.g. BALCO
That used to happen in 90s era, when
Government sold shares to specific
private companies at an arbitrary
price.
But, Unlikely to happen if shares
directly sold via stock exchange. +
CAG, Media very active these days.
To complete the disinvestment targets,
Government asks one PSUs to buy
shares of another PSU.
e.g. ordering LIC to buy ONGCs
sharesIski topi uske sir pe. In such
cases, disinvestment doesnt decrease
Government control over those
companies.
Need for a clear policy on disinvestment to
stop this practice.
Speed of Disinvestment
Should India adopt rapid pace of disinvestment/privatization or move with a slow pace? Taking
example of disinvestment process of other countries:
Disinvestment Speed
1993: Czech Republic disinvested ~1000 state owned enterprises.
Russia did same.
Rapid speed Results were disappointing in both the cases.
Hence rapid approach= not recommended for India
Slow speed
China- after more Open Door Policy in 1978.
But speed too slow- thousands of enterprises still under Government
ownership.
Middle
speed
Most suitable for India
Modi PSU-reform1: Disinvesting NHPC, Coal India, ONGC
Data not important except for random GK in non-UPSC exams & interviews
Org underMinistrygovt.shareholding
Approved
disinvestment
Issues
NHPC Power 86% 11.36%
Has 20 hydroelectric
power stations.
Unable to recover dues
from electricity utility
companies=> company
making huge losses.
Hence it share price
wont fetch truckload of
cash to Government.
Coal
India
Ltd
coal ~90% 10%
Labour union strike may
bring down share price.
So Government maynot
earn truckload of cash
from selling these coal
India shares.
ONGC petroleum ~69% 5%
Maharatna PSU
If Government clears the
gas price policy, ONGCs
share prices will go up
(And after that
Government should sell
it- to earn truckload of
cash).
Note: in PSUs, Government owns the shares, in the name of President of India.
Modi PSU-reform2: Revive 5 and shut down 6
2014, Sep. week2: Union Government finished reviewing 11 PSUs: 5 worth savings and 6
worth closing.
Names not important except for random GK in bank exams
6 epicfails beyond saving 5 worth saving
1. Hindustan Photo Films
2. HMT Bearings
3. HMT Watches
4. HMT Chinar Watches
5. Hindustan Cables.
6. Tungabhadra Steel Products Ltd
1. HMT Machine
Tools
2. Heavy
Engineering
Corporation
3. NEPA
4. Nagaland Paper
& Pulp Co
5. Triveni
Structurals
These will be given 1000 crore rupees to give VRS to employees
then shut down operations. Total employees ~3600
October week2: HMT watches in news, because theyve tied up with flipkart.com to sell
away the remaining stock of wrist watches.
Mock Questions
MCQs:
1. Non-UPSC exams: Trivial fact based questions- In September 2014, Government
approved closing down Which of the following companies? How many crores does
Government want to make from disinvestment?
2. CSAT: assertion-reasoning, cause consequences type. Which of the statements are
correct about disinvestment process in India / NIF etc.
Mains: Answer following in 200 words each:
1. Outline the main objectives and achievements of the policy of disinvestment in India?
[Mains 2002]
2. The Public sector undertakings have lost relevance in the post 1991 Indian economy. Do
you agree? Justify your stand.
3. Public sector undertakings in India, have often been criticized for their poor efficiency
and low profitability. Examine the reasons and suggest remedies.
Published on 13/10/2014 @ 7:16 pm under Category: Economy
URL to article: http://mrunal.org/2014/10/disinvestment-india-timeline-methods-pro-
anti-arguments-modi-policy.html

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