Public Sector Disinvestment in India: A Narrative Review and Future Research Directions

Introduction

In 1947, when Indian became independent, ‘Public Sector’ Enterprises included the Railways, the Posts and Telegraphs, the Port Trusts, the Ordinance Factories, All India Radio and some the departmentally managed organizations like Government Salt Factories, Quinine Factories. Post -independence, India opted for planned economic development to face the challenges of inequalities in income, low levels of employment, regional imbalances in economic development and lack of trained manpower. Hence, Public Sector was designed as an instrument for self-reliant economic growth and implemented through Industrial Policy Resolution of 1948 and 1956 which laid emphasis on tackling the challenges of regional imbalances, unemployment, expansion of production especially of capital equipment and commodities for domestic consumption and export. The strategies for public sector were further refined in policy statements of 1973, 1977, 1980 and 1991.

The Indian Government adopted disinvestment in PSUs as a major route for privatization. Disinvestment refers to the sale of PSU's equity to the private sector and the public. The disinvestment program began in 1991-92, and 48 public sector companies' stakes were sold in varying degrees by 2004-05.

The various modalities of disinvestment are Sales on a Strategic basis; Capital Market (which refers to a sales offer to the public for a certain price; Secondary Market Operation; Sales offer made to the public through the building of books; International offering- Global Depositary Receipts (GDR), American Depositary Receipts (ADR); Placement of Private nature; Equity Reduction - (By buying back Equities, Equity conversion into debt, which can be used for exchange in the instruments functional within the capital market space; Sales of Assets; Buy-out of Management Employees; Cross Sale; Demergers); Warehousing and Auctioning.

Until 1999-2000, disinvestment was majorly carried out by holding auctions to sell minority shares. However, the dynamics changed between 1999 and 2000 and between 2003 and 2004, as disinvestment methods shifted to strategic sales. The disinvestment policy focuses on regulating the ownership of CPSEs so that the equity share of the Government stays above 51%, i.e., to ensure management control remains with the Government (Vijayakumar and Jayachitra, 2015). In 1991-92 A total of 31 PSUs were finalized for disinvestment, with their equity amounting to Rs 30.38 billion by making shares available to workers, financial institutions, mutual funds, and the public. Between 1991 and 1992 and 2000 and 2001, shares worth Rs 203.21 billion were sold to private players.

The three different approaches of divestment are:

• 1.

  Disinvestment of a minor portion wherein the majority stake is retained by the government post divestiture of above 51%, and management control.

• 2.

  Majority disinvestment, the Government retains a minority stake of less than 51%.

• 3.

  Complete privatization, total control over the company given to private sector (BSE, 2017). In the Indian context, modality selection became critical and has been debated regarding appropriate modality.

The bundling of shares at the initial phase and later the strategic sale has come under criticism. Though disinvestment of profit-making PSUs has been the issue of criticism, very few review studies, have been undertaken on disinvestment, especially in India, as evident from a literature review. The author could not find any review paper on the topic in literature.

In this narrative review, the literature on disinvestment of Indian public sector enterprises has been synthesized under the themes of factors determining performance outcomes of disinvestment, Performance outcomes of disinvestment, Problems, and issues of disinvestment.