Disinvestment Policy of Government of Punjab

Government of Punjab
Department of Finance
Directorate of Disinvestment

Subject: Policy for disinvestment in Punjab.

I Background

At the time of independence, the country had a narrow industrial base, backward agriculture and nominal tertiary sector. The private sector lacked both breadth and depth, while the financial institutions were weak. In the state of Punjab, as also at the national level and in other states, it was considered desirable to develop a strong public sector. The public sector was conceived as controlling the commanding heights of the economy, providing core and critical goods and services, promoting social and economic development and providing the base for sustainable development. Over time, a large number of units were set up in the public sector in Punjab. Fifty five years after independence, it is imperative to re-examine the role of the public sector in the changed national as well as global context, as also in the context of the public sector’s own performance and the fiscal position of the state.

II. Public Sector in Punjab.

As per the report of Disinvestment Commission, 74 PSUs have been established under various statutes in the State of Punjab.

Sr.No. Description Number
1. Statutory Corporations 8
2. Statutory Boards/Authorities 14
3. Corporations under Companies Act 18
4. Boards & Corporations under Societies Act 6
5. Apex Cooperative Institutions 9
6. Subsidiaries of PSU’s 18
7. Miscellaneous entities 1
  Total 74

The Commission has covered in its report 29 PSUs along with their subsidiaries and 9 apex cooperative institutions. The Commission has classified the PSUs on sectoral basis as below:

Sr.No. Type of PSU/Apex Coop. Institutions Number of PSUs and ACIs examined by the Commission
1. Infrastructure & Industrial Sector 9
2. Agricultural Sector 10
3. Utility & Service Sector 13
4. Subsidiaries of PSUs 11
5. Already closed units 6
  Total 49

Its recommendations, in brief, for the PSUs in each sector are as below:-

  1. Disinvest

    1. PUNCOM: Disinvest.

    2. Punjab Digital Industrial Systems Ltd. : Disinvest along with PUNCOM.

    3. Spinfed: Wind up through privatization if possible, else liquidation.

    4. Conware: Sale on ‘As is Where is’ basis.

  2. Wind up

    1. Punjab Financial Corporation: Pending winding up, PFC should sell units whose possession it has taken, concentrate on recovery of NPAS and down sizing.

    2. ESPL: Wind up.

    3. PSEDPC: Wind up by transferring assets, liabilities and functions to PSIDC.

    4. Punjab Recorders Limited: Wind up through liquidator.

    5. Consumer Electronics Punjab Limited: Wind up.

    6. Punjab Bio Medical Equipments Limited: Wind up through liquidator.

    7. Punjab Electro Optic Systems Limited: Wind up through liquidator.

    8. Punjab Power Packs Limited: Wind up through liquidator.

    9. Inter-Magnetics India Limited: Transfer assets and liabilities to PSIDC, wind up.

    10. Zimag India Limited: Wind up.

    11. Weavco: Wind up through sale of assets.

    12. Sugarfed: Wind up with liquidation of 4 sugar mills and disposal/sale of 9 other sugar mills, retention of Nawanshahr sugar mill as farmers’ Cooperative.

    13. Punsup: Settlement of claims and transfer of activities to other agencies within six months and winding up.

    14. Punjab Agro Industries Corporation: Winding up, pending closure its activities be transferred to other agencies and assets be sold through public auction.

    15. Punjab Agri Export Corporation: Closure and transfer of its assets and liabilities to other agencies.

    16. Punjab State Tubewell Corporation: Winding up in phased manner.

    17. Punjab Land Development & Reclamation Cororation: Winding up through transfer of functions to Department of Agriculture and sale of assets.

    18. Punjab State Forest Corporation: Winding up by transfer of assets and liabilities to Department of Forests and Wild Life.

    19. Punjab Road Transport Corporation: Accumulated losses be made good by government, failing which winding up through retrenchment of staff.

    20. Punbus: Winding up.

    21. Punjab Health Systems Corporation: Winding up.

    22. Punjab Tourism Development Corporation: Winding up through asset sale.

  3. Substantially Restructure

    1. PSIDC: Rename as Punjab State Infrastructure and Industrial Development Corporation (PSIIDC); to function as Secretariat for the Punjab Infrastructure Development Trust. Until this happens, PSIDC should concentrate on recovery, right sizing and reducing its liabilities.

    2. PIDB: Restructure into a Trust.

    3. PSIEC: Restructure through down sizing, stop development of more focal points and eventually merge with PSIIDC.

    4. Punjab Financial Corporation: Pending winding up, PFC should sell units whose possession it has taken, concentrate on recovery of NPAS and down sizing.

    5. Markfed: Restructuring by right sizing, disinvest industrial units to strategic partner.

    6. Milkfed: Restructuring through down sizing, corporatization of Milk Plants at Ropar and Ludhiana.

    7. Punseed: Restructuring by right sizing and collaboration with strategic partner.

    8. Punjab State Electricity Board: Restructuring by down sizing, unbundling and corporatization.

    9. Punjab Water Supply & Sewerage Board: Restructuring through transfer of activities for corporation towns to the Municipal Corporations.

    10. Punjab State Cooperative Bank: Restructuring and merger with Punjab State Cooperative Agricultural Development Bank and thereafter with Housefed.

    11. Punjab State Cooperative Agricultural Development Bank: Restructuring through merger with Punjab State Cooperative Bank and then with Housefed.

    12. Housefed: Merger with the merged Punjab State Cooperative Bank and Punjab State Cooperative Agricultural Development Bank, with down sizing.

    13. Punjab Scheduled Caste and Land Development Corporation: Merge with Bakfinco along with right sizing.

    14. Backfinco: Merge with Punjab Scheduled Caste and Land Development Corporation, along with right sizing.

    15. Punjab Ex-Servicemen Corporation: Restructuring through right sizing staff strength.

    16. Puncofed: Restructuring through right sizing.

  4. Retain

    1. Punjab Police Housing Corporation: Retain.

    2. Punjab Warehousing Corporation: Retain till MSP is in operation.

III. Analysis of PSU functioning:

It may be noted from the above that the PSUs, which have been set up over the past several decades in the State, are functioning in many different areas. However, the functioning of these units leaves much to be desired. The State Government had decided that the PSUs and Apex Co-operative Institutions should give at least a modest return of 4% on the equity invested by the State Government. However, none of the PSUs except Punjab Small Industries and Export Corporation, HOUSEFED, MARKFED, Punjab State Cooperative Bank, Punjab State Cooperative Agricultural Development Bank and MILKFED have paid any return up to 31.3.2001. The Government has so far received only a small amount of Rs. 8.40 crore as dividend on the huge investment of over Rs.3300 crore in these PSUs and Cooperative Institutions. This investment does not include loans provided by the Government, which stood at Rs. 4864.25 crore as on 31.03.2001. The outstanding loans of other Institutions were Rs. 19464.95 crore as on 31.03.2001, and out of these loans Rs. 18707.12 crore were against Government Guarantee. The fiscal position of the state does not permit any more profligacy. The State Govt. is not only unable to provide further budgetary support to the PSUs, but has also to ensure that loans guaranteed do not devolve upon the govt., else the State will suffer financial collapse. In the context of the changing environment, therefore, there is need to take a policy decision as to the sectors which can be considered core or strategic sectors, where continuance of the public sector is still required, as against those sectors where the private sector is now operating in strength and the activities are not of core or strategic nature, so that the continuance of the public sector may not be warranted.

  1. Manufacturing Activity:

  2. The subsidiaries of PSIDC and PSEDPC are engaged in manufacturing activities in sectors where there is no core or strategic reason for continuance of the public sector. The products being manufactured by them are also being manufactured by a large number of private companies and the presence of these public sector undertakings is neither resulting in better quality nor greater affordability of these units and in any case, the products are not in the nature of essential items. Without any doubt, therefore these units do not need to be retained in the public sector and should be disinvested to the private sector where possible or wound up/liquidated in other cases. Further, there should be no new PSUs established in the manufacturing sector.

  3. PSUs set up for industrial promotion:

  4. PSIDC, PFC, PSEDC and PSIEC were set up to promote industry in the state through grant of capital subsidies, concessional finance, supply of raw material etc. The policy frame work has now substantially changed. The State is no longer in a position to provide capital subsidies and nor is it meaningful to do so any longer, as the critical requirement for industrial growth is no longer availability of such incentives but adequate infrastructure. Similarly, providing concessional finance through State financial institutions can no longer be justified in the presence of a vibrant private sector with much lower administrative costs. All these PSUs need, therefore, to reorient their functioning and eventually merge into a single promotional and regulatory body. In the mean while, however, they have a large number of non performing and under performing assets and should, therefore, concentrate on effecting recoveries. There should be no pressure to continue with the past operation and the sole basis of assessment of their performance now should be the recoveries effected.

  5. PSUs engaged in procurement operation:

  6. Punsup, Warehousing Corporation, Punjab Agro Industries Corporation and Markfed, to the extent that they are currently engaged in MSP based operations, must continue these activities as long as the Govt. of India policies remain unchanged in this regard. However, any industrial activity, for instance in the case of Markfed, must be divested immediately.

  7. Agricultural Promotion PSUs

  8. Punjab State Tubewell Corporation, Punseed, PLDRC and Punjab State Forest Corporation were set up for various activities relating to agricultural promotion but have proven unequal to the task and should, therefore, be closed as soon as VRS/Retrenchment package becomes available.

  9. Power Sector

  10. The Punjab State Electricity Board is responsible for generation, transmission as well as distribution of electricity through out the state. As a result both of inadequate tariff realization as well as operational and financial weaknesses of the Board, the power situation in Punjab has become a serious cause of concern. A strategy for reform in the power sector needs to be urgently put in place, keeping in view the international and national experience in this regard, as well as the special features of the State.

  11. Transport Sector

  12. PRTC, Punbus and even Punjab Roadways, although the last is not a PSU but a departmental undertaking, should be progressively privatized, as a large number of private players are now willing and able to provide transport service in the State. However, it would be desirable to establish a Transport Regulatory Authority or Infrastructure Regulatory Authority in order to ensure that the interest of all the stake holders are properly balanced.

  13. Tourism Promotion

  14. PTDC is, in fact working not so much for promotion of tourism in the State as for running a chain of hotels/restaurants. In the context of wide spread availability of these facilities in the private sector, there is no justification for continuing with this none core activity in the public sector. The role of Tourism promotion can be performed equally well by the industrial promotion organisations.

  15. PSUs performing Welfare activities

  16. The Scheduled Caste and Backward Classes Corporations may continue but could be merged for better service delivery and economies of scale. The Punjab Ex-Servicemen Corporation can be professionally managed by the ex-servicemen themselves.

    Punjab Police Housing Corporation should continue only as long as there is substantial activity in police housing and should be flexible enough for early closure as soon as funds flow dries up.

  17. Cooperative Institutions

  18. To the extent that cooperative institutions like Sugarfed, Spinfed, Weavco and Milkfed are engaged in manufacturing activities, the state should disinvest its stake in favour of the cooperative sector or strategic investor.

    Financial Institutions in Cooperative Sector have shown significant weakness in states like Maharashtra and it is desirable that the state government should exit from these institutions at the earliest.

  19. Closed Units

  20. Govt. of Punjab has decided, over the past decade, to close down six units, namely; Punjab State Leather Development Corporation, Punjab Textile Development Corporation, Punjab Film & News Corporation, Punjab Hosiery and Knitwear Corporation, Punjab Poultry Development Corporation and Punjab Women & Children Development Corporation. However, these decisions remain unimplemented till date. Steps must be taken urgently to effectively close down these units.

IV. Objective

The primary objectives for disinvestment are as follows:

The other benefits expected to be derived from disinvestment are:

V. Policy towards Public Sector in Punjab

The following policy has, therefore, been adopted towards the public sector in Punjab.

  1. The public sector in the state is not engaged in such core or critical activities where national or state interest would dictate that the public sector must necessarily continue.

  2. At the same time several sectors for instance; power, transport, industrial promotion, procurement operations and welfare of the weaker sections are such where it would not be desirable for the state PSUs to immediately withdraw. Even in these sectors, however, progressive privatization must be considered, there must be no expansion of the public sector and restructuring/down sizing should be given effect to.

  3. All such units, which are engaged in the manufacture of goods, must be disinvested immediately. As the units are generally small and the shares generally are not listed on the stock exchange, the route of strategic sale rather than sale of equity to the general public would be the preferred route.

  4. Within the general framework outlined above, the Cabinet Committee on Disinvestment would take a decision in each case to wind up/restructure/privatise/retain each PSU, which will be final. The Core Group of Officers on Disinvestment chaired by the Chief Secretary, would issue directions to the administrative department and the Directorate of Disinvestment for implementing the decision of the Cabinet Committee on Disinvestment, and this decision would be binding on the administrative department and the PSU.

  5. Decision of the Govt. of Punjab regarding closure of certain PSUs that has already been taken in the past must be implemented immediately and the Global Advisor and other Advisors as required may be appointed for this purpose.

  6. The implementation of disinvestment decisions should be done through out sourcing in the form of appointment of Global and other Advisors as required for completing each transaction in an efficient and time bound manner.

Other Policy Decisions

The Council of Ministers, Punjab, in its meeting held on 4 June 2002, decided as follows:

(a) The existing Bureau of Public Enterprises, in the Department of Finance, may be converted into Directorate of Disinvestment under the Department of Finance. It may be headed by a Director, who should be a senior officer of the Indian Administrative Service. Minimum support of 3-4 professionals in the legal, financial and other fields may be provided to this officer by drawing suitable people from the PSUs. Principal Secretary Finance may also be designated as Principal Secretary Disinvestment.

(b) Recommendations made by the Disinvestment Commission may be processed by the above administrative structure and placed before a Core Group of officers under the Chairmanship of Chief Secretary, with Principal Secretary Finance and Disinvestment and Principal Secretary to Chief Minister as Members and the concerned Administrative Secretary and the Managing Director of the concerned PSU as co-opted Members. The Directorate of Disinvestment may also propose suo moto disinvestment in the PSUs after consulting the concerned Administrative Department and the PSU for consideration of the Core Group.

(c) The recommendations of the Core Group may be placed before a Cabinet Committee on Disinvestment for final decision. Since the size of the problem in the State is smaller than that of the Central Government, the present Cabinet Committee on Fiscal Management may also act as Cabinet Committee on Disinvestment.

(d) The Directorate of Disinvestment will be empowered to engage consultant for legal advice, valuation of assets etc., and the mode and extent of disinvestment by following a transparent procedure. There may be one or more consultants for a single case of disinvestment or a group of cases, depending upon the magnitude of the problem.

         In his Budget speech, S. Lal Singh, Finance Minister, Punjab, stated:

Despite an investment of Rs. 8234 crore in the State PSUs and Cooperative Apex Institutions, they are hardly giving any return to the Government. On the other hand, they are incurring heavy losses and their annual losses are more than Rs.185 crore. It is, therefore, proposed to effect fast-track disinvestments in the Punjab Communications Limited, Punjab Alkalies and Chemicals Limited, Punjab Tourism Development Corporation Limited, CONWARE and PSIDC’s holding in the PTL. While doing so, principles of transparency, equity and fairness would be strictly adhered to.

The Government had constituted the Punjab State Disinvestment Commission, whose Draft Report has been received and is being processed for implementation. The Commission is yet to make their recommendations for some of the PSUs. To expedite the process of disinvestment and ensure transparency, fairness and equity, the Government have decided to set up the Directorate of Disinvestment for processing the recommendations of the Commission, as also to suo moto process disinvestment proposals in consultation with the concerned Administrative Departments. After processing, the proposals would be placed before a Core Group of Officers, headed by the Chief Secretary, on whose recommendations, final decisions would be taken by the Cabinet Committee on Disinvestment, constituted under the Chairmanship of the Chief Minister, Punjab.

Scheme for Utilization of Proceeds of Disinvestment

The Disinvestment Commission has noted that the public sector undertakings in the State of Punjab fall into one or the other of the following types:-

  1. Those requiring closure and sale of their assets.

  2. TThose considered fit for outright sale as on going concerns.

  3. Those requiring restructuring of activities and/or amalgamation along with modernization of internal systems and right sizing.

In this context, the Commission has adopted the following principles:-

  1. Strategic and viable PSUs be retained.

  2. Strategic but non viable PSUs be retained if their viability can be restored by necessary measures like out sourcing of activities.

  3. Non-strategic PSUs be disinvested either by direct sale or through strategic sale.

  4. Non-strategic PSUs which can not be revived and in which no expression of interest by private parties is forthcoming, be liquidated.

The recommendations of the Disinvestment Commission regarding proceeds from disinvestment is as follows:-

"The proceeds from the disinvestment should be placed in a "Disinvestment Fund" to be managed by 'The Punjab State Asset Management Authority'. The fund will be utilized for financing restructuring, retrenchment/VRS and re-training for re-deployment of the employees of PSUs. However, the first, second and third charge on the fund would be that of retrenchment/VRS compensation, cost of re-training for re-deployment and retirement of long term debts of the PSUs so divested respectively. Moreover, State should lay down an explicit policy on the terms of VRS/retrenchment package on a stable and long-term basis."

However, elsewhere in the report in the context of disinvestment of CONWARE, Commission has recommended that :- "the expected sale proceeds of the Corporation should be used for retiring the long term debt of the State after meeting the borrowings and other liabilities of CONWARE".

The Disinvestment Commission has not given any assessment of the likely proceeds from disinvestment. However, it has estimated the quantum of terminal benefits to be given to the employees of PSUs as follows:-

Rs. In Crores
(i) PSUs recommended to be closed 645.81
(ii) Subsidiaries of PSUs recommended to be closed: 86.06
(iii) PSUs recommended to be restructured 5385.98
(iv) PSUs already closed 5.76
Total 6123.62

Even if disinvestment is carried out in totality and at one go, the amount of funds so generated shall fall far short of the requirement even for PSUs recommended to be closed, leave alone meet the restructuring requirements. In this context, a view may be taken as to whether the proceeds of disinvestment should be placed in a Disinvestment Fund to be utilized for financing restructuring, retrenchment/VRS and re-training of PSUs employees, as recommended by the Commission.

It may be noted that the view widely held, not just by economic experts but also by the discerning public, is that the proceeds of disinvestment represent capital receipts, which should be utilized either for reducing capital liability or for building fresh capital assets. The reduction of capital liabilities can take the form of retirement of public debt. It may be noted in this context that the Government of Punjab is burdened by a huge pubic debt which was Rs.28,000 crore as on 31.3.2001 and has only increased since. The debt to GDP ratio is at an unacceptably high level of over 40%. Besides, much of this debt has been contracted in the past at fairly high interest rates, resulting in an interest burden to the extent of Rs.2800 crore in the year 2001-02, amounting to almost 1/3rd of the revenue receipts of the State.

The disinvestment of companies promoted by public sector undertakings like PSIDC and ECP is also under process/in consideration. Some of these PSUs like PSIDC, are themselves weighed down under heavy debt. As this debt is largely guaranteed by the State Government, if the financial position of the PSUs does not improve, this contingent liability shall also devolve upon the State.

Besides, many of the PSUs under disinvestment would have statutory and other liabilities, for instance outstanding debt, P.F. and other dues of the employees etc., which may not be fully passed on to the strategic partner in the case of strategic sale. In the case of closure or partial asset sale, these liabilities shall, in any case, devolve upon the government.

Finally it must be kept in consideration that public funds to the extent of Rs.3397 crore stood invested by the State Government in the equity of the PSUs. Any investment in equity is based upon an expected return of at least 20 to 25%, as equity is the riskiest form of investment and therefore carries the highest risk premium. In the case of public investment, even if a return on equity comparable with that expected in the private sector is not insisted upon, yet some return on equity should become available to the State Government.

Apart from equity investment, the State Government has provided loans amounting to Rs.5033 crore as on 31.3.2001 and also guaranteed loans raised by PSUs from other sources.

In the light of the foregoing, it has been decided as follows:-