THE EFFECTIVENESS OF PRIVATISATION IN INDIAN

ECONOMY: THE CASE OF UNIVERSITY OF ALLAHABAD

STUDENTS

BY

Mohd. Rafeeque Ansari & Affan Arshad

A RESEARCH PROJECT SUBMITTED IN COMMERCE

DEPARTMENT-UNIVERSITY OF ALLAHABAD

FEBRUARY, 2020
 DECLARATION
This research project is my original work and has not been submitted for examination
to any other university.

Signed_________________ Date _______________

This research project has been submitted for examination with my approval as the
University Supervisor.

Signed_________________ Date _______________

DR. AKHILESH CHANDRA PANDEY
DEPARTMENT OF COMMERCE,
UNIVERSITY OF ALLAHABAD

ii
 DEDICATION
This study is dedicated to my family especially my friends and my classmate for their
constant encouragement and patience throughout my academic struggle and my
brother little for his continuous financial support thus realizing my long cherished
dream.

iii
 ACKNOWLEDGEMENTS

I take this responsibility to express my profound and sincere gratitude of

COMMERCE DEPARTMENT, UNIVERSITY OF ALLAHABAD for providing
me with this opportunity to explore the corridors of the corporate world and gather
valuation knowledge and practical experience via the live RESEARCH
METHODOLOGY.

I take the privilege of offering a deep sense of graduate and indebtedness to

AKHILESH CHANDRA PANDEY, COMMERCE DEPARTMENT,
UNIVERSITY OF ALLAHABAD for his most valuable guidance and consistent
encouragement.

I express my sincere and profound gratitude to RESEARCH METHODOLOGY

PRIVATISATION IN INDIAN ECONOMY for giving me this wonderful
opportunity.

I would also like tio thank the employee working in Commerce Department for the
help and co-operation during the PG.
 ABSTRACT

This paper examines various causes for privatisation in India. Five

major dimensions—which are changes in International and domestic politics,
Performance of Public Sector Undertakings, Magnitude of fiscal compulsion and
external debt, External pressure of the donors and Inherent efficiency of private
sector companies— were taken for the study to find out whether or not there have
been sufficient existence of reasons to substantiate the privatisation programme in
the country. The analyses and discussion prove that there are viable reasons for the
government why they implemented the privatisation and why they want to continue
the same in the country. The paper calls for further research on comparative
performance of enterprises in their pre-privatisation and post privatisation era in
order to significantly substantiate the reasons for privatisation in the country.

Keywords: Privatisation, public sector undertakings, fiscal compulsion, external debt,

Private sector companies
 TABLE OF CONTENTS
Declaration .......................................................................................................................................... ii
Dedication ........................................................................................................................................... iii
Acknowledgements .......................................................................................................................... iv
Abstract................................................................................................................................................. v
Table of contents............................................................................................................................... vi
List of tables .................................................................................................................................... viii

CHAPTER ONE: INTRODUCTION ..................................................................................... 1

1 Rationale Behind Privatisation................................................................................................... 2
1.1 Arguments In Support Of Privatisation ............................................................................... 3
1.2 Techniques Of Privatisation .................................................................................................... 4
1.3 Modes Of Privatisation………………………………………………………….4-5
1.4 Objectives ..................................................................................................................................... 5

CHAPTER TWO: LITERATURE REVIEW ..................................................................... 6

2.1 Introduction .................................................................................................................................. 6
2.2 India’s Privatisation Experience ............................................................................................ 6
2.3 Problems Associated with Privatisation............................................................................. 7
2.4 Privatisation Visions of Good Society ............................................................................... 8
2.5 Level Of Analyses ................................................................................................................... 9
2.6 Privatisation Effects……………………………………………………………………..10-11

CHAPTER THREE: RESEARCH METHODOLOGY ................................................ 12

3.1 Introduction ................................................................................................................................ 12
3.2 Area OF Study........................................................................................................................... 12
3.3 Period OF Study........................................................................................................................ 12
3.4 Data Sources .............................................................................................................................. 12
3.5 Sample Design........................................................................................................................... 12

3.6 Tools OF Analysis………………………………………………………………..12

CHAPTER FOUR: DATA ANALYSIS, RESULTS AND DISCUSSION ............. 13
4.1 Introduction ................................................................................................................................ 13
4.2 Evidence on the Benefits of Privatization ......................................................................... 14
4.3 Evolution of Disinvestment Policy in India………………………………………….14-15
4.4 Impact OF Privatisation .......................................................................................................... 16
4.5 Comparison of Financial Indicators of Privatized Firms…………………………...17-23
4.6 Pre & Post Privatisation………………………………………………………………….23-28

CHAPTER FIVE: SUMMARY & CONCLUSION…………………………….29

5.1 Introduction ................................................................................................................................ 29

REFRENCES…………………………………………………………………..30-31

APPENDICES ............................................................................Error! Bookmark not defined.

APPENDIX I: RESEARCH QUESTIONNAIRE ........ Error! Bookmark not defined.

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 LIST OF TABLES
Table 1 List of Selected CPSEs and Peers ............................................................................ 16
Table 2 Net Worth (` Crore) ...................................................................................................... 18
Table 3 Net Profit (` Crore ......................................................................................................... 18
Table 4 Gross Revenue (` Crore) ............................................................................................. 19
Table 5 Return on Assets (per cent) ....................................................................................... 20
Table 6 Return on Equity (per cent) ...................................................................................... 20
Table 7 Net profit margin (per cent) ...................................................................................... 21
Table 8 : Sales growth y-o-y (per cent) .................................................................................. 22
Table 9 Gross profit/employee (` lakh) .................................................................................. 22
 CHAPTER ONE
INTRODUCTION

‘Privatisation, is a term that is employed to convey a variety of

ideas. The idea that it most prominently suggests is
‘denationalisation’ (in the sense of transferring the ownership of a
public enterprise to private hands). Another idea in vogue is
‘liberalisation and deregulation’; which unleash forces of
competition. In this context, the concept of privatisation becomes
wider to be understood, not merely in the structural sense of who
owns an enterprise, but in the substantive sense of how far the
operations of an enterprise are brought within the discipline of
market forces. For convenience, a distinction could be made
between micro (roll back as producer state); macro (roll back of
state as producer, regulator, facilitator, and welfare provider); and
mega (roll back in all dimensions including non-economic
regulations). Micro privatisation referring to producer state
essentially deals with public enterprise.

No country in the world has lately been immune from the

trend of restructuring of its economy because of a compelling
combination of circumstances. India at one time had a huge
public enterprise sector. It consisted of nearly 1,300
enterprises, owned and managed by the central government,
state and union territory governments, and local governments
in the country. These had dominated many sectors of the
economy by including: surface irrigation; water supply in
rural and urban areas; railways; river transport; ports; postal
services; telecommunications; mining (including
hydrocarbons and coal); one-third of registered manufacturing
(particularly steel, petrochemicals, capitals goods,
pharmaceuticals, fertilizers); power generation and
distribution; oil and gas production and marketing; air
transport; one-third of bus transport; storage; and banking and
insurance. As you may be aware, same of these sectors have
been transferred to private sector recently.

1. RATIONALE BEHIND PRIVATISATION

A few factors seem to have brought the issue of privatisation on the forefront.
They are as under:

1) The monopoly status of public sector enterprises (PSEs) bred inefficiency.

2) Lack of competitiveness affects PSEs performance very adversely.

3) Bureaucracy was also responsible for poor performance of PSEs. It was cer-tainly not always
upto turning such enterprises around.

4) Restructuring of the PSEs by way of privatisation became very common in de-veloped

countries like UK and U.S.A.

5) A lot of intellectual discussion and debate started on privatisation all over the world and
pressure of public opinion also exerted influence.

6) Some aid giving agencies even started forcing the pace by linking aid with privatisation.

Suggestions from management of public sector enterprises themselves led to fresh thinking towards
privatisation.
1.1 Arguments in Support of Privatisation

Advocates of privatisation claim that it will lead to an improved economic

performance. The reasons for such a view are the following:

i) It will improve the environment public enterprises operate in and thereby strengthen
their managers’ incentives to be efficient. These in turn can contrib-ute to making the
Indian economy substantially more efficient.
ii) Privatisation may create conditions for substantial additional investment, which
may help in generation of a large number of productive employment opportunities,
which in turn may contribute to removing poverty.

iii) Consumers may gain from privatisation.

iv) Privatisation can be of help in reforming public enterprises. These enterprises are
engaged in innumerable activities such as manufacturing steel; building ships;
generating and distributing electric power; running domestic and international air-
lines; exploring, producing and refining oil; operating domestic and international
telecom network; running hotels; manufacturing polyester film; making condoms;
producing fruit pulp and juice; running banks as also life and general insurance and
electronic entertainment business; and so on. Privatisation will allow the
government to concentrate on things, which it has failed to do, but which it alone
can do.

v) Privatisation can be of major help in reducing India’s huge public sector defi-cit.
This can happen in three ways: (a) the proceeds from the sale of public
enterprises can be used to finance the public sector deficit, (b) the proceeds can be
used to reduce the outstanding public debt, both domestic and external; and
(c) will reduce the burden of interest payments and thereby the deficit.

vi) Privatisation is expected to ensure generation of revenue to finance social infra-

structure and eradication of poverty.

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1.2 Techniques Of Privatisation
Various experts have categorised privatisation into the following techniques:
1) Public offering of shares: all or part of a shares of the public limited company are offered for
sale to the public as a running concern.

2) Private sale of shares: all or part of the shares of a state owned enterprise are sold to a private
individual or a group of purchasers in the private corporate sec-tor.

3) New private investment in a state owned enterprise: primary share issues are subscribed by
the private sector or public.

4) Sale of Government or state enterprises assets: the assets of the public sector are sold as
private sale instead of shares.

5) Reorganisation or fragmentation into smaller units: a holding company with a number of

subsidiaries can be privatised separately.

6) Management/Employee buy out: the management or the employees acquire the controlling
interest in the unit in which the shares are purchased on credits extended by Government or
financial institutions.

7) Lease and management contract: the ownership remains with the Government while the
lessee assumes full responsibility for operations and maintenance. Un-der management
contract, the owner pays for the management and operational control.

1.3 Mode of Privatisation

In terms of policy initiative in the Indian context, privatisation is generally conceptualized in three
broad ways, viz., greenfield privatisation; cold privatisation and disinvestment or divestiture (in
particular distressed privatisation). The features of each of these modes are summarized below.

1) Greenfield Privatisation

Under this method the barriers to entry, including ‘reservation’ for the public sector are removed
and private sector is encouraged to enter. Under this mode actions move on the following lines:

a) removing barriers of entry for the private sector and it is allowed to do economic activity
hitherto reserved for public sector;
b) not allowing any new investment or new activities on the part of the public sectors agencies;
c) preferential treatment being given to the private sector for increasing the level of its activities;
d) in enterprises where private and public sectors have been functioning side-by-side, such as
the joint sector, the relative share of the private sector may be increased.

2) Cold Privatisation or Proxy Privatisation

Under this method public enterprise made to behave as private enterprises by:

a) giving financial autonomy to seek financial assistance directly from the bank/capi-tal market;
b) giving autonomy to make investment decisions;
c) entering into a Memorandum of Understanding (MOU) for providing freedom to fix prices,
output etc.;
d) making subsidies explicit;
e) taking recourse to corporations, i.e., converting a department enterprise into a corporate entity to
ensure distancing.

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3) Disinvestment or Divestiture

Disinvestment or divestiture is effected by sale or transfer of shares held by the government directly
or through its agencies in enterprises (i.e., public activities organized under enterprise form) to the
private sector. When a loss-making enterprise is turned over to the private sector because the
government can no longer support and sustain it, this can be termed ‘distressed privatisation.’

It may be mentioned that alternative approaches are possible to analyzing techniques.

For instance the techniques can be divided into:

a) privatisation of financing (that is charging for government services);

b) privatisation of production or provision (contracting out construction and main-tenance or giving
franchises to private sector);
c) denationalization or load-shedding (that is sale of shares or assets held by government); and
d) liberalization (removing restrictions and promoting competition).

1.4 Objectives
This unit explains privatisation debate in India. After studying this unit, you will be able to answer the
following
(a) Reasons behind the debate of privatisation ;
(b) Why are public sector enterprises (PSEs) in India so inefficient ?
(c) The environment under which PSEs are working in India;
(d) Rationale behind the privatisation;
(e) Various techniques of privatisation;
(f) Identifying areas of privatisation in India;
(g) Progress towards privatisation;
Problems in India’s privatisation experience

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 CHAPTER TWO
LITERATURE REVIEW

2.1 Introduction
This chapter provides, through selective reference to some of the literature, a clearer
understanding of Privatisation concept and outlines previous research findings on the
effectiveness of PRIVATISATION IN INDIAN ECONOMY.

2.2 India’s Privatisation Experience

Disinvestment Strategy in Public Sector Undertakings in India

Disinvestment in the state owned enterprises has been adopted by both developed and developing
countries during the last two decades as part of market oriented reforms. The process of
disinvestment in equity was initiated by the Government of India (GOI) during 1991-92 as part of
a package of Public Sector Undertaking (PSU) reform. For framing proper strategies of
disinvestment of shares of PSUs, a Committee under the chairmanship of Dr. C.Rangarajan was
appointed in 1993 by the Government of India. Further, Government of India constituted a five-
member Public Sector Disinvestment Commission in August 1994 under the Chairmanship of
Shri G.V. Ramkrishna for drawing a long-term disinvestment programme for the PSUs referred to
the Commission. The Commission had wide ranging terms of reference and was asked to
determine the extent of disinvestment in each PSU, the modalities of disinvestment and the order
in which the process would be undertaken. The long-term strategy of the Disinvestment
Commission had four objectives : (i) strengthen PSUs, where appropriate, in order to facilitate
disinvestment, (ii) protect employees’ interest, (iii) broad base ownership, and (iv) augment
receipts for the government.

As a broad approach, the Commission was in favour of prior restructuring of the PSUs before
disinvestment, based on global experiences that restructuring before disinvestment enhances
share value and maximizes share proceeds.

The Commission was in favour of adopting a case-by-case approach in terms of unit specific
disinvestment strategy after taking into account various aspects of the units, e.g., industry
category, competitive position and profitability. Accordingly, the Commission broadly classified
the PSUs into two categories for disinvestment. viz., the core group and the non-core group. The
PSUs in the core group are defined as having a considerable market presence. In these PSUs, as
the private sector is yet to mature fully, the public sector disinvestment would be limited to a
maximum of 49 per cent for the time being. The non-core group industries are defined as the
units where private sector players have already made huge investments. With the aim of
enhancing the intrinsic value of PSU shares, the Disinvestment Commission recommended that
the core as well as non-core PSUs should be restructured prior to disinvestment.

The Commission had made recommendations for a graded delegation of autonomy for three
categories of PSUs, namely, ‘general autonomy to all PSUs, additional powers to ‘moderate
performers and additional autonomy to strong performers’. Further, it had made the following
recommendations regarding the policy decisions to be delegated to the Board for greater
autonomy of all the PSUs.

1) Professionalising the Board through outside recruitment.

2) Provisions of elected Directors to represent minority shareholders.
3) Selection of top management without having to go to the Appointment Committee.
6
A major initiative for turning India towards privatisation needs to be launched. In this context certain
steps required to be taken are:

i) The people will have to be convinced that, given the extremely high opportunity costs, India
cannot afford public sector misadventures in areas like, running ho-tels, manufacturing
polyester film, making condoms and producing fruit pulp and juice). That properly belongs to
the private sector.

ii) The Government should announce a properly structured and articulated privati-sation policy
for India. The policy will need to clearly address at least the follow-ing issues: why
privatise?; what to privatise?; when to privatise?; which organi-zation will serve as the nodal
agency for privatisation and what will be its compo-sition, powers and responsibilities? What
are the institutional mechanisms that will be put in place to gain public enterprise employees’
support for privatisation?; and what is the role that India would like foreign investors to play
in its privatisation programme?

iii) Privatisation is a difficult process, it involves reconciling the government’s politi-cal

objectives and the business needs of given public enterprise and tap generate efficiencies. It
will therefore be absolutely necessary to come up with training programmers designed to
equip selected public enterprise managers and govern-ment officials in India with the
knowledge and skills required for managing the various component of the privatisation
process.

iv) The proposed initiative will address the issue of evaluating India’s post-privatisa-tion
experiences. This will involve rigorous work on estimating the impact of pri-vatisation on: (i)
efficiency and investment, (ii) public finance and balance of payments, (iii) employment, (iv)
management practices and strategies, and (v) managers’ skills, attitudes and behaviours.
Evaluations of post-privatisation experience along these lines may generate ideas that may
help India maximize the gains from privatisation.

2.3 Problems Associated with Privatisation

Privatisation is not a very easy option. Problems are there and it is always not very easy to
overcome them. Some of the major problems (see G.S. Gupta, 1996) are:

1) choice of PSEs for privatisation

2) opposition from employees
3) pricing of assets/or equity
4) extent of disinvestment
5) mode or preference of selling
6) political instability

These problems are very complex and it is not possible to find out an easy way out. The question
of permission to be given to foreign investors, particularly in the consumer goods sector, is very
difficult to decide. Disinvestment should be done, but in favour of whom? Should it be in favour
of financial institutions or to be sold to general public? If management control is retained by the
Government then improvement in efficiency will be doubtful. Sometimes, it is also feared that
owing to political considerations the very policy of privatisation might to reversed. There has
been sustained pressure from the organisation of employees against the policy of privatisation and
disinvestment.

7
2.4 Privatisation visions of a good society

(a)Economic efficiency.

As Lawrence Reed (1997, p2) says, “The theory is simple, but grounded in profound
truths about the nature of humans and their responses to incentives and disincentives. Tie
up the performance of a task with red tape, bureaucracy, and politics within a system that
is guaranteed to exist regardless of outcome, and the result is usually mediocrity at great
expense. Infuse competition, accountability, and the fear of losing a valued customer into
the task and mediocrity becomes the exception, excellence the rule.” Putting it simply,
proponents are convinced 23 that whatever government does, the private sector can do
better. They have confidence that the pursuit of private gain serves the larger social order
ala Adam Smith’s “invisible hand.” According to proponents, economic efficiency can be
gained by allowing the free market and laissez-faire individualism through privatization
to determine the best way to deliver services. A smaller government and greater
individual choice would result if property rights and market forces were expanded (Starr,
1988, p8) and (Savas, 1987, p167). For example, private companies can invest in snow
removal machinery and specialized labor and use these to service several municipalities,
rather than each locality having big capital outlays and keeping snow-removing
employees on their respective payrolls all year long. Privatization proponents argue that
private sector labor costs are lower because government workers are notoriously
“overpaid” and have higher benefits. Additionally, the private sector, unlike the public
sector, has the flexibility to hire and lay off employees as required. Public sector unions
see their power, namely the threat of strikes, greatly diminished because privatized
services are often decentralized among many contractors. This last point, trying to reduce
the power of public unions, is not lost on privatization proponents (Starr, 1988, p19).
They know all too well that while unions have lost membership in the private sector,
public employee unions currently are the only type of union with growing membership.
Proponents further maintain that the argument that privatization necessarily leads to loss
of jobs, wages, morale, and job satisfaction is not conclusive. Nightengale and 24 Pindus
(1997, p2) say there are many examples of negotiated arrangements for transferring
public employees to private employment or to other public agencies. Starr (1988, p19)
reports New York City privatized its school busing, but the drivers remained represented
by the same union with no change in wage levels. A report by the National Commission
for Employment Policy (Nightengale, 1997, p13) found that: 1) privatization caused a
shrinkage in the rate of growth of the public sector work force since the mid-1970s; 2)
that of 2,000 workers studied in 34 privatized city and county services, 62% were hired
by the private contractors, 24% transferred to other government jobs, 7% retired, and 7%
were laid off; and 3) privatizing results in lower benefits but a modest increase in wages.
Along those same lines, a 1985 General Accounting Office (GAO) study of Department
of Defense downsizing showed that of 9,650 employees impacted by privatization, 94%
transferred to other government agencies or retired, 3% went to work for the private
contractor, and only 3% were laid off. Johnson (2001, p1-2) also cites a study of
privatizing Illinois municipalities that found only 3% of the 516 responding cities
reported laying-off employees. In fact, many governments are insisting that as part of
their privatizing strategies, contractors have to hire all existing public employees at
comparable wages and benefits (e.g., Atlanta, Buffalo, Milwaukee, and Indianapolis
water services). With regard to quality of service, proponents contend that because
contractors are always in danger of not having their contracts extended, they are driven by
market 25 discipline to provide quality services efficiently. The same cannot be said for
governments that have a monopoly over some services. Proponents of privatization would
prefer that when services are poorly delivered, protesters would set up shop outside.
8
what Hirschman terms going from “voice to exit” as the usual and preferred tactic of coping
with dissatisfaction (Starr, 1988, p14). As to social equity, proponents contend that by saving
the government money, consumers will be rewarded with lower taxes, meaning more money
in their own pockets that they can spend as they choose, which will stimulate the economy.
Proponents of privatization use the market as the standard for judging the value of public
organizations. Whereas private firms have to earn a profit to stay alive, public institutions
only have to obtain approval through the political process. Believers in privatization feel that
society would be better off if public organizations had to meet the same test as private sector
firms. Done correctly, proponents believe that privatization can produce a win-win-win
outcome for taxpayers, employees, and contractors. With regard to winning, privatization
advocates argue that even when a competition fails to result in a contract being awarded to
the private sector, the taxpayers still win because the competition itself will have forced the
government agency providing the service to become more efficient. Instead of contracting out
being the objective, Savas says, “The primary goal of any privatization effort is, or should be,
to introduce 26 competition and market forces in the delivery of public services (Van Slyke,
2003, p297).”

b) Return of Power to Communities: More socially conservative thought visualizes a good

society that strips the state mega-structure of its responsibilities for service provision,
thereby returning more power to communities, particularly families, churches, and non-
profit institutions. Berger and Neuhaus (Starr, 1988, p 13) believe in privatization with a
human face. They want to strengthen local, small-scale, “peoplesized” forms of social
provision of services. Like Lester Salamon, they argue that government programs should
only be permitted where there has been a demonstrated failure of the non-profits in
delivering a public service (Starr, 1988, p12).

c) Reduce Government “Overload.” Some proponents of privatization visualize a good

society that restricts governments to focusing on what few things they should be doing,
and leaving the provision of the remaining services to the rigors of the free market.
According to Hebdon, “Privatization allows policy makers to steer rather than row (1995,
p5).” By diverting demands away from the state, the overload that governments are faced
with will be diminished and public spending coalitions will be broken. Proponents believe
that the role of government should be restricted to that of enforcing the laws. While some
(Starr, 1988, p19) contend that because wages tend to be more equal in the public sector,
privatization is likely to skew the income distribution in the direction of greater
inequality, proponents counterclaim that governments don’t exist for the benefit of those
who work for it; they exist for the benefit of those who pay its bills or need its services.

2.5 Levels of Analyses

The literature reveals privatization has been examined from three different levels of
analysis: a government-wide level (i.e., state, federal, local); a type of service area level
(i.e., prisons, child welfare, unemployment compensation administration); and an
individual government organization level. At the government-wide level of analysis, there
are few studies at all, other than some that show trends in terms of numbers of jobs
affected and dollars involved. At the service area level of analysis, privatizing issues are
concerned mainly with whether to do it at all, and how to do it (i.e., guidelines). At this
level, there are numerous accounts, although much of it is anecdotal and politically
slanted. At the individual government agency level of analysis, substantial literature
exists but much of it too is anecdotal. While later privatization literature tends to be more
positive, earlier studies tend to focus on A-76 commercial activities studies and
emphasize the negative outcomes.
9
2.6 Privatization Effects

The effects of privatization revealed by the literature are wide and varied. Many full time
jobs after privatization become seasonal or part–time, and without health or pension
benefits. The holders of these jobs after privatization tend to rely on community services
more than when they were full time government workers with benefits (Ballard, 2000,
p15). 47 The literature views privatizing as having a profound effect on government
organizations, even when they do not privatize. Employees who survive a privatization
attempt and then remain with the government organization can still be affected because
that organization may actually adopt some privatizing strategies intended to improve
organizational flexibility, increase employee responsibility, and streamline operations.
Privatization proponents maintain that even when they lose, they win, because they
forced government organizations to change. Once an organization goes through an
episode of privatization, productivity can actually increase because the remaining
employees fear their jobs might be outsourced. They argue that even when an
organization decides not to privatize, this “fear factor” can have the same effects in terms
of cost savings and improving service quality. However, eventually this “fear factor” can
dissipate, and employees may get angry and respond with lower trust, morale, and
organizational commitment when they feel the organization broke its 'psychological
contract' with them. Sometimes the result of privatizing is what a 15 March 1993 article
in Time magazine called “dumbsizing" because of the deleterious actions taken in pursuit
of getting smaller. A small part of the literature examines another effect of privatization,
“cherrypicking,” where private service companies only provide services to those who can
pay. For example, in Charlotte, North Carolina, taxi drivers who provided para-transit
service for the elderly and disabled viewed these passengers as less desirable fares than
other passengers because they were less likely to tip (Ballard, 2000, p13). 48 The
literature also examines the emergence of corruption as an effect of privatizing. In Iowa, a
laundry service charged its government customer based on the weight of the laundry
when it was wet instead of dry. Another way in which private sector firms try to take
advantage of governments is through change orders which work as follows. First, a
contractor bids low and wins a contract to perform a certain level of work, for example
providing bus transportation for the city. Second, the contractor waits for the government
to get out of the transportation business completely and therefore becomes unable to
present a viable alternative to the contractor. History shows that once the government
retreats from providing a service, it usually does not get back into that business because
the start up costs such as new maintenance equipment, buses, and hiring new employees,
are excessive. Lubbock, Texas gets around this by only contracting out about one third of
any given task at any given time. Mildred Cox, the director of Lubbock’s Public Works
Department says, “This way we never lose the ability to keep the private firms on their
toes (Ballard, 2000, p15).” Third, the contractor presents the government with change
orders to the contract, to recoup any losses they have incurred to date on providing the
service. The city, having no alternatives, pays the cost of the change orders which
invariably end up costing the city more than if they had kept the bus service in-house all
along. On the other hand, researchers have found evidence of a “reverse privatization”
effect, that is to say work efforts being brought back in house after a period of having
been contracted out. A survey by the International City/County Management Association
(ICMA) (Ballard, 2000, p11) is done every five years with responses sought from 49
counties with a population over 25,000, cities over 10,000 people, as well as one in eight
cities and counties with fewer than 25,000 people. Questions are asked regarding 64
public services. In 1997, 1,500 municipalities responded to the survey. Between 1992 and
1997, survey respondents reported on average contracting out for eight new types of
services.
10
contractual requirements with complex services; the cost and difficulty of monitoring
contractor performance is overwhelming; and/or there are limited cost savings. The biggest
reason for reverse privatization is the high standards the public expects from service
deliverers and the failure of private firms to meet changing citizen demands. For example,
New York City established its street cleaning department in 1881 in response to decades of
failure by private contractors to clean the streets of horse manure (Yergin, 1998, p358).
Campbell, California brought public park maintenance back in house after two years of the
city responding to complaints of poor quality service provided by the contractor, (Ballard,
2000, p14). The same held true for Pinellas County, Florida, which terminated its contract for
grass mowing at 360 water-pumping stations because of its inability to control service quality
(Ballard, 2000, p14). Whittier, California, Charlotte, North Carolina, and Fort Collins,
Colorado, all brought their public bus services back in house after the contractors were
providing poor, unreliable service by rude, unqualified, accident prone drivers that were
causing higher than expected vehicle repair costs 50 (Ballard, 2000, p16). How much of these
problems could have been solved by more clearly communicating the expectations of the two
groups was unclear.

11
 CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction
This chapter focuses on research methodology that was used in the study. It provides a
detailed description of the research approach adopted in this study. Area Of Study, Period of
Data, Data Sources, Sample Design, Case Study Analysis, Tools Of Analysis and Statistical
Tools were presented in the subsequent sections.

3.2 Area Of Study

The private entrepreneurs by way of transferring control of management through strategic

sale route.

3.3 Period Of Study

Privatisation programme 2019-2020 .However, the financial data of specific companies

have been taken based upon availability of data from F.Y. 2017-18 to F.Y. 2019-20
specifically six financial years before and six years after the disinvestment of the company.

3.4 Data Sources

(i) Annual Report of Economic Survey OF India 2018-2019

(ii) Media Publication of Times of India and Economic Times
(iii) Journals of Economic & Political weekly
(iv) Books: Disinvestment in India, Pradeep baijal,Privatisation in India ,Mishra R K
(v) Privatisation of Public sector undertaking,Jesiah Selvam,Disinvestment in India,
Sudhir Naib
(vi) Internet: www.divest.nic.in
(vii) Government of India Publications

3.5 Sample Design

Taken to test the objectives of research as follows-
Sample of financial data from Different public sector sick units and disinvestments company
F.Y 2018-2019.

3.6 Tools Of Analysis

Been used for analysis and interpretation of data which have been mentioned as follows-
a) Accounting Tools: The financial analysis Of Public Sector Companies covers the
following tools of
analysis:-
(i) Ratio Analysis, (ii) Trend Analysis (iii) Leverage Analysis.

12
 CHAPTER FOUR
DATA ANALYSIS, RESULTS AND DISCUSSION
4.1 Introduction

Free enterprise has enabled the creative and the acquisitive urges of man to
be given expression in a way which benefits all members of society. Let free
enterprise fight back now, not for itself, but for all those who believe in
freedom.
- Margaret Thatcher
The recent approval of strategic disinvestment in Bharat Petroleum Corporation
Limited (BPCL) led to an increase in value of shareholders’ equity of BPCL by `
33,000 crore when compared to its peer Hindustan Petroleum Corporation
Limited (HPCL)! This reflects an increase in the overall value from anticipated
gains from consequent improvements in the efficiency of BPCL when compared
to HPCL which will continue to be under Government control. This chapter,
therefore, examines the realized efficiency gains from privatization in the Indian
context. It analyses the before-after performance of 11 CPSEs that had
undergone strategic disinvestment from 1999-2000 to 2003-04. To enable a
careful comparison using a difference-in-difference methodology, these CPSEs
are compared with their peers in the same industry group. The analysis shows
that these privatized CPSEs, on an average, perform better post privatization
than their peers in terms of their net worth, net profit, return on assets (ROA),
return on equity (RoE), gross revenue, net profit margin, sales growth and gross
profit per employee. More importantly, the ROA and net profit margin turned
around from negative to positive surpassing that of the peer firms, which
indicates that privatized CPSEs have been able to generate more wealth from
the same resources. This improved performance holds true for each CPSE taken
individually too. The analysis clearly affirms that privatization unlocks the
potential of CPSEs to create wealth. The chapter, therefore, bolsters the case
for aggressive disinvestment of CPSEs.

Figure 1: Comparison of Stock Prices of BPCL and HPCL

4.2 :Evidence on the Benefits of Privatization

Brown et al. (2015) found that the average privatization effects are estimated to be significantly
positive, about 5-12 per cent, but these vary across countries and time periods. There is evidence of
significant positive impacts for better quality firms and in better macroeconomic and institutional
environments. Chibber and Gupta (2017) showed that disinvestment has a very strong positive
effect on labour productivity and overall efficiency of PSUs in India. O’ Toole et al. (2016) in their
study from Vietnam find that privatization improves capital allocation and economic efficiency.
Chen et al. (2008) showed that there is a significant improvement in performance of Chinese
companies after transfer of ownership control, largely due to cost reductions but only when the new
owner is a non-state entity.
Subramanian, K. and Megginson, W (2018) found that stringent employment protection laws
(EPL) are a deterrent to privatization, and the effect of EPL on privatization is disproportionately
greater in industries with higher relocation rates and in less productive industries. Megginson and
Netter (2001), Boardman and Vining (1989), La Porta and Lopez de Silanes (1999) found that in
the post-privatization period, firms show significantly higher profitability, higher efficiency,
generally higher investment levels, higher output, higher dividends, and lower leverage post
privatization. According to Gupta (2005), both the levels and growth rates of profitability, labour
productivity, and investment spending improve significantly following partial privatization.
Majumdar (1996) documented that efficiency levels are significantly higher than state owned
enterprises which show efficiency only during efficiency drives only to decline afterwards based on
a study of Indian firms over the period 1973-89.
Borisova and Megginson (2010) indicated that on an average across firms, a one percentage point decrease
in government ownership is associated with an increase in the credit spread, used as a proxy for the cost of
debt, by three-quarters of a basis point. According to Li et al. (2016), profitability of newly privatized
companies increases significantly (by 2-3 percentage points) after adjusting for negative listing effect.
Capital spending and sales growth also improve significantly based on triple difference-in-difference tests.
Wolf and Pollitt (2008) showed that privatization is associated with significant and comprehensive
performance improvements over 7-year period (−3 to +3 years). Oum et al. (2006) provides strong
evidence that airports with majority government ownership and those with multi-level government
ownership are significantly less efficient than those with private majority ownership. Increased customer
satisfaction comes in form of reduction in tariffs, increased data usage etc. in the telecommunication
sector; increased penetration of banking services in the rural areas; and reduced air-fares comparable to
high-end consumers in the railways.

4.3 Evolution of Disinvestment Policy in India

The liberalization reforms undertaken in 1991 ushered in an increased demand for privatization/
disinvestment of PSUs. In the initial phase, this was done through the sale of minority stake in bundles
through auction. This was followed by separate sale for each company in the following years, a method
popularly adopted till 1999-2000. India adopted strategic sale as a policy measure in 1999-2000 with sale
of substantial portion of Government shareholding in identified Central PSEs (CPSEs) up to 50 per cent
or more, along with transfer of management control. This was started with the sale of 74 per cent of the
Government’s equity in Modern Food Industries Limited (MFIL). Thereafter, 12 PSUs (including four
subsidiaries of PSUs), and 17 hotels of Indian Tourism Development Corporation (ITDC) were sold to
private investors along with transfer of management control by the Government.
14
IBP, however, remained a PSU after this strategic sale, since IOC held 53.58 per cent of its paid-up
equity. Another major shift in disinvestment policy was made in 2004-05 when it was decided that
the government may “dilute its equity and raise resources to meet the social needs of the people”, a
distinct departure from strategic sales.
Strategic Sales have got a renewed push after 2014. During 2016-17 to 2018-19, on average,
strategic sales accounted for around 28.2 per cent of total proceeds from disinvestment. Department
of Investment and Public Asset Management (DIPAM) has laid down comprehensive guidelines on
“Capital Restructuring of CPSEs” in May, 2016 by addressing various aspects, such as, payment of
dividend, buyback of shares, issues of bonus shares and splitting of shares. The Government has
been following an active policy on disinvestment in CPSEs through the various modes:
i. Disinvestment through minority stake sale in listed CPSEs to achieve minimum public
shareholding norms of 25 per cent. While pursuing disinvestment of CPSEs, the Government
will retain majority shareholding, i.e., at least 51 per cent and management control of the
Public Sector Undertakings;

ii. Listing of CPSEs to facilitate people’s ownership and improve the efficiency of companies
through accountability to its stake holders - As many as 57 PSUs are now listed with total
market capitalisation of over ` 13 lakh crore.
iii. Strategic Disinvestment;

iv. Buy-back of shares by large PSUs having huge surplus;

v. Merger and acquisitions among PSUs in the same sector;

vi. Launch of exchange traded funds (ETFs) - an equity instrument that tracks a particular
index. The CPSE ETF is made up of equity investments in India’s major public sector
companies like ONGC, REC, Coal India, Container Corp, Oil India, Power Finance,
GAIL, BEL, EIL, Indian Oil and NTPC; and
vii. Monetization of select assets of CPSEs to improve their balance sheet/reduce their debts
and to meet part of their capital expenditure requirements.
NITI Aayog has been mandated to identify PSUs for strategic disinvestment. For this purpose, NITI
Aayog has classified PSUs into “high priority” and “low priority”, based on (a) National Security (b)
Sovereign functions at arm’s length, and (c) Market Imperfections and Public Purpose. The PSUs
falling under “low priority” are covered for strategic disinvestment. To facilitate quick decision
making, powers to decide the following have been delegated to an Alternative Mechanism in all the
cases of Strategic Disinvestment of CPSEs where Cabinet Committee on Economic Affairs (CCEA)
has given ‘in principle’ approval for strategic disinvestment:
(i) The quantum of shares to be transacted, mode of sale and final pricing of the transaction or
lay down the principles/ guidelines for such pricing; and the selection of strategic partner/
buyer; terms and conditions of sale; and
(ii) To decide on the proposals of Core Group of Disinvestment (CGD) with regard the
timing, price, terms & conditions of sale, and any other related issue to the transaction.
On November 20, 2019, the government announced that full management control will be ceded to
buyers of Bharat Petroleum Corporation Ltd. (BPCL), Shipping Corporation of India (SCI) and
Container Corporation of India Ltd (CONCOR). On January 8, 2020, strategic disinvestment was
approved for Minerals & Metals Trading Corporation Limited (MMTC), National Mineral
Development Corporation (NMDC), MECON and Bharat Heavy Electricals Ltd. (BHEL).
4.4 IMPACT OF PRIVATIZATION: A FIRM LEVEL ANALYSIS

To assess the impact of strategic disinvestment/privatization on performance of select CPSEs

before and after privatization, 11 CPSEs are studied, that had undergone strategic disinvestment
from 1999-2000 to 2003-04 for which data is available both before and after privatization.2 To
enable careful comparison using a difference-in-difference methodology, these CPSEs have
been compared with their peers in the same industry group (Table 1). Box 4 gives an
explanation of the difference-in-difference methodology.

Table 1: List of Selected CPSEs and Peers

Industry Group Privatized CPSE Peers

Tinplate Co. Of India, Hindustan
Metals-Non Ferrous Hindustan Zinc
Copper, Vedanta
Aluminium& Aluminium Bharat Aluminium
NALCO, Hindalco, PG Foils
Products Company Ltd. (BALCO)
Computers, peripherals & Computer Management Moserbear, Zenith Computers, Izmo
storage devices Corporation Ltd. (CMC) Limited
Ashok Leyland Ltd, Tata Motors.,
Automobile Maruti Suzuki
Mahindra & Mahindra Ltd
Chemplast Sanmar, Bhansali
Indian Petrochemicals
Petrochemicals Engineering Polymers, Ineos
Corporation Ltd. (IPCL)
Styrolution India Ltd
Telecommunication Services Tata Communications Tata Teleservices, MTNL, GTL infra
Gujarat Toolroom, Gujarat Textronics,
Heavy Engineering Lagan Engineering Integra Engineering India Ltd.

Elgi Ultra, Disa India, Alfa Laval,

Medium & Light Engineering Jessop &Co.
Filtron Engineers
Modern Food India Ltd.
Bakery Products Britannia
(MFIL)
Hindustan Teleprinters Anamika Conductors, Delton Cables,
Wires and Cables
(HTL) Fort Gloster Ltd
GSFC, Fertilizers & Chemicals-
Chemicals and Fertilizers Paradeep Phosphates Travancore, Godavari Chemicals and
Fertilizers
Total 11 32

16
 17
4.5 Comparison of Financial Indicators of Privatized Firms
The differences for each metric are described in detail below.
i) Net worth: The net worth of a company is what it owes its equity shareholders. This consists of
equity capital put in by shareholders, profits generated and retained as reserves by the company.
On an average, the net worth of privatized firms increased from `  700 crore before privatization to
`  2992 crore after privatization, signalling significant improvement in financial health and
increased wealth creation for the shareholders (Table 2). Difference in difference (DiD) analysis
attributes an increase of ` 1040.38 crore in net worth due to privatization

Table 2: Net Worth (` Crore)

Name of privatized CPSE Pre average Post average Post minus Pre
1 BALCO 656.25 1921.60 1265.35
2 CMC 35.28 275.41 240.13
3 Maruti 1426.02 8191.98 6765.96
4 Jessop -212.07 77.19 289.26
5 Lagan Engineering 5.15 6.30 1.15
6 IPCL 2258.52 3106.69 848.17
7 HTL 33.35 -145.98 -179.33
8 Hindustan Zinc 818.06 12874.57 12056.51
9 Modern Food India 10.63 -79.34 -89.97
10 Paradeep Phosphates -3.98 214.12 218.1
11 Tata Communications 2683.82 6468.49 3784.67
12 Combined average of all privatized firms 701.00 2991.91 2290.91
13 Combined average of peer firms 551.61 1802.14 1250.53
14 Privatized firm minus peer firms 149.39 1189.77 DiD = 1040.38

Net Profit: This is the net profit of the company after tax. An increase in net profit indicates
greater realizations from the company after incurring all the operational expenses. On an
average, the net profit of privatized firms increased from ` 100 crore before privatization to ` 555
after privatization compared to the peer firms (Table 3 below). DiD analysis attributes an increase
of
` 300.27 crore in net profit due to privatization.
` ` Table 3: Net Profit (` Crore)
`
Name of privatized CPSE Pre average Post average Post minus Pre

1 BALCO 45.47 348.94 303.47

2 CMC 6.77 73.22 66.45

3 Maruti 205.28 1321.99 1116.71

4 Jessop -36.44 7.87 44.31

5 Lagan Engineering -0.49 0.18 0.67

6 IPCL 238.48 606.42 367.94

7 HTL 3.16 -43.84 -47

 8 Hindustan Zinc 72.47 3237.04 3164.57

9 Modern Food India -1.2 -18.4 -17.2

10 Paradeep Phosphates -53.93 114.83 168.76

11 Tata Communications 620.34 452.25 -168.09

12 Combined average of all privatized firms 100 554.6 454.6

13 Combined average of peer firms 68.51 222.84 154.33

14 Privatized
` firm minus peer firms 31.49 331.76 DiD=300.27
`

iii) Gross Revenue: On an average, the gross revenue of privatized firms increased from `
1560 crore to before privatization to ` 4653 crore after privatization, signalling increase in
income from sales of goods and other non-financial activities (Table 4). DiD analysis
attributes an increase of ` 827.65 crore in gross revenue due to privatization.
Return on assets (ROA): ROA captures the ratio of profits after taxes (PAT) to the total average
assets of the company, expressed in percentage terms. On an average, ROA for the privatized
firms have turned around from (-)1.04 per cent to 2.27 per cent surpassing the peer firms
which indicates that privatized firms have been able to use their resources more productively
(Table 5). DiD analysis attributes an increase of 5.04 per cent in ROA due to privatization.

Table 4: Gross Revenue (` Crore)

Name of privatized CPSE Pre average Post average Post minus Pre

BALCO 747.84 2858.48 2110.64

CMC 261.55 792.88 531.33
Maruti 6013.28 22958.8 16945.52
Jessop 79.76 178.33 98.57
Lagan Engineering 6.52 12.87 6.35
IPCL 3791.56 9341.25 5549.69
HTL 141.21 126.89 -14.32
Hindustan Zinc 999.16 7923.77 6924.61
Modern Food India 77.21 192.6 115.39
10 Paradeep Phosphates 824.52 2692.56 1868.04
Tata Communications 4219.51 4106.69 -112.82
Combined average of all privatized firms 1560.19 4653.19 3093
13 Combined average of peer firms 945.42 3210.77 2265.35
14 Privatized firm minus peer firms 614.77 1442.42 DiD=827.65

19
 20
Table 5: Return on Assets (per cent)

Name of privatized CPSE Pre average Post average Post minus Pre

1 BALCO 4.62 6.84 2.22

2 CMC -0.89 8.7 9.59
3 Maruti 8.24 10.29 2.05
4 Jessop -35.95 4.34 40.29
5 Lagan Engineering -2.19 0.78 2.97
6 IPCL 4.34 6.74 2.4
7 HTL -3.12 -24.17 -21.05
8 Hindustan Zinc 5.29 26.7 21.41
9 Modern Food India 3.35 -39.5 -42.85
10 Paradeep Phosphates -8.78 2.57 11.35
11 Tata Communications 13.4 4.03 -9.37
12 Combined average of all privatized
firms -1.04 2.27 3.31
13 Combined average of peer firms 3.28 1.55 -1.73

14 Privatized firm minus peer firms -4.32 0.72 DiD=5.04

l Return on equity (ROE): Return on equity

(ROE) is profit after tax (PAT) as percentage of average net worth. On an average, the
ROE of privatized firms increased from 9.6 per cent before privatization to 18.3 per cent after
privatization, reflecting increase in firm’s efficiency at generating profits from every unit of
shareholders’ equity. For the average peer group, the increase in ROE over pre privatization period
was 7.8 per cent (Table 6). DiD analysis attributes an increase of 0.89 per cent in ROE due to
privatization

Table 6: Return on Equity (per cent)

Name of privatized CPSE Pre average Post average Post minus Pre

1 BALCO 6.1 16.9 10.8

2 CMC 11.2 26.6 15.4

3 Maruti 19 16.6 -2.4

4 Jessop 5 12.9 7.9

 5 Lagan Engineering -4.5 1.4 5.9

6 IPCL 11.2 17.9 6.7

7 HTL 9.8 2.3 -7.5

8 Hindustan Zinc 9.2 28.8 19.6

9 Modern Food India 11.4 27.8 16.4

10 Paradeep Phosphates 3.5 -0.1 -3.6

11 Tata Communications -44.8 7.3 52.1

12 Combined average of all privatized firms 9.6 18.3 8.7

13 Combined average of peer firms 4.5 12.31 7.81

14 Privatized firm minus peer firms 5.1 5.99 DiD=0.89

Net profit margin: Net profit margin of a company is PAT as percentage of total income. On an
average, the net profit margin of privatized firms increased from (-3.24) per cent before
privatization to 0.65 per cent after privatization, reflecting that out of a rupee that is generated as
income, the share of after-tax profit in the income increases. For the average peer group, the net
profit margin has fallen to (-13.4) per cent in the post privatization period from (-2.03) per
cent in the pre privatization period (Table 7). DiD analysis attributes an increase of 15.26 per
cent in net profit margin due to privatization.

Table 7: Net profit margin (per cent)

Name of privatized CPSE Pre average Post average Post minus Pre

1 BALCO 5.8 10.1 4.3

2 CMC 1.9 9.1 7.2
3 Maruti 6.5 34.3 27.8
4 Jessop 2.9 -66.9 -69.8
5 Lagan Engineering 6.7 5.9 -0.8
6 IPCL -65 5.8 70.8
7 HTL -3.1 -0.2 2.9
8 Hindustan Zinc 3.7 5.9 2.2
9 Modern Food India -2.1 -9.8 -7.7
10 Paradeep Phosphates -6.6 1.8 8.4
11 Tata Communications 13.7 11.1 -2.6
12 Combined average of all privatized firms -3.24 0.65 3.89
13 Combined average of peer firms -2.03 -13.4 -11.37
14 Privatized firm minus peer firms -1.21 14.05 DiD= 15.26

7) Sales growth: On an average, growth rate of sales of privatized firms increased from
14.7 per cent before privatization to 22.3 per cent after privatization (Table 8). DiD analysis
attributes 4.9 per cent increase in sales growth due to privatization.
8) Gross profit per employee: Figure 2 shows that on average, the number of employees has Sales
growth: On an average, growth rate of sales of privatized firms increased from
14.7 per cent before privatization to 22.3 per cent after privatization (Table 8). DiD analysis
attributes 4.9 per cent increase in sales growth due to privatization.

Table 8: Sales growth y-o-y (per cent)

Name of privatized CPSE Pre average Post average Post minus Pre
1 BALCO 7.87 22.25 14.38
2 CMC 20.19 4.66 -15.53
3 Maruti 20.26 16.18 -4.08
4 Jessop -2.45 17.26 19.71
5 Lagan Engineering 0.22 17.05 16.83
6 IPCL 14.33 23.90 9.58
7 HTL 19.29 82.10 62.81
8 Hindustan Zinc 10.44 28.34 17.90
9 Modern Food India 18.36 4.02 -14.34
10 Paradeep Phosphates 6.41 32.39 25.99
11 Tata Communications 46.58 -2.94 -49.52
12 Combined average of all privatized firms 14.68 22.29 7.61
13 Combined average of peer firms 59.37 62.09 2.72
14 Privatized firm minus peer firms -44.69 -39.80 DiD =4.89

Table 9: Gross profit/employee (` lakh)

Name of privatized CPSE Pre average Post average Post minus Pre
1 BALCO 0.46 10.87 10.42
2 CMC 0.17 1.49 1.32
3 Maruti 4.75 21.01 16.26
4 Jessop -1.06 0.77 1.82
5 IPCL 1.89 4.14 2.26
6 Hindustan Zinc 0.26 166.66 166.40
7 Paradeep Phosphates -6.02 -14.96 -8.94
8 Tata Communications 22.28 13.42 -8.85
9 Combined average of all privatized firms 2.84 25.43 22.58
10 Combined average of peer firms 0.54 1.78 1.24
11 Privatized firm minus peer firms 2.30 23.65 DiD= 21.34

4.6 Pre & Post Privatisation

Net worth of privatized firms (pre and post privatization)

 24

Gross Revenue of privatized firms (pre and post privatization)

 25

Return on Assets (ROA) of privatized firms (pre and post privatization)

 26

Net Profit Margin of privatized firms (pre and post privatization)

 27

Sales growth of privatized firms (pre and post privatization)

)
 28

Gross Profit per Employee of privatized firms (pre and post privatization
 CHAPTER FIVE
SUMMARY & CONCLUSION

Approval for strategic disinvestment of Government’s shareholding of 53.29 per cent in

Bharat Petroleum Corporation Limited (BPCL) led to an increase of around ` 33,000 crore in
the value of shareholders’ equity of BPCL when compared to Hindusta Petroleum
Corporation Limited
(HPCL). This translates into an unambiguous increase in the BPCL’s overall firm value, and
thereby an increase in national wealth by the same amount.

A comparative analysis of the before-after performance of 11 CPSEs that had undergone
strategic disinvestment from 1999-2000 to 2003-04 reveals that net worth, net profit, return
on assets (ROA), return on equity (ROE), gross revenue, net profit margin, sales growth and
gross profit per employee of the privatized CPSEs, on an average, have improved
significantly in the post privatization period compared to the peer firms.

The ROA and net profit margin turned around from negative to positive surpassing that of
the peer firms which indicates that privatized CPSEs have been able to generate more wealth
from the same resources.

The analysis clearly affirms that disinvestment (through the strategic sale) of CPSEs unlocks
their potential of these enterprises to create wealth evinced by the improved performance
after privatization.

Aggressive disinvestment should be undertaken to bring in higher profitability, promote
efficiency, increase competitiveness and to promote professionalism in management in the
selected CPSEs for which the Cabinet has given in-principle approval.

Although the academic debate on en masse privatisation is still going on, the government has
already made moves in that direction, since it is realised that without it the pace of liberalisation and
marketisation of the economy would not attain the take off stage. Some of these are: (i) permitting
the entry of the private corporate sector in such core sectors as steel, telecommunications, power,
airlines, ports etc; (ii) no fresh budgetary support for public enterprises; (iii) issue of equity to the
public by the identified PSUs; (iv) outright of sale identified PSUs. As the momentum picks up
there is a need to formulate a comprehensive privatisation policy. The policy needs to address at
least the following issues: why privatise? what to private? when to private? which organisation will
serve as the nodal agency for privatisation and what will be its composition, powers and
responsibilities? What are the institutional mechanisms that will be put in place to gain public
enterprise employees’ support for privatisation? And, what is the role that India would like foreign
investors to play in its privatisation programme?

Privatisation does not remove problems from the public domain. Monopolies require regulation, can
be water and electricity. The complex political interests and economic incentives within the country
militate against the process of privatisation. The process of disinvestment is going on since 1991
and yet it remains more or less where it started. If meant to be meaningful, privatisation need to be
pursued more systematically within a carefully designed framework of action.

29
 30
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