Disinvestment, sometimes referred to as divestment, refers to the use of a concerted economic boycott, with specific emphasis on liquidating stock, to pressure a government, industry, or company towards a change in policy, or in the case of governments, even regime change.
The term was first used in the
1980s, most commonly in the United States, to refer to the use of a concerted
economic boycott designed to pressure the government of South Africa into
abolishing its policy of apartheid. The term has also been applied to actions
targeting Iran, Sudan, Northern Ireland, Myanmar, and Israel.
Definition of 'Disinvestment'
1.The action of an organization or government selling or liquidating an asset or subsidiary. Also known as "divestiture". 2. A reduction in capital expenditure, or the decision of a company not to replenish depleted capital goods.
Investopedia explains 'Disinvestment'
1. A company or government organization will divest an asset or subsidiary as a strategic move for the company, planning to put the proceeds from the divestiture to better use that garners a higher return on investment. 2. A company will likely not replace capital goods or continue to invest in certain assets unless it feels it is receiving a return that justifies the investment. If there is a better place to invest, they may deplete certain capital goods and invest in other more profitable assets. Alternatively a company may have to divest unwillingly if it needs cash to sustain operations.
BACK GROUND
The role of the State vs. Market has been one of the major issues in development economics and policy. In a mixed economy such as India, historically the public sector had been assigned an important role. However, in the year 1991 the national economic policy underwent a radical transformation. The new policy of liberalization, privatization and globalization de-emphasized the role of the public sector in the nation’s economy.
Several arguments have been
proffered by the apologists of market-oriented economic structures:
The government must not enter into those areas where the private sector can perform better. Market-driven economies are more efficient than the state-planned economies. The role of the state should be as a regulator and not as the producer. Government resources locked in commercial activities should be released for their deployment in social activities.
It is also contended that the
functioning of many public sector units (PSUs) has been characterized by low
productivity, unsatisfactory quality of goods, excessive manpower
utilization, inadequate human resource development and low rate of return on
capital. For instance, between 1980 and 2002, the average rate of return
on capital employed by PSUs was about 3.4% as against the average cost of
borrowing, which was 8.66%. Disinvestment (or divestment) of the PSUs has
therefore been offered as one of the solutions in this context.
Disinvestment involves the sale
of equity and bond capital invested by the government in PSUs. It also
implies the sale of government’s loan capital in PSUs through securitization.
However, it is the government and not the PSUs who receive money from
disinvestment.
The fixation of share/bond price is an important aspect of disinvestment. Now, the Disinvestment Commission determines the share/bond price. Disinvested shares are listed, quoted and traded on the stock market. Indian and foreign financial institutions, banks, mutual funds, companies as well as individuals can buy disinvested shares / bonds.
The Need For Disinvestment.
One basis rational for
privatization in the concept that private ownership leads to better use of
resources and their more efficient allocation. Throughout the world, the preference
for market economy received a boost after it was realized that the State could
no longer meet the growing demands of the economy and the state share holding
inevitably had to come down. The ‘State in business’ argument thus lost out
and so did the presumption that direct and comprehensive control over the
economic life of citizen from the Central government can deliver results
better than those of a more liberal system that directly responds according
to the market driven forces.
Another reason for adoption
for privatization policy around the globe has been the inability of the
Governments to raise high taxes, pursue deficit / inflationary financing and
the development of money markets and private entrepreneurship.
Further, technology and W.T.O.
commitments have made the world a global village and unless industries, including
PSEs do not quickly restructure, they would not be able to survive.
Public enterprises, because of
the nature of their ownership, can restructure slowly and hence the logic of
privatization gets stronger. Besides,
techniques are now available to control public monopolies by regulation/competition,
and investment of public money to ensure protection of consume interests is no
longer a convincing argument.
Objectives of the Disinvestment
Following objectives were stated
in July, 1991 while propounding the disinvestment policy:
expansion of PSUs.
Disinvestment in India
The new industrial policy statement 1991 based on economic reform measures
envisaged disinvestment of a part of government holding in the case of select
public sector enterprises to provide financial support and improve the
performance of public sector enterprises. This became necessary because of
the withdrawal of the budgetary support of 60 percent by the government to
the loss making units. The Common Minimum Programme of the United Front Government,
has also, emphasized that it would be a democratic disinvestment.
Disinvestment Process in India
was there in some public sector undertakings. However, now the focus has
shifted to strategic sale of the identified public sector units. For the
period 1991-2008, the progress of disinvestment has been a normal one.
Against the budgeted disinvestment of Rs.96, 800 cores, only an amount of
Rs.51, 609crores approximately could be collected. The pressure of the left
party’s has largely restricted the pace of disinvestment. Now, we don’t have
the ministry of disinvestment also.
Rangarajan Committee (1993)
RangarajanCommittee of 1993 constituted by the government for this purpose made important observations. It maintained that the units to be disinvested should be identified and disinvestment could be made up to any level, except in defense and atomic energy where the government should retain the majority holding in equity. Further disinvestment should be a transparent process duly protecting the rights of the workers. Further, it suggested setting up of an autonomous body for the smooth functioning and monitoring of the disinvestment programme.
Disinvestment Commission was thus
constituted in 1996 as an advisory body having a full time chairman and four part-time
members. The Commission was required to advise the government on the extent
made timing and pricing of disinvestment.
It suggested four modes of
disinvestment
In its budget speech of 2000-01,
the government emphasized that more emphasis would now be paid on the
strategic sale of public sector enterprises. Up to November 1999, the
commission had submitted 12reports to the government covering 58 public
sector enterprises. On 30th November 1999, the term of the Commission
expired. However, it was reconstituted in July 2001. Initially the Department
of Disinvestment was constituted which was later on upgraded as the ministry
of disinvestment in order to streamline and speed up the process of
disinvestment including restructuring.
The Disinvestment Commission also
recommended creation of separate disinvestment fund in which the disinvestment
proceeds would be placed to be used for the purpose of financial
restructuring of the concerned unit before disinvestment and for carrying out
voluntary retirement schemes. It also suggested merger of National Renewal
Fund with the disinvestment fund.
Challenges Before 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.
Social Problem—Process of disinvestment is not favored
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.
Present Disinvestment Policy
The present disinvestment policy has been
articulated in the recent President’s addresses to Joint Sessions of
Parliament and the Finance Minister’s recent Parliament Budget Speeches.
The
salient features of the Policy are:
Progress of Disinvestment in India (1991-Present day)The
1991 economic reforms introduced the privatization process when the sale of
minority stake was there in some public sector undertakings. However, now the
focus has shifted to strategic sale of the identified public sector units. The
Government does not have a well defined disinvestment policy with a time
bound programme. From the period of
1991-2012 the progress of disinvestment has been a normal one. The pressure of
the left parties has largely restricted the pace of disinvestment. Now, we
don’t have the ministry of disinvestment also.
Table-1
Table-2
List of main Public Sector Units in which partial/ full disinvestment has already been made 1. Shipping Credit and Investment Corporation of India 2. Container Corporation of India Ltd. 3. Videsh Sanchar Nigam Ltd. (VSNL) 4. Oil and Natural Gas Corporation (ONGC) 5. Gas Authority of India Ltd. (GAIL) 6. Steel Authority of India Ltd. (SAIL) 7. Mahanagar Telephone Nigam Ltd. (MTNL) 8. Indian Petrochemicals Corporation Ltd. (IPCL) 9. Power Grid Corporation 10. Shipping Corporation of 11. National Aluminum Company (NALCO) 12. National Fertilisers Ltd. (NFL) 13. Indian Airlines 14. Dredging Corporation 15. LNG Petro Net 16. Madras Refineries Ltd. 17. Hindustan Zinc Ltd. 18. Maruti Udyog Ltd. 19. Modern Food Industries ( 20. Indian Tourism Development Corporation (10 Hotels) 21. Hotel Corporation of India etc. Finance Minister P. Chidambaram said on May 26, 2004 that the present government will not further disinvest the strategic, profit-making and navratan PSUs like Oil and Natural Gas Corporation (ONGC), Indian Oil Corporation (IOC), Hindustan Petroleum Corporation Ltd. (HPCL), Bharat Petroleum Corporation Ltd. (BPCL), Oil India Limited (OIL), National Thermal Power Corporation (NTPC), Steel Authority of India Ltd. (SAIL) etc. However, disinvestment of sick PSUs will be allowed.
As on 30 November 2012, the 50 Central
Public Sector Enterprises (CPSEs) listed on the stock exchanges contributed
about 18% of the total market capitalization.
Table
3
The Union Government
finally unveiled its disinvestment programme for the current fiscal year
2012-13.The Cabinet
Committee on Economic Affairs (CCEA), on Friday, gave the go-ahead to equity
stake sale in four PSUs, namely, Hindustan Copper, Oil India Ltd., MMTC and
Nalco, which is likely to mop up
nearly Rs.15,000 crore or about 50 per cent of the Rs.30,000-crore divestment
target set for 2012-13.
Conclusion.
If disinvestment policy is to be in wider public
interests, it is necessity to examine systematically issues such as correct
valuation of shares and appropriate use of disinvestment proceeds. The
disinvestment of public sector units which is, in fact, the public’s money is
done without even due amount of debate in the parliament. This, therefore,
calls for utmost care and meticulous planning.
To conclude, it may be argued
that disinvestment in India, though slow, has helped considerably the
government to unlock value of central PSEs, though admittedly the process
needs to be hastened to ensure that the market is able to benefit from this
exercise. Progressively, the government should move away from commercial
activity and leave it best to the private players who are driven more by
markets. Even globally the thought process is that the proportion of the GNP due to Government
economic activity should be reduced to the extent possible. This is possible
even for natural monopolies where effective regulatory surrogates for
competition have been created to protect consumers.
RERFERNCES
1. Government of India, Economic Survey 2001-02, 2002-03, 2003-04, 2004-05,
2005-06,
2006-07, 2007-08 New Delhi.
2. Aswathappa K., Essentials of Business Environment 7th edition 2004 Himalayan Publishing House, New Delhi. 3. Datt Ruddar and Sundharam K.P.S., Indian Economy, S, Chand and Company Ltd. New Delhi 2008. 4. Mishra and Puri, Indian Economy, Himalayan Publishing House, New Delhi 2007.
5. G. S. Batra,
Emerging trend in Globalization, Liberalization and privatization (edited)
17-36, 2001
6. Wikipedia.
7.
G.O.I-Ministry of Finance, Department of Disinvestment.
8. Disinvestment
of India’s Public Sector Units- L M Bhole
9.
Disinvestment: the need of the hour in India -D.R. Dogra
10. Disinvestment back on agenda -ASHOK DASGUPTA |
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9 December 2012
DISINVESTMENT IN INDIA.
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