final assignment kaushik 2

8/8/2019 Final Assignment Kaushik 2

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DISINVESTMENTS IN PUBLIC SECTOR

UNDERTAKINGS IN INDIA AN OVER

VIEW

Introduction

Public sector undertakings were established in India as a part of mixed economy. The

coexistence of private and public sector will make the economy balanced and independent.

After independence public sector undertakings played a vital role in the economic

development of the country. Generation of employment, balanced regional development and

economic development of the country were the objectives of PSE's at the time of their

establishment. The government has contributed either wholly or partially in the equities of the

public sectors depending on the need and requirement of the projects. During mid 1991onwards the economic scenario of the country has changed with the onset of Liberalisation

and Globalisation measures. The goal of service rendering was slowly substituted with profit

maximization in PSE's and other government departments.

Disinvestment

Disinvestment is a process where Government sells its equity holding to private sectors. In

other ways it is a privatization process where private parties are given shareholding in

Government undertakings either wholly or partially. The Rangarajan committee

recommended the programme of disinvestments in 1991-92. The disinvestments commission

was established under the chairmanship of Shri. G. V. Ramkrishnan. He was given the task oflong term planning of disinvestment To speed up the disinvestment process, the Government

of India has set up a separate Department of disinvestment The amount realized fromdisivestments will be used for meeting expenditure in social sector, restructuring the PSE's

and for retiring public debt. An attempt has been made in this paper to study the progress andprocess of disinvestment of PSE's in India.

According to Anjila Saxena (2001) bureaucratic, trade union and valuation of PSU's

disinvestments. Fair valuation and transparency is disinvestments process are equally

important to make this exercise free from criticism and better public acceptance, B.K.S.

Prakasa Rao and S.V. Ramana Rao (2001) found that disinvestment process through

liberalization and privatization leads to cost reduction, quality of service and operational

efficiency.Improvement of management and operating performance is a precondition forsuccessful privation. They further observed that a strong private sector and strong growth

potential are essential for attaining higher degree of national output.

Status of Public Sector Enterprises In India

The quantitative information on the present status of PSE's in India is explained in the table.Large numbers of public enterprises in India are either owned by state or central Government.


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The number has increased from 163 in 80-81 to 236 in 90-91 and then remained stagnantover the years. This indicates that the government promoted P.S.E's till 1990-91 and the

process came to a halt when the disinvestment started. The ratio of gross profit to capitalemployed and gross profit to sales is low indicating the declining performance of PSE's. The

Net profit ratio to capital employed and sales is also poor. Thus, it can be concluded that even

though the performance of all PSE's taken together showing profit there are many loss-

making units and very few units are making profit.

Table: 1 Status Analysis of PSE's in India for the period

from 1980- 81 TO 1998-99

Particulars 1980-81 1990-91 1997-98 1998-99

No of PSE's (nos) 163 236 236 235

Total Capital (Rs in Crs) 18207 102084 233661 273697

Sales (Rs. In crs) 28630 118676 275996 309994

Gross profit (Rs. in Crs) 1148 11102 37212 59266 Net Profit (Rs in Crs.) 203 2272 13720 13235

Net Profit to capital

employed (%)

7.8 10.9 14.7 14.5

Net Profit to capital

employed (%)

5 9.4 13.5 12.8

Gross Profit to sales (%) .70 1.91 4.97 3.94

Table: 2 Targeted Disinvestment and Amount Realised

Analysis for the period from 1991-2002-2003

Years Tomet Realized Fund

1991-92 2500 3038

1992-93 2500 1913

1993-94 3500 0

1994-95 4000 4843

1995-96 7000 362

1996-97 5000 380

1997-98 4800 902

1998-99 5000 53711999-2000 10000 1829

2000-2001 10000 2125

2001-2002 12000 5000

MM-203 12000


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The methods used for disinvestments were offering equity, issuing depositary receipt andstrategic sale. It is observed from the table 2 that from 1990-91 to 1999-2000, altogether 39

companies' share were sold and 36 companies were offered strategic sale. The total receiptreceived through sale of shares was 19573 crores and through strategic sale was 11344

crores. From 1990-91 till today the Government was not able to meet the target fixed at the

time of the budge except for two years i.e. 94 95 and 98-99. The realised value is much less

than the targeted value. One of the reasons for this poor response is that to get a buyer for lossmaking unit is difficult where as large number of bidders are available for profit making unit.

On the contrary the Government is interested to dispose off loss making unit and not profit

making unit The politicians from both state and central government oppose the

disinvestments process as it is noticed in the case of IPCL and HPCL. From the table 3 it is

found that the government will lose the dividend over the years for the equity invested in

PSE's. At the same time realized value if borrowed from outside the Government has to pay

minimum interest for 10 percent. The table 3 shows the equity sold, realised amount,

dividend received and interest paid on borrowed fund. It is observed that interest on borrowed

funds comes to larger amount than dividend received through PSE's annually. Thus it

indicates that even profit making PSE's are worth for disinvestments provided it is valuedproperly and full transparency is maintained. Hence it is required to disinvest not only the

lose making units but also the profit making units with proper valuation.

Table: 3 Equity sold, fund realized Int. on borrowed fund

and dividend received Analysis Of selected PSE's

Sr. no Particulars Equity Sold Realiased

Funds

Government

Borrows @

10% int

Dividend

received by

Government on

equity sold

1 BALCO 112.52 826.5 82.65 5.69

2 ITDC HOTELS 34.29 615.45 71.66 Nil

3 HCI HOTELS 14.67 242.51 25.91

4 IBP 7.44 1153.68 115.36 1.84

5 VSNL 71.5 3689 368.9 10.4

6 STC 40 4 Nil

7 MMTC 60 6

8 PPL 320.16 151.7 15.17 -71

9 JESSOP 68.13 18.18 1.82 -5.5

10 HLL 109.85 445 44.5 3.5

11 MUL 66 2424 242.4 1312 IPCL 64.5 1490.84 149 16.24

Total 894.23 11344.03 1142.79 -73.59

Sources : Website- department of disinvestements.


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Government should be a regulator then a producer

The Government played an Important role as producer for several years. The government has

manufactured innumberable number of products including steel and oil and rendered varietyof services such as hotels industry, telecommunication etc. After disinvestment the role of

government has changed from a producer to a regulator. Now Government should act as aregulator then a mere producer. Privatization of PSE's will create a certain degree of

monopoly in the market and it is important that the Government should play the role of atough regulators to Protect the Consumers from market exploitation.. In Present competitive

world the market requires strong regulator and the Government is best suited for that.

Workers Issue

The major apprehension about disinvestment is that workers interest will not be protected.

Local politicians misguide the workers saying that disinvestment will lead to insecurity of

jobs. But in reality the protection of employees is an integral part of the disinvestment Policy.From the information available, the companies that have Privatized have no retrenched even a

single worker. the VRS given by the disinvested PSE's are at scales, which are normally

higher or equal to the VRS given by the Government to central public sector employees.

Reduction in the workforce of PSE's is a continuous process as during the last 10 years the

workforce has come down from 2.3 million to 1.7 million even without Privatisation or

strategic sale. One of The disinvested companies, BALCO in spite of the losses of 200 crores

due to strike gave an ex-gratia payment of Its 500 per employees. Workers are given more

benefit compared to earlier Even in MUL the wages were increased by an average of Its 1600

per employee and VRS benefit is higher than Government. in PPL also the new strategic

partner increased wages after disinvestments.

Road Blocks Envisaged

The top ten PSUs contributed Rs 14,254 crore profit out of the total Rs 22,509-crore profits

generated by 127 PSUs. In short, about 8 per cent of the total profit-making PSUs contributed63 per cent of the total profits. If one looks at the profits of all PSUs put together (net of

losses), those of 10 PSUs exceed that of the total profits of all PSUs put together. It isapparent that the CIER study has tried to establish that the performance of the public sector

companies is better than that of private sector firms. In this connection it is relevant to addthat of the top 50 public sector companies taken by CIER for study, 42 are profit making and

include units in petroleum, power and telecommunications sectors where the government hasfull or near monopoly. Again, out of the 100 PSUs taken into account for the purpose of


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comparison, 73 are profit making, including those in petroleum, power, telecommunications

and minerals in which the government had full or near monopoly. The comparison shouldhave been made with PSUs in competitive sectors also to arrive at a competitive analysis of

the financial results of public sector companies vis-a-vis the private sector firms. Such astudy would reveal that the performance of public sector companies is in no way better than

that of private sector firms. Major PSUs which are monopolies in such sectors as coal and

lignite, power, petroleum and telecom account for most of the profits made. In 1997-98, outof the total profits of profit-making PSUs, those of five monopoly sectors amounted to Rs

14,051.48 lakh which is 69 per cent share of total profits. Similarly, in 1998-99, out of the

total profits of profit-making PSUs, those of five monopoly sectors amounted to Rs 16,497.98

lakh which works out to 73 per cent share of total profits. According to an NCAER report

submitted to the Ministry of Industry (So many lost years -- the public sector before and after

reforms, Laveesh Bhandari and Omkar Goswami), the profitability of the PSUs (excluding

petroleum, power, coal, lignite and minerals) was minus 4.3 per cent in 1996-97 and minus

3.91 per cent in 1997-98. The NCAER Study shows that: *Even if accounting for the

monopolistic trends of the petroleum PSUs, large private sector manufacturing companies are

more profitable than their PSU counterparts. *The profitability differential substantially

widens in favour of the private sector when the petroleum companies are netted out. Even so,these PSUs are profitable though the ratio of post-tax profits to net sales is far more modest.

*The 123 pure manufacturing PSUs have been always posting losses. These are inengineering, chemicals, pharmaceuticals, fertilisers, agro-based industries, textiles and

consumer goods -- relatively competitive sectors with many private players. Thus, theprofitability of the PSUs as a whole seems to rest on monopolistic or oligopolistic rents

earned from non-competitive sectors which are bereft of significant private sector presence,such as petroleum, power, minerals and coal mining. *Between 1986-87 and 1997-98,

Central PSUs as a whole never earned post-tax profit that exceeded 5 per cent of total sales,

and 6 per cent of the capital employed. As on 1997-98, there were 100 loss-making PSUs out

of 240 and their annual loss was Rs 6,500 crore. *Exclude the monopoly profit of the PSUs in

petroleum, power, coal and lignite, the post-tax profit turns to losses for the manufacturing

PSUs for nine out of ten years between 1988-89 and 1997-98. In 1997-98, the losses stood atRs 1,870 crore. *A large sample of PSUs in manufacturing was compared with another

sample of scale-wise similar private sector companies for the period 1988-89 to 1997-98.

Unit gross profit and post-tax profit of the PSUs measured as a proportion of sale revenue net

of indirect taxes were significantly lower than that of private sector companies throughout the

period. Moreover, the differential between non-petroleum PSUs and the private sector is

much higher. The former posted losses, the latter profits. *An analysis of 109 manufacturing

PSUs (including petroleum companies) for the period 1993-94 to 1997-96 shows that the

return on capital for these companies has been far less than the opportunity cost capital. Thus,the shareholders -- mostly the government -- have been steadily losing value. Over the five-

year period, at 20 per cent cost of capital, these PSUs have got EVA (Economic ValueAdded) worth Rs 90700 crore or 8.8 per cent of capital employed. *The cost structure of the

PSUs was compared with private sector manufacturing companies. It showed that the PSUshistorically carry a much higher burden of unit fixed cost than the private sector. Despite

paying wages and salaries that were no higher than large- and medium-scale private sectorcompanies, the PSUs suffered from a significantly higher wage cost burden, which is

widening over time. Similarly, despite the benefit of soft budget constraints, the PSUs

incurred higher interest cost per rupee of sales compared to private firms. Non-petroleum

PSUs suffered from a much larger fixed cost differentials vis-a-vis private sector. *As on

1997-98, there were 56 Central PSUs in manufacturing, with cumulative losses higher than

their net worth and registered with the BIFR. Further, 21 manufacturing PSUs had eroded


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their net worth but were not yet registered with the BIFR. In addition, there were 23

companies in services and trading whose losses had eroded their net worth but which, byvirtue of not being ``industrial companies'' were not eligible to register with the BIFR.

Together, these 100 PSUs, employed over 6,79,000 people many of whom will faceretrenchment when these companies are either downsized or liquidated. The CIER report

states that 60 per cent of the private sector companies did not declare any dividend in 1998-

99 whereas nearly 62 per cent of the public sector companies declared dividends exceeding10 per cent. In the case of the private sector companies only 36 had declared dividends of 10

per cent. What the report did not say is that the PSUs which are in the monopoly sector

contributed almost 68 per cent of the total dividend declared. The CIER report states that the

EVA of the public sector was better than private sector. The performance of the public sector

in terms of M-EVA of both top 50 and top 100 corporates shows negative coefficients than

those for the private sector. Moreover, the top 50 public sector corporates add relatively more

value to the shareholders than do the counterparts in the private sector. The NCAER report,

however, clarifies that out of a sample of 109 non-banking and non-financial services PSUs

(including petroleum monopolies, power companies, coal and lignite, which make profits and

excluding all perennially loss-making PSUs) it was found that as a whole these could not

recover their cost of capital. In the aggregate, they lost corporate value for each of the fiveyears, 1993-94 to 1997-98, and the value lost has been substantial. Mind you, this was the

dismal picture despite the sample being heavily biased in favour of the public sector.SCOPE'S entire exercise appears, however, to be entirely misplaced. Everybody is aware that

the PSUs were established to (1) provide necessary infrastructure, (2) promote redistributionof income and wealth, (3) create employment opportunities,(4) secure balanced economic

development, and (5) promote social services. However, since 1991, the objectives of thePSUs have undergone a sea change and they are expected to compete in the market and earn

profits. For this purpose, Government has deregulated various sectors with the objective of

making these sectors competitive. With the globalisation of the economy, industry, whether

in the public sector or private, has to face stiff competition in order to survive. The age of

monopolies is now over. It would be difficult for today's public sector monopolies to remain

profitable once full deregulation and competition sets in. Disinvestment/privatisation of PSUsshould be viewed in the context of emerging competition and as a method of being able to

face that competition. Studies such as the one made by SCOPE/CIER will only serve to

obfuscate the real issues facing PSUs today

Conclusion

The following conclusion is drawn from the analysis

a) The profitability ratio such as profit net profit to sales and capital employed is poor inPSE's This shows the performance of PSE's is declining rapidly.

b) The targeted amount and actual realized disinvestments amount showed that Government

has not fulfilled the target except in two rest years in 1994-95 and 1998-99. The realizedvalue is much lower than the targeted amount.

c) If the government borrows amount equivalent to the money realized from disinvestments,

the interest burden will be much higher than the dividend received from the equities sold.


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Suggestion

The disinvestments process should cover not only for loss making PSE's but also the profit

making units

The general public must benefit from the proceeds of the disinvestment process. The IPO

and FPO of the PSUs being disinvested must give discounts to the retail investor so that the

retail investor can take part in the disinvestment process.

There are a number of disinvestments like coal india power grid steel authority of India

copper and many other Navratna companies where the government wants to disinvest .two of

them have already completed the process and the others are in the pipe line. The response to

both the coal India and power grid corporation IPO and FPO was tremendous .that went to

show that the public in general wants to take part in the disinvestment process and given a

chance the shareholding pattern of these companies can also contain the retail investor which

will benefit the common man

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