Policy on Public Sector and Disinvestment

The Industrial Policy Resolution of 1956 gave the public sector a strategic role in the economy. Massive investments were made over the next four decades to build the public sector. Many of these enterprises successfully expanded production, opened up new areas of technology and built up a reserve of technical competence in a number of areas. Nevertheless, after the initial concentration of public sector investment in key infrastructure areas, public enterprises began to spread into all areas of the economy including non-infrastructure and non-core businesses.

The Government announced on 24th July 1991 the ‘Statement on Industrial Policy’ which inter-alia included Statement on Public Sector Policy. The statement contained the following decisions: 

“Portfolio of public sector investments will be reviewed with a view to focus the public sector on strategic, high-tech and essential infrastructure. Whereas some reservation for the public sector is being retained, there would be no bar for area of exclusivity to be opened up to the private sector selectively. Similarly, the public sector will also be allowed entry in areas not reserved for it.

Public enterprises which are chronically sick and which are unlikely to be turned around will, for the formulation of revival/rehabilitation schemes, be referred to the Board for Industrial and Financial Reconstruction (BIFR), or other similar high level institutions created for the purpose. Social security mechanism will be created to protect the interests of workers likely to be affected by such rehabilitation packages.
In order to raise resources and encourage wider public participation, a part of the government’s shareholding in the public sector would be offered to mutual funds, financial institutions, general public and workers.

Boards of public sector companies would be made more professional and given greater powers.

There will be a greater thrust on performance improvement through the Memorandum of Understanding (MOU) System through which managements would be granted greater autonomy and will be held accountable. Technical expertise on the part of the Government would be upgraded to make the MOU negotiations and implementation more effective.

To facilitate a fuller discussion on performance, the MOU signed between Government and the public enterprises would be placed in Parliament. While focusing on major management issues, this would also help place matters on day-to-day operations of public enterprises in their correct perspective”.

In accordance with the decision announced in the aforesaid statement on industrial policy on public sector and also as per budget speech of July 1991, in order to encourage wider participation and promote greater accountability, the Government equity in selected CPSEs was offered to mutual funds, financial institutions, workers and the general public.

In the subsequent years, there have been constant policy changes. While on one hand, disinvestment as a policy has been much debated, there have also been changes and disagreements in terms of the different approaches that can be taken for disinvestment to happen. 

Current Government Policy

The President of India’s address on 4th June 2009 unveiled the agenda of the Congress- led Government at the Centre. In keeping with the election manifesto of the Congress Party, the President’s address mentioned: “Our people have every right to own part of the shares of public sector companies while the Government retains majority shareholding and control. My Government will develop a roadmap for listing and people-ownership of public sector undertakings while ensuring that Government equity does not fall below 51%.” 

In line with the Presidents’ address, the Economic Survey (2008-09) stated the following as the Governments plan of action: "Revitalize the disinvestment program and plan to generate at least Rs. 25,000 crore per year. Complete the process of selling of 5-10% equity in previously identified profit making non-navratnas. List all unlisted public sector enterprises and sell a minimum of 10% of equity to the public. Auction all loss making PSUs that cannot be revived. For those in which net worth is zero, allow negative bidding in the form of debt write-off."  

The subsequent Union Budgets have also taken disinvestment on the agenda of the Government. 

The Government has also announced its intentions of raising the minimum public shareholding in listed companies to 25%. This figure was subsequently revised to 10%. This, besides bringing more quality paper in the market, shall also lead to disinvestment as the Government shall have to dilute its present holding to ensure the minimum public shareholding in the listed PSUs. At current prices, this could mean a divestment amount of over Rs. 337353.68 crore, in case 25% public shareholding were to be achieved and Rs. 55889.58 crore, in case 10% public shareholding were to be achieved. Click here for details.