 3400-4000 words

 Certificates
 Acknowledgement
 Topics such as effect of corona on unemployment
 Choose one from the topics given in the syllabus
Expected Checklist:

 Introduction of topic/title
 Identifying the causes, consequences and/or remedies
 Various stakeholders and effect on each of them
 Advantages and disadvantages of situations or issues identified
 Short-term and long-term implications of economic strategies suggested in the course of
research
 Validity, reliability, appropriateness and relevance of data used for research work and
 for presentation in the project file
 Presentation and writing that is succinct and coherent in project file
 Citation of the materials referred to, in the file in footnotes, resources section,
bibliography etc.

Sequence of the project:

1) Certificate
2) Table of contents
3) Introduction & definition
4) Types
5) Procedure
6) Merits
7) Demerits
8) Previous uses in India
9) Present situation
10) National investment fund:
 Definition & purpose
 Features
 Restructuring it
11) Conclusion
12) Acknowledgement
13) Bibliography

DISINVESTMENT POLICY IN INDIA

Definition
Disinvestment means sale or liquidation of assets by the government, usually Central
and state public sector enterprises, projects, or other fixed assets. The government
undertakes disinvestment to reduce the fiscal burden on the exchequer, or to raise
money for meeting specific needs, such as to bridge the revenue shortfall from other
regular sources. In some cases, disinvestment may be done to privatise assets.
However, not all disinvestment is privatisation. Some of the benefits of disinvestment
are that it can be helpful in the long-term growth of the country; it allows the
government and even the company to reduce debt. Disinvestment allows a larger share
of PSU ownership in the open market, which in turn allows for the development of a
strong capital market in India.

Main objectives of Disinvestment in India:

 Reducing the fiscal burden on the exchequer
 Improving public finances
 Encouraging private ownership
 Funding growth and development programmes
 Maintaining and promoting competition in the market

TYPES OF DISINVESTMENT
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. It is also called
Strategic Disinvestment.
Historically, majority disinvestments have been typically made to strategic partners.
These partners could be other CPSEs themselves, a few examples being BRPL to
IOC, MRL to IOC, and KRL to BPCL. Alternatively, these can be private entities, like
the sale of Modern Foods to Hindustan Lever, BALCO to Sterlite, CMC to TCS etc.
Disinvestment of a majority stake in PSUs can be done in the following ways:
 Strategic sale: it is the sale of a substantial portion of government
shareholding, 50 percent or higher, in a PSU, along with the transfer of
management control.
 Privatization: it's a type of strategic sale in which the government divests its
entire shareholding, along with the transfer of management control, to a private
entity.

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.
Historically, minority stakes have been either auctioned off to institutions (financial)
or offloaded to the public by way of an Offer for Sale.  Examples of minority sales via
Offer for Sale include recent issues of Power Grid Corp. of India Ltd., Rural
Electrification Corp. Ltd., NTPC Ltd., NHPC Ltd. etc.
Disinvestment of a minority stake in PSUs can be done in the following ways:
 Initial Public Offering (IPO): an offer of shares by an unlisted PSU to the
public for the first time.
 Follow-on Public Offering (FPO): also known as Further Public Offering, it's
an offer of shares by a listed PSU.
 Offer for sale (OFS): shares of a PSU are auctioned on the platform provided
by the stock exchange. This mode has been used extensively by the
government since 2012.
 Institutional Placement Programme (IPP): under this, only selected financial
institutions are allowed to participate and the government stake is offered to
only such institutions. E.g., mutual funds, insurance, and pension funds such as
LIC etc.
 CPSE Exchange Traded Fund (ETF): Through this route, the government
can divest its stake in various PSUs across diverse sectors through a single
offering. This mechanism allows the government to monetize its shareholding
in those PSUs which form part of the ETF basket.
 Cross-holdings: in this method, one listed PSU takes up the government stake
in another listed PSU.

Complete Privatisation
Complete privatisation is a form of majority disinvestment wherein 100% control of
the company is passed on to a buyer. Examples of this include 18 hotel properties of
ITDC and 3 hotel properties of HCI.
Disinvestment and Privatisation are often loosely used interchangeably. There is,
however, a vital difference between the two. Disinvestment may or may not result in
Privatisation. When the Government retains 26% of the shares carrying voting powers
while selling the remaining to a strategic buyer, it would have disinvested, but would
not have ‘privatised’, because with 26%, it can still stall vital decisions for which
generally a special resolution (three-fourths majority) is required.
PROCEDURE
The disinvestment process of individual CPSEs has evolved over time and is based on
decision-making through inter-ministerial consultations and involvement of
professionals and experts, in view of the technical and complex nature of transactions
and the need for transparency and fair play. The current disinvestment process
involves the following steps
1. In-principle consent by the Administrative Ministry of the CPSE concerned;
2. Approval of the proposal to disinvest by CCEA;
3. Constitution of an Inter-Ministerial Group (IMG) with the approval of the
Finance Minister to guide and oversee the disinvestment process;
4. IMG appoints Advisers for the transaction including Merchant Bankers/ Book
Running Lead Managers (BRLMs)/ Legal Advisers;
5. Presentation by BRLMs before High Level Committee (HLC) on valuation;
6. HLC recommends price band/ floor price to ‘Alternative Mechanism’ taking
into consideration the recommendation of the BRLMs;
7. Approval by ‘Alternative Mechanism’ of recommended price band/ floor price,
method of disinvestment, price discount for retail investors and employees, etc.
MERITS
i. To obtain release of the large amount of public resources locked up in non-
strategic Public sector units for re-employment in areas that are much higher on
the social priority e.g. health, family, welfare etc. and to reduce the public debt
that is assuming threatening proportions.
ii. Privatization would help stemming further outflows of the scarce public
resources of sustaining the unviable non-strategic public sector unit.
iii. Privatization would facilitate transferring the commercial risk to which the tax
payer’s money locked up in the public sector is exposed to the private sector
wherever the private sector is willing to step in.
iv. Privatization would release tangible and intangible resources such as large
manpower locked up in managing PSU’s and release them for deployment in
high priority social sector
v. Disinvestment would expose privatized companies to market disciplines and
help them become self-reliant.
vi. Disinvestment would result in wider distribution of wealth by offering shares
of privatized companies to small investors and employees.
vii. Disinvestment would have a beneficial effect on the capital market. The
increase in floating stock would give the market more depth and liquidity, give
investors early exit options, help establish more accurate benchmarks for
valuation and raising of funds by privatized companies for their projects and
expansion.
viii. Opening up the public sector to private investment will increase economic
activity and have an overall beneficial effect on economy, employment and tax
revenues in the medium to long term.
ix. Bring relief to consumers by way of more choices and better quality of
products and services, e.g. Telecom sector.

DEMERITS
i. The amount raised through disinvestment from 1991-2001 was Rs. 2051 crores
per year which is too meagre. Further, the way money released by
disinvestment is being used, remaining undisclosed.
ii. The loss of PSU’s is rising. It was 9305 crore in 1998 and 10060 crore in 2000.
iii. This is welcome but disinvestment of profit making public sector units will rob
the government of good returns. Further, if department of disinvestment wants
to get away with commercial risks, why should it retain equity in disinvested
PSU’s, e.g. Balco (49%), Modern Foods (26%) etc.
iv. The growth in social sector is not in any way hindered by non availability of
manpower.
v. This is true but only when the govt, ensures that the market system regulates
and disciplines privatized firms taking care of public’s interest.
vi. Privatization programme is generally not been affected through the public sales
of shares. Earlier, sale of shares (1991-96) attracted the employees to a limited
extent and was not friendly to small investors and employees.
vii. In most cases, shares of disinvested PSU’s are by and large in the hands of
institutions with little floating stock. The present policy of privatization
through the strategic partner route would also not achieve these objectives.
viii. Hindustan Lever has categorically stated that it has no plans for any capital
infusion in Modern food industries acquired by it in January, 2002. The
supporter of disinvestment had thought that tax payer’s money would be saved
through private sector investment.
ix. No monopoly is good. Only fair and full competition can bring relief to
consumers.

PREVIOUS USES IN INDIA

For the first four decades after Independence, the country was pursuing a path of development in
which the public sector was expected to be the engine of growth. However, the public sector
overgrew itself and its shortcomings started manifesting in low capacity utilisation and low efficiency
due to over manning, low work ethics, over capitalisation due to substantial time and cost over runs,
inability to innovate, take quick and timely decisions, large interference in decision making process
etc. Hence, a decision was taken in 1991 to follow the path of Disinvestment.
Period from 1991-92 - 2000-01

The change process in India began in the year 1991-92, with 31 selected PSUs disinvested for
Rs.3,038 crore. In August 1996, the Disinvestment Commission, chaired by G V Ramakrishna was set
up to advice, supervise, monitor and publicize gradual disinvestment of Indian PSUs. It submitted 13
reports covering recommendations on privatisation of 57 PSUs. Dr R.H.Patil subsequently took up
the chairmanship of this Commission in July 2001.However, the Disinvestment Commission ceased
to exist in May 2004.

The Department of Disinvestment was set up as a separate department in December, 1999 and was
later renamed as Ministry of Disinvestment from September, 2001. From May, 2004, the
Department of Disinvestment became one of the Departments under the Ministry of Finance.

Against an aggregate target of Rs. 54,300 crore to be raised from PSU disinvestment from 1991-92 to
2000-01, the Government managed to raise just Rs. 20,078.62 crore (less than half). Interestingly,
the government was able to meet its annual target in only 3 (out of 10) years. In 1993-94, the
proceeds from PSU disinvestment were nil over a target amount of Rs. 3,500 crore.

The reasons for such low proceeds from disinvestment against the actual target set were:

 Unfavorable market conditions

 Offers made by the government were not attractive for private sector investors
 Lot of opposition on the valuation process
 No clear-cut policy on disinvestment
 Strong opposition from employee and trade unions
 Lack of transparency in the process
 Lack of political will
 This was the period when disinvestment happened primarily by way of sale of minority
stakes of the PSUs through domestic or international issue of shares in small tranches. The
value realized through the sale of shares, even in blue chip companies like IOC, BPCL, HPCL,
GAIL & VSNL, however, was low since the control still lay with the government.

Most of these offers of minority stakes during this period were picked up by the domestic financial
institutions. Unit Trust of India was one such major institution.

Period from 2001-02 - 2003-04

This was the period when maximum number of disinvestments took place. These took the shape of
either strategic sales (involving an effective transfer of control and management to a private entity)
or an offer for sale to the public, with the government still retaining control of the management.
Some of the companies which witnessed a strategic sale included:

 BHARAT ALUMINIUM CO.LTD.

 CMC LTD.
 HINDUSTAN ZINC LTD.
 HOTEL CORP.OF INDIA LTD. (3 PROPERTIES: CENTAUR HOTEL,JUHU BEACH, CENTAUR HOTEL
AIRPORT,MUMBAI & INDO HOKKE HOTELS LTD.,RAJGIR)
 HTL LTD.
 IBP CO.LTD.
 INDIA TOURISM DEVELOPMENT CORP.LTD.(18 HOTEL PROPERTIES)
 INDIAN PETROCHEMICALS CORP.LTD.
 JESSOP & CO.LTD.
 LAGAN JUTE MACHINERY CO.LTD.,THE
 MARUTI SUZUKI INDIA LTD.
 MODERN FOOD INDUSTRIES (INDIA) LTD.
 PARADEEP PHOSPHATES LTD.
 TATA COMMUNICATIONS LTD.

The valuations realized by this route were found to be substantially higher than those from minority
stake sales.

During this period, against an aggregate target of Rs. 38,500 crore to be raised from PSU
disinvestment, the Government managed to raise Rs. 21,163.68 crore.

Period from 2004-05 - 2008-09

The issue of PSU disinvestment remained a contentious issue through this period. As a result, the
disinvestment agenda stagnated during this period. In the 5 years from 2003-04 to 2008-09, the total
receipts from disinvestments were only Rs. 8515.93 crore.

2009-10-2019-20
A stable government and improved stock market conditions initially led to a renewed thrust on
disinvestments. The Government started the process by selling minority stakes in listed and unlisted
(profit-making) PSUs. This period saw disinvestments in companies such as NHPC Ltd., Oil India Ltd.,
NTPC Ltd., REC, NMDC, SJVN, EIL, CIL, MOIL, etc. through public offers.

However, from 2011 onwards, disinvestment activity slowed down considerably. As against a target
of Rs.40,000 crore for 2011-12, the Government was able to raise only Rs.14,000 crore.
 However, the subsequent years saw some improvement and the Government was able to raise Rs.
23,857 crore against a target of Rs. 30,000 crore (Revised Target : Rs. 24,000 crore) in 2012-13 and
Rs. 21,321 crore against a target of Rs. 54,000 (Revised Target : Rs. 19,027 crore) in 2013-14.

The achieved target dropped to Rs. 24,338 crore against a target of Rs. 58,425 crore in 2014-15.

In 2015-16 the Government was able to raise Rs. 32,210 crore against a target of Rs. 69,500 crore
(Revised Target : Rs. 25,312 crore) and Rs. 46,378 crore against a target of Rs. 56,500 (Revised Target
: Rs. 45,500 crore) in 2016-17.

In 2017-18, some steep improvement was seen and the Government was able to raise Rs. 1,00,642
crore against a target of Rs. 72,500 crore (Revised Target : Rs. 1,00,000 crore) and Rs. 85,063 crore
against a target of Rs. 80,000 in 2018-19.

Further, the achieved target dropped to Rs. 49,828 crore against a target of Rs. 90,000 crore
(Revised Target : Rs. 1,05,000 crore, further the Target Revised downward to Rs.65,000 crore) in
2019-20.

FUTURE PLANS OF DISINVESTMENT 

In the Finance Minister Nirmala Sitharaman’s second Budget,
disinvestment target for 2020-21 has been pegged at a three-
fold increase of ₹2.1 lakh crore as against revised estimate of
₹65,000 crore.
The latest target of ₹2.1 lakh includes ₹90,000 crore that
Government expects to mop up from divestment of
government stake in public sector banks and financial
institutions.

The government on Saturday pegged disinvestment target for 2020-21 at Rs 1.20

lakh crore, nearly double of Rs 65,000 crore it expects to raise in the current
financial year.

The government has missed the budgeted disinvestment target of Rs 1.05 lakh crore
set for the current financial year by a huge margin.
According to an official statement released by the Ministry of Finance on

December 3, 2019, the Cabinet had given its “in-principle” approval for the

following 23 PSUs:

1.    Project & Development India Ltd.

2.    Hindustan Prefab Ltd. (HPL)

3.    Engineering Projects (India) Ltd

4.    Bridge & Roof Co. India Ltd

5.    Hindustan Newsprint Ltd. (Subsidiary)

6.    Scooters India Ltd

7.    Bharat Pumps and Compressors Ltd

8.    Cement Corporation of India Ltd

9.    Hindustan Fluorocarbon Ltd. (Subsidiary)

10.    Central Electronics Ltd

11.    Bharat Earth Movers Ltd (BEML)

12.    Ferro Scrap Nigam Ltd (subsidiary)

13.    Nagarnar Steel Plant of NMDC

14.    Alloy Steel Plant, Durgapur; Salem Steel Plant; Bhadrwati units of SAIL

15.    Pawan Hans Ltd

16.    Air India and its five subsidiaries and one JV

17.    HLL Lifecare

18.    Indian Medicines & Pharmaceutical Corporation Ltd (IMPCL)

19.    Kamarajar Port Limited (Disinvestment has been completed in March. Centre

has sold its 74.49 percent stake to Chennai Port Trust for Rs 2,383 crore.)

20.    Indian Tourism Development Corporation (ITDC)

21.    Karnataka Antibiotics and Pharmaceuticals Ltd (Sources have told PSU Watch

that KAPL may not be disinvested because the Centre wants to assign it the

responsibility of being the sole manufacturer and distributor of Oxytocin in India, if

the Supreme Court gives its approval.)

22.    Hindustan Antibiotics Ltd.

23.    Bengal Chemicals and Pharmaceuticals Ltd (BCPL)

24. BPCL, Air India and LIC next fiscal besides IDBI Bank .

 
National investment fund
Meaning
The cabinet Committee on Economic Affairs (CCEA) on 27th January, 2005 had approved the constitution
of a National Investment Fund (NIF). The Purpose of the fund was to receive disinvestment proceeds of
central public sector enterprises and to invest the same to generate earnings without depleting the corpus.
The earnings of the Fund were to be used for selected Central social welfare Schemes. This fund was kept
outside the consolidated fund of India.

Features

 The proceeds from disinvestment of CPSEs will be channelised into the

National Investment Fund which is to be maintained outside the
Consolidated Fund of India  
 The corpus of the National Investment Fund will be of a permanent nature
 The Fund will be professionally managed to provide sustainable returns to
the Govt., without depleting the corpus. Selected Public Sector Mutual
Funds will be entrusted with the management of the corpus of the Fund  
 75% of the annual income of the Fund will be used to finance selected
social sector schemes, which promote education, health and employment.
The residual 25% of the annual income of the Fund will be used to meet
the capital investment requirements of profitable and revivable CPSEs that
yield adequate returns, in order to enlarge their capital base to finance
expansion/ diversification  

The NIF corpus was thus managed by three Public Sector Fund Managers. The
income from the NIF corpus investments was utilized on select social sector
schemes, namely the Jawaharlal Nehru National Urban Renewal Mission
(JNNURM), Accelerated Irrigation Benefits Programme (AIBP), Rajiv Gandhi
Gramin Vidyutikaran Yojana (RGGVY), Accelerated Power Development and
Reform Programme, Indira Awas Yojana and National Rural Employment
Guarantee Scheme (NREGS).

Restructure
On 5th November 2009, CCEA approved a change in the policy on utilization of
disinvestment proceeds. In view of the difficult situation caused by the global
slowdown of 2008-09 and a severe drought in 2009-10, a one-time exemption was
accorded to disinvestment proceeds being deposited into NIF for investment; this
exemption was to be operational for period April 2009-March 2012. All
disinvestment proceeds obtained during the three-year period were to be used for
select Social Sector Schemes allocated for by Planning Commission/ Department
of Expenditure.

The three-year exemption, mentioned above was extended by CCEA on 1st March
2012 by another year, i.e. from April 2012 – March 2013, in view of the persistent
difficult condition of the economy. The utilization of disinvestment proceeds were
thus continued for funding of Social Sector Schemes till 31st March, 2013.

The Govt. on 17th January, 2013 approved restructuring of the National

Investment Fund (NIF) and decided that the disinvestment proceeds with effect
from the fiscal year 2013-14 will be credited to the existing ‘Public Account’ under
the head NIF and they would remain there until withdrawn/invested for the
approved purpose. It was decided that the NIF would be utilized for the following
purposes:

 Subscribing to the shares being issued by the CPSE including PSBs and
Public Sector Insurance Companies, on rights basis so as to ensure 51%
ownership of the Govt. in those CPSEs/PSBs/Insurance Companies is not
diluted.  
 Preferential allotment of shares of the CPSE to promoters as per SEBI
(Issue of Capital and Disclosure Requirements) Regulations, 2009 so that
Govt. shareholding does not go down below 51% in all cases where the
CPSE is going to raise fresh equity to meet its Capex programme.  
 Recapitalization of public sector banks and public sector insurance
companies.  
 Investment by Govt. in RRBs/IIFCL/NABARD/Exim Bank.  
 Equity infusion in various Metro projects.  
 Investment in Bhartiya Nabhikiya Vidyut Nigam Limited and Uranium
Corporation of India Ltd.    
 Investment in Indian Railways towards capital expenditure.

ARGUMENTS AGAINST DISINVESTMENT

1.Disinvestment of public enterprises is criticised by left-oriented economists on the ground
that it amounts to selling ‘family silver’. This in our view is not a valid criticism. This is
because original investment on these public enterprises was made by the Government out of
its revenue and capital receipts in the past. If some part of these public enterprises are sold
and the resources so released are spent on certain beneficial schemes of promotions of
education and health or reduction of poverty and unemployment, it cannot be called an
undesirable act.
2. Second, it is pointed out that privatisation of some public enterprises would, in the absence
of anti-trust law, lead to the emergence of private monopolies under which resources are
misallocated. As a result, consumer welfare will be reduced. Besides, adoption of
monopolistic practices will lead to higher prices and lower levels of output and employment.
3. It is argued that mere change of ownership, from public to private, does not ensure higher
efficiency and productivity of industrial enterprises. In the modern corporate form of business
organisation, management has been separated from ownership. In case of both public and
private enterprises professional managers can be employed to manage the industrial
enterprises to ensure efficiency in working. Thus, it is argued that for professionalization of
management, privatisation of public enterprises is not needed.
4. The disinvestment of public enterprises is also opposed on the ground that it will lead to
the concentration of economic power in a few private hands. This economic power can be
used to exploit the consumers on the one hand and workers on the other. Further, greater
concentration of economic power in private hands will also lead to increase in inequalities of
income and wealth. Thus, disinvestment and privatisation is a negation of the objective of
promoting equality.
5. An important argument against privatisation is that it will lead to retrenchment of workers
who will be deprived of the means of their livelihood. Further, private sector, governed as
they are by profit motive, has a tendency to use capital-intensive techniques in production.
This will not lead to generation of many employment opportunities. As a result,
unemployment problem in India will worsen.
6. Disinvestment is also opposed on the ground that it is no solution for loss-making sick
public sector undertakings. In fact, it is pointed out that about 50 per cent of loss-making
public enterprises, especially in the field of textiles, are those sick units which were taken
over by the Government from the private sector to protect the jobs and interests of the
workers.
7. Last but not the least, it is argued that public enterprises should not be privatized because,
though they may not be yielding enough profits, they are socially profitable and have made
important contribution to build up a strong base for industrial development of the country.
But for the growth of public enterprises in the industries such as machine making, heavy
chemicals, fertilizers, steel and power, and communication, these industries would not have
been developed as has been actually the case.