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Norms for central public sector enterprise (CPSE) divestment announced

  • Category
    Economy
  • Published
    21st Dec, 2021

Context

The Finance Ministry has recently released guidelines for the implementation of the new central public sector enterprise (CPSE) policy, aimed at the privatisation, merger, closure or subsidiarisation of non-strategic CPSEs and achieve disinvestment target.

Background

  • In 2021 Budget, the central government announced the plan to raise Rs 1.75 lakh crore in 2021-22 fiscal through the sale of its stake in PSEs and financial institutions.
  • Of the total target, CPSE disinvestment receipts are expected to yield Rs 75,000 crore.
  • In this direction, Department of Public Enterprises (DPE) was transferred this year from the Heavy Industries and Public Enterprises Ministry to the Ministry of Finance.

In this background, the Finance Ministry has released guidelines for the implementation of the new central public sector enterprise (CPSE) policy which is aimed at the privatisation, merger, closure or subsidiarisation of non-strategic CPSE.

Analysis

What are CPSEs?

  • These Central Public Sector Enterprises (CPSEs) are firms in which at least 51 per cent of the paid-up share capital is held by the central government, either fully or together with one or more state governments.
  • These have two more categories:
  • Strategic CPSE: The strategic sectors include:
  • Atomic Energy, Space, and Defence
  • Transport and Telecommunication
  • Power, Petroleum, Coal, and Other Minerals
  • Banking, Insurance, and Financial Services
    • Non-strategic CPSE: All other PSUs apart from the strategic sectors fall under Non-strategic Sector including Power Discoms.
  • In the 1950s and 1960s, most CPSEs were greenfield enterprises, set up in the first flush after Independence when the private sector had limited capacity to set up large capital-intensive enterprises.

What are the main highlights of the recent guidelines?

  • Disinvestment

Under the norms, once the Union Cabinet or Cabinet Committee on Economic Affairs clears disinvestment or closure of a CPSE, it will be disinvested completely within seven months.

  • The process
  • Identification & approval: Department of Public Enterprises (DPE) will identify CPSEs for closure or privatization in non-strategic sector and seek approval from the CCEA (Cabinet committee on Economic affairs).
  • Detail analysis: The administrative ministry of the concerned CPSE will work out the details of any proposed closure, including details of budgetary support required. Based on the inputs of the administrative ministry, the DPE will then prepare a note and submit it to an inter-ministerial committee.
  • Final approval: The final approval is then given by the Finance Minister.
  • After the final approval, the norms envisage a timeline of two months for the process, including settlement statutory dues, payment to secured creditors, settlement of VRS for employees, and transfer of assets to a holding company.
  • The guidelines also state that any directors or even the CMDs of the selected CPSEs that do not cooperate may be removed from their roles and replaced by officials from the concerned ministry.

This time bound process will result in faster closure and merger of CPSE in the light of achieving disinvestment targets.

Strategic and Non-Strategic sectors-

The PSE Policy envisages classification of CPSEs into Strategic and Non-Strategic Sectors.

  • The strategic sectors as per the policy are as given below:
  • Atomic Energy, Space, and Defence
  • Transport and Telecommunication
  • Power, Petroleum, Coal, and Other Minerals
  • Banking, Insurance, and Financial Services
  • CPSEs in the Strategic Sector/ Non- Strategic Sector are to be taken up for privatisation, merger, subsidiarisation with another CPSE or for closure. Only a bare minimum presence of CPSEs in the aforesaid Strategic Sector is to be maintained

Relevance of establishment of CPSEs in India

Public sector enterprises were called as temples of modern India that were aimed to bring India to the path of industrialization with the key role played by the state. The key benefits envisaged were-

  • Economic growth-
    • Second five year plan (FYP) has major focus on large industries as the driver of economic growth.
    • Key partnerships with developed countries including Russia and UK were made for import and transfer of technology.
    • In the nascent phase, PSEs served as the main giver of employment to Indian workforce.
  • Social development-
    • Industries were set up with a focus on regional balance, and local employment.
    • Reservation for various sections in employment ensured financial and thus, socially inclusive growth.
  • Strategic autonomy-
    • As India was keen on self-reliance in early phases of growth, foreign direct investment directly or through private players were largely avoided.
    • It also gave the central and state government the key control over the path to development through fiver year plans and licensing restrictions.

Why CPSE are important for India in current scenario?

While some of the goals for creation of CPSEs have been met, they are still relevant in the present scenario for the following reasons-

  • Strategic reasons -
    • State control is desirable in some sectors for national security and autonomy like defense and atomic energy.
    • In the light of liberal foreign investment, increasing upto 100% in some sectors, state enterprises can protect India from foreign domination.
    • Many PSEs like ONGC are also important for diplomatic foreign investment and relations
  • Economic reasons-
    • While investment from private companies in many domains like telecom or steel, they invest on cost benefit reasons, thus mandating state investment in sunrise sectors.
    • Many PSE are competitive or even performing better than their private counterparts.

What are the challenges faced by CPSE?

In the light of liberalization, privatization and globalization (LPG) policy adopted by the government after 1991, there is a need for reassessment of the CPSEs. In the present times, following changes are faced by CPSE-

  • Reduced Competitiveness-
    • The cost on employee salaries and allowances are higher with respect to private counterparts.
    • They are also putting a strain on public exchequer due to their failures, duplication of PSE leading to competition within them and thus also impacting fiscal deficit of the government.
    • As per a performance review conducted by the department of public enterprises (DPE) for 2019-2020, only 25 of the 144 central public sector enterprises (CPSEs) in the country have been tagged as "excellent".
  • Policy and political issues-
    • They have less autonomy for decision making regarding day to day decisions, mergers and acquisitions, and starting new projects.
    • The slow employment hiring and firing policy makes it difficult for them to maintain to ensure optimum performance by the employees.
  • Declining social relevance-
    • The easy presence of education, health and employment facilities in most of the country makes it unnecessary for the government to invest through PSEs
    • The rise of large base of private companies have resulted in huge investment, thus government spending is not very relevant.

Steps taken by the government-

The central and state governments have taken many steps to ensure the economic and social goals are aligned with the CPSE policy. These are:

  • Disinvestment-
    • Multiple disinvestment models were developed like ‘Minority stake sale’, ‘Strategic Disinvestment’ etc.
    • Yearly targets were announced in the union budget for disinvestment in CPSEs.
    • Guidelines were announced for the time bound disinvestment of CPSEs.
  • Performance analysis: Regular performance analysis and ranking of CPSEs to ascertain cost benefit analysis.
  • New classification of the CPSEs for better identification and planned disinvestment.
  • Reservation in private industries-
    • Some states have announced local reservation up to a certain level of pay in the private industries to align the social goals of the state with the private companies. For example, Haryana and Maharashtra.

Way forward-

There is a need to assess the relevance of CPSEs and adopting measures to ensure CPSEs remain relevant in the light of new national policies and goals. Some suggestions are-

  • Learning from global best practices-
    • Success of Chinese companies in remaining competitive as well as being flexible in operations can act as a path for the success of India’s CPSEs.
  • Talent upgradation-
    • Easy and flexi options for reskilling, providing mid-level training and assessment at regular intervals can lead to better performance.
  • Strategic partnership-
    • CPSEs should be allowed to partner with Indian and foreign players for better performance, technology transfer and optimum growth.
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