ABSTRACT It was in the year 1998-99, when Prime Minister Shri Atal Bihari Vajpayee made a statement in parliament about disinvestment –"Disinvestment / Privatization is the only panacea for ills of loss making public sector undertakings." And soon the response from the opposition was "You can't sell the family silver to meet your daily expenditure." The Indian approach towards disinvestment seems to have gone totally wrong ever since the reforms process was initiated in the early 90's. The country now has lost the opportunity and its way as the pace of the entire process is very slow and lethargic in nature. While all the politicians claim to share a common platform on this issue but find the escape route by stating – "We agree in principle but differ in details", "Decide about strategic sale or public offer", "is it videshi or swedeshi", so on and so forth. The whole process of disinvestment is not encouraging as the total proceeds realized is just 35% as against the target set for the decade of 1991-92 to 2001-02. Though 49 companies so far have been disinvested but in reality only a few have been genuinely privatized. On the other hand the countries like Taiwan, Hungary, Thailand, Philippines, Korea, Turkey, Poland, Eastern Europe, West Asia and even China have marched ahead with the disinvestment program with a professional approach. Needless to say the 3 P's of disinvestment – Promise, policy and performance is not much appreciable. The paper focuses on the Objectives of disinvestment, Process of disinvestment, Timing of disinvestment, progress & recent trends in disinvestment, comparative study of fiscal deficit and disinvestment and lastly concluding remarks & suggestions. DISINVESTMENT OF PUBLIC SECTOR UNDERTAKINGS Introduction Investment and disinvestment are two sides of the same coin. When we deal with the investment management, it automatically encompasses, disinvestment also, as what is investment for one is disinvestment for another, particularly in the secondary market. It investment is an art and science, the more so is the disinvestment process. What is Disinvestment Investment refers to conversion of money or cash into securities, debentures, bonds or any other claims on money. At the same time, disinvestment involves the conversion of money claims or securities into money or cash. Objectives of the study The study of disinvestment of public sector undertakings is aimed at examining the following : 1. To analyse the objectives of disinvestment process in India. 2. To study the disinvestment process followed in India till date. 3. To examine the timing of disinvestment 4. To bring out the significance of disinvestment proceeds vis-à-vis budget deficit. 5. To bring out the findings of the study. Disinvestment of Public sector undertakings Disinvestment is a wider term extending from dilution of the stake of the government to a level where there is no change in the control to dilution that results in the transfer of management. The transfer of ownership may occur when in an enterprise the dilution of government ownership is beyond 51 percent. The disinvestment implies that the government will sell to public or private enterprises / public institutes part of its holding in public sector enterprises. Reasons for disinvestment The public sector in India at present is at cross roads. The new economic policy initiated in July – 1991, clearly indicated that the public sector undertakings have shown a very negative rate of return on capital employed. On account of this phenomenon many public sector undertakings have become burden to the government. They are infact turning out to be liabilities to the government rather than being assets. This is a sector which the government clearly wants to get rid off. In this direction the government has adopted a new approach to reform and improve the public sector undertakings performance i.e 'Disinvestment policy'. This has gained lot of importance especially in latter part of 90s. At present the government seriously perceives the disinvestment policy as an active tool to reduce the burden to financing the public sector undertakings. Problems of Public sector undertakings The most important criticism levied against public sector undertakings has been that in relation to the capital employed, the level of profits has been too low. Even the government has crticised the public sector undertakings on this count. Of the various factors responsible for low profits in the public sector undertakings, the following are particularly important :- i. Price policy of public sector undertakings ii. Under – utilization of capacity iii. Problem related to planning and construction of projects iv. Problems of labour, personnel and management v. Lack of autonomy The government in order to put an end to these problems, decided to disinvest its stake in the PSUs. The companies traditionally established as pillars of growth have now become a burden on the economy. Except few mighty oil and petroleum companies, almost all other PSUs are incurring losses. The national gross domestic product and gross national savings are also adversely effected by low returns from PSUs. About 10 to 15 % of the total gross domestic savings are reduced on account of low savings from PSUs. Objectives of Disinvestment The following are the main objectives of disinvestment policy of the government. i. To reduce the financial burden on government. ii. To improve public finances. iii. To introduce, competition and market discipline. iv. To find growth. v. To encourage wider share of ownership. vi. To depoliticise essential services. The Disinvestment process in India The following are the three methods adopted by the Government of India for disinvesting the Public sector undertakings. There are three broad methods involved, which are used in valuation of shares. 1. Net Asset Method: This will indicate the net assets of the enterprise as shown in the books of accounts. It shows the historical value of the assets. It is the cost price less depreciation provided so far on assets. It does not reflect the true position of profitability of the firm as it overlooks the value of intangibles such as goodwill, brands, distribution network and customer relationships which are important to determine the intrinsic value of the enterprise. This model is more suitable in case of liquidation than in case of disinvestment. 2. Profit Earning Capacity Value Method: The profit earning capacity is generally based on the profits actually earned or anticipated. It values a company on the basis of the underlying assets. This method does not consider or project the future cash flow. 3. Discounted Cash Flow Method: In this method the future incremental cash flows are forecasted and discounted into present value by applying cost of capital rate. The method indicates the intrinsic value of the firm and this method is considered as superior than other methods as it projects future cash flows and the earning potential of the firm, takes into account intangibles such as brand equity, marketing & distribution network, the level of competition likely to be faced in future, risk factors to which enterprises are exposed as well as value of its core assets. Out of these three methods the Discounted cash flow method is used widely though it is the most difficult. Timing of Disinvestment (Through Technical Analysis) Unless the disinvestment is a distress sale, it has to be well timed to reap the optimum gain. Such timing can be sought from research analysis of the market trends called Technical analysis. There are many methods prevailing for finding the significant timing for disinvestment of shares. The most significant method is "Relative Strength Index" method. Relative Strength Index (RSI) : The most vital method of finding the timing for disinvestment of shares in RSI, which was developed by 'Wells Wilder'. RSI is calculated for each scrip to identify the inherent technical strength or weakness. The formula for finding RSI is given below R.S.I = 100 - [ 100 ] 1+Rs Where Rs = Average gain per day Average loss per day 100 = present days share price Let us take an example for 10 days. RSI to find the timing for disinvestment of shares. (Table – 1) Days Price Gain (over the previous day) Loss (over the previous day) 1 100 - - 2 110 10 - 3 105 - 5 4 108 3 - 5 112 4 - 6 115 3 - 7 120 5 - 8 115 - 5 9 110 - 5 10 105 - 5 25 / 10 20 / 10 10 days average gain / loss - 2.5 2.0 Rs. = 2.5 = 1.25 2.0 RSI = 100 - 100 = 100 – 44.4 = 55.6 1+1.25 RSI = 110 - 110 = 110 – 48.89 = 61.11 1+1.25 RSI = 105 - 105 = 105 – 46.67 = 58.33 1+1.25 RSI = 108 - 108 = 108 – 48 = 60 1+1.25 RSI = 112 - 112 = 112 – 49.78 = 62.22 1+1.25 RSI = 115 - 115 = 115 – 51.11 = 63.89 1+1.25 RSI = 120 - 120 = 120 – 53.33 = 66.67 1+1.25 RSI = 115 - 115 = 115 – 51.11 = 63.89 1+1.25 RSI = 110 - 110 = 110 – 48.89 = 61.11 1+1.25 RSI = 105 - 105 = 105 – 46.67 = 58.33 1+1.25 After calculating such data for a number of days, a graph as shown below (Graph – 1) can be drawn representing the data on RSI. The Graph foretells a raise or a fall and time at which the share has to be disinvested. One can develop their own skill in tracing turning signals, for both purchases and sales based on the reversal trend. In daily movement of prices, there will be both rise and falls. If we take closing prices and compare them, sometimes each successive top will be higher than the previous top and at a point then next peak is lower than the previous one the first sign of change of trend or sell signal is registered. (Graph / chart – 1) In the above chart (Graph –1) there are four peak each rising above their previous ones (A, B, C & D) and afterwards there is a decline in the graph (from 66.67 to 63.89) lower than D and even C, hence it is a signal to sell the share of that company to minimize the loss. The disinvestment decisions have to be taken with extreme care to make the optimum profit. Recent Trends in Disinvestment Process The change process in Indian begun in the year 1991-92 and in that year 31 selected PSUs were disinvested totaling an aggregate equity of Rs.3,038 crores. In the decade 1991-92 to 2000-01, the total rose to Rs.20,506 crores as against the target of 54,300 crores. In the year 2000-01 itself the government was able to raise Rs.1,868 crores against the target of Rs.10,000 crores. Disinvestment proceeds (Table – 2) Year Target Actual 1991-92 2,500 3,038 1992-93 2,500 1,913 1993-94 3,500 Nil 1994-95 4,000 4,843 1995-96 7,000 362 1996-97 5,000 380 1997-98 4,800 902 1998-99 5,000 5,371 1999-2000 10,000 1,829 2000-01 10,000 1,869 2001-02 12,000 5,632 2002-03 12,000 3,342 2003-04 13,200 - Source: ET Survey, Mar.2003 The target set for disinvestment proceeds was met in only three of the last twelve years. The most recent of such years is 1998-99. In the early 90's, India used to have relatively modest targets of generating around Rs.2000 – Rs.3000 crores through disinvestment. By mid-nineties, the targets were jacked up to an annual revenue of Rs.5,000 crores. By the late nineties, Rs.10,000 crore plus targets became common. The reasons for such low proceeds from disinvestment against the actual target set are – i. Unfavorable market conditions ii. Offers made by the government were not attractive for private sector investors. iii. Lot of hue and cry being made on valuation process. iv. Government has no clear-cut policy on disinvestment. v. Strong opposition from employee and trade unions. vi. Lack of transparency in the whole process. vii. Lack of political will. Modus Operandi – Method of Disinvestment Methods followed by India for Disinvestment so far… (Table – 3) Year No. of Companies Method of disinvestment '91-92 47 Minority shares sold by auction method in bundles of "very good" "good" and "average" companies '92-93 35 Bundling of shares abandoned. Shares sold separately for each company by auction method. '93-94 - Equity of 7 companies sold by open auction but proceeds received in 1994-95 '94-95 13 Sale through auction method, in which NRIs and other persons legally permitted to buy, hold or sell equity, allowed to participate. '95-96 5 Equities of 4 companies auctioned. '96-97 1 GDR (VSNL) in international market '97-98 1 GDR (MTNL) in international market '98-99 5 GDR (VSNL) / Domestic offerings with the participation of FIIs (CONCOR, GAIL). Cross purchase by 3 oil sector companies i.e. GAIL, ONGC & IOC. '99-00 2 GDR (GAIL), Domestic issues (VSNL), restructuring BALCO '00-01 4 Strategic sale of BALCO, LIMC, takeover – KRL (CRL), CPCL (MRL), BRPL '01-02 10 Strategic sale of CMC (51%), HTL (74%), VSNL(25%), IBP (33.58%), PPL (74%), and sale by other modes (ITDC & HCI). '02-03 6 Strategic sale of JESSOP (72%), HTL (26%), MFIL (26%), IPCL (25%) and other modes (HCI, Maruthi). Source: ET Survey, Mar.2003 Government stakes in 48 companies have been sold in varying degrees by 2002-03. Till 1998-99, the government used to sell minority stakes through domestic or international issue of shares in small trenches every year. Post 1999-00, there has been a greater stress on strategic sale – involving an effective transfer of control and management to private entity. The prominent companies which have witnessed strategic sale include Modern Foods, BALCO, CMC, VSNL, IBP, ITDC Hotels, Maruthi , Pradeep Phosphate and HZL. As per the Economic Survey – 2001, the government was set out the following policies towards PSUs :- i. Bring down the Government equity to 26% or lower. ii. Re-structure the potential and viable PSUs. iii. Close down PSUs that cannot be revived. iv. To protect the interest of the workers. Disinvestment v/s. Fiscal Deficit Of late the government has been using the proceeds from disinvestment to bridge the budget deficit. Of the total Rs.12,300 crores earned between 1991-96 through disinvestment, more than Rs. 7,300 crores was used to bridge the deficit. It is also said that the funds raised through disinvestment process is used to repay the past debts, which would lessen the burden of interest on the government. From this it is quite evident that the government is aimed at reducing the fiscal deficit through disinvestment proceeds but not focused on improving these undertakings and reinvesting in social sector. Most nations spend a substantial chunk of their privatization proceeds for meeting their budget deficits. Many countries have attempted, however, to build a political consensus and garner public support for the process of privatization by setting aside disinvestments revenues for 'noble' causes. In Ukraine, for instance, revenues are credited to the State Privatization Fund (kept outside the budget) and legislation explicitly prohibits the use of revenues from privatization for covering the budget deficits. In Estonia, the government can use privatization revenues for development projects only as long as the fiscal deficit is contained at a specific level (fixed at 3.9% of GDP in '01). In UK and much of South America, Eastern Europe and Russia, the idea behind privatization was not merely to raise money, but also driven by ideology – privatize swiftly at all costs under the assumption that this would increase the firm's efficiency and profitability and benefit the economy as a whole. In the light of the above, it is interesting to study the proceeds from disinvestment vis-à-vis fiscal deficit and to know the share of disinvestment proceeds in the total deficits. Fiscal Deficit & Disinvestment proceeds (Table-4) Particulars 1991- 1992 1992- 1993 1993- 1994 1994- 1995 1995- 1996 1996- 1997 1997- 1998 1998- 1999 1999- 2000 2000- 2001 2001-2 002 1. Target of Disinvestment 2500 3500 3500 4000 7000 5000 5000 5000 10000 12000 12000 2. Amount realized from disinvestment 3038 1961 1866 5078 357 455 902 5371 1892 2600 5632 3. Amount realized as percentage target 121.5 56.03 53.31 126.9 5.10 9.101 8.04 107.42 18.92 21.67 47 4. Fiscal Deficit 36325 40173 60257 57703 60243 66733 83937 113349 108898 111275 5. Fiscal Deficit as percentage of GDP 5.9 5.7 7.0 5.7 5.1 4.9 5.9 6.4 5.6 5.1 5.1 6. Disinvestment as percentage of Fiscal Deficit 8.36 4.88 3.1 8.8 0.6 0.7 1.0 4.7 1.7 2.3 Source: Annual Report – 2000, RBI Bulletin The data relating to fiscal deficit and disinvestment proceeds shows that the proceeds realized from disinvestment were very inconsistent and insignificant as compared to the increasing rate of fiscal deficit. The average growth of fiscal deficit as percentage to GDP in the current decade 1991-92 to 2001-02 stood at 6 percent, whereas on the other hand the disinvestment proceeds as a percentage of fiscal deficit stood at 3.86 percent. From this information it is quite evident that this objective of the government to mitigate the proceeds of disinvestment to bridge the fiscal deficit gap also was not materialized. Therefore, it is clear that disinvestment proceeds realized were totally insignificant and insufficient in relation to fiscal deficit during the decade 1991-92 to 2001-02. This also means that the government failed to meet the disinvestment targets set. Concluding Remarks The study on Disinvestment of public sector undertakings have revealed the following conclusions: i. There is no clear-cut framework or policy for disinvestment in India. ii. The study of disinvestment for a period of 1991-92 to 2001-02 has revealed that a very meager amount of disinvestment proceeds has been realized as against the target. iii. The entire proceeds of disinvestment are been used to mitigate the gap fiscal deficit instead of using them for development of social sector & building infrastructure. iv. The government has not been concentrating on the timing of disinvestment as a result most of the private sector investors are shying away form the process because of the unattractive offers made by the government. v. There is no transparency in the entire process of disinvestment in India. vi. The government has done a little or more so failed to attract foreign suitors for the disinvestment process in India. Suggestions: i. The government has to form a policy framework for the entire disinvestment process. ii. The government should de-link the disinvestment process from the budgetary exercise. iii. Government should stop setting up of the targets in every year annual budget and should have a long-term plan. iv. A separate fund should be created for disinvestment and it should be kept under the control of president and the fund should be utilized for building infrastructure and developing the social sector. v. Timing of disinvestment is crucial and the government should follow a specific method or process in order to reap more chunks. vi. The entire exercise of disinvestment should be audited by not less than two reputed auditing firms in order to have a fair and transparent picture of the entire process. vii. Finally, the government should have an 'Yearly Action Plan' which should spell out the activities carried out in that particular year and at the end of the year an 'Action Taken Report' has to be submitted.