Most public sector undertakings (PSUs) were set up in India in a complex situation where there was a dearth of industrial participation in the Indian economy. These companies had been the pillars of the great Indian economy, but at the wake of economic policies in 1991, they had a negative rate of return on capital employed. This was not a good sign of a thriving economy coupled with the policy of globalization. The government had to get rid of these companies or at least handover a part of holding to private persons. Thus came about the birth of disinvestment policies in India.
In general terms, disinvestment is simply selling the equity (share) invested by the government in PSUs which are either owned completely by the government or whose shares are maximum owned by the government (51% or above). Examples include BHEL and ONGC.
There are two main reasons in support of disinvestment. One is to provide fiscal support and the other is to improve the efficiency of the enterprise. The argument for fiscal support emphasizes that the resources raised through disinvestment must be utilized for retiring past debts and there by bringing down the interest burden of the government. The second argument in support to improve the efficiency of public enterprises through disinvestment is the contribution that it can make to improve the efficiency of the working of them.
I propose to deal with the methods of disinvestment and conceptualize the advantages and disadvantages of this phenomenon.
Methods of disinvestments:
1. Purchasing the stake or acquiring the company by opening the membership for all
2. To sell shares through
a. fixed price
b. book building
c. auction – where the highest bidder would be accepted
Now that an overview of disinvestments has been established, we must concern ourselves with the advantages and disadvantages of disinvestments.
Advantages of disinvestments
In an ever growing economy, investment by the government alone would not suffice. It is of absolute necessity that even private capital is entertained at the maximum level. The most economically successful country has the highest amount inflow of private capital. After 1991, the private inflow of capital has been high. And the phenomena of disinvestment have constantly supported this inflow of private money. The money received from the process of disinvestment can be utilized to compensate the deficit finance.
The market thrives if there is sufficient amount of competition. If new firms enter into the market, then the competition increases which in turn makes the companies more competitive – an advantage for the consumers as they may experience choice. The PSUs which have undergone this disinvestment were (prior to the disinvestment) low productivity companies. Thus when the decision making capacity was given to private players, there has been a huge turn over with respect to optimum utilization of resources, capacity to invest, and profit. This is because the focus has been shifted to the PSU’s as a profit making company.
Disadvantages of disinvestments
India is slowly shifting its base from a welfare and socialistic state to a capitalistic economy. Government companies or even PSUs are the heart of any socialistic state, the interest of the public is protected through these organizations. Unlike private companies who thrive for profits and strive to infringe the rights of people, PSUs were started for the people. Thus disinvestments are certainly against the interest of the people but it is a necessary evil.
Foreign direct investments in these companies would mean more foreign control. This would mean that the sovereignty would be hampered. Selling equities to foreign companies result in serious consequences shifting the nation's wealth, power and control to outsiders.If a company is privatized, the job security would not be same as that of a PSU. Thus the risk of being unemployed if not proven to be useful to the company is high.
Considering the advantages and disadvantages of disinvestment in a weighing machine, it can be construed that this is a necessary evil. There have been many instances where fundamental rights have been violated because of privatization (for example, the closure of mills in Mumbai), but it has caught like wildfire in India.
References
1. Disinvestments in Public sector enterprises, V. Gangadhar, Dr. M. Yadhagiri
2. Government report as on 2006
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—About our writer:
Bhagavath Krishnan is a law student from KIIT Law School. He has been writing for about 4 years now. He has written for the college magazine and other blogs, a real enthusiast in using up his grey matter for purposeful benefits. He has a keen interest in creative writing and specializes on writing on legal issues.
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