Disinvestment of Public Sector Enterprises: Policies & Challenges

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After Independence in 1947, the founding fathers envisageda mixed economy for India, assigning an effective and dominan role for public sector enterprises (PSES) in the future economic development of the country. During the 1950s and 1960s, India witnessed a massive expansion of public sector through new unitsand nationalisation of existing units.
Started with great fanfare, public enterprises were soon afflicted with various ills like over-staffing, labour indiscipline, under-utilisation of installed capacity, excessive political inter- undue emphasis on capital-intensive technology. ference, bureaucratic instead of professionalised management and The poor performance of PSES started to be reflected in low profits and in some cases mounting losses year after year. Hence, privatisation of public sector enterprises is a part of the economic reforms process initiated in 1991. In dismantling the public sector, India has adopted a gradualist approach. The slow pace of sation has disappointed the public in general.
This book traces the philosophy and growth of PSEs in India also set forth. 

 

Author’s Profile

 Vibha Mathur received her M.Phil. and Ph.D. degrees from the Delhi School of Economics, University of Delhi. She has written extensively on Indian economy and its problems. Her recent works include: India- European Union Trade Prospects and Impact of Euro; Trade Liberalisation and Foreign Investment in India: 1991-2001 and Indian Economy and the WTO: New Challenges and Strategies. Dr. Mathur was a visiting fellow at the European Commission and Parliament in Brussels, Belgium in May 2001. Presently, she is a University of Delhi. Reader in the Department of Commerce, Jesus and Mary College,

Preface

Prior to Independence in 1947, public sector activities in India were restricted to certain utility services like irrigation, railways, posts and telegraph, and ports. After Indepen- dence, the Industrial Policy Resolution of April 1948 envisaged a mixed economy for India and declared that public sector would play an effective and dominant role in the future economic development of the country. This role was to be particularly significant in the establishment and development of heavy and basic industries. A more definite and clear-cut industrial policy, based on the 1948 Resolution, was announced in 1956, coinciding with the launching of the Second Five Year Plan (1956-61). The Industrial Policy Resolution of 1956, called by some as the economic constitution of India, reserved 17 industries for exclusive development in the public sector. From 1956 onwards, it was public sector all the way, through new units and through nationalisation of existing units.
Started with great fanfare, public enterprises were afflicted with various ills over the years. Their poor performance was reflected in low profits and in some cases mounting losses year after year. The Government of India announced a new industrial policy in the Parliament on July 24, 1991 which, inter alia, reduced the list of industries reserved for public sector from 17 to 8. Subsequently, 4 more industries were dereserved. Thus, at present there are only four industries reserved for the public sector.
In pursuance of the Common Minimum Programme adopted by the United Front Government, a Public Sector Disinvestment Commission was constituted through a Regulation dated August 23, 1996. The Disinvestment Commission has so far submitted 8 reports containing In dismantling the public sector, India has adopted a gradualist approach. The slow pace of privatisation has disappointed the public in general. This book traces the philosophy and growth of public sector enterprises in India and describes recent moves towards their privatisation. It is organised in 8 chapters and 4 appendices.
 
Chapter 1 presents an overview of the industrial policy of the Government of India since Independence. Chapter 2 is devoted to the objectives, expansion and problems of public sector enterprises in India. Chapter 3 explains the disinvest- ment policy of the Government and its implementation. Chapter 4 describes the procedures and modalities of the disinvestment process. Chapter 5 highlights the contro- versies associated with the disinvestment policy of the Government. Chapter 6 focuses on the dismantling of public sector enterprises of the State Governments. Chapter 7 explains the disinvestment experience of different countries of the world. Chapter 8 summarises the discussion and presents future outlook for PSEs in India.
Vibha Mathur         
 

Contents

Preface
                            1. Indian Industry Since Independence
    1.1 Pre-Independence Industrial Scene
    1.2 Post-Independence Industrial Policy
       1.2.1 Constitutional Provisions Pertaining to Industry
       1.2.2 Main Legislations Concerning Industry:
                                                    A. Industrial (Development and Regulation) Act, 1951
                                                    B. Monopolies and Restrictive Trade Practices (MRTP) Act, 1969
                                                    C. FERA and FEMA
 1.2.3 Industrial Policy Resolution, 1948
 1.2.4 Industrial Policy Resolution, 1956
                                                    A. Categorisation of Industries
                                                    B. Other Features
1.2.5 Industrial Policy, 1977 and 1980
1.2.6 Regulation and Control of Private Sector
1.2.7 Disillusionment and Rethinking
1.2.8 Pressure for Industrial Liberalisation
A. Internal Factors
B. External Factors
1.2.9 Liberalisation Measures, 1985-86
1.2.10 Industrial Policy Statement, 1991
1.2.11 Industrial Liberalisation of the
            Period 1985-2003
1.3 Industrial Policy Issues: Approach Paper to Tenth Five Year Plan
                      2.Public Sector Enterprises (PSES) : Expansion and Disillusionment
       2.1 Evolution of Public Sector Policy
       2.2 Objectives of Public Sector Enterprises
             2.2.1 Development of Infrastructure
             2.2.2 Balanced Regional Development
             2.2.3 Employment Generation
             2.2.4 Promotion of Competitive Conditions
             2.2.5 Check on Concentration of Economic Power
      2.3 Organisation of Public Sector
             2.3.1 Departmental Undertakings
             2.3.2 Government Companies
             2.3.3 Public Corporations
             2.3.4 Holding Companies
  2.4 Poor Performance and Rethinking
  2.5 Public Sector in the Industrial Policy Statement of July 1991
2.6 Public Sector Disinvestment Commission
      2.6.1 Classification of Industry Groups
 A. Strategic Sector
B. Core Sector
C. Non-core Sector
      2.6.2 Objectives and Strategy
      2.6.3 Loss-making PSUs
     2.6.4 Profit-making PSUs
     2.6.5 Criteria for Disinvestment
     2.6.6 Use of Disinvestment Proceeds
     2.6.7 Analysis Based on Net Profits
     2.6.8 Analysis by Industry Classification
     2.6.9 Analysis Based on Paid-up Capital
    2.6.10 Analysis Based on Accumulated Reserve
    2.6.11 Analysis Based on Listing and Trading
    2.6.12 Restructuring
    2.6.13 Corporate Governance and Autonomy
    2.6.14 Delegation of Powers to PSUs
    2.6.15 Recommendations Applicable to all PSUs
A. Professionalising the Board
B. Provision for Elected Directors
C. Selection of Top Management
D. Salaries and Incentives for Top Management
E. Autonomy in Price Fixation
F. Accountability
G. Setting up of Pre-Investigation Board
H. Strengthening the Investor Interface
I. Additional Autonomy to Moderate Performers
J. Further Autonomy to Strong Performers
2.7 Industrial Sickness and Nationalisation
     2.7.1 Extent of Industrial Sickness
     2.7.2 Causes of Industrial Sickness
A. External Causes:
B. Internal Causes:
    2.7.3 Measures to Help Sick Industrial Units
    2.7.4 Government Policy Regarding Nationalisation of
                 Sick Industrial Units
                          3. Disinvestment of PSES: Policy and Action
    3.1 Meaning of PSES Disinvestment/Privatisation
    3.2 Need for PSES Disinvestment
         3.2.1 PSEs as Burden on the Government
    3.3 Objectives of Disinvestment
    3.4 Policy Statements on PSES Disinvestment
    3.5 Disinvestment of PSES in Action
       3.5.1 Obstacles
       3.5.2 Reconstitution of Disinvestment Commission
    3.6 Disinvestment Targets and Achievements
    3.7 India’s Financial Sector: Towards Privatisation
        3.7.1 Banking Sector
A. Pre-nationalisation Period
B. Post-nationalisation Period
C. Narasimham Committee on
Banking System
D. Post-liberalisation Banking Reforms
E. Future Policy Regarding Public
   Sector Banks
     3.7.2 Insurance Sector Reforms.
                   4. Disinvestment of PSEs: Considerations and Modalities
    4.1 Transparency
    4.2 Valuation of PSES
   4.3 Disinvestment Process
   4.4 Guidelines on Disinvestment in PSUs
         Referred to the Disinvestment Commission
     4.4.1 Formation of Standing Empowered Group (SEG)
    4.4.2 Guidelines on Modalities
A. Offer of Sale
B. Strategic Sale
C. Sale of Units after Corporate Restructuring
D. Leasing and Management Contracts
4.4.3 Guidelines on Selection of Intermediaries
A. Selection of Merchant Bankers
              Global Co-ordinators:
B. Selection of Strategic Partners
C. Retailing of PSU Shares to Small
          Investors and Employees
                     5. Disinvestment of PSES: Issues and Concerns 138-154
     5.1 Protection of Labour
         5.1.1 Outmoded Labour Laws
         5.1.2 Privatisation and Job Creation/Abolition
      5.2 PSES and Competition
     5.3 Privatisation of Profitable PSES
     5.4 Foreign Angle of Privatisation
    5.5 Privatisation and Consumers’ Interest
    5.6 Post-privatisation Role of the Government
    5.7 Privatisation and Security Concerns
   5.8 Selective Privatisation.
    5.9 Privatisation versus Restructuring
                      6. Disinvestment of PSES at the State Level
       6.1 Financial Support to State Level Public Enterprises
      6.2 Disinvestment of SLPES
                    7. Disinvestment of PSES: Global Experience
                    8.Conclusion
                                Appendices
  Appendix 1: Industrial Policy Resolution, 1956
  Appendix 2: Public Sector in the Industrial Policy
                        Statement of July 24, 1991
  Appendix 3: List of PSUs Referred to the
                        Disinvestment Commission
 Appendix 4: Constitutional Provisions Regarding
                      Labour and its Welfare
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