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

[Act 1] PSU Classification

Classification #1: where they operate?

STRATEGIC	NON-STRATEGIC
Arms, Ammunition, defense equipment defense air-crafts and warships Atomic Energy (except nuke energy for agriculture, medicine and non-strategic industries) Railways transport	Those who are not under “Strategic” category

 

Classification #2: How they were born?

GOVERNMENT COMPANIES	PUBLIC CORPORATIONS
ONGC, SAIL, Coal India ltd etc.	LIC, Air India, IDBI, UTI etc.
registered under companies act, Government owns >50% shares	setup 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 applies	same
Dept. of public enterprises (under Heavy ministry) acts as nodal agency	same
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 maker	Top loss makers
The Oil and Natural Gas Corporation Ltd National Thermal Power Corporation Ltd Fertilizer Corporation of India Ltd Coal India Ltd Bharat Heavy Electricals Ltd	Bharat Sanchar Nigam Ltd Mahanagar Telephone Nigam Ltd Air India Ltd Chennai Petroleum Corporation Ltd Hindustan Photo Films Manufacturing Co. Ltd

• Overall 277 Central public sector enterprises
• Out of them ~80 loss making.

Problems with PSUs	REFORMS 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) Receipts	Expenditure
interest from loans given to PSU dividend from shares owned in PSU	Cost of running the department of disinvestment, Department of Public Enterprises etc. grants (खेरात) given to PSUs

Capital Part: Annual financial statement

Receipt	Expenditure
money earned from selling PSU shares aka Proceeds from disinvestment 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 2013	Rs. 40,000 crore but #EPICFAIL
Budget 2014	~63,000 crores.

[Act 3] CPSE-ETF Exchange traded fund

• 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 fund	CPSE-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 manager	lower 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. company	25%
PSUs	25% 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

Miniratna	CAT1	CAT2
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
examples	Airport Authority of India, Antrix (ISRO), BSNL	HMT, Mineral Exploration Corporation Limited etc.

Navratna PSU (1997)

CONDITIONS	BENEFITS
already has miniratna cat1 status MoU with Government- has “very good” or “excellent” ratings 60 out of 100 marks in various criterias 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)

CONDITIONS	BENEFITS
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 turnover >25,000 crores net worth >15,000 crores 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