Types of Public Sector Enterprises (PSUs)
| Sr. No. | Type | Set Up | Finance | Examples |
|---|---|---|---|---|
| 1 | Departmental Undertaking (for specially defined functions) | Executive action | Annual budget | Railways, Postal Department |
| 2 | Statutory Corporation (for economic and manufacturing activities) | Statutory | Own revenues | ONGC, IOC |
| 3 | Control Boards | To manage government projects | – | River valley projects |
| 4 | Government Companies | 51% government holding; Companies Act, 2013 | – | – |
| 5 | Cooperative | To support cooperative movement; 65% capital by the Centre | – | IFFCO |
Industries Reserved Exclusively for PSUs
- Atomic Energy.
- Minerals specified in the schedule to the Atomic Energy (Control of Production and Use) Order, 1953.
- Railway passenger transport.
Disinvestment
- Sale of government shares to retail public, employees, mutual funds, or FIIs.
- No change in management if the government holds >51%.
- Even if shareholding falls below 51%, shares are distributed to ensure no investor takes over management.
Privatization or Strategic Sale
- The government sells a significant equity chunk (26%, 51%, or more) to a single buyer, transferring management control.
Corporatization
- Government units are reorganized along business lines.
- Operate on commercial principles:
- Pay taxes.
- Raise capital from markets without government support.
Valuation of PSE Shares
- Done using the Discounted Cash Flow (DCF) model.
- DCF Model: Values a business today based on its future profit or cash flow stream.
Strategic PSUs
- Arms, ammunition, defense equipment, defense aircraft, and warships.
- Atomic energy.
- Railway transport.
Buyback of Shares
- A corporate action where a company repurchases its shares from existing shareholders, usually at a price higher than the market price.
- Impact:
- Reduces the number of outstanding shares in the market.
- Increases the company’s percentage ownership of shares.
- Reasons for Buyback:
- Additional exit route for shareholders with undervalued shares.
- Enhances consolidation of stakes in the company.
- Supports sluggish share prices.
- Returns surplus cash to shareholders.
- Increases earnings per share.
Cross-Holding
- State-owned companies buy back shares of one another in bulk.
- Facilitates mutual guidance and alignment towards a common purpose.
Exchange Traded Fund (ETF)
- A fund owning underlying assets divided into marketable securities (shares).
- Contains a combination of shares, bonds, or commodities sliced into shares.
- Purpose: Tool for disinvestment in PSUs as it avoids the need for individual IPOs for separate PSUs.
- Managed by: ICICI Mutual Fund.
Bharat-22 ETF
- Advanced ETF: Comprises 22 stocks from six sectors.
- Comparison:
- First ETF in India: Nifty BeEs (Nifty Benchmark Exchange Traded Scheme), 2002.
- Bharat-22: More diversified with a single company cap of 15% and sectoral cap of 22%.
- Components:
- Holdings in 19 CPSEs, government banks, SUUTI, and private sector blue-chip companies.
Methods of Disinvestment of Minority Stakes in CPSEs
| Method | Process |
|---|---|
| Initial Public Offering (IPO) | Offer of shares by unlisted CPSE or government to the public for subscription for the first time. |
| Further Public Offering (FPO) | Offer of shares by listed CPSE or government for public subscription. |
| Offer of Sale | Sale through the stock exchange mechanism. |
| Strategic Sale | Sale of up to 50% or more equity with transfer of management control. |
| Institutional Placement Program (IPP) | Only institutions can participate in the offering. |
| CPSE ETF | Simultaneous sale of stakes in diverse CPSEs across sectors. |
| Cross Holding | Buyback of shares among state-owned companies. |
Use of Disinvestment Funds
- Proceeds Credited to: National Investment Fund (NIF).
- Utilization:
- To subscribe to shares in CPSEs to maintain government stake above 51%.
- Recapitalization of Public Sector Banks (PSBs).
- Investment in RRBs/NABARD/EXIM Bank.
- Equity infusion in metro projects.
- Investment in railways for capital expenditure.
Categories of PSUs
Miniratna
- Type I:
- Profit continuously for the last three years with a profit of ₹30 crore or more in at least one year.
- Autonomy: Capital expenditure up to ₹500 crore or net worth.
- Type II:
- Profit continuously for the last three years with positive net worth.
- Autonomy: Capital expenditure up to ₹300 crore or 50% of net worth.
Navratna
- Established: 1997.
- Eligibility Criteria:
- Net profit to net worth.
- Total manpower cost.
- Earnings per share (EPS).
- Inter-sectoral performance.
- Must have Miniratna status.
- Minimum four independent directors.
- Powers:
- Enter joint ventures.
- Set up subsidiaries abroad.
- Engage in technical or strategic alliances.
- Managerial and operational autonomy.
- Raise funds from domestic and international capital markets.
- Invest up to ₹1,000 crore or 15% of net worth without prior approval.
Maharatna
- Established: 2010.
- Eligibility Criteria:
- Navratna status.
- Average annual turnover over the last three years: ₹25,000 crore.
- Average annual net worth over the last three years: ₹15,000 crore.
- Average annual net profit over the last three years: ₹5,000 crore.
- Significant global presence.
- Powers:
- Additional autonomy in investments for joint ventures and subsidiaries.
- HR development.
- Investment up to ₹5,000 crore in a single project.
Arjun Sengupta Committee (2004)
- Objective: Empowerment of Public Sector Enterprises (PSEs).
- Recommendations:
- Greater autonomy for PSEs.
- Establishment of truly independent boards.
- Ministries should not interfere in PSE operations—management should be accountable to the board, not the ministry.
- Flexibility for the government to divest its stake in PSEs without parliamentary approval, provided the stake remains above 51%.
- Comptroller and Auditor General (CAG) audits should be conducted on an exception basis, not as a rule.
- Address concerns related to Article 12 (regarding state control and accountability).
Memorandum of Understanding (MoU)
- Definition: A freely negotiated agreement between a public enterprise and its administrative ministry.
- Purpose:
- To ensure enterprises commit to achieving specific targets set at the beginning of the year.
- Reason for MoU Introduction:
- Lack of clarity in goals.
- Multi-point accountability.
- Absence of functional autonomy.
DIPAM (Department of Investment and Public Asset Management)
- Under: Ministry of Finance.
- Functions:
- Handles all matters related to the sale of central government equity through offer-for-sale, private placement, or other modes in CPSEs.
- Ministries consult DIPAM on matters like the call option (buying additional shares in the same unit). Final decisions rest with the ministries.
- Identifies PSEs for equity sale in consultation with respective ministries.
- New Disinvestment Policy (2020):
- DIPAM and NITI Aayog jointly identify PSEs for strategic sales.
- DIPAM acts as the nodal department for strategic sales.
- DIPAM Secretary co-chairs the Inter-Ministerial Group on Disinvestment along with the Secretary of the concerned ministry.
NITI Aayog’s Role
- Tasked with identifying CPSEs for strategic sales.
Purchase Preference Policy (PP Policy)
- Objective: To promote CPSEs by giving them a preference in the supply of goods and services.
- Key Feature:
- If a CPSE’s bid price is within 10% of the lowest bid price, it receives a purchase preference for contracts from government departments, autonomous bodies, or other PSEs.
