Overview of Central Public Sector Undertakings

Central Public Sector Undertakings (PSUs) are enterprises created by the Government of India either as companies under the Companies Act or as statutory corporations under specific Acts of Parliament. After independence the state took the lead in industrialisation because the scale of capital investment required exceeded the capacity of the private sector. Beginning in the early 1950s, PSUs were established to accelerate industrial and economic growth, build infrastructure, generate employment, promote balanced regional development and support small-scale and ancillary industries. In that era the central government, directly or through holding companies, often held as much as 95 per cent of the equity of central public sector undertakings, and 58 industries were reserved exclusively for the public sector. Over time this list was progressively shortened — to 18 in 1991 and, at present, to three core areas.

Although intended to operate commercially, PSUs do not enjoy full autonomy. Major decisions such as capital expenditure, acquisitions and investments typically require approval from bodies like the Public Investment Board (PIB), the Cabinet Committee on Economic Affairs (CCEA) and the central government. Parliamentary accountability is reinforced through oversight agencies such as the Comptroller and Auditor General (CAG), the Central Vigilance Commission (CVC) and, where applicable, the CBI. PSUs are variously classified as Public Sector Enterprises (PSEs), Central Public Sector Enterprises (CPSEs) and Public Sector Banks (PSBs), and CPSEs are further described as ‘strategic’ or ‘non‑strategic’. The strategic areas reserved for exclusive public sector presence include defence equipment (arms, ammunition, aircraft and warships), atomic energy (with narrow exceptions for certain civilian applications) and rail transport.

Over the decades CPSEs have been entrusted with broad macroeconomic objectives: higher growth, self‑reliance in key goods and services, balance‑of‑payments stability and price stability, alongside socio‑economic responsibilities. Their scale has grown enormously — from only five CPSEs with an aggregate investment of around ₹29 crore at the start of the First Five Year Plan to 320 CPSEs (excluding seven insurance companies) with total investment of ₹11,71,844 crore as on 31 March 2016. By 31 March 2017, 47 CPSEs were listed on stock exchanges and together accounted for nearly 12 per cent of market capitalisation, with an aggregate market value of about ₹15,45,270.99 crore. Several CPSEs rank among India’s largest companies and command dominant positions in critical sectors; some are even listed in global league tables.

CPSEs occupy a dominant position in strategic sectors such as petroleum, mining, electricity and transportation while also competing in open markets like telecommunications and hospitality. Leading names include ONGC, Indian Oil, BPCL and HPCL in petroleum; Coal India and NMDC in mining; NTPC and NHPC in power generation; Power Grid in transmission; BHEL in heavy engineering; Hindustan Aeronautics and Air India in aviation; Steel Authority of India and Rashtriya Ispat Nigam in steel; and BSNL and MTNL in telecommunications. Alongside other large public institutions — for example the State Bank of India, Life Insurance Corporation and Indian Railways — CPSEs have shaped India’s industrial and services landscape.

Financial and operational trends for 2015–16 show both strengths and pressures. Paid‑up capital in 320 CPSEs rose to ₹2,28,334 crore (a 7.19% increase over 2014–15), and total investment grew by 6.96% to ₹11,71,844 crore. Capital employed rose to ₹19,68,311 crore, up 5.43%. At the same time, aggregate turnover and income declined — turnover from operations fell by about 7.04% and total income by some 10.22% compared with the previous year. Profit‑making CPSEs increased profits by nearly 10.86%, while loss‑making units saw losses widen by 4.57%; the overall net profit of 244 CPSEs rose by 12.54% to ₹1,15,767 crore. Reserves and surplus and net worth also inched up, and the contribution of CPSEs to the central exchequer (through taxes, duties, interest and dividends) rose substantially. Exports and foreign exchange outflows both fell, reflecting shifting global and domestic demand patterns. Employment in CPSEs declined modestly to 12.34 lakh employees (excluding contractual workers), while salary and wage bills increased slightly.

CPSEs have also been important instruments of public policy and social provision. They have nurtured pools of managerial and technical talent, helped create a sizeable middle class, and provided civic amenities—education, healthcare, recreational and vocational facilities—particularly in and around company townships. At the same time, many PSUs have enjoyed dominant or monopolistic positions in their markets and receive substantial government support. The public sector therefore remains a heterogeneous mix of infrastructure firms, manufacturers and service and trading companies.

According to the Public Enterprises Survey 2015–16, the central public sector universe comprises a wide variety of entities — including banks, hire‑purchase companies, coal and lignite firms, investment services, trading units and specialised consultancy organisations such as the India Trade Promotion Organisation and the Central Mine Planning and Design Institute. In that period Coal India, ONGC and Indian Oil Corporation ranked among the top profit‑making CPSEs, while a number of very small central PSUs continued to operate with modest revenues. The government’s disinvestment and strategic restructuring initiatives have also changed the ownership and corporate profiles of several CPSEs in recent years, reflecting an ongoing rebalancing of public and private roles in the economy.

Evolution of Disinvestment Policy

Disinvestment refers to the sale of public sector equity that reduces the government’s stake in a company. In India the term is preferred to “privatization,” because disinvestment does not necessarily change ownership or management, whereas privatization implies both. When well designed, a disinvestment programme can support long‑term growth by attracting foreign investment, enabling technology transfer and raising productivity. The process began in 1991–92 as part of the broader PSU reform programme announced in the Industrial Policy Statement of that year, since a large amount of capital remained tied up in public sector undertakings.

By the early 1990s many PSUs were underperforming. Nearly half were loss‑making and imposed a heavy burden on the national exchequer, consuming scarce capital and current revenues at a time when the government faced a serious fiscal crunch. Then Finance Minister Manmohan Singh recognised that liberalisation and rising competition would expose cash‑short PSUs to further stress, and he therefore proposed equity sales in 1991 as a way both to raise resources and to improve enterprise performance. The wider liberalisation of the 1990s also opened the door for private sector entry into areas—such as hotels and food—that the government decided could be left to private management.

The initial disinvestment effort lacked a clear strategy. Its stated aim was to raise resources to finance the fiscal deficit and to broaden share ownership, thereby improving efficiency, but the government’s early sales—often tiny lots of 2–3 per cent—left control firmly with the state and signalled a desire to retain management authority. Over time, the objectives were articulated more fully: to broaden equity ownership, improve management, increase resource availability for PSUs and help finance the fiscal deficit. The Disinvestment Policy 2000–01 marked a shift in stance by indicating that the government was prepared, where appropriate, to reduce its stake in non‑strategic PSUs to 26 per cent or even lower.

Further refinements followed. In 2001 the government introduced a provision reserving a quota of shares for small investors and workers. Its policy framework for PSUs focused on four priorities: reduce government equity in non‑strategic units to around 26 per cent (or below if required); restructure and revive potentially viable enterprises; close firms that could not be made viable; and fully protect workers’ interests. Proceeds from disinvestment were to be channelled into social and infrastructure spending, used for PSU restructuring and applied to public debt management.

To maximise returns and ensure meaningful changes in management and performance, the strategy moved away from selling tiny share lots toward strategic sales of share blocks to identified investors. In a review of policy on 9 December 2002, the disinvestment minister described the aim as putting national resources to optimal use and unlocking the productive potential of public enterprises. The policy emphasis was on modernising and upgrading PSUs, creating new assets, generating employment and using receipts, where appropriate, to retire public debt.

The current disinvestment policy has four central objectives: promote people’s ownership of Central Public Sector Enterprises (CPSEs) so citizens can share in their prosperity; enable more efficient management of public investment to accelerate economic development and augment government resources; list CPSEs on stock exchanges to deepen capital markets and spread an equity culture; and raise budgetary resources for the government.

Institutional Framework for Disinvestment

The initial phase of disinvestment in 1991–92—when the government sold shares only in bundled lots of “very good,” “good” and “average” companies—proved ineffective and yielded low realizations. This experience highlighted the need for a coherent strategy, prompting the Government of India to seek expert guidance. In 1993 a committee chaired by former RBI Governor C. Rangarajan recommended the creation of a statutory disinvestment body to coordinate across ministries, manage the reform implications and monitor the use of proceeds.

In 1996 the United Front government established the Disinvestment Commission under G. V. Ramakrishna to advise on disinvestment policy and to prepare a long‑term programme for public sector undertakings (PSUs). The commission set four guiding objectives: strengthen PSUs where appropriate to facilitate disinvestment; protect employees’ interests; broaden ownership; and augment government receipts. To implement a calibrated approach it divided PSUs into two broad categories: a “core” group—enterprises with significant market presence where divestment would be limited to a maximum of 49 percent—and a “non‑core” group where private sector participation was already substantial and fuller divestment could be contemplated. The commission also recommended restructuring PSUs before sale, and identified about 100 enterprises for special status, classifying several as navratnas and mini‑ratnas. Nine navratnas—BHEL, BPCL, HPCL, IPCL, IOC, NTPC, ONGC, SAIL and VSNL—were granted greater autonomy to incur capital expenditure, raise resources and enter technology agreements.

The commission favoured “strategic sales” — sale of large equity blocks to a single buyer accompanied by transfer of management — and the government signalled readiness to transfer control where a private investor acquired 25 percent. For non‑core and non‑strategic areas the commission had the mandate to recommend disposal of up to 74 percent of government equity, while strategic sectors—defined to include arms and ammunition, related defence equipment, defence aircraft and warships, atomic energy and railway transport—would see no reduction in government ownership.

Over its first tenure the commission produced 12 reports covering 71 PSUs and recommended disinvestment in 58 of them. Its recommendations ranged from strategic sale (29 PSUs) and trade sale (8) to offers through GDR and the domestic route (5); one PSU was recommended for no disinvestment, 11 were deferred, and four for closure. The government accepted disinvestment in 45 of the 58 recommended cases. The commission’s mandate ended on 30 November 1999. It was reconstituted in July 2001 under R. H. Patil with a narrower brief to advise on non‑strategic PSUs (excluding IOC, ONGC and GAIL); its thirteenth report, submitted in January 2002, made specific recommendations for NLC, MOIL, RITES and PEC.

To institutionalize the process, the government created the Department of Disinvestment on 10 December 1999 as the nodal body responsible for all matters relating to central government equity in PSUs and for streamlining the disinvestment policy and procedures. This department was elevated to the Ministry of Disinvestment on 6 September 2001, and subsequently became a department within the Ministry of Finance on 27 May 2004. Reflecting a shift from mere disposal to active stewardship of public assets, the department was renamed the Department of Investment and Public Asset Management (DIPAM) on 14 April 2016, with an explicit mandate to manage the government’s investments in Central Public Sector Enterprises to support economic development and augment resources for public expenditure.

Framework for CPSE Disinvestment

Approach for disinvestment is structured around three linked priorities: selling minority stakes in profit-making Central Public Sector Enterprises (CPSEs), pursuing strategic disinvestment where appropriate, and managing the government’s broader investment in CPSEs to maximise value.

For disinvestment by minority stake sale, the emphasis is on bringing profitable CPSEs into compliance with the revised public shareholding norm—previously 10 per cent, now 25 per cent—using market mechanisms such as an Offer for Sale (OFS), fresh equity issuance by the CPSE, or a combination of both. Unlisted CPSEs that have no accumulated losses and have reported net profits for three consecutive years are to be brought to the market through listing. Follow-on public offers will be considered case by case, taking into account a CPSE’s capital needs; the government may offer its shares simultaneously or separately. All disinvestment decisions will be taken on a case-by-case basis, with the Department of Investment and Public Asset Management (DIPAM) identifying candidate CPSEs in consultation with the concerned administrative ministries and submitting proposals where an offer for sale of government equity is required.

Strategic disinvestment will proceed through inter-ministerial consultation, including inputs from NITI Aayog. NITI Aayog will identify CPSEs suitable for strategic sale and advise on the appropriate mode of sale, the percentage of equity to be divested, and valuation methodology. The Core Group of Secretaries on Disinvestment (CGD) will consider these recommendations, help the Cabinet Committee on Economic Affairs (CCEA) take final decisions, and oversee the implementation and monitoring of the strategic disinvestment process.

Beyond individual transactions, the government treats its investment in CPSEs as a strategic national asset and is committed to deploying it efficiently to support economic growth and secure optimum returns. This calls for a comprehensive approach that addresses interlinked issues such as leveraging assets to attract fresh capital, capital and financial restructuring, and other measures to enhance operational and financial health. Different options for optimally utilising government investments will be assessed to strengthen investor confidence and market capitalisation—both essential for mobilising fresh funds from the capital market for expansion and growth. Efficient management will be supported by streamlining decision-making and ensuring seamless coordination across departments.

Disinvestment Policy and Routes

The disinvestment policy treats Public Sector Undertakings as national wealth and seeks to ensure that this wealth ultimately benefits the public by promoting wider public ownership of Central Public Sector Enterprises (CPSEs). Disinvestment, in this context, means the government’s sale of its equity stake in CPSEs and is carried out through different routes depending on the objectives and the extent of stake transfer.

One route is minority stake sales in listed CPSEs, where the government divests only a non‑controlling portion while retaining majority shareholding and management control — explicitly at least 51 percent. The other route is strategic disinvestment, which entails selling a substantial portion of the government’s shareholding — typically fifty percent or more — accompanied by the transfer of management control to the purchaser.

National Investment Fund: Purpose and Uses

The Government of India set up the National Investment Fund (NIF) on 3 November 2005 to channel proceeds from the disinvestment of Central Public Sector Enterprises. The NIF was conceived as a permanent corpus to be managed professionally so that the government could earn sustainable returns without eroding the principal; accordingly it was kept outside the Consolidated Fund of India. The fund was seeded with ₹71,814.45 crore obtained from the disinvestment of two CPSEs — Power Grid Corporation of India (PGCIL) and Rural Electrification Corporation (REC).

The National Investment Fund (NIF) was created to receive the proceeds from the disinvestment of Central Public Sector Enterprises (CPSEs) and was to be maintained outside the Consolidated Fund of India. Its corpus was intended to be permanent rather than one‑time spending, preserving capital while generating income for priority uses.

The Fund was to be professionally managed so as to deliver sustainable returns without depleting the corpus. Management was entrusted to selected public‑sector asset managers; the corpus was, in practice, overseen by three public‑sector fund managers — UTI Asset Management Company Ltd., SBI Funds Management Company (Pvt.) Ltd., and LIC Mutual Fund Asset Management Company Ltd.

Annual income from the NIF was to be deployed in two main ways. Seventy‑five percent of yearly income was earmarked for selected social‑sector programmes that promote education, health and employment, while the remaining 25 percent was reserved for capital investment in profitable or revivable CPSEs that could generate adequate returns, thereby enlarging their capital base to support expansion or diversification.

In application, NIF income financed several named schemes, including the Jawaharlal Nehru National Urban Renewal Mission (JNNURM), the Accelerated Irrigation Benefits Programme (AIBP), the Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY), the Accelerated Power Development and Reform Programme, Indira Awaas Yojana, and the National Rural Employment Guarantee Scheme (NREGS).

On 5 November 2009, the Cabinet Committee on Economic Affairs (CCEA) approved a temporary change in the use of disinvestment proceeds. In view of the global slowdown of 2008–09 and the severe drought in 2009–10, a one‑time exemption allowed disinvestment receipts to be deposited into the National Investment Fund (NIF) for investment. This exemption covered the period from April 2009 to March 2012 and was subsequently extended until 31 March 2013. All proceeds received during this three‑year window were earmarked for selected social sector schemes as identified by the Planning Commission and the Department of Expenditure.

On 17 January 2013 the Government approved a restructuring of the NIF. With effect from the fiscal year 2013–14, disinvestment proceeds were to be credited to the existing Public Account under the head “NIF” and would remain there until withdrawn or invested for approved purposes. The Government specified that the NIF could be used for a range of strategic interventions: subscribing to shares issued by CPSEs (including public sector banks and insurance companies) on a rights basis to ensure that the Government’s 51% ownership is not diluted; preferential allotment of CPSE shares to promoters in accordance with SEBI’s Issue of Capital and Disclosure Requirements Regulations, 2009 so that Government shareholding does not fall below 51% when fresh equity is raised to finance capital expenditure; recapitalization of public sector banks and public sector insurance companies; investments by the Government in regional rural banks (RRBs), India Infrastructure Finance Company Ltd (IIFCL), NABARD and EXIM Bank; equity infusion into various metro projects; investment in Bhartiya Nabhikiya Vidyut Nigam Ltd and Uranium Corporation of India Ltd; and financing capital expenditure of Indian Railways.

Allocations from the NIF are to be decided through the annual Government budget. For FY 2013–14, the Government approved NIF allocations specifically for recapitalizing public sector banks and for capital expenditure by Indian Railways.

PSU Disinvestment Methods and Valuation

The government has used several distinct methods to sell its shareholdings in public sector undertakings (PSUs), each chosen to suit market conditions and policy goals.

One early method was closed bidding, introduced in 1991–92. Under this auction-style route the Department of Public Enterprises invited sealed bids, usually from government financial institutions and mutual funds, and set a reserve price derived from valuation models — net asset value, earnings potential or past realizations — often after consultation with merchant bankers. In the first year the government experimented with bundling shares into “very good,” “good” and “average” lots. While this produced realizations above target, bundling also led to low prices for some bundled loss‑making firms and deprived individually attractive PSUs of the premium they might have fetched if sold separately. Consequently, the practice was abandoned and later sales were made company by company, with early disinvestment focusing on selling equity while retaining the government’s controlling stake.

A common route has been sale of shares through the domestic market via public issues. Between 1991 and 1999, blue‑chip PSUs such as IOC, BPCL, HPCL, GAIL and VSNL were offered to the public, typically at price‑earnings ratios in the mid single digits. Public offers reduce the government’s holding and raise cash that can be used for development, while also broadening ownership through retail participation, improving price discovery and deepening capital markets. The IPO route works best when secondary market conditions are strong and gives retail investors a direct stake in state‑created wealth. Its limitation, however, is that merely increasing public float does not by itself change management or operational behaviour; government control often persists and that can keep valuations (P/E ratios) lower than in private transactions.

When domestic markets were sluggish, the government turned to international offerings, notably Global Depository Receipts (GDRs). VSNL’s GDR issue in March 1997 was priced at US$13.93 and was oversubscribed ten times; a later VSNL issue in 1999 was priced lower at US$9.25. MTNL and GAIL also accessed foreign capital, with the government selling an 18 percent stake in GAIL in 1999–2000 and raising Rs 21,095 crore via 155 million shares represented by 22.5 million GDRs. While GDRs tapped a larger investor base and sometimes fetched strong demand, offloading minority stakes through domestic ADR/GDR routes did not always produce expected long‑term benefits.

An innovative, if controversial, response to missed disinvestment targets occurred in 1998–99 when the government arranged cross‑holdings among cash‑rich oil PSUs. Firms were asked to subscribe to one another’s shares: IOC took stakes in ONGC and GAIL, ONGC took stakes in IOC and GAIL, and GAIL took a smaller stake in ONGC. This intra‑group swapping helped the government meet its disinvestment receipts for the year; the lock‑in on those shares expired in September 2004. While effective for meeting short‑term fiscal targets, such arrangements raised questions about commercial rationale and corporate governance.

From the mid‑1990s the government also pursued privatization through strategic sale — the sale of a controlling equity block to a single buyer together with transfer of management control. The idea, advocated by the Disinvestment Commission, was that a strategic buyer would pay a premium reflecting intrinsic value, bring fresh investment and technology, and improve efficiency. Strategic sales are conducted through competitive bidding and typically include covenants that govern post‑sale conduct; successful bidders are often required to make an open offer to public shareholders under SEBI’s takeover rules. The first high‑profile strategic sale was Modern Foods (74 percent to Hindustan Lever). Subsequent strategic transactions — including Balco, CMC, HTL, VSNL and others — generally achieved much higher price‑earnings multiples than minority public issues, making this route attractive from a revenue perspective. Critics note, however, that strategic sales may reduce competition in some sectors and can limit the government’s ability to realise the full competitive value of public assets.

To ensure fair pricing, the Ministry of Disinvestment laid down four methods for arriving at a reserve price: the discounted cash flow (DCF) method, the balance sheet method, the market multiple method, and the asset valuation method. The DCF approach discounts expected future cash flows to present value and is preferred because it captures earnings potential, future competitive pressures, risk factors and intangible advantages such as brand and distribution networks. The balance sheet method values a company primarily on the worth of its reported assets and does not account for future earnings, while the market multiple method benchmarks valuation against comparable firms trading in the market. The asset valuation method estimates replacement cost of tangible assets and is most useful in liquidation scenarios; it tends to overlook intangibles and so can understate the value of a going concern. In practice, valuers often combine methods — for example using DCF alongside asset valuation — when PSUs hold substantial non‑core tangible assets such as surplus land.

Innovative Disinvestment Strategies

Between 2000–01 and 2001–02 the government disinvested 14 public sector undertakings and adopted a variety of creative techniques to make these sales attractive to investors. In some cases the state retained certain high‑value elements while selling operating assets: for example, cash balances and real estate were carved out in the sales of BALCO and VSNL. Other sales involved breaking companies into individually marketable units, as with the India Tourism Development Corporation and the Shipping Corporation of India. Sick units were also tidied up before sale — Paradeep Phosphates was financially restructured to improve its appeal to buyers.

Two 2002 transactions — Maruti Udyog Limited and Indian Petrochemicals Corporation Limited — were notable for their novel structuring. In Maruti’s case the government decided to sell a 50 per cent holding in three phases. The first phase involved a substantial rights issue, with the government renouncing its entitlement in favour of its partner, Suzuki Motor Corporation, thereby raising Suzuki’s stake to a majority and injecting capital into the company. Suzuki paid a control premium and underwrote the government’s subsequent share sale. The second phase envisaged the government selling 36 lakh shares through an initial public offer underwritten by Suzuki, and the remaining stake was to be sold in a final phase. Suzuki only increased its holding modestly through the rights issue to secure majority control and was obliged to buy the rest only if the government failed to obtain a pre‑agreed minimum price in the public offers. When the government finally divested 27.5 per cent of Maruti by IPO in 2003, the issue was a major success — it was oversubscribed ten times and opened with a 25.2 per cent premium.

IPCL’s disinvestment was also structured to enhance competitiveness and buyer interest. To avoid creating a monopoly in the petrochemical sector, the government sold the Baroda unit to Indian Oil Corporation before the main divestment; this removed the company’s oldest and least profitable plant, making the remaining business more attractive to prospective buyers. Holding 59.95 per cent in IPCL, the government chose to dilute its stake by selling 51 per cent in two phases. In April 2002 it invited financial bids from Reliance Industries, IOC, the Chatterjee Group combine and Nirma; Reliance emerged as the strategic buyer in May 2002 with the highest offer and subsequently augmented its holding by purchasing additional shares from the market. The second phase envisaged further sales of up to 25 per cent in tranches of 10 per cent or less each year, either through market sales or to a strategic investor.

CPSE ETF: Government Disinvestment Tool

The Central Public Sector Enterprises Exchange Traded Fund (CPSE ETF) is a concentrated portfolio of ten public sector undertakings created to help the Government of India (GoI) disinvest part of its holdings through the ETF route. The CPSE ETF comprises shares of ten PSUs: ONGC, Coal India, Indian Oil Corporation, GAIL (India), Oil India, Power Finance Corporation, Bharat Electronics, REC, Engineers India and Container Corporation of India.

Launched in March 2014 by Goldman Sachs Asset Management India, the initial issue raised ₹4,300 crore against a target of ₹3,000 crore. The second tranche was handled by Reliance Mutual Fund after it acquired Goldman Sachs’ mutual fund business in 2015; the government raised ₹6,000 crore in that tranche. A subsequent Further Fund Offer (FFO) was subscribed 3.7 times, with bids worth ₹9,200 crore received and an option to retain an additional ₹1,500 crore in case of oversubscription. That FFO carried an upfront discount of 5% and attracted strong interest from non-anchor investors; it was also eligible for the Rajiv Gandhi Equity Savings Scheme (RGESS).

The CPSE ETF tracks the Nifty CPSE Index and was listed on the NSE on 28 March 2017. In the Union Budget 2017–18 the government reaffirmed that ETFs would continue to be used as a vehicle for further disinvestment of public-sector shares.

Over the past fifteen years the government has raised disinvestment proceeds of around ₹49,214 crore from the sale of 50 public sector undertakings. Only on four occasions — 1991–92, 1994–95, 1998–99 and 2003–04 — did actual receipts exceed the budgeted targets. Early successes were uneven: very low bids in 1991–92, large offloads of premium shares in 1994–95 from attractive PSUs such as BHEL, GAIL and Bharat Petroleum, and transfers effected through cross-holdings in which cash-rich PSUs bought equity in other PSUs all played a role in boosting receipts.

Timing and market conditions have mattered. The disinvestment held in March 1994, with bids opened in April, meant those proceeds were recorded in 1994–95. Weak capital markets led to a shortfall in receipts from 1995–96 to 1997–98 and prompted the government to tap the Global Depository Receipt route to mobilize resources. A landmark Supreme Court judgment in December 2001 upholding the previous year’s sale of Balco to Sterlite Industries revived momentum for strategic sales. Under Arun Shourie’s stewardship the disinvestment ministry secured sizeable premiums by using competitive bidding and requiring successful bidders to make open offers to public investors. This revived investor confidence in the PSU space: stocks that had traded at discounts began to command price-earnings multiples closer to private-sector blue chips. Between December 31, 2001 and March 31, 2002 the BSE PSU index rose 57.44 per cent, while the Sensex gained only 6.34 per cent over the same period.

Buoyed by the recovery in PSU valuations, the Department of Disinvestment in July 2002 proposed raising large sums through public offers in five major PSUs — BSNL, IOC, GAIL, NTPC and ONGC — where the government held significant stakes. Despite repeated shortfalls between 1999–2000 and 2002–03, the NDA set an ambitious disinvestment target for 2003–04. The flagship transaction that year was the partial privatisation of Maruti Udyog Limited (MUL). The government divested 25 per cent of its 45.8 per cent stake by selling 7.22 crore shares through a book-building route; the offer size was ₹830 crore with a green-shoe option. Institutional and retail interest was strong: the issue was nearly ten times oversubscribed and listed at a substantial premium, raising ₹993.35 crore and reducing the government stake to 18.3 per cent. The Maruti IPO demonstrated the appeal of a two-stage disinvestment strategy — a strategic sale followed by a residual public offer.

Other notable transactions followed. On March 27, 2002 the government sold 26 per cent of Hindustan Zinc to Sterlite for ₹7,445 crore, and in November 2003 Sterlite acquired the remaining 18.92 per cent stake for ₹7,323.88 crore. However, the disinvestment programme also faced legal and political hurdles: a Supreme Court ruling on September 16, 2003 held that disinvestment of erstwhile foreign-owned companies such as HPCL and BPCL required parliamentary sanction because they had been nationalised by statute, and planned sales of Nalco, HPCL and BPCL were deferred.

The revival of markets and positive responses to bank IPOs encouraged the government to offer stakes in six PSUs in March 2004 — IPCL, CMC, IBP, Dredging Corporation of India (DCI), ONGC and GAIL — with retail investors given a 25 per cent reservation and a 5 per cent discount to the cut-off price. The disinvestment process began in late February and was completed by mid-March 2004. IPCL’s offer opened on February 20, 2004 and the government sold a 29 per cent stake, raising ₹7,121.94 crore as the issue was oversubscribed nearly five times. IBP and CMC offers opened on February 23; after an initial lull IBP’s offer became 2.8 times oversubscribed and raised ₹3,352.53 crore, while the remaining government stake in CMC was sold at a cut-off price that yielded ₹1,188.69 crore. DCI’s February 26 offer of 56 lakh shares was oversubscribed more than nine times and raised ₹2,223.44 crore. GAIL’s offer on February 27 attracted brisk interest, raising ₹1,643.63 crore. The largest among these was ONGC’s offer for 14.26 crore shares, which became the largest IPO in India at that time; the issue was 5.9 times oversubscribed and raised the government’s target in a matter of minutes. Collectively these six offers helped the government surpass its 2003–04 disinvestment target and broaden the retail investor base, confirming that Indian markets could effectively handle large, global-sized offerings.

After the UPA assumed office, an offer for sale of a 5.25 per cent stake in National Thermal Power Corporation was completed in 2004–05. The government continued selective sell-downs in the years that followed: in early 2006 it sold 8 per cent of Maruti’s shares at ₹678.40 per share to public sector banks and financial institutions, and later, in 2008–09, sold a further 10.27 per cent stake to banks, financial institutions and mutual funds through differential pricing.

There were gaps in activity: no major divestments occurred in 2006–07 and 2008–09, but 2010 saw a major mobilisation when the government sold a 10 per cent stake in Coal India Limited through the largest-ever IPO up to that point. Disinvestment proceeds surged during 2012–13 to ₹22,395.6 crore, with multiple CPSEs — including NBCC, HCL, NMDC, OIL, NTPC, RCF, NALCO and SAIL — contributing; NTPC was the largest single mobiliser among them. The 2013–14 budget projected an even higher disinvestment target.

In 2016–17 the government achieved a revised disinvestment target of ₹45,500 crore by realising a total of ₹46,247 crore, of which ₹35,468 crore came from CPSE disinvestment and ₹10,779 crore from strategic disinvestment and income from management of SUUTI investments. Sixteen transactions were completed that year, compared with an average of about four transactions per year during 2009–10 to 2013–14. Employee offer-for-sale allocations amounted to ₹530 crore. The CPSE-ETF route proved significant: realisation through CPSE-ETF was ₹8,500 crore, accounting for 24 per cent of CPSE disinvestment receipts and 18.4 per cent of total receipts for the year. Building on the success of the first Further Fund Offer, CPSE-ETF FFO-II launched on March 14, 2017 was oversubscribed roughly four times, raising ₹22,499 crore. An additional ₹1,000 crore was received as income from SUUTI management on March 29, 2017.

The government also participated in buyback offers from NHPC and Neyveli Lignite Corporation, realising ₹948.52 crore and ₹1,429.38 crore respectively. In 2016–17 the government employed a mix of offer-for-sale (OFS), employee OFS, buybacks and FFO routes to effect disinvestment. Despite occasional high-profile successes, the government has frequently missed its disinvestment targets in recent years, underlining the challenges of timing sales to market conditions, navigating legal and political constraints, and broadening retail participation while securing fair value for public assets.

Disinvestment Outcomes and Challenges

The government’s disinvestment programme suffered from an absence of clear, consistent objectives. In its early years the emphasis was on selling stakes without relinquishing control; when that approach faltered, rhetoric shifted toward privatization. In practice, disinvestment became primarily a fiscal instrument to raise revenue—often to plug budgetary gaps—rather than a coherent means to redefine the state’s role in the economy. There was no comprehensive privatization policy outlining which businesses the state should retain and which it should exit. Political ambivalence and the absence of sustained will meant sales were repeatedly started, halted and restarted, turning each transaction into a contested political issue. Disagreements over methods and pricing further slowed progress, while the lack of a politically acceptable agenda undermined momentum.

Efficiency gains should be the central rationale for privatization, achieved by transferring inefficient public enterprises to more productive owners. Instead, in the past decade some of the best-performing firms were sold, often at low prices, as a result of weak pricing strategy and delays in execution. Pricing delays in cases such as VSNL and some GAIL transactions produced large losses to the public exchequer and illustrated a basic lesson: market forces determine the realized price of a PSU share. Poorly timed or poorly marketed sales have also imposed costs on other public institutions. For example, the Unit Trust of India suffered a loss of about Rs 5,056 crore on an investment of Rs 6,403 crore after its holdings acquired through early disinvestment fell sharply; the government ultimately had to step in to stabilize the situation.

Strategic sales frequently failed to secure fair value because restructuring and marketing efforts were incomplete. Paradeep Phosphates, whose restructuring remained unfinished, was sold at a modest price to Zuari Macro Phosphate; restructuring exercises that omit financial and operational overhaul—such as selective debt write-offs combined with phased operational targets—tend to depress sale proceeds. The long, uneven restructuring of SAIL, for example, has been delayed by unresolved legacy issues and conflicts with state governments, reflecting a half-hearted approach that diminishes the attractiveness and value of assets on offer.

Much of what passed for disinvestment was in effect intra-public transfers intended to meet short-term financing needs. Cash-rich oil companies were sometimes persuaded to take cross-holdings in other oil PSUs instead of using surplus funds for their own competitive restructuring. True change in ownership and management quality has therefore been limited: in many cases the government’s stake fell by less than 10 per cent, leaving control structures largely intact.

Proceeds from asset sales were intended to be deployed productively—for debt reduction, infrastructure investment or for restructuring PSUs—but in practice shortfalls against targets were frequent and receipts often ended up as generic revenue rather than ring-fenced capital for reform. Between 2011‑12 and 2017‑18 the government repeatedly missed disinvestment targets. For instance, the 2011‑12 target of Rs 40,000 crore yielded only Rs 13,894 crore; in 2016‑17 the target of Rs 56,500 crore produced Rs 46,246.58 crore; and as of 9 May 2017 the 2017‑18 target of Rs 72,500 crore had yielded merely Rs 1,195.46 crore.

There have been periods of more disciplined implementation. Around 2000–01 a disinvestment minister pursued a transparent, systematic approach that accelerated privatization—14 PSUs were divested in two years and many fetched significant premiums. Since 2001 the emphasis shifted to strategic sales on the grounds that a successful sale can lift a PSU’s market valuation and thereby increase the value of the government’s remaining equity. To widen financing options for bidders, the finance ministry in June 2002 allowed use of ADRs/GDRs and external commercial borrowings to fund buyouts, opening additional sources for disinvestment transactions.

Policy development continued under subsequent governments. The UPA proposed creating a Board for Reconstruction of Public Sector Enterprises to replace the Disinvestment Commission, with a mandate to strengthen CPSEs and confer greater autonomy and professionalism. The state also recognised that some public sector presence remains essential, especially in strategic domains: defence and aerospace PSUs have built strong performance records and global brands, and public provision is still necessary in areas such as broadcasting, internal security and regulation.

To manage its portfolio more effectively, the government has adopted a multi-pronged strategy for CPSEs: minority stake sales (up to 49 per cent), listing of profitable enterprises and strategic disinvestment where warranted; alongside capital restructuring to optimise returns and financial restructuring to revive or strengthen weaker units. Implementing this strategy will be challenging: the government must balance national priorities with the need for commercially driven investment and disinvestment decisions if CPSEs are to contribute meaningfully to sustained economic growth.

Comparative Privatization Approaches

Privatization gained momentum in the 1970s and 1980s, with Chile and the United Kingdom often cited as pioneers. Developed economies such as the UK, France, Australia and New Zealand pursued disinvestment mainly to reduce the state’s footprint in the economy and to redeploy resources toward better governance. Many developing countries — including Chile, Thailand, Malaysia, Indonesia, Mexico, Argentina and the Philippines — pursued similar programmes to accelerate growth, raise resources for capital formation, improve efficiency and reduce fiscal deficits. These countries typically defined clear objectives and methodologies for disinvestment, and most succeeded in reducing direct government control over their economies.

The UK programme, launched under Prime Minister Margaret Thatcher in the late 1970s, is regarded as one of the most successful. Its explicit aim was to shrink the government’s economic role and transfer assets to more efficient private management. Privatization used multiple routes: direct sales, management buyouts and public flotations. Large enterprises such as British Telecom and British Airways were corporatized and given managerial autonomy before being offered to the public; their issues were aggressively marketed and deliberately underpriced, producing oversubscriptions of 35 to 45 times. In many major cases the government sold its entire stake through public issues, and the result was improved performance, higher profitability and better service outcomes for consumers at lower cost.

Other countries experimented with a range of approaches tailored to their circumstances. Some units were sold whole as going concerns when viable, or broken up and disposed of when loss-making. Several programmes adopted staged divestments, selling an initial tranche (for example, 30 per cent) often to employees with attractive options, followed by further tranches until full divestment; large private institutions were typically allowed to enter only in the final round. Malaysia combined underpricing with mass fixed-price offerings and reserved preferential allotment to native shareholders, while companies were restructured prior to sale. Governments also used four principal modes of privatization: outright sale of assets or equity, long-term leases, build-operate-transfer (BOT) arrangements for new infrastructure, and management contracts that contracted private operators to run enterprises. Brazil, for example, legislated a national programme, sequenced privatization from industry to infrastructure and used its national development bank (BNDES) to execute sales on behalf of federal and state governments, disposing of both profitable and unprofitable enterprises; other countries prioritized sales of loss-making firms to cut fiscal burdens.

A widely used instrument has been public share issues. Countries such as Japan, France, Italy and Germany raised nearly USD 285 billion through around 120 public offerings, and the model known as Share Issue Privatization (SIP) has mobilized more than USD 400 billion for governments worldwide over the past two decades. Beyond immediate fiscal receipts, SIPs helped develop domestic capital markets, promote an equity culture among savers and investors, and provide governments with resources to trim budget deficits, strengthen institutional capacity and manage the social costs associated with restructuring.

Strategic PSU Disinvestment Framework

India needs a focused restructuring of its public sector undertakings alongside a renewed programme of public offer–based sales to revive the slack primary capital market. With fiscal deficits under pressure, disinvestment of PSUs has become difficult to avoid; used thoughtfully, it can mobilise resources and improve market activity without compromising strategic objectives.

A one-size-fits-all disinvestment policy will not work. Each PSU requires a clear, customised methodology based on its financial health, asset base and market role. Some enterprises may be loss-making yet valuable because of their production capacity or distribution network; in such cases a strategic sale to a buyer who can use those assets efficiently will typically fetch a better price than a broad retail offer. Other PSUs may benefit from a retail-centric approach that builds trading volumes, strengthens market sentiment and broadens the shareholder base. Choosing the right route for each company is therefore essential to maximise value and preserve operational strengths.

Timing and speed matter as much as method. Protracted delays in disinvestment allow competitive pressures and shrinking government resources to erode even strong PSUs, reducing the price that can ultimately be realised. Swift, well-planned transactions protect value and signal policy credibility.

Finally, a smooth and successful central PSU disinvestment programme will raise confidence and increase the likelihood of similarly effective disinvestments at the state level, creating a virtuous cycle for public enterprise reform and market development.