Explained: Privatization of PSUs

Reading time: 6-8 minutes.

Recently, Union Minister of Finance, Nirmala Sitharaman announced the Union Government’s decision to sell its stake in several companies, including Bharat Petrol Corporation Ltd (BPCL), Shipping Corporation of India (SCI), Container Corporation of India(CCI), Tehri Hydro Development Corp of India (THDC) and North Eastern Electric Power Corporation (NEEPCO). 

While BPCL’s stake of 53.3% will fetch the exchequer about Rs. 63000/- Crore (After removing Numaligarh Refinery from the ambit of privatization), SCI’s disinvestment will generate Rs 2000/- Crore, in exchange of 63.75% of the stake. Sale of 30.8% share in CONCOR will make the exchequer richer by Rs 13,400/- Crore. NEEPCO is being sold to NTPC. In all the abovementioned instances, however, the government shall retain management and control.

The move, as mentioned earlier, has led to concerns from several factions which state that “Golden Goose” industries are being sold off, which would lead to private enterprises benefitting from the dividends and revenue generated by these profit-making enterprises.

Meaning and significance of PSUs:

Public Sector Undertakings, alternatively referred to as Public Sector Enterprises, refer to any organization which is owned by the state. The state or its units exercise significant holding and control over such enterprises.

The control and management of the company lie with the state. The functioning, rules, and regulations, powers and procedures are stipulated in consonance with the directives and standards of the state or the country concerned.

Public Sector Undertakings are of two types-

While the Central Government controls CPSEs; SLPEs are controlled by the State Government. Public Sector Undertakings are significant in the Indian context as it helps fulfill several objectives which are enshrined in the Indian constitution, such as generation of employment by way of inducing a massive workforce, an example in this context is the Indian Railways, which is the second-largest employer in India, employing more than 10 Lakh people in their workforce.

PSUs also help in regional development and is the source of livelihood for many. PSUs offer services at a subsidized rate, thus benefiting the general populace, even though it has to incur losses for the same. Such enterprises are also the source of revenue and foreign exchange, which is generated by way of international trade. It can be deciphered thus, that PSUs are incredibly crucial in the Indian context.

What does privatization signify:

The primary objective of privatization is to place the management and control in efficient and competent hands. Privatization increases competitiveness in terms of price, quality, and quantity, inter alia.

This practice also helps negate the evils of Government control such as red-tapism, bureaucratic hierarchy and power structures, and nepotism. Privatization can also be undertaken to increase the viability as well as the commercial attractiveness of the company to potential investors and stakeholders.

Ceding management is sometimes done purely for fiscal objectives. Privatization also helps to generate revenue, which can be utilized for the implementation of public policy, generating employment, etc. Thus, it can be stated that privatization is a commercially viable option for Public Sector Enterprises through out the globe.

Pros and cons of privatization:

PROS- As stated above, Privatization accords several advantages such as efficient and competitive management and control, freedom from stifling government regulations, commercial viability, generation of revenue to help fund several government objectives, amongst others.

However, it is erroneous to conclude the overall viability of the move. It becomes imperative to analyze the drawbacks of privatization, which has been stated below.

CONS- In light of the poor performance of PSUs and a growing acceptance of privatization, several factions call for the process of “Rapid Mass Privatization” in India, which seems to be the policy objective of the current government.

Rapid Mass privatization was undertaken in the Czech Republic (1992), wherein more than one thousand state-regulated enterprises were privatized by way of a voucher scheme.

The same measure was undertaken by way of “glasnost” and “perestroika” in the erstwhile Soviet Union (1989), years preceding its disintegration. In both instances, the move failed and led to severe economic collapse.

Privatization can also lead to the sale of crucial government resources at the price of peanuts to management, which may not be duly equipped on handling industry of considerable stature.

Due caution has to be taken before the sale of essential industries as it might lead to exploitation of resources, underpayment to the workforce, denial of several health, medical, and retirement benefits to employees, which are guaranteed to PSU workers.

Legal principles involved:

Since privatization involves the state and its functionaries, several regulations are laid down as to how the privatization should be undertaken. The methods by which privatization is undertaken is governed by legal precepts.

  • It is mandatory to hold a public auction and post tender inviting applicants to bid for the proposal. The government cannot exercise discretion and sell the stake to any party. The government has to take into consideration all applications received through the mandated procedure before approving a bid. The party which is approved also has to meet specific requirements regarding the legality, functioning, and payments.
  • In cases where shares of a public company are to be sold,  disclosure has to be made in several aspects- financial, business information and other relevant information has to be disclosed by the company which may materially affect the decision of the investor on whether the investment should be made or not.
  • In cases where the government retains a minority shareholding, the government shall relinquish its control and management as well as voting rights in favor of the majority stakeholder.

Non-compliance with such directives can invoke liability under several statutes of India.

Public Reaction:

The move of the government has garnered mixed reactions from different factions of the public, and other stakeholders, such as employees, trade unions and workers. While general citizenry seems to be appreciative of the plan, almost a quarter of industry employee unions intend to strike against the decision made by the government.

The representatives of the union of BPCL, Numaligarh Refinery (Assam), Federation of Oil PSU Officers (FOPO), and Confederation of Maharatna Company (COMCO), among others, expressed their dissent over the move along with plans for individual and joint action.

To express their disapproval of the measure, strikes and protests shall be held across several unions over the year. Amongst other measures, a multitude of representatives has attempted to reach out to the government officials demanding answers; while several representatives claiming support has been offered by members of the NCP, Shiv Sena, Congress and other opposition parties, the members ensuring the representatives that the issue shall be raised in the parliament.

Conclusion: Probable way forward

While India must not follow the footsteps of Russia, Venezuela, and the Czech Republic which led to a collapse of their economies, the move made by the government is in the right direction, as it paves the way towards efficient and competitive management and control, freedom from stifling government regulations, commercial viability, etc.

The reason why the move is suitable in the present scenario is that the government smartly retained control and management over the PSUs at stake, thus creating an equitable power distribution between the private entity and government and generating revenue at the same time.

The dual objective of revenue generation and power salvaging has been achieved by way of the present move. In the future, the government should look out for potential takeovers while retaining control ad-nauseam, for the overall benefit to every faction involved. Such an objective paves a balanced path to development.

–This article is brought to you in collaboration with Tamanna Gupta from Rajiv Gandhi National University of Law, Patiala.

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