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27 Nov


Privatisation is a process by which government transfers the productive activity from public sector to private sector. – The Globalizing World Economy necessitated increase in efficiency and performance by leaps and bounds. Thus many countries in the world including former socialist economies like those belonging to central and eastern Europe and Soviet Union.
Privatisation in India
With New Economic Policy there was marked change in perception regarding role of Public Sector in Indian Economy and a growing need for decreasing the use of public resources at public enterprises and instead giving more stake to private sector in public sector companies: public companies. The need for such reform was felt due to the following facts regarding

  1. Public Sector Companies could not recover their investments due to their pricing policies which were based on either a) public utility b) Rate of return approach which essentially involved operating Public sector units at no profit and no loss.
  2. Underutilisation of capacity
    Underutilisation of installed capacity is another reason for low level of profitability in public sector enterprises. A large number of these enterprises ran on below 50 per cent of their total capacity. This is because of lack of proper planning, public sector being used as instrument of meeting immediate or ad hoc demands as producing goods of mass consumption etc
  3. Problems related to planning and construction of projects:
    i) The site selected were not based on scientific soil study;
    ii) Serious omissions and commissions were made regarding vital elements resulting in severe cost over runs; projects could not be completed in time.
  4. Project often embodied unscientific mix of technology and personnel. Problems of labour, personnel and management:
    i) Public Sector enterprises are often plagued with undue political interference in their day to day working and this has demoralising effect on personnel and management.
    ii) Often the upper management was under bureaucracy which was not technically competent to providing managerial guidance to complex capital intensive tasks of public sector companies.
    …………..iii) With their civil services background these officers inevitably tended to have bureaucratic caution in their work and lack innovative, and energetic measures.
    iv) In the face of intensive audits and exacting standards the scope of imagination was limited.
    Consequently to decrease governmental role and improve overall efficiency to match the globalization level competitiveness in the New Industrial Policy 1991, advocated privatisation of public sector companies, for purpose of privatisation the government has adopted route of disinvestment which involves sale of public sector equity to private sector and the public at large.
  5. Due to political interference overstaffing resulted in payment to unskilled workers; and weaning away of skilled workers to private sector.
    Effect of Globalizing tendencies could be seen in other countries bit earlier as first major programme of privatisation was carried out by Britain in 1980s. This was followed by OECD countries, former communist countries and developing nations.
    India in 1956 resolution reserved 17 industries for public sector; 1991 industrial policy reduced this to 8; currently only three industries are reserved for public sector: atomic energy, minerals specified in schedule to atomic energy and rail transport.
    Methods adopted for privatisation
  6. Initial Public Offering: This is the most important method for privatisation. Under this method the shares of public sector undertakings were sold to retail investors and institutions. The government in some cases may sell shares of a PSU in international market also. The IPO method is best method where countries have of Sale: international market robust capital market. Following are the advantages of IPO method helps in the widening and deepening of capital market .
    i. It ensures wide participation of retail investors and thus of capital market.
    ii. It is likely to face less resistance from PSU employees as there is continuity in the management.
    iii. It helps to offer shares to employees.
    iv. It is instrumental in those cases where government wants to raise resources but does not want to let go of management
  7. Strategic Sale: Strategic Sale refers to government sells its share in PSUs to a strategic partner. As a result management passes over to buyers. The transfer of shares by Government may-not necessarily be such that more than 51% of the total equity goes to the Strategic Partner for the transfer of management to take place. In the case of PSUs, in order that the company no longer has the character of a Government company, the transfer of shares involves bringing down Governments shareholding below 51%. In fact, it must be remembered that Companies Act, 1956 only defines a ‘Government Company’, which in common parlance, is a company in which Government holds more that 51%. PSU is not defined in the Act. Once the Governments shareholding goes below 51%, it ceases to be a Government company and hence, it requires changes in the Articles of Association of the company especially in relation to the Presidential directives etc. The Strategic Partner, after the transaction, may hold less percentage of shares than the Government but the control of management would be with him. For instance, if in a PSU the shareholding of Government is 51% and the balance is dispersed in public holdings, then Government may go in for a 25% strategic sale and pass on management control, though Government would post-transfer have a larger share holding (26%) than the Strategic Partner (25%).
    Privatisation a cirque
    Disinvestment most commonly selling off of government shares in PSUs was the most common method of Privatisation. This year government has kept a target of 430
    In most of the years, realisations from disinvestment were much less than the targets; the main reasons for poor performances were:
  8. Government carried out disinvestment exercise hastily and in an unplanned way; thus it failed to realize not only the best value but also other objectives of disinvestment programme.
  9. It did not create adequate linkage between PSUs and stock market, did not list PSUs on stock exchange thus filed to deepen the capital market.
  10. Often the prices listed for shares of PSUs were undervalued which led to under payment than actual price of shares.
  11. Department of Public Enterprise adopted techniques which led to realisation of far lower prices. Undervaluation was because inter alia, the values of core assets like leasehold land, housing, township and plant and machinery; were not valued or ignored.
  12. Although globalisation has intensified privatisation but private companies did not fill gap in crucial sector hence government had to fill in; for e.g. In initial years after independence many important sectors like infrastructure, health etc which had long gestation period and/or low profit generation possibilities.

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