Lessons from disinvestment experience of India: implications of contractual issues

Abstract

India s policy on the disinvestment of its Public Sector Units (PSUs) has not been able to ensure a steady flow of returns to the Government. There have been years where the disinvestment receipts have surpassed all expectations and there have also been periods when there was no disinvestment activity. India today has 244 Central PSUs of which 56 are chronically loss making such that their net worth is now negative. At the same time we have PSUs which have been accorded the Maharatna and Navratna status based on their exemplary performance. One way of unleashing the productive potential of our PSUs is to by following a disinvestment strategy that The experience from the past several years shows that disinvestment is neither a panacea nor a universal solution that can be easily applied to all countries and sectors. There is no ?one size fits all? approach. Instead, policies and approaches need to vary taking into account sectoral and country circumstances, in particular market structures and levels of institutional development. Given this context, it is proposed that the policy for disinvestment in India should follow a dual approach offer for sale/private placement/buyback of equity/cross sale for profitable units and strategic sale for loss making units. The recent offerings of profit making public sector units have generated substantial resources for the Government and has also instilled good corporate governance practices in these enterprises. However, given the current volatility in the markets the situation is not appropriate for undertaking further disinvestment through offer for sale at this point of time. Therefore the time is ripe to look at the other alternatives especially exploring the strategic sale option for loss making units. In this context the learning from the strategic sale transactions carried out in past assume importance. Particularly important are the contractual and valuation issues. An examination of these has revealed that several post disinvestment matters have cropped up that require resolution. While it is important to keep these in mind and conduct a due diligence before initiating the process it is also imperative to give due regards to the concerns of the bidders so that the transaction can be successfully completed. Disinvestment, however, cannot be at the cost of social unrest and in this regard it is necessary to safeguard the interests of employees. For this purpose it is also imperative that some amount of goodwill be built so that the public is willing to support the strategic sale of loss making units.