BY GADHA

VISWAMBHARAN HAFSATH

HARI KUMAR NAJIYA

NEENU

DEFINITIONPrivatisation means transfer of ownership and

/management of an enterprise from the public sector to private sector.

It also means the withdrawal of the state from an industry or sector, partially or fully.

Another dimension of privatisation is opening up of an industry that has been reserved for the public sector to private sector.

CONDITIONS FOR PRIVATISATIONLiberalization and deregulation of an

economy is prerequisite if the privatisation to take place.

Capital markets should be sufficiently developed to be

able to absorb the disinvested public sector shares.

OBSTACLES TO PRIVATISATIONGovernment want to sell least profitable

enterprises those the private sector is not willing to buy at prices acceptable to government.

Disinvestment tends to arouse opposition from employees , politicians and bureaucrats.

Relatively underdeveloped capital market makes it difficulty for government to float shares.

CONDITIONS NECESSARY FOR THE SUCCESS OF PRIVATISATIONCommitment of political leadership.There must be a multiplicity of private suppliers

for the benefit of competition to follow.Freedom of entry to provide goods and services.Public services to be provided by the private

sector must be specific or should have a measurable outcome.

Consumers should be able to link the benefit they received from a service to the cost they pay for.

Privately provided services should be less susceptible to fraud than government services.

Equity is an important consideration in the delivery of public services.

ARGUMENTS IN FAVOUR OF PRIVATISATIONIncreases efficiency.Helps government to mop up funds.Specialisation.Helps government to concentrate on essential

state functions.Capital.Better management of enterprise.Encourage entrepreneurship.Accountability.Better performance.

ARGUMENTS AGAINST PRIVATISATIONDiscards noble objectives.Concentration of economic power.Performance.Driven by profit motive.Forgoing future streams of income for

government.No guarantee of performance.Vested interest behind privatisation.Against national interest.Cannot be carried out effectively in developing

countries.

STAGES OF PRIVATISATION

As per Prof. S.K.Goyal privatisation in India has been carried out in following stages:

1.Deregulation.2.Dereservation. 3.Disinvestment4.Privatisation.

1.DEREGULATION Deregulation means removal of government

rules and regulations that constrain the operation of market forces.

In India deregulation would imply loosening of statutes like the IDRA 1951,MRTP act 1969,FERA 1973.

2.DERESERVATION Deregulation implies opening up of sectors

reserved for only public sector to private sector.

Now only two areas(defence production and railways ) are under public sector.

3. DISINVESTMENT Diposal of public sector units equity in the market

or in other words selling of a public investment to private entreprenuer.

Methods of disinvestment are- Issuance of Global Depository Reciepts.Cross-Holding:Selling part of government’s shares

in one PSU to another PSU.Warehousing: Government financial institutions

buying stake in selected PSU and holding them until a third pay emerged.

Retaining golden share: Retaining stake upto 26% in PSU.

Strategic sale method: selling major portion of share to a private party and also giving management control.

Examples:Bharat Aluminum Company Limited(BALCO)Modern Food Industries LimitedVidesh Sanchar Nigam Limited(VSNL)Hindustan Zinc LimitedMarathi Udyog Limited(MUL)Lagan Jute Machinery LimitedHotel Corporation Of India Limited (HCI)Paradeep Phosphates Limited(PPL)Grand Ashok, Delhi and Bangalore units of

ITDC Limited

PRIVATISATIONSelling majority of stake of public company to

private parties.Ways of privatisationDivestitureDenationalizationContractingFranchisingLiquidation

SINS AND PITFALLS OF PRIVATISATIONLack of proper strategy.Ambiguity of objectives.Connivance.Wrong timing. Lack of political consensus.Wrong labour strategies.Lack of political will.Poor financial strategies.Wrong environment.Prevalence of monopoly elements.Problem of cultural change.

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