Selling off public sector enterprises could be the key to strengthening a sluggish economy, writes Subir Bikas Mitra. Will a new privatization drive succeed where earlier attempts have failed?

Aatma Nirbhar Bharat Abhiyaan (ANBA), which literally means self-reliant India mission) is the vision of Prime Minister Narendra Modi to build an autonomous nation against vigorous global competition. But a self-reliant India should not be construed as cutting the country off from rest of the world.

So, just what are the benefits of ANBA (another Make in India initiative) with specific regard to disinvestment of public sector enterprises (PSEs) through the Department of Investment and Public Asset Management? And how will applicable laws and regulations change with this reclassification process?

A brief history

Modi underlined his vision to make India a self-reliant nation based on five pillars – economy, infrastructure, system (technology-driven arrangements), vibrant demography and demand.

In 1948, the industrial policy envisioned a greater role for the government in all areas/sectors and categorized them as:

  1. Exclusively controlled by the government, e.g., manufacture of defence equipment, atomic energy and railways;
  2. Government and private sectors co-existing, e.g., coal, iron and steel, aircraft manufacturing, ship building, telephone manufacturing, telegraph and wireless apparatus, and mineral oils; and
  3. Other sectors where the government can only enter to enhance growth.

However, the government has entered various sectors and industries that are not under its control, such as fertilizers, tourism, chemicals, information technology, construction, pharmaceuticals, etc. This created stress on the public purse, as many of these industries have been hit by financial trouble due to things like changing technologies, user habits or intense competition from private enterprises. The government had no option but to try to enhance growth and this was only possible by opening more areas for private companies.

Fallout of loss-making PSES

The Public Enterprises Survey shows that in 2018-2019, 70 central public sector enterprises (CPSEs) recorded total losses of ₹316 billion (US$4.3 billion) in the 2019 financial year. Also, three companies – BSNL (₹149 billion), MTNL (₹33 billion) and Air India (₹84 billion) – accounted for 84% of the losses.

The size of many PSEs makes them significant enough to warrant a serious discussion. As per a report by the Comptroller and Auditor General of India (CAG), tabled last year, the government had invested ₹3.57 trillion in the shares of 420 government companies and corporations towards the end of March 2018. The market value of shares held by the government in 42 listed PSEs was ₹13.63 trillion.

The CAG report states that there were 184 CPSEs with accumulated losses of ₹1.42 trillion at the end of March 2018. Of these, 66 were undergoing winding-up, liquidation or strategic disinvestment. Further, 77 CPSEs had negative net worth amounting to ₹831.2 billion. Taking all these circumstances into consideration, it is essential to privatize such volatile government entities, which are financially burdened and adversely affecting the public purse, to make them self-reliant.

A new PSE policy is in the works with plans to privatize all PSEs except the ones functioning in certain strategic sectors. As part of reforms under the ANBA, the changes for PSEs will be:

  • In strategic sectors, at least one enterprise and a maximum of four entities will remain in the public sector, but private sector participation will also be allowed;
  • In other sectors, PSEs will be privatized (timing to be based on feasibility); and
  • For minimization of wasteful administrative costs, the number of enterprises in strategic sectors will ordinarily be only one to four; other enterprises will be privatized, merged, or brought under the holding companies.

Other highlights of ANBA

Definition of MSMEs. As per the June 2020 government notification introducing changes to the Micro, Small and Medium Enterprises (MSME) Development Act, 2006, the definition of MSMEs will change. According to the proposed definition, the investment limit will be increased from ₹2.5 million to ₹10 million for micro enterprises, from ₹50 million to ₹100 million for small enterprises, and from ₹100 million to ₹200 million for medium enterprises. Also, a new criterion for annual turnover will be introduced. The turnover limit for MSMEs will be ₹50 million, ₹500 million and ₹1 billion, respectively. The current distinction between manufacturing and services MSMEs to provide different investment limits for each category will be done away with.

Initiation of insolvency proceedings. The Insolvency and Bankruptcy Code, 2016, will be amended to include the following: (1) a minimum threshold to initiate insolvency proceedings is to be increased from ₹100,000 to ₹10 million; (2) a suspension of fresh initiation of insolvency proceedings for up to one year, depending on the pandemic situation; and (iii) covid-19-related debt to be excluded from the definition of “default” under the code for triggering insolvency proceedings.

Amendments to Companies Act, 2013. The Companies Act, 2013, will be amended to provide for the following:

  1. Under the Companies Act, 2013, decriminalization of certain acts, which will include minor technical and procedural defaults such as shortcomings in corporate social responsibility reporting, inadequacies in board reports, filing defaults, and delays in holding of annual general meetings (AGMs). Several compoundable offences will be moved to the internal adjudication mechanism.
  2. Presently, certain provisions from the Companies Act, 1956, continue to apply to producer companies. These provisions will be included in the Companies Act, 2013. The National Company Law Appellate Tribunal (NCLAT) will be granted powers to make the additional/specialized benches. All defaults by small companies, one-person companies, producer companies and startups will be subject to lower penalties.

Methods for privatization

Delegation. Through contract, franchise, lease or grant, etc., the government keeps the ownership and therefore the responsibility of an enterprise. Handling of daily activities and the delivery of products and services will be taken care of by a private company. The state will continue to be an active participant in the process.

Divestment. The government will be selling off a majority stake of the enterprise to one or more private companies. It may keep some ownership, but will be a minority stakeholder within the enterprise.

Displacement. The first step in this concept will be deregulation.

Private players will be allowed to enter the market, and slowly and progressively the private company will displace the public enterprise. The private sector will become competitors of the public companies, and ultimately outperform them, which will result in their displacement.

Disinvestment. This relates to a direct sale, of a portion to a whole of a public enterprise, to private parties.

Government v private company

Definitions and legal aspects. Government companies and private companies are both diverse constitutions under the Companies Act, 2013. As stated in section 2(45) of the Companies Act 2013, a government company is one in which at least 51% of the paid-up share capital of the company is held by a government, central authority or state, wholly or partly, and also includes a subsidiary company of such a government company.

Compliance/regulatory framework. As per the Companies Act, the rules applicable to government companies and private companies vary from each other. For government companies, the CAG appoints an auditor, whereas for private companies, the board of directors appoints the auditors of the company. According to section 394 of the act, the annual report on the working and affairs of the company will be processed within three months of the AGM, and after preparation of the report it will be placed before both houses of parliament, along with the audit report of the CAG. Such rules are pertinent solely to government companies, to restrain the functioning and commercial viability of the said entity.

Ease of doing business. An exhaustive plan that acknowledges the entire PSE ecosystem to deliver a solution is certainly embraced. In recent times, the government has been progressively dependent on funds raised through PSU (public sector undertaking) divestment, and the dividends from these companies that have led to ad hoc stake sales to the public, cross-selling among PSEs, buybacks, etc. Reallocation of resources for key areas such as health and education will be helped by the refurbishment of government ownership in the PSEs.

Judicial challenge

In 2003, the government raised a proposal for the sale of its shareholding in Hindustan Petroleum Corporation Limited (HPCL) and Bharat Petroleum Corporation Limited (BPCL). The proposal has been challenged in the Supreme Court because it violated the provisions of the laws that transfer the ownership of assets to the government (which later resulted in the formation of these PSUs).

For instance, BPCL was established by nationalizing the company Burmah Shell through an act of parliament, and fusing its refinery and marketing companies. On this point, the ruling of the court was that the central government cannot continue with the privatization of HPCL and BPCL without amendments to the concerned laws. So the government continues to hold the majority stake, directly in BPCL, and indirectly in HPCL (through another PSU, the Oil and Natural Gas Corporation).

The five companies that received approval for privatization include BPCL and Shipping Corporation of India (SCI), into which two nationalized companies, the Jayanti Shipping Company and the Mogul Line, were merged. The relevant nationalization acts for this purpose have been repealed in the past five years.

Between 2014 and 2019, the parliament passed six repealing and amending acts, which repealed 722 laws. These comprised laws through which the ownership of the companies was transferred to the central government, which later formed BPCL, HPCL and Oil India. The laws that had transferred ownership of the companies to the central government were also repealed, which indicates that now the privatization of these public companies can be undertaken by the government.

Aatma Nirbhar Bharat Abhiyaan,Prime Minister Narendra Modi,Disinvestment?Cases of privatized CPSEs

Hindustan Zinc. A good example of privatization and its after-effect on the enterprise is Hindustan Zinc. In 2002, the Atal Bihari Vajpayee-led BJP government sold 45% of the shares in Hindustan Zinc for ₹7.6 billion. The 30% stake that the government retained was valued at more than ₹200 billion. The company was the world’s second-largest zinc-lead miner, and one of the top 10 silver producers in the world. Management changes and privatization can thus give rise to shareholder wealth through improved efficiency.

Bharat Aluminium Company Ltd (BALCO). BALCO, a fully integrated aluminium producing company, has its own captive mines, an alumina refinery, an aluminium smelter, a captive power plant and downstream fabrication facilities. The company was set up in 1965, with its corporate office in New Delhi. The main plant and facilities of the companies are located at Korba, in Chhatisgarh. It also has a fabrication unit located in Bidhanbagh (West Bengal). BALCO has a refining capacity of 200,000 tonnes per year and a smelting capacity of 100,000 tonnes per year. In March 2001, it had more than 6,400 employees.

Benefits for BALCO employees

  1. From 31 July 2001 to 16 August 2001, a voluntary retirement scheme (VRS) was introduced by the new management. A total of 956 applications for VRS were accepted, mostly where units were lying closed. An ex gratia payment of ₹5,000 was made to all employees, despite the loss of ₹2 billion that occurred due to an employee strike.
  2. On 7 October 2001, a long-term wage agreement was entered for a period of five years (wage revision was due since April 1999, and the earlier revision was for 10 years) as follows: Workmen get a guaranteed benefit at the rate of 20% of the basic pay. Increase in allowances: Night shift allowance ₹10 – ₹20/shift; canteen allowance ₹400/month (instead of subsidized canteen facilities); education allowance ₹50-₹75 per month; hostel allowance ₹150-₹200 per month; scholarship amount to meritorious children doubled; leave travel assistance of around ₹6,000 as cash every year; conveyance allowance: scooter users ₹400-₹500 per month, moped users ₹240-₹350 per month, other users ₹150-₹260 per month.
  3. New practices introduced: Job rotation and an appraisal system.

An investment of ₹60 billion was proposed by the new management, which would mainly increase production by four times. In the case of BALCO Employees Union (Regd) v Union of India, BALCO employees had pleaded the loss of their rights and protections under articles 14 and 16 of the constitution. However, the Supreme Court called the process of disinvestment a policy decision that involved complex economic factors and refused to interfere in the economic decision taken by the government.

Privatization: a trade law perspective

The Principle of General Prohibition of Quantitative Restrictions of the General Agreement on Tariffs and Trade (GATT) stipulates that: “No prohibitions or any kind of restrictions other than duties, taxes or other charges shall be instituted or maintained by any contracting party.” One of the reasons for the prohibition on quantitative restrictions is that they are treated to have a greater protective effect than tariff measures, and are more likely to distort the free flow of trade.

The agreement on Trade-Related Investment Measures (TRIMs) states that certain investment measures can have trade-restrictive and distorting effects. It states that no member shall apply a measure that is prohibited by the provisions of GATT article III (national treatment) or article XI (quantitative restrictions).

Thus, an international investor that meets the significant criteria under the PSE policy may not be contradicted the opportunity to invest in the PSE. However, PSEs may not be termed as true “Aatma Nirbhar” if international players are controlling them. Further, as per the current financial situation, Indian individuals or groups may be reluctant to invest in PSEs, which may result in lower investment capital than the government has anticipated under the privatization policy.


The privatization of PSEs has become the need for economic development and for the purposes of ease of doing business. Therefore, it is essential that our policy should strike a balance between the concept of the welfare state and privatization of the economy. Certain critical and sensitive sectors that require proper state control should continue to function in a PSE setup, and competition within PSEs needs to be eliminated given that the cost of expenses arising from inter-PSE competition are borne by the public purse.

Further, the regulator should be empowered so that anti-competitive and unfair trade practices can be eliminated for the protection of consumer interest, along with the enhancement of the ease of doing business.