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UPA unveils new disinvestment policy

Our Economy Bureau
28 January 2005

The process of disinvestment in India began in 1992, under the aegis of new economic
liberalization policy put forward by then Finance Minister, Dr. Manmohan Joshi. Disinvestment
was supposed to be the tool in the hands of government to improve the functioning and
profitability of public sector enterprises and also raise funds to mitigate its fiscal deficits.
Disinvestment exercise over the past decade has been plagued by criticisms and controversies
and has not achieved desired results for the government because of political bickering.

New Delhi: The Congress-led UPA government on yesterday unveiled its new
disinvestment policy. It involves selling minority stakes in both listed and unlisted
profitable public sector units (PSU) but retaining 51 per cent equity to avoid ceding
management control.

The cabinet committee on economic affairs (CCEA) has agreed to set up a National
Investment Fund (NIF) with proceeds from the sale of government equity in profitable
PSUs. This will be in the form of a separate dedicated fund such as the 'central road fund'
outside the purview of the 'consolidated fund of India'.

For implementing the disinvestment programme, the CCEA has segregated profitable
PSUs that are currently unlisted and those that are already listed on the bourses.

In the case of profitable PSUs having a net worth of over Rs200 crore that are currently
unlisted, the disinvestment of equity would be done through a stock exchange listing by
floating an IPO, either independently by the government or in conjunction with a fresh
equity issue by the PSU concerned.

For profitable PSUs that are already listed, the minority stake sale will be carried out
either in conjunction with a public issue of fresh equity by the PSU concerned or
independently by the government through an offer for sale.

"In both these cases, the stake sales will be subject to the government retaining
management control of the PSU concerned by holding a residual equity of at least 51 per
cent in these entities," a statement issued after the CCEA meeting said.

This is in line with the announcement made in the 'national common minimum
programme' of the UPA Government.

A detailed company-wise programme will be prepared in consultation with the

administrative ministry concerned, identifying the quantity of shares to be sold and the
likely timing of the offer for sale / IPO. "While doing so, priority would be given to those
PSUs which, autonomously, intend to approach the capital market for issue of fresh
equity. Firm proposals for disinvestment of a small part of the shareholding in specific
PSUs after due consultation with the administrative ministries / departments concerned
will again be put up to the CCEA for approval," the statement said.

After the CCEA approves the disinvestment proposal, it will be referred to a group of
ministers for fixing a price band and the final price.

The broad objective of the NIF will be to finance social sector projects in areas such as
education, healthcare and employment. It will also be utilised to meet the capital
investment in selected profitable PSUs that yield adequate returns to enlarge their capital
base for financing expansion and diversification plans.

The money raised through sale of government equity in profitable PSUs would go to the
NIF from April 2005.

"The fund would be managed by professional public sector managers such as LIC Mutual
Fund, UTI Mutual Fund and SBI Mutual Fund, returns of which would be utilised for
social sectors such as education, employment and health and for capital investment in
select PSUs," said the finance minister, P Chidambaram.

The NIF would be permanent in nature and will not require any statutory clearance. Up to
75 per cent of the returns on the NIF would be used for social sectors and the balance for
profit-making PSUs.

Chidambaram said the policy of 'selling and spending' has been discontinued. "This is a
significant departure from the existing practice. The NDA used disinvestment proceeds
for current expenditure. The proposal is that any new disinvestment proceeds will go to
the National Investment Fund and treated as capital receipts," he said.