[Industries] Public Sector Undertakings, CPSE-ETF, Disinvestment, NIF, Mini-Nav-Maharatna

Economy43 Comments

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  1. Prologue
  2. [Act 1] PSU Classification
    1. Classification #1: where they operate?
    2. Classification #2: How they were born?
  3. [Act 2] Disinvestment
    1. National investment fund (NIF-2005)
  4. [Act 3] CPSE-ETF Exchange traded fund
    1. How is CPSE ETF different from Mutual funds?
  5. [Act 4] Various “Ratna” for PSU

Prologue

Economic Survey Ch.9 Industrial performance. Four subparts:

  1. Industries, Acts, Policies, excise and customs duty
  2. PSUs, Disinvestment, CPSE-ETF
  3. Companies Act 2013
  4. MSME sector

cover Economic Survey PSU

[Act 1] PSU Classification

Classification #1: where they operate?
STRATEGICNON-STRATEGIC
  1. Arms, Ammunition, defense equipment
  2. defense air-crafts and warships
  3. Atomic Energy (except nuke energy for agriculture, medicine and non-strategic industries)
  4. Railways transport
Those who are not under “Strategic” category

 

Classification #2: How they were born?
GOVERNMENT COMPANIESPUBLIC CORPORATIONS
ONGC, SAIL, Coal India ltd etc.LIC, Air India, IDBI, UTI etc.
registered under companies act, Government owns >50% sharessetup under an act of parliament /Vidhan Sabha
Government decides majority of the board of directors. (independent directors will have to be appointed as per Companies Act 2013)Government decides ALL Board of directors. the independent director provision under Companies act doesn’t apply
Audit by CAG appointed private auditors. (with term limits as per Companies Act 2013)CAG directly audits using his own staff (some exceptions to certain large corporations).
  • Their Employees are not “public servants” or “Government employees”.
  • Their disciplinary rules, salary-pension benefits are separate from Government employees.
same
RTI appliessame
Dept. of public enterprises (under Heavy ministry) acts as nodal agencysame
Their top executives are selected by Public sector enterprises selection board (PSEB) under personnel ministry.same

What about Railways and Postal department?

Viewpoint #1:

  • Railways and posts are departmental undertakings.
  • And since all departmental undertakings are “public sector undertakings”, as per the classification given in Laxmikanth (Public Administration book) and NIOS courses.
  • Therefore, railway, posts, also “PSU” or “PSE”.

Viewpoint #2:

Railways and Postal department are not “public sector enterprises” (PSE) or public sector undertaking (PSU) because of the following reasons:

  1. Department of public enterprises has no jurisdiction over them.
  2. Their manpower and finance are directly controlled by respective ministries.
  3. Their top Executives are Group-A Government officers recruited through UPSC civil service exam. [And not through Public sector enterprises selection board (PSEB) under personnel ministry.]
  4. If railway and post were PSUs then parliamentary Committee on PSU would have been examining them.
  5. But railways under parliamentary standing Committee on railways; Postal under parliamentary standing Committee Information Technology.
Names not important except for PSU interviews
Top profit makerTop loss makers
  1. The Oil and Natural Gas Corporation Ltd
  2. National Thermal Power Corporation Ltd
  3. Fertilizer Corporation of India Ltd
  4. Coal India Ltd
  5. Bharat Heavy Electricals Ltd
  1. Bharat Sanchar Nigam Ltd
  2. Mahanagar Telephone Nigam Ltd
  3. Air India Ltd
  4. Chennai Petroleum Corporation Ltd
  5. Hindustan Photo Films Manufacturing Co. Ltd
  • Overall 277 Central public sector enterprises
  • Out of them ~80 loss making.
Problems with PSUsREFORMS TAKEN
  • Overstaffed. can’t hire and fire easily like private companies
Voluntary retirement scheme- VRS
  • APM: Administered pricing mechanism- over coal, steel, cement, fertilizer petroleum products etc.
  • Government began deregulating the prices- example petroleum, steel, cement
  • survey recommends Government to deregulate coal prices as well
Since Government is majority shareholder- constant political interference in board appointments, policy decisions, factory locations, product pricing etc.
  • disinvestment
  • operational flexibility to Miniratna, Navratna and Maharatna PSUs

[Act 2] Disinvestment

Mind the money flow in annual financial statement

Revenue Part: Annual financial statement
(Non-Tax) ReceiptsExpenditure
  • interest from loans given to PSU
  • dividend from shares owned in PSU
  1. Cost of running the department of disinvestment, Department of Public Enterprises etc.
  2. grants (खेरात) given to PSUs
Capital Part: Annual financial statement
ReceiptExpenditure
  1. money earned from selling PSU shares aka Proceeds from disinvestment
  2. when PSU repays loan principal, counted here. (interest payment in revenue reciept)
loans given to PSUs

Current skeleton framework of “disinvestment” comes from UPA-I’s Common Minimum Program

  1. Department of Disinvestment will look after this matter.
  2. We’ll not disinvest from “strategic” Public sectors viz. arms, ammunition, defense equipment, railways and atomic energy.
  3. We’ll not privatize the profit making PSU. Government will control atleast 51% shareholding in them
  4. We’ll not disinvest Navratna PSU
  5. We’ll close / sell off the loss making PSUs, with adequate compensation to workers.
  6. We’ll setup Board for reconstruction of public sector enterprises (BRPSE) + National investment fund.

National investment fund (NIF-2005)

  • Disinvestment = when Government sells its shares of Public sector undertaking.
  • Obviously, Government would earn ‘money’ from this share-selling.
  • This money doesn’t go into Consolidated Fund Of India
  • It goes to National investment fund (under Public accounts of India), therefore, outside parliament control.
  • Three fund managers look after NIF viz. UTI, LIC and SBI
From NIF, money goes into
75%into sarkaari schemes- MNREGA, health education, JNNURM etc.
25%into reviving / expanding other PSUs

Above 75:25 rule continued till 31st March 2013. After that, NIF Money is used for following purposes

  • buying shares of CPSE to enture 51% sarkaari ownership
  • recapitalizing sarkari banks and insurance companies
  • Investing in EXIM bank, NABARD, Regional rural banks,
  • Uranium corporation, Nabhikiya Vidyut Nigam
  • Metro projects and Indian railways capital Expenditure.

And Government budget will decide where to spend money among these sectors. For Budget 2013, NIF money was spent on Bank recapitalization and Indian railways.

Disinvestment targets
Budget 2013Rs. 40,000 crore but #EPICFAIL
Budget 2014~63,000 crores.

[Act 3] CPSE-ETF Exchange traded fund

CPSE-ETF Exchange traded Funds Goldman Sach

CPSE-ETF = a novel method of doing “Disinvestment”

  • Government takes out its shares of TEN Central public sector enterprises (CPSE) – ONGC, CIL, GAIL etc. worth total 3000 crore rupees.
  • gives them to fund manager Goldman Sach.
  • Goldman Sach packs these shares into a box. Then, he cuts off this box into smaller pieces, each piece sold for Rs. 17.45 as “new fund offer”.
  • You can buy these pieces (minimum order has to be Rs.5000)
  • if you’re first time investor, you can even get tax benefit under Rajiv Gandhi Equity Savings Scheme.(upto Rs.50k)
  • Later, you earn dividend (From the profit of those CPSE companies).
  • if you don’t want to wait for the dividend, simply sell your piece to another guy in the secondary market/stock exchange (BSE, NSE). (July rate Rs.26 for each unit).
  • Hence these are called “Exchange traded funds” (ETF)
  • and since the original shares were of Central public sector enterprises (CPSE)=> hence we call’em CPSE-ETF.

How is CPSE ETF different from Mutual funds?

Mutual fundCPSE-ETF
no such “free offer”Initially Goldman sach made an offer- if you buy 15 ETF units, they give you 1 unit free. (but with caveats on investment limit etc.)
When you return your mutual fund “UNIT” to the fund manager, he’ll repay CASH.when you return your ETF, Goldman SAch won’t give you CASH, he’ll give you shares (of those CPSE companies), then you can sell them in secondary market (at BSE/NSE etc) and recover the CASH
Fund manager takes higher Commission than ETF managerlower commission (meaning more “return” for you).
1963: UTI was the first mutual fund company in India
  • 1993: ETF launched in USA
  • 2002: ETF launched in India

SEBI Public listing norms

Minimum public shareholding
Non PSU (listed) public ltd. company25%
PSUs25% within next 3 years. (Earlier 10%)
  • So in other words, Government shareholding in PSUs, will decline to atleast 75% in the days to come.
  • Since Government will have to sell its shares= automatic disinvestment = ~60,000 crores will be earned = less fiscal deficit.
  • May be Jaitley himself secretly told SEBI to order this? One can come up with many conspiracy theories.
  • Related topic: PJ Nayak Committee for reducing Government shareholding in Sarkaari banks. But we’ll see that under chapter on financial intermediaries.

[Act 4] Various “Ratna” for PSU

Cost benefit of mugging up this topic= bad. But putting for the record.

Miniratna

  • two categories: CAT1 and CAT2
  • Common condition: must have made profit in last 3 years.
  • then further classification, based on “how much” profit they made
  • common benefit: capital Expenditure without Government approval
MiniratnaCAT1CAT2
condition
  • 30 cr. profit in any one year
  • profit all three years
  • positive networth
Expenditure freedom
  • 500 crore or upto their – whichever higher
  • 300 crore or 50% of their networth
examplesAirport Authority of India, Antrix (ISRO), BSNLHMT, Mineral Exploration Corporation Limited etc.

Navratna PSU (1997)

CONDITIONSBENEFITS
  1. already has miniratna cat1 status
  2. MoU with Government- has “very good” or “excellent” ratings
  3. 60 out of 100 marks in various criterias
  4. 4 independent directors in the board
  • can invest 1000 cr / 15% of networth in a single project- without Government approval
  • Examples: BEL, Hindustan Aeronautics, MTNL, Neyveli Lignite etc. total 17 as of June 2014.

Maharatna PSU (2010)

CONDITIONSBENEFITS
  • already has navratna status
  • significant global presence
  • listed on Indian stock exchange with minimum public shareholding as per SEBI rules (earlier 10%, new limit 25%)

in the last 3 years

  1. turnover >25,000 crores
  2. net worth >15,000 crores
  3. net profit after tax >5000 crores
can invest 5000 cr / 15% of networth in a single project- without Government approval.Full List (7)

  • BHEL, SAIL, GAIL
  • NTPC, Coal India
  • ONGC, Indian oil

Mrunal recommends

  1. (free) NCERT, NIOS, TN-Books
  2. Environment by ShankarIAS
  3. Indian Polity M.Laxmikanth (Hindi | English)
  4. Art & Culture by Nitin Singhania (Hindi | English)
  5. Spectrum: Modern History (Hindi | English)
  6. Bipin Chandra: Post Independence
  7. Fast-track to Arithmetic Rajesh Verma
  8. MK Pandey’s Analytical Reasoning
  9. Disha’s Topicwise Paperset (Hindi | English)
  10. School Atlas
  11. Mains: Language papers
  1. (free) NCERT, NIOS, TN-Books 4 History,Geo,Sci
  2. Indian Polity M.Laxmikanth (Hindi | English)
  3. Spectrum: Modern History (Hindi | English)
  4. Maths: Quantam CAT Sarvesh Kumar
  5. Objective General English SP Bakshi
  6. Word Power made Easy -Norman Lowe
  7. Topic wise Solved Paperset by Disha


So far 43 Comments posted

  1. themountaineer

    awesome mrunal……….you’re doing such a commendable job…..thanks to you from myself and the ones from rural areas………thanks..

  2. Sajid

    Mrunal Sir you’re raining articles!!

  3. Abhijit

    Sir earlier 75% of NIF was used for funding social sector schemes as you have rightly pointed. But this was amended in Jan 2013…now social schemes are not funded by NIF.
    Link: http://www.divest.nic.in/Nat_inves_fund.asp
    Thanks for being our messiah 🙂

  4. shikha

    thanks sir….nice work

  5. Atul

    Flood of articles.. With continuous raining.. No El nino effect. 😀

  6. puku

    sugarcane is kharif or zayad crop? plz ans anyone

    1. magnificient

      kharif mostly

    1. Mrunal

      updated thanks Rajesh.

      NIF Topic Update:
      National Investment fund: the 75:25 rule continued till 31st March 2013.
      After that, NIF Money is used for following purposes

      buying shares of CPSE to enture 51% sarkaari ownership
      recapitalizing sarkari banks and insurance companies
      Investing in EXIM bank, NABARD, Regional rural banks,
      Uranium corporation, Nabhikiya Vidyut Nigam
      Metro projects and Indian railways capital Expenditure.

      And Government budget will decide where to spend money among these sectors. For Budget 2013, NIF money was spent on Bank recapitalization and Indian railways.

  7. Amit

    good for basic knolewadge

  8. Nityesh

    if we get a question in the xam to classify PSU’s and railways or posts is among the given options then what should we do since mrunal has talked about 2 scenarios??

  9. vicky

    What’s up with English comprehension marks…..no notification yet by DoPT or upsc. They think that they can notify it later how does it matters. If someone knows the answer he should attempt all questions. But why shall I waste my 5-7 mins in these questions when I can attempt atleast a few more questions in that time as time management is also a part of CSAT paper 2.

  10. sachin

    Sir, english comprehensive ke marks to finel list me add nahi honge to fir
    unhe attempt krna necessary to ni hai na and agar attempt karte bhi hai to usme nagative marking to hogi hi ni ??
    Plz clarify.

  11. Nityanand

    I think in reference to National Investment fund, its not the actual proceeds that go into schemes and reviving PSUs.
    But the interest income generated after investing the amount by fund managers is allotted to the schemes and other PSUs.
    Not sure though. Imfact it would defeat the purpose of fund manager in the former case.
    Kindly clarify.

  12. rajendra

    mrunal sir please inform me about the best coaching center for economics in delhi,because i have planned to take economics as my optional subject for civil service main examination

  13. Mrunal

    NIF Topic Update:
    National Investment fund: the 75:25 rule continued till 31st March 2013.
    After that, NIF Money is used for following purposes

    buying shares of CPSE to enture 51% sarkaari ownership
    recapitalizing sarkari banks and insurance companies
    Investing in EXIM bank, NABARD, Regional rural banks,
    Uranium corporation, Nabhikiya Vidyut Nigam
    Metro projects and Indian railways capital Expenditure.

    And Government budget will decide where to spend money among these sectors. For Budget 2013, NIF money was spent on Bank recapitalization and Indian railways.

    1. Maharaj

      adding on;
      all fund managers managing the funds(LIC,UTI,SBI) have been discharged off and only govt will declare in budget or by executive decision of how much amount is to be spent off and where.

      1. puku

        so money will be spent on social sector schemes or not?

  14. Sourav basak

    good work

  15. Sourav basak

    good work. can anyone give ias toppers interview from wb

  16. Sourav basak

    can anyone give ias toppers interview from wb

  17. swathi

    NIF:
    The corpus as such is not used.
    But the profits that are received by investing the amount in various mutual funds are used in the ways told by mrunal sir.

  18. Sid

    very helpful article.. Thanks Mrunal sir..

  19. beb

    good job…mrunal….

  20. NEHA VERMA

    sir please guide us about atempting the questions on english comprehension

  21. neha

    criteria for maharatna has been revised in 2011…its 20/10/2.5 rather than 25/15/5

    see the link
    m.thehindu.com/business/Industry/norms-relaxed-for-maharatna-status-to-cpses/article1547322.ece/

  22. drts

    sir if i m not wrong audit for LIC is done by private auditors n not CAG.. correct me if m wrong.. thanks for the article

    1. B+ve

      3 category of Auditing of public corporation
      1. CAG directly audit …..DVC, ONGC, AI, et
      2. Private professional auditors who are appointed by Govt. in consultation of CAG….Central warehousing corp,
      3. Totally audited by private auditors. CAG does not come into picture at all

      ABOUT COMPANY, falls under second category…
      correct me if I’m wrong
      cheers!

      1. B+ve

        example of 3rd category…LIC, RBI, SBI, FCI etc

    2. Mrunal

      like i said in the article, some large corporation given exemption from CAG audit.

  23. shubh

    @Mrunal: U r great..!! I sometimes wonder how many hours of effort you put into all this…u should get some award for this “subsistence” service…
    Regards

  24. tuks

    @Mrunal.. small and humble addition.. goldman sach was giving 15 pe 1 free.. when one invested at least 200000 rs in etf..

  25. arun mishra

    sir as per ..s n lal..in case of maharatn condition are relaxed since mar17,2011…from 25000 to 20000 from 15000 and from 5000 to 2500…kindly make it clear…..tnx

    1. Mrunal

      Arun, since 2013, it is 25,000.
      Ref 2013’s PIB release:pib.nic.in/newsite/erelease.aspx?relid=92030

      1. arun mishra

        sir thnk u vry much.

  26. civil service aspirant

    mrunal sir can u please tell in which sector NIF money is to be spent as per budget of 2014 if it is given

  27. caustic576

    In an earlier article where you made a case for and against Disinvestment- you made an argument that Disinvestment proceeds are being used for bridging the FISCAL DEFICIT; and that reforms in FRBM are needed for the same.

    Isn’t the very act of Disinvesment- that it shows up under the CAPITAL RECEIPTS portion of the AFS, a notion of filling up the deficit (or atleast made to look so?)

    Are we to say that the accounting procedure itself will change in the future so that the Disinvestments won’t show up there?

    Please clarify, thanks in advance! 🙂

    1. osho baba

      when it is said “Disinvestment proceeds are being used for bridging the FISCAL DEFICIT”..it means that disinvestment money is only being treated as part of revenue received with no guideline for specific use of this revenue..this used to happen in 90’s..since disinvestment proceed are not likely to be regular and resource is finite using this to cover ur revenue shortfall is dangerous..might be rewarding in short term but dangerous in long term….i think this is what mrunal meant

  28. Nitin meena

    SIR ,
    Please ESB 16 series jaldi complete karo… Many others subjects currents are to be corelate with survey, but time limited.

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