Privatization

Privatization

Whether private or public, every business uses the resources of nation and society i.e. human, capital, land and machine. And if it cannot add value to these resources then it is a burden on society as well as on the nation. A loss in PSUs not only depletes the nation’s resources but also increases the fiscal deficit that results in inflation. Privatisation is the process of involving the private sector in the ownership or operation of a state-owned or public sector undertaking. In a broader sense, it connotes private ownership (or even without change of ownership) the induction of private control and management in the PSUs.
Privatisation can take three forms:
Ownership Measures: The degree of privatisation is judged by the extent of ownership transferred from the public enterprise to the private sector. It can take the following forms:
Total Denationalisation: It is a complete transfer of a public enterprise to the private sector. As done in BALCO, which was acquired by Sterlite industries. Modern Foods was acquired by Hindustan Lever.
Joint Venture: This implies partial introduction of private ownership. The range of private ownership can vary; it can be as low as 25% and even as high as 75% or more. As in the case of Maruti Suzuki where earlier the majority share were with Maruti but after liberalisation, Suzuki increased its stake and became the majority stake holder.
Liquidation: The assets are sold to someone who may use those assets for the same purpose or for any other purpose.
Workers Co-operative: Here ownership of the enterprise is transferred to workers who may form a co-operative to run the enterprise.
Organisational Measures: A number of organizational measures are conceived to limit state control. They include:
A Holding Company Structure: Here, the organization is decentralised and sufficient autonomy of decision making is given at the operative level but the government still controls decisions made at the apex level. In this way a decentralised pattern of management emerges.
Leasing: The government transfers the use of assets to private bidders for a specified period. In the leasing agreement the bidder is required to be assured regarding profit sharing between the State and bidder. This is a kind of tenure ownership.
Restructuring: Restructuring is of two types: financial and basic restructuring. Financial restructuring means the writing off of accumulated losses and rationalisation of capital composition in respect of debt-equity ratio. The main purpose of rationalisation is to improve the financial health of the enterprise and basic restructuring is said to occur when the public enterprise decides to shed some of its activities to be taken up by ancillaries or small scale units.
Operational Measures: The objective of operational measures is to improve efficiency of the organisation. Operational measures include the following measures:
Grant of autonomy to public enterprise in decision making.
Provision of incentives for workers and executives consistent with increase in efficiency and productivity.
Freedom to acquire certain inputs from the market.
Development of proper criteria for investment planning.
Permission to public enterprises to raise resources from the capital market to execute plans of diversification and expansion.
Divestiture is one of the important ways of privatisation, it is a privatisation of ownership through the sale of equity. It entails selling stock to the public. In India various public sector banks such as State Bank of India, Vijay Bank etc., sold their stock to the public through IPOs.