Overview of Indian Public Sector
Central and state Public Sector Undertakings (PSUs) play a prominent role in India’s industrialization and economic development. Since independence, various socio-economic problems needed to be dealt with in a planned and systematic manner. A predominantly agrarian economy, a weak industrial base, low savings, inadequate investments and lack of industrial facilities called for state intervention to use the public sector as an instrument to steer the country’s underlying potential towards self reliant economic growth. The macroeconomic objectives of Central PSUs have been derived from the Industrial Policy Resolutions and the Five Year Plans. State-level public sectors enterprises (state PSUs) were established because of the rising need for public utilities in the states. These PSUs operated in public utilities such as railways, post and telegraph ports, airports and power and contributed significantly towards infrastructure development in India. Since its inception during the First Five Year Plan, many public sector undertakings performed exceptionally well in wealth creation for the country.
Many Central PSUs, particularly the Maharatnas, are already global players matching the best global firms in their field of operations. One of the important reasons for the excellent performances of Central PSUs during the recent years was the empowerment of the boards of such profit making Central PSUs by the Government leading to greater autonomy. Consequently, such PSUs have been able to effectively use this autonomy to enhance their performance and operate on commercial lines.
Evolution of Public Sector Enterprises in India
Public sector enterprises in India have grown from only five enterprises post independence and with an investment of ` 0.3 bn in the year 1951 to 249 enterprises as on Mar 31, 2010. Aggregate investment in Central PSUs has been increasing over the years. Total investment, including equity plus long-term loans of Central PSUs went up from ` 5,135.32 bn in FY09 to ` 5799.20 bn in FY10, growing 12.93%.
As on Mar 31, 2010, there were 94 mega projects costing ` 10 bn and above and 44 major projects costing between ` 1 bn and ` 10 bn. Overall profit of all Central PSUs stood at ` 925.93 bn during FY10 and dividend declared by such Central PSUs stood at ` 332.23 bn. The CPSEs earned foreign exchange equal ` 777.45 bn during the year compared with ` 742.06 bn in FY09.
The evolution of PSUs can be divided into three distinguished phases: 1) The pre-independence era; 2) The post-independence era; and 3) The post-liberalization period. The fourth period could perhaps be the one following the recent global economic crisis. During the pre-independence era there were few public enterprises, namely the railways, the posts and telegraph, the port trust, All India Radio and the ordinance factories, among few other government managed enterprises. During the post independence era, the Industrial Policy Resolution 1956 was implemented. Moreover, several strategies specific to the public sector were defined in policy statements in 1973, 1977, 1980 and 1991. The post liberalization era which commenced from 1991 saw the Government introducing the concept of Maharatna, Navratna and Miniratna to accord greater financial and managerial autonomy with the aim of incurring higher capital expenditure apart from forming JVs within the country as well as outside.
The period following the recent global economic downturn was one of Government infusing capital into the economy. In order to boost sectors such as real estate, agriculture and small enterprises, GoI, through public sector banks, provided capital at lower interest rates. These initiatives of the Government helped contain serious after effects of the economic meltdown while keeping a tab on inflation.
Role of PSUs in the Indian Economy
PSUs contributed significantly to the country’s economy. As on Apr 30, 2011, of the total 247 Central PSUs and their subsidiaries only 50 were listed; of these, 47 that were listed at the Bombay Stock Exchange (BSE) constituted 22% of the total market capitalisation of 4,946 companies listed on the BSE. Additionally, 28 Public Sector Banks (PSBs) including their subsidiaries and six State Level Public Enterprises (SLPEs), accounted for 6% of the total market capitalisation at BSE. The market capitalization of all PSUs taken together was ` 19.84 trn, constituting 28.7% of the total market capitalisation at the BSE. Of these, the share of Central PSUs share in the BSE market capitalization was 22.37% and amounted to ` 15.45 trn as on Apr 30, 2011. The share of PSBs was 6.28%, amounting to ` 4.34 trn and share of SLPEs in the BSE market capitalisation was less than 1%.
The growth and performance of Central PSUs runs parallel with the growth of the Indian economy. In fact, thePSUs have the potential for an even dominant role to play on the back of several yet-to-be listed profitable Central PSUs that can go to the market. As per data from the BSE as on Dec 15, 2010 there were 98 unlisted Central PSUs that made profit for the past three years, clearly indicating the importance of Central PSUs in the growth of the Indian economy. The Central PSU with the highest market capitalization is Oil and Natural Gas Corporation Ltd (ONGC) at ` 2,642.8 bn on the BSE as on Apr 30, 2011.
Central PSUs in employment generation
The total number of employees in Central PSUs was 1.53 mn in FY09 and came down to 1.49 mn in FY10. While the number of people employed by Central PSUs came down by 2.7% in FY10, the average annual per capita emoluments given went up to ` 609,816 in FY10 up from ` 541,716 in FY09. Moreover, several Central PSUs face high attrition with employees looking out for higher salaries elsewhere.
Contribution of PSUs to the Central Exchequer
Apart from fulfilling their social commitments, public sector enterprises are contributing significantly to the central exchequer through direct taxes and dividend.
The Central Exchequer obtains revenue from PSUs through two modes namely investments in the companies and through taxes and duties paid. The government earns investment revenue from PSUs in the form of dividend and interests and levies taxes on income, custom duties, corporate tax, excise duties and many more. The public sector has been the backbone of the Indian economy. It has acted as a strategic partner in the nation’s economic growth and in our development process.
There was significant decline in the total contribution of Central PSUs to the Central Exchequer during FY10, which came down from ` 1,515.43 bn in FY09 to ` 1,398.30 bn in FY10. This was primarily due to reduction in contribution towards customs duty and excise duty that came down from ` 87.05 bn and ` 632.62 bn in FY09 to ` 69.03 bn and ` 526.42 bn in FY10. This was owing to decline in excise duty rates across several sectors. Moreover, during FY10, net profit of profit making Central PSUs stood at ` 1084.35 bn compared with ` 984.88 bn in the previous year.
There was decline in other duties and taxes during the year compared with the previous year. There was however an increase in contribution from corporate tax, dividend payment and dividend tax. The central PSUs have always been supportive to the government in terms of helping them manage its financials and cash flows. In this perspective, the Ministry of Finance issued directives to select Central PSUs asking them to declare special dividend during FY11. The government intends to use additional revenue generated from this dividend to meet additional expenses, including the rising subsidy burden.
Net Value addition by Central PSUs
In FY10, the share of profit before tax and enterprise profit (PBTEP) was the highest at 35.41% followed by salaries and wages at 25.92%, indirect taxes and duties at 23.70% and interests at 10.19%. A comparison between the shares of the respective items during FY09 and FY10 show very little change during these two years. Moreover, the share of gross value addition of Central PSUs in GDP at market prices stood at 6.30% in FY10 as against 6.20% in FY09.
Evolution of the Disinvestment Policy
The salient features of the new disinvestment policy include the following:
- Citizens have every right to own part of the shares of Public Sector Undertakings.
- PSUs are the wealth of the nation and this wealth should rest in the hands of the people.
- At least 51% of the shareholding and management control should rest with the Government.
Objectives of Disinvestment
Disinvestment was seen by the government as a means to raise funds for meeting certain general and specific needs. The government’s disinvestment policy was identified as an active tool to reduce the burden of financing the PSUs. Following were the main objectives of disinvestment:
- Improving public finances
- Reducing financial burden on the government
- Funding expansion plans
- Expanding share of ownership
- Initiating competition
- Remove politics from non-essential services
Importance of Disinvestment
Given an increasingly competitive environment on the back of private enterprises gaining ground on several parameters, disinvestment of PSUs assumes significance. Increased competition from private players makes it difficult for many PSUs to operate profitability. As a result of a rapid erosion of the value of the public assets, it becomes extremely important that the Government disinvests Central PSUs early in order to realize a high value. At present the government has a significant stake locked up in Central PSUs of ` 2 trn. Disinvestments of several leading Central PSUs have raised noteworthy funds through this route. In fact, ONGC’s public offer through the Further Public Offer (FPO) route during 2003-2004 has been the largest for any Central PSU, XVII raising ` 105.42 bn. With respect to raising funds through the Initial Public Offering (IPO) by any Central PSU, Coal India Ltd raised ` 151.99 mn through its IPO in 2010-2011 making it the biggest Central PSU IPO until date. The primary purpose of the government’s disinvestment initiative is to utilize the funds that become available post disinvestment, for several purposes. The important among them are:
- Financing the increasing fiscal deficit
- Financing large-scale infrastructure development
- Encouraging spending
- Retiring government debt, since almost 40-45% of the Central Government’s revenue goes towards repaying public debt/interest
- Spending on social programs such as health and education
Approaches to Disinvestment
The following action plan was approved by the government for disinvestment in profit making government companies.
- Already listed profitable CPSEs (not meeting mandatory shareholding of 10%) are to be made compliant by ‘Offer for Sale’ by Government or by the CPSEs through issue of fresh shares or a combination of both.
- Unlisted CPSEs with no accumulated losses and having earned net profit in the three preceding consecutive years are to be listed,
- Follow-on public offers would be considered on a case-by-case basis, based on the need for capital investment of CPSE, and Government would simultaneously or independently offer a portion of its equity shareholding.
- In all cases of disinvestment, the government would retain at least 51% equity and the management control.
- All cases of disinvestment are to be decided on a case-by-case basis.
- The Department of Disinvestment is to identify CPSEs in consultation with respective administrative ministries and submit proposal to Government in cases requiring Offer for Sale of Government equity.
- 1991-1992 to 2000-2001: During this period 31 PSUs were divested for ` 30.38 bn. The Department of Disinvestment was set up as a separate department in Dec 1999 that was later renamed as Ministry of Disinvestment from Sept 2001. The Government raised ` 200.78 bn during this period against an aggregate target of ` 543 bn, less than half. During this period disinvestments that took place were mostly by way of sale of minority stake in the PSUs. Unit Trust of India picked up minority stakes in several companies that were divested.
- 2001-2002 to 2003-2004: This period saw the maximum number of disinvestments taking place either by way of strategic sales or through a public offer. The Government raised ` 211.63 compared with an aggregate target of ` 385 bn.
- 2004-2005 to 2008-2009: During this time, disinvestment almost stagnated owing to it remaining a contentious issue. Total amount raised from disinvestments during this period was only ` 85.15 bn.
- 2009-2010 to present: On the back of improved market conditions backed by a stable Government a renewed thrust on disinvestment is visible. Government commenced selling minority stakes in both listed and unlisted PSUs through public offers and until Dec 31, 2010 it was able to raise ` 463.15 bn.
- Multiple Principles: Most Central PSUs these days are being plagued by multiple principles and multiple goals often resulting in conflicting situations for these enterprises. The outcome of these conflicting principles and goals lead to the public sector enterprises being unable to ascertain the outcome. Conflicting goals often result in affecting overall performance of the organization.
- Broad based decision making structures: More often than not, the decision making structures in Central PSUs are broad based, resulting in people working at cross purposes owing to lack of proper coordination and a common objective. The principle of profit maximization takes a backseat while vested interests seem to take over.
- Problem of untapped talent: PSUs were established with the purpose of absorbing surplus labour while reducing unemployment rates in the country. However, owing to stringent recruitment practices that are filled with old-school thoughts and political interventions, these enterprises lost their sheen compared with their private counterparts who despite lacking size and might of such enterprises, end up in moving ahead in recruiting the country’s best minds. Moreover, lack of transparency in the entire recruitment process stops students from top educational institutes from applying for these government posts.
- Private sectors steer ahead in terms of compensation structure: On the back of economic liberalization and movement of compensation structures from socialist regimes, the differentials between the public sector and their corporate counterparts is widening. If this disparity is not controlled, the private sector will continue to draw all the talent and public sector enterprise would be left high and dry. Despite the sixth pay commission being implemented, there is still not enough parity between the compensation structures prevalent in the public sector and their private sector counterparts.
- Inadequate implementation of quantitative performance metrics: Performance measurement of the past years, such as linking financial parameters with operational efficiency led to deterioration of liability. As a result, public sector enterprises find it difficult to compete with private sector companies, whose processes are better aligned. Owing to this, the opportunities available to this sector have become constricted.
- Lack of autonomy in decision making: Public sector enterprises have always suffered due to lack of autonomy. Initially, delegation of powers was restricted. Consequently, when the Indian economy opened up in the early nineties, such companies were caught off-guard and lost out on several opportunities of expansion both within the country as well as overseas. The need of the hour was to divest more by granting more financial and operational autonomy to the top management in decision making. Creating Maharatnas and Navratnas was one such step towards creating greater autonomy.
A Historical Perspective to Disinvestment
The public sector was envisaged to be the engine of growth for development envisaged by the country. However, this growth was marred when the public sector’s shortcomings started manifesting in a way that led to lower capacity utilization, low efficiency, cost overruns, lack of innovativeness, and delay in taking strategic decisions. As a result disinvestment gained credence. The period since the first disinvestment that happened in 1991-1992 to the current period, disinvestment has undergone a sea change both in approach and the policy changes implemented to make the process more functional.
Amounts Raised Through Public Offers
Central PSUs have shown their mettle on the stock exchanges. As discussed earlier in this report, these listed companies can boast of around 22% of the total market capitalisation of listed companies of BSE. The performance of CPSEs on the stock exchanges is even more credible as listed Central PSUs constitute only about one percent of the total number of companies listed on the BSE.
With the biggest ever IPO launched by Coal India Ltd (CIL), PSUs have once again become centre stage with CIL’s IPO being oversubscribed 15 times. The CIL IPO has reaffirmed investor confidence in public sector enterprises that had waned during the mid 2000’s. In fact, the government intends to reap benefits from the credibility and recognition that these enterprises hold in the Indian markets as well as overseas. Robust public sector enterprises have made investments overseas on their own, besides expanding operations and succeeded in meeting global challenges of competition, advancing technologies and free markets. Several Central PSUs have established subsidiaries and alliances abroad.
PSBs in tandem with public sector enterprises have performed reasonably well in an increasingly competitive and uncertain environment. Compared with banks globally, Indian PSBs have stood their ground and done well to weather the global economic crisis of 2008 that caught people unaware.
Disinvestment by Central PSUs in the past
In the past, Central PSUs made substantial disinvestments in several ways. These include strategic sale to private entities, raising funds through public offers (excluding raising fresh capital), sale of one Central PSU to another Central PSU, apart from auction to financial investors and sale to employees.
Strategic sale of Central PSUs witnessed renewed activity post 2008-2009. Historically, majority of disinvestments have been typically made to strategic partners including sale to private entity or to another Central PSU.
Challenges and Concerns
The integration of the Indian economy with global markets resulted in several challenges and concerns. These challenges act as impediments in the growth of public sector enterprises and come in the way of competing space with other private entities. Since their inception, public enterprises have been bereft of proper autonomy and authority to make investments and acquisitions whether in India or overseas. Few of the major challenges and concerns facing these public sector enterprises especially Central PSUs have been discussed below:
The public sector is an integral part of the Indian economy and a key growth driver. With the advent of globalization, the public sector gained credence in the face of faced new challenges in developed economies. This sector provided the required thrust to the economy and developed and nurtured human resources, the vital ingredient for the success of any enterprise.
The optimistic nature of the operations of Central PSUs can be fathomed from the fact that the gross block in top ten enterprises amounted to ` 7,799.60 bn as on Mar 31, 2010. This was equal to 69% of the total gross block in all Central PSUs. Oil & Natural Gas Corporation Ltd, Bharat Sanchar Nigam Ltd and NTPC Ltd are the top three Central PSUs among the top ten Central PSUs in terms of gross block during the year FY10. The share of these three Central PSUs alone was 39% of the total gross block of all the Central PSUs as on the above period.
Over the last few years, public sector enterprises have gained tremendous credibility and recognition not just domestically but also in the international markets and the government is now gearing up to cash in on this.