A PROJECT REPORT ON

DISINVESTMENT AND PRIVATIZATION

SUBMITTED TO : -

MS. INDRANI SEN GUTPA

SUBMITTED BY : -

MUKESH CHOUDHARY

(MBA 2017 – 2019)

 PRIVATIZATION :
Definition of privatization :

The term privatization has its diversified use as it signified wide range of ideas.
Privatization, in a narrow sense, indicates an introduction of private ownership in
publicly owned and managed enterprises, but, in a broader sense, it signifies
introduction of public control and management in the public sector enterprises.

“Privatization is the general process of involving the private sector in the ownership
or operation of a state owned enterprise. Thus, the term refers to purchase of all or
part of a company. It covers ‘contracting out’ and the privatization of management—
through management contracts, leases or franchise arrangements.”

The objectives of Privatization :

 Revealing The True And Full Cost Of The Service Provided.

 Publicly provided goods and services are underpriced because of some

political and economic reasons. Politicians want to maximize their votes and
people would like to get services free of charges. So public pricing of goods
and services tends to be below the cost of production of these services.

 Promotion Of Technological Advancement Competition as a result of

privatization forces entrepreneurs to introduce new methods of production that
will generate additional output with the same amount of inputs.

 Development of Capital Markets- the main purpose foe establishing a capital

market is to withdraw some of the savings of individuals and private firms and
to lead them toward productive investment fields.

 Broadening the Wealth and Achieve Widespread Private Ownership In

Society Privatization can broaden the wealth and achieve widespread private
ownership in Turkey.

 Curbing Inflation - In many countries public economic enterprises do not work

efficiently and effectively they are usually in need of supplementary funds
from general account budget. So they cause cost-push inflation. Privatization
can be considered a disinflationary tool.

 Raising Extra Revenues for the Government.

 One of the objectives of privatization would be to raise revenues for the

government. This strategy would be important when the government
encounters financial crises.
There are many examples of privatization of companies in India such as:

 Lagan Jute Machinery Company Limited (LJMC)

 Videsh Sanchar Nigam Limited (VSNL)

 Hindustan Zinc Limited (HZL)

 Hotel Corporation Limited of India (HCL)

 Bharat Aluminium Company limited (BALCO)

Privatisation in infrastructure sector started with the modification of relevant
legislation to permit private enterprises to enter power generation in October 1991.
Reforms have been much successful in telecommunications sector. Value added
services were opened to private sector in 1992, followed by the enunciation of the
National Telecom Policy in 1994-95 which opened up basic telecom services to
competition. Foreign equity participation up to 49% was permitted in case of a joint
venture between an Indian and a foreign firm.
The Telecom Regulatory Authority of India (TRAI) was established in 1997. In order
to separate the service-providing function of publicly owned telecom enterprises and
policy-making function, both of which were initially with the Department of
Telecommunications, a separate Department of Telecom Services was set up in 1999-
2000. The two public sector service providers were corporatised in 2000-01.
International long-distance business, which was a public sector monopoly, was
opened to unrestricted entry in 2002-03.

Major impact of Privatization on Indian Economy are as under:

It frees the resources for a more productive utilisation.

 Private concerns tend to be profit oriented and transparent in their

functioning as private owners are always oriented towards making
profits and get rid of sacred cows and hitches in conventional
bureaucratic management.

 Since the system becomes more transparent all fundamental

corruption are minimised and owners have a free reign and
incentive for profit maximisation so they tend to get rid of all free
loaders and vices that are inherent in government functions.

 Gets rid of employment inconsistencies like free loaders or over

employed departments reducing the strain on resources.

 Lessen the government's financial and administrative load.

 DISINVESTMENT :

Definition of Disinvestment

At the very basic level, disinvestment can be explained as follows:

“Investment refers to the conversion of money or cash into securities, debentures,
bonds or any other claims on money. As follows, disinvestment involves the
conversion of money claims or securities into money or cash.”
Disinvestment can also be defined as the action of an organisation (or government)
selling or liquidating an asset or subsidiary. It is also referred to as ‘divestment’ or
‘divestiture.’
In most contexts, disinvestment typically refers to sale from the government, partly or
fully, of a government-owned enterprise.
A company or a government organisation will typically disinvest an asset either as a
strategic move for the company, or for raising resources to meet general/specific
needs.

Objectives of Disinvestment :

The new economic policy initiated in July 1991 clearly indicated that PSUs had
shown a very negative rate of return on capital employed. Inefficient PSUs had
become and were continuing to be a drag on the Government’s resources turning to be
more of liabilities to the Government than being assets. Many undertakings
traditionally established as pillars of growth had become a burden on the economy.
The national gross domestic product and gross national savings were also getting
adversely affected by low returns from PSUs. About 10 to 15 % of the total gross
domestic savings were getting reduced on account of low savings from PSUs. In
relation to the capital employed, the levels of profits were too low. Of the various
factors responsible for low profits in the PSUs, the following were identified as
particularly important:

 Price policy of public sector undertakings

 Under–utilization of capacity
 Problems related to planning and construction of projects
 Problems of labor, personnel and management
 Lack of autonomy

Hence, the need for the Government to get rid of these units and to concentrate on
core activities was identified. The Government also took a view that it should move
out of non-core businesses, especially the ones where the private sector had now
entered in a significant way. Finally, disinvestment was also seen by the Government
to raise funds for meeting general/specific needs.
In this direction, the Government adopted the 'Disinvestment Policy'. This was
identified as an active tool to reduce the burden of financing the PSUs. The following
main objectives of disinvestment were outlined:

 To reduce the financial burden on the Government

 To improve public finances
 To introduce, competition and market discipline
 To fund growth
 To encourage wider share of ownership
 To depoliticize non-essential services

Importance of Disinvestment

Presently, the Government has about Rs. 2 lakh crore locked up in PSUs.
Disinvestment of the Government stake is, thus, far too significant. The importance of
disinvestment lies in utilisation of funds for:

 Financing the increasing fiscal deficit

 Financing large-scale infrastructure development
 For investing in the economy to encourage spending
 For retiring Government debt- Almost 40-45% of the Centre’s revenue receipts
go towards repaying public debt/interest
 For social programs like health and education

Disinvestment also assumes significance due to the prevalence of an increasingly

competitive environment, which makes it difficult for many PSUs to operate
profitably. This leads to a rapid erosion of value of the public assets making it critical
to disinvest early to realize a high value.
 REFERENCES :
 http://www.yourarticlelibrary.com/india-2/privatisation/privatisation-in-india-
meaning-critical-analysis-and-other-details/62916

 http://www.bsepsu.com/importance-disinvestment.asp

 https://www.investopedia.com/terms/p/privatization.asp

 https://www.investopedia.com/terms/d/disinvestment.asp