India's Top PSUs 2009

Overview of Indian Public Sector

Central and state Public Sector Undertakings (PSUs) play a prominent role in India’s industrialization and economic development. Since independence, various socio-economic problems needed to be dealt with in a planned and systematic manner. A predominantly agrarian economy, a weak industrial base, low savings, inadequate investments and lack of industrial facilities called for state intervention to use the public sector as an instrument to steer the country’s underlying potential towards self reliant economic growth. The macroeconomic objectives of Central PSUs have been derived from the Industrial Policy Resolutions and the Five Year Plans. State-level public sectors enterprises (state PSUs) were established because of the rising need for public utilities in the states. These PSUs operated in public utilities such as railways, post and telegraph ports, airports and power and contributed significantly towards infrastructure development in India. Since its inception during the First Five Year Plan, many public sector undertakings performed exceptionally well in wealth creation for the country.

Many Central PSUs, particularly the Maharatnas, are already global players matching the best global firms in their field of operations. One of the important reasons for the excellent performances of Central PSUs during the recent years was the empowerment of the boards of such profit making Central PSUs by the Government leading to greater autonomy. Consequently, such PSUs have been able to effectively use this autonomy to enhance their performance and operate on commercial lines.

Evolution of Public Sector Enterprises in India

Public sector enterprises in India have grown from only five enterprises post independence and with an investment of ` 0.3 bn in the year 1951 to 249 enterprises as on Mar 31, 2010. Aggregate investment in Central PSUs has been increasing over the years. Total investment, including equity plus long-term loans of Central PSUs went up from ` 5,135.32 bn in FY09 to ` 5799.20 bn in FY10, growing 12.93%.

As on Mar 31, 2010, there were 94 mega projects costing ` 10 bn and above and 44 major projects costing between ` 1 bn and ` 10 bn. Overall profit of all Central PSUs stood at ` 925.93 bn during FY10 and dividend declared by such Central PSUs stood at ` 332.23 bn. The CPSEs earned foreign exchange equal ` 777.45 bn during the year compared with ` 742.06 bn in FY09.

The evolution of PSUs can be divided into three distinguished phases: 1) The pre-independence era; 2) The post-independence era; and 3) The post-liberalization period. The fourth period could perhaps be the one following the recent global economic crisis. During the pre-independence era there were few public enterprises, namely the railways, the posts and telegraph, the port trust, All India Radio and the ordinance factories, among few other government managed enterprises. During the post independence era, the Industrial Policy Resolution 1956 was implemented. Moreover, several strategies specific to the public sector were defined in policy statements in 1973, 1977, 1980 and 1991. The post liberalization era which commenced from 1991 saw the Government introducing the concept of Maharatna, Navratna and Miniratna to accord greater financial and managerial autonomy with the aim of incurring higher capital expenditure apart from forming JVs within the country as well as outside.

The period following the recent global economic downturn was one of Government infusing capital into the economy. In order to boost sectors such as real estate, agriculture and small enterprises, GoI, through public sector banks, provided capital at lower interest rates. These initiatives of the Government helped contain serious after effects of the economic meltdown while keeping a tab on inflation.

Role of PSUs in the Indian Economy

PSUs contributed significantly to the country’s economy. As on Apr 30, 2011, of the total 247 Central PSUs and their subsidiaries only 50 were listed; of these, 47 that were listed at the Bombay Stock Exchange (BSE) constituted 22% of the total market capitalisation of 4,946 companies listed on the BSE. Additionally, 28 Public Sector Banks (PSBs) including their subsidiaries and six State Level Public Enterprises (SLPEs), accounted for 6% of the total market capitalisation at BSE. The market capitalization of all PSUs taken together was ` 19.84 trn, constituting 28.7% of the total market capitalisation at the BSE. Of these, the share of Central PSUs share in the BSE market capitalization was 22.37% and amounted to ` 15.45 trn as on Apr 30, 2011. The share of PSBs was 6.28%, amounting to ` 4.34 trn and share of SLPEs in the BSE market capitalisation was less than 1%.

The growth and performance of Central PSUs runs parallel with the growth of the Indian economy. In fact, thePSUs have the potential for an even dominant role to play on the back of several yet-to-be listed profitable Central PSUs that can go to the market. As per data from the BSE as on Dec 15, 2010 there were 98 unlisted Central PSUs that made profit for the past three years, clearly indicating the importance of Central PSUs in the growth of the Indian economy. The Central PSU with the highest market capitalization is Oil and Natural Gas Corporation Ltd (ONGC) at ` 2,642.8 bn on the BSE as on Apr 30, 2011.

Central PSUs in employment generation

The total number of employees in Central PSUs was 1.53 mn in FY09 and came down to 1.49 mn in FY10. While the number of people employed by Central PSUs came down by 2.7% in FY10, the average annual per capita emoluments given went up to ` 609,816 in FY10 up from ` 541,716 in FY09. Moreover, several Central PSUs face high attrition with employees looking out for higher salaries elsewhere.

Contribution of PSUs to the Central Exchequer

Apart from fulfilling their social commitments, public sector enterprises are contributing significantly to the central exchequer through direct taxes and dividend.

The Central Exchequer obtains revenue from PSUs through two modes namely investments in the companies and through taxes and duties paid. The government earns investment revenue from PSUs in the form of dividend and interests and levies taxes on income, custom duties, corporate tax, excise duties and many more. The public sector has been the backbone of the Indian economy. It has acted as a strategic partner in the nation’s economic growth and in our development process.

There was significant decline in the total contribution of Central PSUs to the Central Exchequer during FY10, which came down from ` 1,515.43 bn in FY09 to ` 1,398.30 bn in FY10. This was primarily due to reduction in contribution towards customs duty and excise duty that came down from ` 87.05 bn and ` 632.62 bn in FY09 to ` 69.03 bn and ` 526.42 bn in FY10. This was owing to decline in excise duty rates across several sectors. Moreover, during FY10, net profit of profit making Central PSUs stood at ` 1084.35 bn compared with ` 984.88 bn in the previous year.

There was decline in other duties and taxes during the year compared with the previous year. There was however an increase in contribution from corporate tax, dividend payment and dividend tax. The central PSUs have always been supportive to the government in terms of helping them manage its financials and cash flows. In this perspective, the Ministry of Finance issued directives to select Central PSUs asking them to declare special dividend during FY11. The government intends to use additional revenue generated from this dividend to meet additional expenses, including the rising subsidy burden.

Net Value addition by Central PSUs

In FY10, the share of profit before tax and enterprise profit (PBTEP) was the highest at 35.41% followed by salaries and wages at 25.92%, indirect taxes and duties at 23.70% and interests at 10.19%. A comparison between the shares of the respective items during FY09 and FY10 show very little change during these two years. Moreover, the share of gross value addition of Central PSUs in GDP at market prices stood at 6.30% in FY10 as against 6.20% in FY09.

Evolution of the Disinvestment Policy

The salient features of the new disinvestment policy include the following:

Objectives of Disinvestment

Disinvestment was seen by the government as a means to raise funds for meeting certain general and specific needs. The government’s disinvestment policy was identified as an active tool to reduce the burden of financing the PSUs. Following were the main objectives of disinvestment:

Importance of Disinvestment

Given an increasingly competitive environment on the back of private enterprises gaining ground on several parameters, disinvestment of PSUs assumes significance. Increased competition from private players makes it difficult for many PSUs to operate profitability. As a result of a rapid erosion of the value of the public assets, it becomes extremely important that the Government disinvests Central PSUs early in order to realize a high value. At present the government has a significant stake locked up in Central PSUs of ` 2 trn. Disinvestments of several leading Central PSUs have raised noteworthy funds through this route. In fact, ONGC’s public offer through the Further Public Offer (FPO) route during 2003-2004 has been the largest for any Central PSU, XVII raising ` 105.42 bn. With respect to raising funds through the Initial Public Offering (IPO) by any Central PSU, Coal India Ltd raised ` 151.99 mn through its IPO in 2010-2011 making it the biggest Central PSU IPO until date. The primary purpose of the government’s disinvestment initiative is to utilize the funds that become available post disinvestment, for several purposes. The important among them are:

Approaches to Disinvestment

The following action plan was approved by the government for disinvestment in profit making government companies.