PRIVATISATION - PROBLEMS & PROSPECTS

PRIVATISATION : MODES, RESONS AND PROBLEMS According to World Bank, privatisation is the transfer of ownership of state-Owned Enterprises ( SOEs ) to the private sector by sale ( full or partial ) of going conerns or by sale of assets following their liquidation. Over past few years, the Indian Government has been working towards privatisation of some state-owned enterprises in order to help diversify the economy. However, the efforts of privatisation has continued to attract criticism, particularly from the Left Parties, who seem to believe that India should not privatise. The questions to ask , therefore, are what privatisation is and what are the benefits and costs of privatisation

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MODES OF PRIVATISATION A firm can be privatised through the following modes : (i) Sale of enterprise (ii) Lease of entity ( with short term purpose ) (iii) Joint Ventures (iv) Public share offers ( example, Initial Public Offer ) The modes and methods of privatisation adopted by governments vary and include the following : (i) Strategic sale by auction method. (ii) Offer of shares through a public offering, both domestic and global, which may or may not involve a change in ownership/ management ( IPO and ADR / GDR )

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STRATEGIC SALE In a strategic sale, there is the transfer of management control of the company to the strategic partner. The strategic sale method of disinvestment enables governments to receive a higher value for the shares transferred by it, as the strategic partner pays a premium for acquiring management control of the target company. This method of disinvestment has been successfully used in Great Britain during the privatisation drive under the Thatcher Led Regime. China has also used this method for selling shares of State-Owned Enterprises ( SOEs ).

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STRATEGIC SALE DEAL - THE PROCESS Prospective and interested investors are invited by the government to put in their Expressions of Interest ( EOIs ). Government scrutinises the EOIs to shortlist the Qualified Interested Parties ( QIPs ) who meet the pre-determined net worth criteria. Therefore, the authorities ensure an unbiased selection process wherein shortlisted QIPs are allowed to conduct detailed due deligence of Public Sector Undertaking ( PSU ), including site visits, and management meets in order to satisfy themselves on the fundamentals of the PSU. The disinvestment process culminates in a biding process by auction where the QIP that puts in the highest bid would be eligible for the transfer of shares and controlling interest of the PSU concerned.

Step I : Step II : Step III :

Step IV :

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Step V : Shares are transferred by the government to the strategic partner through execution of share purchase agreement. Step VI : For the purpose of effective management control of the target company, government and the strategic partner execute a shareholders agreement that grants them rights on certain critical items of business at the general meetings of members as well as the meetings of board of directors. Step VII : Ordinarily, QIPs are given sufficient opportunity to put across their points and concerns. NOTE - In India, the route of strategic sale method has been the preferred choice over that of public offerings. - This is on account of the perception that the Indian Capital Markets is not as well-developed as those of the developed world, thereby preventing government from getting the full value for the sale and disinvestment. - US and Europe have also followed similar routes.

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REASONS FOR PRIVATISATION To Reduce the Burden on Government To Strengthen Competition and Efficiency To Improve Public Finances To Fund Infrastructure Growth Accountability to Shareholders To reduce Unnecessary Interference More Disciplined Labour Force

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PROBLEMS OF PRIVATISATION Ownership to a Privileged Few Labourers would be at the Mercy of the Owner

Price and Ignorance Factors

Lack Of Social Responsibility

Loss of Experienced Managerial Expertise

Difficulties in the Process of Privatisation

POLITICAL SYSTEM ( Majority - Opposition - Coalition ) UNION POWER ( Labour Unions ) SOCIAL INSTITUTIONS ( against job losses )

CORRUPTION
MISUSE OF POWER BY NEW OWNERS

PRIVATE MONOPOLY CREATION

PRIVATISATION IN UK
The privaisation programme carried out by Margaret Thatcher government in the UK has been a Trend Setter and Bench Mark for all programmes of its kind pursued by the various governments around the world today. MOTIVES

Ideological : Enables Restructuring and Better Professional Management

Economic : Reduce the power of monopolistic firm and encourage competition. Managerial : Privatisation programme holds substantial advantage for the management of the industries, their employees, the consumer and the tax payer