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Through the 1990s, consecutive governments at the Centre have advocated
the sale of public sector equity as a means of public
sector 'reform'. Equity sale, the industry policy statement
of July 1991 argued, was a means of ensuring financial
discipline and improving performance. The fact that
there is little theoretical justification for or empirical
validation of this position has of course been ignored.
The immediate reason is fiscal convenience. Having internalised
the IMF prescription that reducing or doing away with
fiscal deficits is the prime indicator of good macroeconomic
management, the government has found privatisation proceeds
to be a useful source of revenues to window dress budgets.
To boot, such window dressing could be defended on the
grounds that privatisation was taking the economy in
a market friendly direction.
This has meant that, while there has been much talk
of managerial reform, voluntary retrenchment and greater
public sector autonomy, the thrust of public sector
reform has been the sale of equity. In the event, the
target for disinvestment has been increasing. It was
placed at Rs. 2,500 crore in 1991-92, Rs. 3,500 crore
in 1992-93 and 1993-94, Rs. 4,000 crore in 1994-95,
Rs. 7,000 crore in 1995-96, Rs. 5,000 crore in 1996-97,
Rs. 4,800 crore in 1997-98, Rs. 5,000 crore in 1998-99
and an ambitious Rs. 10,000 crore in 1999-2000.
Over these years, the nature of the privatisation has
also changed. Initially the emphasis was on divestment
of a part of equity, with the controlling block still
being with the government. Since shares of different
public sector units (PSUs) would be valued differently
by the market because of variations in performance,
shares were offered only in "bundles" which
combined equity from poor and good performers. In practice,
rather than help the government divest shares in loss-making
enterprises at reasonable prices, bundling resulted
in the government obtaining an extremely low average
price for each bundle, implying that prime shares where
being handed over at rock-bottom prices. Thus, in 1991-92,
when the bundling option was resorted to, the average
price at which more than 87 crore shares were sold stood
at Rs. 34.83, as compared with the average price of
Rs. 109.61 realised since then (Table 2). While the
growing tendency to sell equity in the best PSUs partially
accounts for this difference, it was also due to the
low prices obtained for even premium shares in that
year. As Table 1 shows, MTNL, ITI, VSNL, CMC and Cochin
Refineries were some of the firms in which the government's
equity was divested that year.
Table
1 >> Click
to Enlarge
Table
2 >> Click
to Enlarge
With the experience of 'bundling' proving to be disastrous
from a price (and revenue) point of view, the government
soon began talking of the need for privatisation, as
opposed to just disinvestment. It was argued, by a committee
headed by former RBI Governor C. Rangarajan, that equity
sales could be of magnitudes that brought the government's
stake below 50 per cent and even as low as 25 per cent
in some cases. This, it was held, was not merely in
keeping with the objective of the State withdrawing
from non-core and non-strategic areas, but also provided
a greater incentive to the private sector to acquire
public sector equity. More recently, after the constitution
of the now dissolved Disinvestment Commisssion in 1996,
the government has gone further and advocated 'strategic
sales' of particular PSUs, or sales of equity blocks
to a single buyer accompanied by the transfer of management
to the private investor. What is amazing is that in
some cases such as IPCL, a highly successful and profitable
PSU, the transfer of management has been recommended
to any private party which acquires a 25 per cent in
the company.
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