BBA Discuss the various Methods implemented to Achieve Objectives of Disinvestment in India and also explain the problems faced by public sector enterprises in india

Question: Discuss the various Methods implemented to Achieve Objectives of Disinvestment in India and also explain the problems faced by public sector enterprises in India.

Answer: In order to achieve the various objectives and goals of disinvestment many methods have been formulated and implemented. These include:

(a) Public Offer:

Offering shares of public sector enterprises at a fixed price through a prospectus. The offer is made to the general public through the medium of recognized market intermediaries. Initially equity was offered to retail investors through domestic public issues. This was followed by issuance of the Global Depository Receipts (GDRs) to tap the overseas market.

(b) Sale of Equity:

The equity should be sale through auction of share amongst pre-determined large number of clientele. The reserve price for the public sector enterprises (PSE)’s equity can be determined with the assistance of merchant bankers.

(c) Offer for Sale:

Offer for sale, determining the fixed price for sale of a public enterprise, inviting open bidders and accepting highest bidder’s quotation for sale.

(d) Cross Holding:

In the case of cross holdings, the government would simply sell part of its shares of one PSU to one or more PSUs.

(e) Golden Share:

In this model, the government retains a 26 percent share in the PSU. This 26 percent share will continue to give the Government the status of majority shareholder.

(f) Warehousing:

Under this model, the government owned financial institutions were expected to buy the government’s share in select PSUs and holding them until third buyer emerged.

(g) Strategic Sale:

Of late, Government is pursuing the strategic sale method. Under this method, the government sells a major portion (51 percent and above) of its stake to a strategic buyer and also gives over the management control. Disinvestment price will be market based and not prefixed and PSUs shares will be under the department of Disinvestment.

Table 1: Targeted and Actual Disinvestment:

Year	Targeted Receipts	Actual Receipts
1991-92	2,500	3,038
1992-93	2,500	1,913
1993-94	3,500	Nil
1994-95	4,000	4,843
1995-96	7.000	362
1996-97	5,000	380
1997-98	4,800	902
1998-99	5,000	5,371
1999-00	10,000	1,829
2000-01	10,000	1,870
2001-02	12,000	5,632
2002-03	12,000	3.348

2003-04	14,500	15.547
2004-05	4,000	2,765
2005-06	—	1,570
2006-07	3,840	—
2007-08	1,651	4,000
Total	1,02,291	53,370

Some of the problems of financial management in public understandings are as follows:

1. Lack of proper planning:

Public sector undertakings spend too heavily on construction as well as designing. It is primarily because there is a lack of proper planning.

This lack of proper planning results in heavy drainage of funds and thus there is serious financial problem in the wake.

2. Unfavorable input-output ratio:

Public sector undertakings are heavily over-capitalised with the result that there is unfavourable input-output ratio. Inadequate planning, inordinate delays in construction etc., are the causes for over-capitalisation.

3. Cost of capital:

At present in public sector undertakings cost of capital does not include cost of raising capital of different types and this cost is not reckoned at market price. This results in underestimating the cost of the capital. Consequently, it leads to non-realistic fixing of prices and the underestimating market trends. Even it becomes difficult to estimate the extent of profits and losses as well.

4. Problem of pricing:

Another problem of a public sector undertaking is that of fixing the prices of the goods produced. As we know that unless pricing policy is sound even good concerns can run into losses. The public sector undertakings in India are facing serious financial problems as they are not following uniform pricing policy.

5. Problem of surpluses:

In the financial field another problem is that of declaring surpluses. From surplus we mean the resources available as surplus, after deducting working expenses, normal replacements, interest payments and dividends. But again in the public sector undertakings it has not been found possible to device a policy of declaring surpluses. No clear cut principles in this regard have been laid down by the Government for the guidance of public sector undertakings.

6. Problem of raising loans:

All public sector undertakings are run with the finance of the Government. Now this has in turn raised many problems. Sometimes Government may feel it difficult to finance public sector undertakings such cases, if these undertakings depend on capital market, they bound to disturb financial structure of the market.

7. Problem of budgeting:

Still another problem is that of budgeting. It is seen that most of the public sector undertakings have no serious budgeting system. The budgets are of course prepared, but these are primarily with a view to obtaining funds from the Government.

The budget estimates are kept very high providing for a margin for cuts and when cuts are not made to the extent to which these have been incorporated the estimated budgets the whole exercise becomes unrealistic.

That is why usually there is wide difference between estimated budgets and actual expenditure. Not only this, but there is another problem namely that in a public undertaking in India expenditure is not linked with the performance and targets achieved.

8. Problem of delegation of authority:

It is seen that usually there is no delegation of authority in a public sector undertaking with the result that prior concurrence of the competent authority is to be obtained for incurring some expenditure. This results in overloading a person with work and in the wake he can commit many mistakes as well.

9. Internal audit:

Accounts of every public sector undertaking are regularly audited. The main purpose of such an audit is that main financial irregularities are brought to light so that these are not committed again and again. But in the field of finances, internal auditors create many problems.

Instead of smoothening everything, they try to create complications and bundles and in many cases internal audit proves more difficult a nut to crack than the external or outside audit to crack than the external or outside audit which is done by statutory authorities.

10. Role and responsibilities of financial advisor:

Whether it is public or private sector undertaking it is most desirable that the finances should be properly checked and controlled. In public sector undertaking such an officer is said to be responsible for creating many problems.

He does not consider himself part of the whole management system. He feels that his sole responsibility is to observe financial rules without caring for the difficulties which their observance will create. He does not feel himself part of whole system but thinks himself outside the system, which is bound to result in many serious problems and complications.

11. Problem of inventory holdings:

In all public sector undertakings inventory holding is very high; it has been estimated than on the whole in public sector undertaking inventory holdings is far higher than even the working capital. In some undertakings inventory is more than 2 years production with the result that cores of rupees are held up for nothing sake. Such an inventory obviously influences adversely capital output ratio.

12. Problem of calling Reports:

One more problem which public sector undertakings quite often face is that of submitting reports to the administrative ministry. Each ministry calls for too many reports, both from the financial as well as administrative management. Attention of financial management is diverted to these statements. This becomes irritating because administrative machinery does not put to use the reports for which these are called for.

13. Problem of performance:

Whether a financial management is working successfully of not that should be link with its performance. Similarly financial management should also be judged by the economies which it has affected without prejudicing efficiency or hostilities of the workers. But again financial management is faced with many problems, it is of course criticised everywhere, but so far there are no means and methods on which performance can be tested.

14. Disinvestment policy of the Government:

As a part of privatization, the Govt. has been following the policy disinvestment, where public sector undertakings are slowly becoming private. In fact a ministry is there to look after disinvestments in public sector. If this trend continues, except few, many public sector undertakings may become private, in the days to come and new problems may creep in such organizations.