Government Policy on Disinvestment/Privatization

The government's policy on disinvestment and privatization has evolved since the initiation of reforms in 1991. Key elements of this policy include:

1. Divestment for Raising Funds:
• The primary objective is to divest shares to raise capital and achieve other associated advantages.
2. Listing Unlisted Public Sector Enterprises:
• Mandate the listing of all unlisted public sector enterprises and sell a minimum of 25 percent of equity to the public, as per SEBI regulations.
3. Share Buyback:
• Utilize share buyback mechanisms for certain enterprises, such as Coal India Limited (CIL) and Engineers India Limited (EIL).
4. Restructuring and Reviving Viable PSUs:
• Implement measures to restructure and revive potentially viable Public Sector Undertakings (PSUs).
5. Closure of Non-viable PSUs:
• Close down PSUs that cannot be revived or sold, focusing on efficiency and viability.
6. Worker Interest Protection:
• Fully protect the interests of workers during the disinvestment process.
7. Strategic Disinvestment Recommendations by NITI Aayog:
• NITI Aayog has recommended strategic disinvestment for many sick and other public sector units.

Strategic and Non-strategic Classification:

The government has classified Public Sector Enterprises into strategic and non-strategic areas for disinvestment purposes. Strategic Public Sector Enterprises are those operating in areas such as arms and ammunitions, defense equipment, defense aircraft, warships, atomic energy (with specific exceptions), and railway transport. All other PSEs fall under the non-strategic category.

Buyback of Shares:

Buyback is a corporate action in which a company repurchases its own shares from existing shareholders, usually at a price higher than the market price. This results in a reduction in the number of shares outstanding in the market.

Advantages of Buyback:

1. Additional Exit Route:
• Provides an additional exit route to shareholders, especially when shares are undervalued or thinly traded.
2. Consolidation of Stake:
• Enhances the consolidation of stake in the company, as the proportion of shares owned by the company increases.
3. Returning Surplus Cash:
• Enables the company to return surplus cash to shareholders, contributing to effective capital management.
4. Supporting Share Price:
• Supports the share price during periods of sluggish market conditions by reducing the number of shares available in the market.

Government's Encouragement:

The government encouraged cash surplus Public Sector Undertakings (PSUs) to opt for share buybacks to meet disinvestment targets. The funds for the buyback were sourced from the internally generated cash resources of the company. In this process, the government, being a major shareholder, benefited as it sold its shares in the companies.

Examples of PSUs Undertaking Buyback:

• Indian Oil Corporation (IOC)
• Oil and Natural Gas Corporation (ONGC)
• Bharat Heavy Electricals Limited (BHEL)
• Neyveli Lignite Corporation (NLC)
• Oil India
• Coal India
• NMDC
• HEG
• NHPC
• Engineers India Limited (EIL)
• National Aluminium Corporation (Nalco)

These public sector companies utilized the buyback mechanism as a strategic financial move.