GS-3: Indian Economy and issues relating to planning, mobilization of resources, Government Budgeting.

Key words: Disinvestment, Strategic disinvestment, strategic and non-strategic PSUs, DIPAM

Why in News:

The Centre has announced approving strategic disinvestment of Central Electronics Limited, a public sector enterprise (CPSE). This is the second privatisation this fiscal year, after Air India.

What is Disinvestment?

Disinvestment means sale or liquidation of assets by the government, usually Central and state public sector enterprises, projects, or other fixed assets.

Different approaches to disinvestments:

There are primarily three different approaches to disinvestments.

• 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. Examples of minority sales via auctioning to institutions go back into the early and mid 90s.
• 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 or private player.  Ex. BRPL to IOC, MRL to IOC, and KRL to BPCL..

• Complete Privatisation: Complete privatisation is a form of majority disinvestment wherein 100% control of the company is passed on to a buyer. Ex Air India.

Why government decided disinvestment or privatization of PSUs?

• To reduce the financial burden on the Government: Disinvestment of loss Making PSU’s, would help the government to invest in profit-making PSU’s which will minimize the burden on the government
• Better efficiency and productivity by implementation of industry best practices being implemented resulting in better ROA, ROE and better profitability.
• Appropriate price realization in case the company is listed, leading to a better value and overall take away for the Government.
• Lack of political interference leading to better result oriented efficiency and better shareholder value.
• Better market efficiency and increase competition within the sector, as most PSE have a huge network and reach and once run effectively and efficiently would lead to better performance and competition to private players within the sector.

Why government should not brought disinvestment in PSUs?

• Using funds made available from disinvestment to bridge the fiscal deficit is an unhealthy and a short term practice. It is said that it is equivalent of selling 'family silver' to meet short term monetary requirements.
• The Sale of profit-making and dividend-paying PSUs would result in the loss of regular income to the Government. It has become just a resource raising exercise by the government. There is no emphasize on reforming PSUs.
• Employees of PSUs would lose jobs
• Complete Privatisation may result in public monopolies becoming private monopolies, which would then exploit their position to increase costs of various services and earn higher profits.
• Strategic Disinvestment of Oil PSUs is seen by some experts as a threat to National Security.

Policy of Strategic Disinvestment 2021-22:

• In this year budget government brought a policy of strategic disinvestment of public sector enterprises that provided a clear roadmap for disinvestment in all non-strategic and strategic sectors.
• Fulfilling the governments’ commitment under the Atma Nirbhar Package of coming up with a policy of strategic disinvestment of public sector enterprises, the policy highlighted the following as it’s main features:
• Fulfilling the governments’ commitment under the Atma Nirbhar Package of coming up with a policy of strategic disinvestment of public sector enterprises, the Minister highlighted the following as its main features :

1. Existing CPSEs, Public Sector Banks and Public Sector Insurance Companies to be covered under it.

2. Two fold classification of Sectors to be disinvested :

• Strategic Sector: Bare minimum presence of the public sector enterprises and remaining to be privatised or merged or subsidiarized with other CPSEs or closed. Following 4 sectors to come under it :

1. Atomic energy, Space and Defence
2. Transport and Telecommunications
3. Power, Petroleum, Coal and other minerals
4. Banking, Insurance and financial services

• Non- Strategic Sector: In this sector, CPSEs will be privatised, otherwise shall be closed.
• The Department of Investment and Public Asset Management (DIPAM) under the Ministry of Finance is the nodal department for the strategic stake sale in the Public Sector Undertakings (PSUs).

Way forward:

There is no one formula which fits all PSEs for privatization, but a case to case approach will have to be adopted for best results and realization. It should be ensured that the proceeds of such strategic sales aren’t frittered away in interest or salary payouts but are reinvested prudently in long-term infrastructure assets that can yield enduring returns to the economy.

Source: The Hindu BusinessLine

Q. Consider the following statements with reference to the disinvestment of PSUs:

1. Disinvestment of less than 50% stake in PSUs is defined as the strategic disinvestment.
2. Disinvestment of Central Electronics Limited, a public sector enterprise (CPSE) is the first step toward the privatisation of CPSEs in India.

Which of the statement/s given above is/are correct?

a)1 onlyy

b)2 only

c)1 and 2 only

d)Neither 1 nor 2

Ans: d