Abstract

The public sector, also known as the State Sector or Government Sector, was conceived as an economic development instrument for ensuring law and order and protecting individual property. The public sector plays a significant role in rapid economic growth; in India, it accounts for approximately two-fifths of total gross investment (or gross capital) and contributes a quarter of the country’s gross domestic product (GDP).

The public sector takes two forms: 

a) Ministries or Government Departments: The Minister is the in-charge, follows government rules, and is accountable to the Parliament; the DVC and the erstwhile LIC are examples; 

b) Incorporated as a Statutory Corporation under a Statute or as a Joint Stock Company under the Indian Companies Act. There are 272 central public enterprises (CPEs), of which 212 reported net profits of Rs. 3.43 trillion and have approximately 18 lakh employees. In addition, there are approximately 800 state-level public enterprises (SPEs). Over the years, there has been a tendency to transform government administrative or commercial departments into incorporated enterprises with the objective of granting autonomy, bringing in competition, and introducing market forces. 

Memorandum of Understanding (MOU) and categorisation of enterprises as Maha Ratanas, Ratanas, Mini Ratanas, and Balance Score Card (BSC) are systems of internal restructuring to grant operational autonomy.  

Privatisation and disinvestment of government shareholdings are systems of external restructuring. Over the years, various disinvestment approaches have been followed, such as share-buy-back, share-cross-holdings, offer-for-sale, follow-on-public-offer, block deal, exchange-trade-fund, and sale of a block of shares. Disinvestment from 1991 onwards has resulted in the realisation of 518,440 crores against the target of 922,727 crores. Disinvestment has increased over the years, and in most cases, the target sets have not been met. The disinvestment process has taken a double “U” turn from ‘fractional equity sale’ in the initial years to ‘strategic sale’ during 1999-2000 to 2003-04; again to ‘fractional equity sale’ in the years starting 2004-5; to ‘strategic sale’ 2014-15 onwards. 

Besides privatisation and disinvestment of public enterprises, the private sector has also been involved in public sector institutions through diverse PPP approaches, including train routes, ordnance factories, airports, urbanisation, asset monetisation of encashing of the idle assets of public sector units, and ownership being retained by the government. These approaches take the forms of BOT (Toll) and BOT (Annuity). BOOT.

Lastly, despite the internal or external restructuring discussed above, the problem of autonomy normally remains unabated, and the attitude of executives is one of the main factors.  

Keywords: Public Sector, Public Enterprises, Statutory Corporations, Joint Stock Companies, Operational Autonomy, MOU, Categorisations-Maha Ratna; Ratna, Mini Ratna; BSC, Privatisation, Disinvestment, ‘Fractional equity sale’, Strategic sale; PPP approaches, Asset Monetisation, Urbanisation

Public Sector Undertakings: Public Sector in Modern India

Coverage: Public Sector Undertakings: Public Sector in Modern India; Forms of Public Sector Undertakings; Problems of autonomy, accountability and control; Impact of liberalisation and privatisation.

The chapter is divided into five parts. The first part details the meaning, objectives, and significance of the public sector. Forms of the public sector, changes over the years, and autonomy and accountability issues are the subject of the second part. The next part, relating to internal restructuring, discusses MOU techniques, categorisation of groups with PE as Maharatanas, Ratanas, and Balance Score Card (BSC), and the problems of autonomy and accountability. Part four presents external reconstruction covering economic reforms and industrial licensing policy leading to disinvestment and privatisation, their meaning, objectives and governance issues arising therefrom. The last part highlights public sector management issues relating to asset monetisation policy, liberalisation measures towards attaining the national objective of minimum government and maximum governance and the Atmanirbhar Bharat’s goal of becoming a developed economy by 2047.

The public sector, also known as the state or government sector, includes all activities funded by the government budget. The government owns, manages, regulates, and controls the public sector.

Since the attainment of political independence, the public sector has been conceived as an instrument of economic development for ensuring law and order and the protection of individual property, particularly in developing economies. It has acquired a prominent place and has witnessed phenomenal growth over the years. This is particularly so where governments assume an obligation to regulate the tendency of private entrepreneurs to make monopolistic profits, eliminate social, economic, and regional inequalities, and invest in socially profitable ventures. This was done to accelerate the rate of economic growth and technological development to achieve self-sufficiency and self-reliance, and to provide political independence and modernisation.

The public sector is of great significance in India, accounting for approximately two-fifths of total gross investment (or gross capital formation) and contributing a quarter of the country’s gross domestic product (GDP).

II. Public Sector Forms 

The public sector takes two forms: 

a) Ministries or Government Departments: The Minister is the in-charge, follows government rules, and is accountable to the Parliament. 

i) government ministries and administrative departments covering fiscal, general administration, and community services activities; and 

ii) Economic services and commercial departments normally engaged in the production of goods and services, including railways, postal services, dairy and milk supply units, ordnance factories, state electricity boards, and water and sewerage works. These are normally suited for the adoption of the principle of ‘commercialisation’ to charge for their goods and services, and are like ‘limited access projects.” 

b) Incorporated enterprises take two forms: 

i) Statutory Corporation set up under a Statute (Centre or State), has a Board headed by a chairman and functions as per the Statute; General Insurance Corporation (GIC), Damodar Valley Corporation (DVC), and erstwhile, Life Insurance Corporation (LIC), are the examples

ii) A Joint Stock Company (JSC) is set up under the Indian Companies Act. It functions and works as per the Indian Companies Act. It has a Board of Directors, headed by a chairman, and 51% or above of its paid-up share capital is held by the Central or State Governments. It also includes a subsidiary company of such government companies, such as IOC, which takes over IBP, and ONGC taking over HPCL are examples. These are commonly referred to as public enterprises (PEs). There are 272 operating Central Public Enterprises (CPEs), of which 212 reported net profits of Rs. 3.43 trillion, around 48% higher than Rs. 2.18 trillion in the FY 23, and have about 18 lakh employees. In addition, there are approximately 800 state-level public enterprises (SPEs). 

Over the years, there has been a tendency to transform government administrative or commercial departments into incorporated enterprises with the objective of granting autonomy, bringing in competition, and introducing market forces. Separation of telecom from the postal ministry, setting up of MTNL, VSNL, and BSNL, or conversion of Indian Airlines or Air India, statutory corporations under the Civil Aviation Act, to joint stock companies under the Indian Companies are some examples.  Similar examples are the Oil and Natural Gas Commission (ONGC) and ordnance factories discussed below. 

ONGC was founded in the form of the Oil and Gas Division under the Geological Survey of India in 1955. It was converted into a Commission on August 14, 1956. It was converted into a Corporation under the Indian Companies Act in 1997 and was conferred with Maharatna Status in 2010. From October 7, 2021, 41 ordnance factories under the Ministry of Defence were converted into seven joint companies. 

The above examples of the conversion of a division to a commission or a corporation were conducted to enhance functional autonomy and efficiency and unleash new growth potential.

The Public Sector: Objectives 

The Industrial Policy Resolution of 1956 guided the policy and functioning of the public sector in India and assigned it a strategic role in the economy with the following major objectives: 

• To help in the country’s rapid economic growth and industrialisation; 

• To earn a return on investment and generate resources for development and income, and wealth redistribution; 

• To create employment opportunities;

• To promote balanced regional development; and

• to assist in the development of small-scale and ancillary industries and 

• promote import substitutions, save, and earn foreign exchange.

Managerial Autonomy and Accountability

As such, the public sector was given primary responsibility for setting up new industrial undertakings and all industries of basic and strategic importance. However, the Industrial Policy of 1991 abolished the monopoly of any sector or of any individual enterprise in any field of manufacturing, except for units set up for strategic or military considerations, and the public sector had to run on business lines. In other words, the Industrial Policy Statement of 1991 was an attempt towards liberalisation of the economy. It was designed to unshackle the economy from the cobwebs of unnecessary bureaucratic controls. It opened up public enterprises to the private sector, referred chronically sick public enterprises to the BIFR for the formulation of plans for their revival, and disinvested government shareholdings in selected public enterprises. The disinvestment aimed to raise resources and encourage wider public participation by offering shares to mutual funds, financial institutions, the general public, and workers. 

This was necessitated as the World Bank Report on Reform of Public Sector Management (1991) reported that the State in a developing country has tried to do too much through the public sector, or has assigned tasks for which they were ill-suited to public agencies or has retained activities in the public sector when conditions justifying public management have changed.

Public enterprises in India are autonomous and have boards of directors as their policy-making body. However, they are subjected to various types of controls, including audits and parliamentary control. To quote from the Arjun Sengupta Committee Report, “it is recognised by all that, on paper, management of public enterprises enjoys large autonomy, sometimes much more than even by the private sector management.” However, in practice, Ministers and Departments’ informal and formal involvement occurs in areas wholly within the decision-making powers of public enterprises”

The public enterprise evaluation system followed in Sweden and other countries, such as Norway and Korea, is decentralised. The supervisory board of professionals is vested with the power to manage the enterprises and report to a committee of elected representatives belonging to various political parties; it protects the directors and management from undue political manipulation and enables it to exercise effective control over public enterprises. 

III. Memorandum of Understanding (MOU)

To improve the performance of public enterprises by providing operational autonomy and enforcing accountability commensurate with authority for results, a system of Memorandum of Understanding was adopted in 1986 on the recommendations of the Arjun Sengupta Committee. An essential part of the MOU is the enumeration of some agreed-upon indicators and targets to arrive at a composite performance score for performance evaluation. 

Thus, an MOU is a negotiated document between the government, as the owner of PEs, and the specific PE. The MOU contains the intentions, obligations, and mutual responsibilities of the government and the PE. Furthermore, it attempts to move the management of PEs from management by controls and procedures to management by results and objectives. 

The process of signing the MOU is initiated with the issuance of guidelines by the MOU Division for drafting the MOUs. These guidelines indicate the broad structure and aspects to be covered in the draft MOU, including the weights assigned to the financial parameters. These guidelines reflect the government’s main concerns and contain the general direction for the group with PE.

In fact, the MOU negotiation meetings also provide a forum to discuss certain good practices adopted in other groups with PE, and these innovative ideas are disseminated through this process. The MOUs finalised during these meetings are signed by the Chief Executive of the PE and the Secretary of the concerned Ministry before March 31.

Evaluation of MOU: PE performance is evaluated with reference to the MOU targets. Review meetings held during the year provide an opportunity to consider the proposals to adjust the criteria and values for factors that were not predicted and could not have been predicted by either party. Thus, the MOU evaluation is finalised based on the actual performance, and the PEs are graded on a five-point scale as "EXCELLENT", "VERY GOOD", "GOOD", "FAIR" & "POOR".

Achievements of the MOU System are as follows: 

• Focus on the achievements of the results; 

• Operational autonomy is encouraged and increased by delegating more financial and administrative powers to the PE signing of the MOU;

• Stress on marketing effort compared with private sector enterprises, and to face competition;

• QPR meetings are more focused, and the discussion is confined to overall achievement, as outlined in the MOU. 

Thus, the MOU is a negotiated document that contains the intentions, obligations, and mutual responsibilities of the government and the PE. Furthermore, the MOU attempts to move the management of PEs from management by controls and procedures to management by results and objectives.

The MOU system has grown over time from four MOUs signed in the year 1987-88, and at present, all operating central public enterprises (CPEs) are required to sign MOUs with the concerned administrative ministry or with their respective holding companies. 

An essential part of the MOU is the enumeration of some agreed parameters and targets to arrive at a composite predetermined score for performance evaluation. The parameters include return for shareholders, market capitalisation, productivity factors and production indicators, which are indexed to past performance and future projections of the CPE; government’s priorities/programmes such as corporate social responsibility (CSR) and procurement from MSEs; and non-compliance of a parameter is assigned negative marks. Marks are allotted for the parameters in relation to the achievement in the range of 50%–100%; the score on all parameters is added to arrive at the aggregate score. The MOU system is significant as PRP is linked with the performance evaluation through the MoU framework. CEs are rated as per the MOU score as follows:

Public Enterprises Categorisation: Maharatanas, Ratnas, and Mini Ratanas

Furthermore, to give more operational freedom and to facilitate decision-making, central public enterprises are classified into various categories, namely, ratanas, mini-ratanas, and maharatanas. Originally, the term navaratana meant a talisman or ornament composed of nine precious gems. Later, this symbology was adopted in the courts of Emperor Vikramaditya and the Mughal emperor Akbar, where the Navaratanas were a group of nine extraordinary men in their respective courts.

Accordingly, the central public enterprises are divided into three categories as follows:

• Maharatana

• Navratana

• Mini Rātana CPEs 

Maharatana status: In 2009, the government established the Maharatana status, which raises a company’s investment ceiling from 1,000 to 5,000 crores. Maharatana firms can now decide on investments of up to 15% of their net worth in a project, whereas Navaratana companies could invest up to Rs 1,000 crore without explicit government approval.

Navaratana status: Navaratana was the title originally given to nine central public enterprises (CPEs) identified by the Government of India in 1997 as having comparative advantages, which allowed them greater autonomy to compete in the global market. The number of CPEs with Navratana status has been increased to 16. 

In addition, the government created another category called Miniratana, which could also enter into joint ventures, set subsidiary companies, and set overseas offices, but with certain conditions. At present, 66 government enterprises have been awarded Miniratana status, under two categories, I and II. These include 

Public enterprises that have made continuous profits for the last three years have a positive net worth; they have the autonomy to incur capital expenditures up to Rs. 250 crore or up to 50% of their net worth without government approval, whichever is lower.

 In short, system of ‘Memorandum of Understanding” (MOU) is a negotiation between the government and the public enterprise (PE) to move the management of PE from ‘management by controls and procedures’ to ‘management by results and objectives’; and categorisation of PEs as Maharatana, Navratana, or Mini Ratana was another approach to grant operational autonomy to facilitate decision making.  

Balanced Score Card

According to a study, a memorandum of understanding (MOU) is used as a technique to quantify both the social and economic obligations of public enterprises (PEs) into measurable terms. The MOU specifies and clarifies the relationship and respective roles of PE with the government; PE management is made accountable to the government on agreed objectives. However, the measurement technique under the MOU has little impact and scope to incorporate global best practices. The MOU considers only mutually agreed indicators and has limited access to non-financial parameters; other measures are hardly considered with respect to the global trend of knowledge management, information capital flow, process efficiency, customer satisfaction, internal processes, employees’ satisfaction and skills, interest of all stakeholders, and excess manpower. 

BSC, a new management system for PEs, not only bridges the hindrances/gaps under the MOU but also incorporates the interests of all stakeholders. BSC is a performance metric used to identify, improve, and control various business functions and resulting outcomes. As a part of their strategic planning framework, companies assign priority to their products, projects, and services, set targets, and plan routine activities.

This process enables companies to 

• monitor and measure the success of their strategies,  

• To determine how well they have performed. 

It acts as a structured report to measure the management’s performance. Management can be evaluated against key performance indicators (KPIs),

The BSC indicates management’s contributions to the strategy and attainment of the targets set forth; the success is measured against the specified goals or targets to determine the rate at which the business is growing and how it compares with competitors; and it uses both financial and non-financial data to create strategies.

The concept of BSCs was first introduced in 1992 by David Norton and Robert Kaplan. It considers multiple indicators and includes financial and non-financial parameters. It is used to measure and provide feedback to organisations. Balanced scorecards are common among companies in the United States, the United Kingdom, Japan, and Europe. Data collection is crucial for providing quantitative results as managers and executives gather and interpret information. Company personnel can use this information to make better decisions for the future of their organisations.

BSCs were originally intefor nded for-profit companies but were later adapted for non-profit organisations and government agencies. It is used as a measure of a company’s intellectual capital, such as training, skills, knowledge, and any other proprietary information that gives it a competitive advantage in the market. 

III. Economic Reforms: Disinvestment and Privatisation of the Group Wwith Pe

The system of MOU and categorisation as Maharatana, Navaratana, or Mini Ratana to grant autonomy, discussed above, are system of internal restructuring of the enterprise, while disinvestment and privatisation are restructuring external to the enterprise.

Industrial Policy Resolution 1991. as a process of economic reforms abolished industrial licencing except for industries relating to security and of strategic importance; pruned down the list of industries reserved for the public sector and opened up public enterprises to the private sector; and allowed disinvestment of government shareholdings in selected public enterprises to raise resources and encourage wider public participation by offering shares to mutual funds, financial institutions, the general public, and workers. Disinvestment of shares also includes when a public enterprise takes over another public enterprise; examples are IOC taking over IBP, and ONGC taking over HPCL.

Disinvestment and privatisation are other approaches to grant autonomy: disinvestment means the dilution of the government’s stake in a public enterprise, while under privatisation, the government ceases to be the owner in favour of a private organisation, domestic or foreign. 

Disinvestment in the  UK:

The United Kingdom was among the first countries to successfully adopt and implement disinvestment and privatisation programmes globally. The core objectives of any disinvestment or privatisation programme were as follows:

• To increase the efficiency of enterprises and the economy, and

• To raise funds to meet socio-economic objectives, reduce fiscal deficits, and reduce the drain of public resources through subsidies and capital infusion. 

In the initial stages, the government sold companies such as Britoil and British Airways, which were operating in a competitive environment and were self-sustaining. Later, monopoly companies such as British Telecom and British Gas were sold after restructuring into smaller entities, allowing them to compete among themselves. In addition, a regulatory system and a regulatory body were set up for better price and service regulation to protect the interests of end consumers. In the final phase, companies that depended on government subsidies and were performing social duties on behalf of the government, such as Railtrack, were sold. In these cases, public–private partnerships (PPPs), which allow private operators to manage services while receiving subsidies, were established. In short, in the UK, once a sector had been opened up for private operators, the government’s role steadily declined. In India, however, the majority of PE investments have occurred in sectors that have been opened up to the private sector with economic liberalisation post-1991.

Privatisation and Disinvestment: Meaning

Privatisation, in a broader term, has been used as the involvement of greater market forces to ensure higher competition, which entails reducing the state’s role as a regulator, facilitator, welfare provider and producer. It also refers to the liberalisation of regulations to unleash competition forces and introduce market forces into the economy. On the other extreme, privatisation refers to divestiture or denationalisation, i.e. the transfer of ownership from the state to private hands. Within these two extremes, privatisation would take the following forms:

 Transfer of shares of public enterprises to the public

 Private placement of shares

 Private investment in public enterprises;

 Sale of PE assets

 Reorganisation of the group with PE into separate entities, like ‘holding’ and ‘subsidiary’ companies;

 Management/employee buy-out;

 Privatisation by lease or management contract

 Economic policy reforms, such as deregulations or liberalisation, i.e. transferring some activities, such as transportation, road construction, public works or electricity generation, to private hands.  

Of the above, the first four involve the sale or transfer of shares or ownership, whereas the last four do not necessarily require the sale or transfer of shares; rather, they involve leasing, management contracting, liberalisation, or setting up of a holding form of organisation. 

Disinvestment: Of the first two (i.e., transfer of shares of public enterprises to the public or private placement of shares), disinvestment is the sale of only a part of the equity shareholding so that the government retains 51 per cent or more of the share capital and thereby retains control of the enterprise. Disinvestment normally takes the following two forms:

a. Sale of only a minority or a part of the equity shareholding and the government retains 51 per cent or more of the share capital, thereby retaining control of the enterprise. This is an example of disinvestment and is also known as ‘partial privatisation’ or fractional equity sale. 

b). Strategic Disinvestment: When a large portion up to 50 per cent or more of the government’s shares is sold or transferred to a private enterprise, and management control of the enterprise is also transferred to the private player, this process is known as strategic sale and strategic disinvestment. Strategic disinvestment relieves the government of the responsibility of maintaining a non-performing public enterprise. 

Thus, when there is the disinvestment or sale of 51% or above of the government’s equity capital to a private enterprise and the enterprise’s control and management is transferred to a private organisation, it results in privatisation. 

In contrast, Keynes defined disinvestment as “the sale of an investment.” (Aiyar, 30 January 2018). In India, disinvestment is not necessarily disinvestment, as Keynes defined it; rather, in the words of Aiyar, it has been defined as the leverage of ‘public assets to be used as an ATM for revenues to fill the pits of rising deficit’. Acquisition of shares of public enterprises by another public enterprise, which may result in a merger or equity swap, also known as cross-holding of shares, or shares-buy-back, creation of SPV, or creation of Exchange Trade Fund (ETF), are disinvestment methods mainly followed in the last 15 years. These disinvestment methods gave rise to the transfer of cash from the company’s coffers, which it might require for its growth or productive purposes, to the government’s kitty to fill the gap in disinvestment targets. Such disinvestment strategies are not disinvestment as defined by Keynes.

Disinvestment of government shareholding, as per Industrial Policy 1991 and economic reforms, started in 1991-92, and has yielded 518,441 crore Rs. against the target of 922,725 crore Rs., i.e. only 56%. Table 1 presents the details of year-wise disinvestment grouped under phases. 

Table 1: CPE Disinvestment during 1991-92 to 2020-21 (Rs. Crore)

Analysis of disinvestment proceeds presented in Table 1 raises the following governance issues:

• Disinvestment, that is, the sale of government shareholdings in India, is an annual exercise, and the proceeds are included in the government budgetary receipts under Article 112 of the Constitution.

• Disinvestment aimed to increase the efficiency of public enterprises by introducing market forces; 

• In the first year, disinvestment was made by grouping the selected enterprises into bundles. Each bundle consisted of shares of nine enterprises, three from each category of ‘very good’, ‘good’, and ‘average’. The categorisation was on the basis of their net asset value (NAV), reflecting the net worth of the enterprise. Shares were sold to mutual funds, investment companies, insurance companies, and UTI in the initial years.

• Realisation on disinvestment has been below the target except for the year 1991-92, which too due to a certain exceptional situation, and for the year 2017-18; and about sixty per cent of realisation had been during the last nine years.

• Disinvestment had generally been achieved by inviting bids, a fixed price or a price range; in the latter, the final price was decided, which could be either by the French or Dutch auction process. In the Dutch auction process, also known as the book-building process, the final price is decided on the basis of the number of bids received, which is the equilibrium price or cut-off price at which bids are accepted. Bids received below the fixed price are rejected, whereas those received at a price higher than the fixed price are accepted, and the excess amount is refunded. The book-building process was common in the international market for GDR issues and was recommended by the Disinvestment Commission for domestic issues of shares in India. It was adopted for the disinvestment of NTPC shares in 2017. In contrast, under the French auction process, the bidders pay the price they bid rather than a common cut-off price followed in the book-building process (i.e., Dutch auction process). The bidding process under ‘the French Auction process’ is open to all public sector banks and FIIs; however, there is a lock-in period of six months; each bidder is obliged to purchase at their bid prices, and they would be allocated the shares they bid for. If the highest bidder does not ask for all the shares on offer at his price, the allocation will be made at lower bid prices until all the shares on offer are allocated. Each bidder pays the price he has bid, and in this process, the government unleashes the bidders’ aggressive pricing. For example, in January 2006, the government offloaded an 8% stake in MUL to eight public sector banks and financial institutions for Rs. 1577 crore at an average price of Rs. 678.24 per share, which was higher than the then prevailing market price. 

• The process of disinvestment has changed with the change in government over the years. ‘Fractional equity sale” during Phase I (i.e. during 1991-92 to 1998-99), and Phase III (i.e. during 2004-05 to 2013-14) was followed to introduce market forces, encourage wide public participation, and raise resources. As against the above, during Phase II (i.e. during 1999-00 to 2003-04) and Phase IV (i.e. during 2014-15 onwards), the strategy of disinvestment included strategic sale and was followed. In other words, the disinvestment process took a double “U” turn from ‘fractional equity sale’ in the initial years to ‘strategic sale’ during 1999-2000 to 2003-04, to fractional equity sale in the years starting from 2004-05, again to strategic sale 2014-15 onwards. The fractional equity sale was characterised as a ‘passive disinvestment” without any change of ownership or control, or without having any positive effect on economic reforms. Conversely, a substantial stake in an enterprise was sold under a strategic sale, resulting in the transfer of management control or privatisation of the enterprise. The enterprises privatised included Modern Food Industries, Hindustan Zinc, IPCL, CMC, VSNL, PPL, and HTL.

• The disinvestment process has largely been dominated by fractional-equity sales, accounting for about three-fourths of the total realisation; in other words, only about 24% of the total has been raised through strategic sales. In this regard, to quote Anup Bagchi, although initial privatisation efforts across the world were aimed at increasing efficiency, governments have gradually tilted towards disinvestment as a route to finance fiscal deficits as the world entered into economic turmoil. This also holds in the Indian context.” Further, to quote Economist Weekly London, “partial disinvestment of equity in the public sector enterprises fails to address the efficiency problems… it has no impact on ownership, control and management…. It has been used more as a fiscal tool to raise cash to finance the government deficit, rather than to improve the efficiency of enterprises’ operations….. There is also a danger that such an approach can be tempted to privatise badly and postpone the more difficult but much-needed longer-term fiscal reforms.”

• The first equity-swap strategy among the IOC, ONGC, and GAIL was adopted during 1998-99. As per the arrangement, IOC acquired from the government, ONGC shares (10 per cent), and GAIL shares (5 per cent) for Rs. 2,200 crore. Similarly, ONGC paid the government for acquiring the shares of IOC (10 per cent) and GAIL (5%); GAIL also acquired shares in ONGC (2.5%) and IOC (2.5%). The equity swap strategy resulted in the transfer of cash to the government kitty by transferring the shares of one company to another. Such a strategy was expected to have a synergistic effect on the enterprises’ operations but had a dampening effect on the share prices of the scripts swapped, as during January-March 1999, the share prices of the swapped scripts fell by approximately 30%, whereas the share price index (i.e., the Sensex increased from 3122 to 3703 during this period;

• Similar to disinvestment through equity swap or share cross-holding, disinvestment was made by acquiring a government shareholding in a public enterprise by another PE. This process of disinvestment involved the transfer of shares of a company to another and was a form of strategic sale. The latter company became the holding company (a public-sector company), and the former remained as a public-sector company. The merger of IBP, India’s oldest standalone oil marketing company, with IOC, the country’s largest petroleum and marketing company, in May 2002 is an example. As such, the government divested its 33.58% stake in IBP in favour of the IOC.

• Another example is ONGC’s acquisition of the entire government’s stake of 51.11% in HPCL for Rs. 36,915 crore in 2017-18, to become an ‘integrated energy giant of global scale. ONGC became the holding company, but HPCL did not merge and continued as a listed subsidiary of parent ONGC. The acquisition enabled the government to meet its year-end disinvestment target of Rs. 103 Lakh crore.

Such disinvestment practices doled out cash from the enterprise

To the government kitty. As per Keynes’ definition, as mentioned

Earlier, these did not fit into the disinvestment meaning;

• Disinvestment proceeds have increased over the years; however, in most cases, the target sets have not been met. 

• This is despite adopting various disinvestment approaches such as share-buy-back, share-cross-holdings, offer-for-sale, follow-on-public-offer, block deal, exchange-trade-fund, and sale of a block of shares. LIC had substantially subscribed to the disinvestment and, in many cases, has saved the disinvestment. 

• The disinvestment process has taken a double “U” turn from ‘fractional equity sale” in the initial years (Phase I) to ‘strategic sale’ during 1999-2000 to 2003-04 (Phase II); again to ‘fractional equity sale’ in the years starting 2004-5 (PHASE III)   to ‘STRATEGIC SALE’ 2014-15 onwards (PHASE IV);

• Fractional equity sale, or partial privatisation, was characterised as a ‘passive disinvestment’ without involving a change of ownership or control. On the other hand, a strategic sale reflected the sale of a substantial stake in an enterprise, resulting in the transfer of management control or the privatisation of an enterprise.

• It is viewed that the disinvestment process usually takes a long time, with some entities even undergoing four iterations. Ideally, disinvestment should not be a part of the budgetary numbers and should be tackled separately, with the receipts being put in escrows.

• CPEs are reported to be losing their shine as the total market capitalisation of CPEs has increased in absolute values; the ratio of total market capitalisation of CPEs to that of BSE-listed companies has reduced from 13% to 8.3% between 2016 and 2024. 

V. Asset Monetisation approach: an alternative to privatisation

In addition to the privatisation and disinvestment of public enterprises, the private sector has also been involved in public sector institutions through diverse PPP approaches, including the following: 

• Private companies were invited to operate 150 trains on 109 routes with an additional investment of 30,000 crore rupees.

• Asset monetisation, a marketing approach for raising resources for financing and infrastructure development, was planned to raise Rs. six lakh crore for four years starting 2022. This approach involved encashing the public sector units’ idle assets, with the government retaining ownership. It was a step towards economic reform and an alternative to privatisation. 

Following the asset monetisation approach, six airports have been monetised by a long-term lease of 50 years using the PPP approach, with the private party having a guaranteed 16% return on equity. In addition, 25 other airports are planned to be monetised for operation and management. Highways and other infrastructure projects have also been developed by adopting various PPP approaches, such as BOOT, BOT, and Annuity systems.

• Growing urbanisation and the shifting of population to cities and towns have led to a transition from an agrarian to an industrial society. As per World Bank estimates, to become Atam Nirbhar Bharat and a developed economy by 2047, it would require an investment of $ 840 billion by 2036, i.e., $ 55 billion every year. This mammoth investment would entail private sector participation, and ULBs have to look for projects and newer sources of finance, such as municipal bonds, which are currently in the nascent stage.

• With the resource crunch and expanding infrastructure needs, budgetary allocations for infrastructure projects have reduced, and the role of the government has shifted from infrastructure provider to infrastructure facilitator. Innovative and diverse financing techniques of the PPP approach must consider two factors, namely, the risk allocation framework and capacity building to implement the project. 

Lastly, despite the abovementioned internal or external restructuring techniques, the abrogation of laws, and the single-window approach, the problem of autonomy normally remains unabated, and the attitude of executives is viewed as one factor.