Utilisation of Privatization Proceeds

Feb 3 • Group Discussion • 3263 Views • 2 Comments on Utilisation of Privatization Proceeds

Privatization basically defines a term in which the ownership of a property, organisation or business are transferred from a government  entity to a private  entity.Most companies start as private companies funded by a small group of investors. As they grow in size, they will often access the equity market for financing or ownership transfer through the sale of shares.

Under the Indian planning system public sector investments are financed through financial allocation by the government.Privatization of public enterprises could take anyone of the following forms :

(i) Divestment of government-held equity to

(a) strategic venture partners through open bidding.
(b) financial institutions (foreign, public sector and mutual funds); or
(c) general public
(ii) Promotion of joint ventures for further expansion or through transfer of
certain existing units/operations;
(iii) Entering into management contracts with private professional groups
(iv) Nomination of private individuals on Board of Directors of PSEs even when their equity is insignificant.
(v) Contractualisation of operation

The entry of new private sector enterprises could introduce competition where public sector enjoyed monopoly. The existing public enterprises (PSEs) would be forced to go commercial and respond to the market discipline. The dereservation process has sometimes been described

as ‘Parallelization’ in the privatization framework. Privatization is also witnessed when governments take a decision to reduce their obligations to regulate and direct the behavior of private actors in the economy. Pursuance of deregulation policies is aimed to make the restrictive regulatory system less important. In India, deregulation would imply loosening such statutes like the Industries (Development & Regulation) Act, 1951 (IDRA), Monopolies & Restrictive Trade Practices Act, 1969, (MRTPA), Foreign Exchange regulation Act, 1973(FERA), Capital Issues Control and technical scrutiny by the Directorate General of Technical Development (DGTD).

Privatization in Inida has been carried out in several stages; such as, deregulation,dereservation, privatisation and disinvestment.

IPS 1991 announced a number of important steps with regard to the public sector. The areas reserved for the public sector under Schedule A to the Industrial Policy Resolution,1956 were reduced, initially from seventeen to eight, and later to four. The remaining four areas related to defence equipment, atomic energy and associated minerals, and railway
transport . Schedule B in which public sector was to play the lead role wasentirely dispensed with to enable greater private sector participation and to provide competitionto the PSEs. Following the dereservation of public sector reserved areas, a number of local and foreign companies received approvals for entry into the energy and telecommunication sector.

Context of Privatization
Soon after the initiation of development planning in India it became evident that the public sector was an economic necessity for the economy and the private sector. Public sector was envisaged as a major instrument for pursuance of plan targets. It was universally accepted that the Indian private sector was neither capable of making the necessary large
investments nor was it expected to take up projects with long gestation periods and carrying low rates of return.

Disinvestment as a form of privatization
The process of privatization in terms of removal of administrative controls and regulations was discussed in the preceding paras. The process is, however, more frequently associated with transfer of public enterprises to the private sector.The process of disinvestment in CPSEs was initiated soon after announcement of the IPS 91.

Some of the public sector enterprises have closed down certain of their activities bysubcontracting them to private parties. Contractualisation of specific tasks has been assistedby the general ban imposed by government on new recruitments.

Consequences of privatization
Each form of privatization has differing implications for the labour, consumers and the economy. Dereservation, for instance, is likely to have little immediate adverse impact on employment. Dereservation, because of the removal of entry barriers, may motivate additional investments and offer enlarged employment opportunities. It is, however, possible that new
private sector entrants may indulge in ‘poaching’ of senior and experienced employees of the public sector by offering attractive emoluments. The outgoing public sector employees would

Regulatory bodies
Privatization of large public enterprises and entry of reserved areas has the potential of giving rise to establishment of private monopolies. The interest ofthe consumers may therefore have to be protected from the normal instinct of privatemonopolies to exploit consumers in order to maximise their profits.

The last two decades have seen widespread criticism of the performance of the Indian public sector and this too on many counts. The criticism of the public sector in Parliament, by expert committees and by independent observers has to be taken. Government’s response has been to put a ban on new recruitments.

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