Over the years, the size of the public sector has increased and currently there are 473 central PSUs, including banks and insurance companies. Out of these, 104 are listed and 369 unlisted; while at the state level, there are 1,160 PSUs.
While the state-led entrepreneurship played an important role in triggering India’s industrialisation, our evolving development needs, comparatively less than satisfactory performance of the public sector enterprises, the maturing of our private sector, and growing institutional capabilities would suggest that the time has come to review the public sector’s role.
Research literature has examined privatisation experiences from all across the world, and the findings suggest big gains in productivity from private ownership.
The two broad approaches that can be adopted for privatisation are “strategic sales” (where a controlling stake is sold to one buyer) or “open market sales” (where shares are sold to the public at large).
There are three arguments in favour of strategic sales: in some situations, the buyer brings in essential new technology or expertise; the buyer can exert sound governance inputs into the firm, and has incentives to do so owing to the large stake, and the buyer can decisively displace government as the controller.
Apart from strategic sales, open market sales are an important instrumentality for disinvestment. Open market sales are the path to obtaining dispersed share ownership, widely-held, professionally managed companies, and creation of widespread shareholder wealth.
The incentives of employees of PSUs could be influenced by sale of shares, and employee stock option plans (ESOPs). This would serve to align the interests of employees with the interests of owners, and encourage support for the disinvestment process on the part of employees.
A transaction where government sells shares could have a temporary impact upon market prices. This can be contained using two tools: the call auction and a sequence of pre–announced small transactions.
The call auction is a computerised market mechanism through which buyers and sellers discover a single price, which clears demand and supply.
It is used, for instance, to discover the New York Stock Exchange opening price. The call auction is very effective at clearing large blocks of supply and demand, while giving all transactions a single price (i.e. zero “impact cost”).
It is possible for the National Stock Exchange (NSE) to build software, which runs the call auction.
Once that is done, the NSE opening and closing prices would come out of call auctions.
A key element, which should play a role here, is a pre–announced schedule of sales. Government can make a public announcement about a programme of future sales using the call auction.
Through such a programme of pre-announced sales, the government can engage in steadily selling shares in a simple, depoliticised way.
To sum up, we need a bold and imaginative programme for disinvestment and privatisation calling for restructuring of the portfolio of the country’s “public capital assets.”