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PRIVATISATION, EMPLOYMENT AND EMPLOYEES

THE INDIAN EXPERIENCE


Shri P.K. Basu
India

OECD CONFERENCE on
Privatisation, Employment and Employees

10-11 OCTOBER 2002


Ataköy, Istanbul
Turkey
PUBLIC SECTOR UNDERTAKINGS IN INDIA

 3
Central Government owned Public Sector Undertakings

Particulars No. Profit/Loss for the


year 2000-01
(US $)
Profit making PSUs 122 (+) 5936

Loss making PSUs 111 (-) 2675

No profit or No loss 1 0

Total number of PSUs 234 (+) 3261

Total Investment 57107

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State Level Public Sector Undertakings in India

Particulars as on 31st March, 1997 No.

Profit making PSUs 54

Loss making PSUs 551

Non functioning PSU 241

PSUs not submitted accounts 100

Total number 946

Total Investment (US$ million) 24533

 5
Employment and Average Annual Emoluments in PSUs

Year Number of Average annual


Employees per capita
emolument
(In million)
(Rs.)

1998-99 190.0 147482

1999-2000 180.6 168339

2000-2001 174.2 219546

 6
DISINVESTMENT POLICY, PROCEDURE AND
PROGRESS

 7
The beginning of the Disinvestment Process

Phase I – 1991-92 to  The disinvestment policy of GoI can be seen to be implemented broadly in 2 phases
1997-October 1999.  The recommendations of the disinvestment commission set up in 1996, which formed the backbone of the
Phase I of disinvestment, can be summed up as :
Culmination of
Phase I was in the
form of the report
of the Number of
Mode of disinvestment recommended
disinvestment PSEs

commission set up A. Involving change in ownership / management


in 1996. 1. Strategic sale 29

2. Trade sale 8

B. Involving no change in ownership / management

Offer of shares 5

C. No change

1. Disinvestment deferred 11

2. No disinvestment 1

D. Closure / sale of assets 4

Grand Total 58

8
The Disinvestment Policy revisited

Main Features of
the current  Phase II – October 1999 onwards. The main feature of the policy can be culled out from the 2000-2001
budget speech as follows :
Disinvestment
– To restructure and revive potentially viable PSEs
Policy were laid out – To close down PSEs which cannot be revived
in the 2000-01 – To bring down Government equity in all non-strategic PSEs to 26% or lower, if necessary
budget speech. – To fully protect the interest of workers
– To put in place mechanisms to raise resources from the market against the security of PSEs' assets
for providing an adequate safety-net to workers and employees
Emphasis on
– To establish a systematic policy approach to disinvestment and privatisation and to give a fresh
maximising value impetus to this programme, by setting up a new Ministry of Disinvestment
realised from sale. – To emphasise increasingly on strategic sales of identified PSEs
– To use the entire receipt from disinvestment and privatisation for meeting expenditure in social
sectors, restructuring of PSEs and retiring public debt
Bold initiative to
close unviable
PSUs which cannot
be revived,
outlined.

9
Disinvestment Process & Role of MODI

Selection of PSU by MODI

Approval by CCD

Formation of IMG & Selection of Global Advisors

2-3 months Submission of Expression of Interest

Submission of Initial Technical Proposal

Due Diligence / Commercial negotiations


3-6 months
Finalise Shareholders Agreement (SHA)
& Share Purchase Agreement (SPA)

Financial bids
1 week
Selection of strategic partner & signing
of SHA & SPA

10
Main Constituents
 Cabinet Committee on Disinvestment (CCD)

 Core Group of Secretaries on Disinvestment

– The Core Group of Secretaries is headed by the Cabinet Secretary and comprises of
Secretaries from Ministries of Finance, Industry, Department of Disinvestment, Planning
Commission and Administrative Ministry and any other Department as may be required
The Cabinet Committee on
Disinvestment is the apex – The Core Group directly supervises the implementation of the decisions of all strategic sales
decision making body in the – The Core Group monitors the progress of implementation of the Cabinet decisions
disinvestment process
– The Core Group makes recommendations to the CCD on disinvestment policy matters
The Ministry of Disinvestment
is the key constituent and  Inter-Ministerial Group
manages the routine
– The Inter-Ministerial Group is chaired by the Secretary, Ministry of Disinvestment and comprises
functioning of the
disinvestment process. of officers of Ministry of Finance, Department of Public enterprises Administrative Ministry and
the CMD of the Public Sector Enterprise concerned
MODI is helped by the relevant
ministry and various other – The Inter-Ministerial Group is responsible for day-to-day implementation of the disinvestment
Government departments and decision
ministries during the process.
 Department of Disinvestment

Cabinet Committee for – The Department of Disinvestment (later, Ministry of Disinvestment)was set up vide Notification No.
Disinvestment (“CCD”) CD.551/99 dated the 10th of December 1999,
– Business allocated to Ministry of Disinvestment
Core Group of – All matters related to disinvestment of Central Government equity from Central Public Sector
Secretaries (“CGS”)
Undertakings
– Decisions on the recommendations of the Disinvestment Commission on the modalities of
Inter Ministerial Group disinvestment, including restructuring
(“IMG”)
– Implementation of disinvestment decision, including appointment of advisors pricing of shares
and other terms and conditions of disinvestment
Working Group – All matters relating to the Disinvestment Commission
11
Disinvestment till date

Disinvestment13022002
Targe t receipt for Actua l
No. of PSEs in w hich
Year the yea r (Rs. in re ce ipts (Rs. Methodology
equity sold
crores) in crores)
The
1991-92 47 (31 in one tranche and 2,500 3,038 Minority shares sold by auction method in bundles of "very
financial 16 in other) good", "good" and "average" companies
year 2002- 1992-93 35 (in 3 tranches) 2,500 1,913 Bundling of shares abandoned. Shares sold separately for each
03 has company by auction method
started off 1993-94 3,500 Nil Equity of 7 companies sold by open auction but proceeds
received in 1994-95
well with the
1994-95 13 4,000 4,843 Sale through auctionmethod, in wchih NRIs and other persons
closure of legally permitted to buy, hold or sell equity, allowed to
the Maruti participate
and IPCL 1995-96 5 7,000 362 Equities of 4 companies auctioned and Government piggy-
backed in the IDBI fixed price offering for the fifth company
divestments
1996-97 1 5,000 380 GDR (VSNL) in international market
1997-98 1 4,800 902 GDR (MTNL) in international market
1998-99 5 5,000 5,371 GDR (VSNL) / Domestic offerings with the participation of FIIs
(CONCOR, GAIL). Cross purchases by 3 oil sector companies
i.e. GAIL, ONGC & IOC
1999-00 3 10,000 1,829 GDR (Gail) in international market & MFIL's strategic sale.
VSNL domestic issue
2000-01 4 10,000 1,870 BALCO, KRL (CRL) & MRL through strategic sale / acquisition
2001-02 12 12,000 6,230 Strategic sale IBP, HTL, VSNL, ITDC, CMC, PPL, JESSOP,
HZL, MFIL, HCI
Total 47* 66,300 26,738

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Pace of Disinvestment
S.No Month PSU/Asset Sold Total

1. Jan., 2000 Modern Food Industries (India) Limited 1

2. Jul., 2000 Lagan Jute Machinery Limited 2

3. Mar., 2001 Bharat Aluminium Company Limited 3


4. Oct., 2001 HTL ; CMC 5

5. Nov., 2001 Hotel Ashok, Bangalore; Hotel Bodhgaya Ashok; Hotel Hasan Ashok 8
6. Jan., 2002 Hotel Ashok, Madurai 9
7. Feb., 2002 IBP ; Videsh Sanchar Nigam Limited ; Paradip Phosphates Limited ; 15
Hotel TBABR Mamallapuram; Hotel Agra Ashok; Luxmi Bilas Hotel Udiapur
8. Mar., 2002 Qutab Hotel, New Delhi; Lodi Hotel, New Delhi ; Centaur Hotel, Juhu Beach, 19
Mumbai; Centaur Rajgir

9. Apr., 2002 Hindustan Zinc Limited ; Centaur Hotel Airport, Mumbai 21

10. May, 2002 Maruti Udyog Limited 22

11. Jun., 2002 Indian Petrochemicals Corporation Limited 23

12. Jul., 2002 Hotel Airport Ashok Kolkata ; Kovalam Ashok Beach Resort ;Hotel Manali Ashok 26

13. Aug., 2002 Hotel Khajuraho Ashok; Hotel Varanasi Ashok 28

13
Disinvestment Scorecard

Disinvestment13022002
The Government Name of PSU
Reserve Price (Rs Reserve Price Bid Price (Rs Bid Price
Sale P/E
mn) (Rs/Share) mn) (Rs/Share)
has fared well in Lagan 20.5 - 23.9 3240 - 3790 25 4,000 Loss making
most instances
MFIL 786 8,559 1,055 11,490 Loss making
and has got a
Balco 5144 46 5,515 490 19
substantial
CMC 1089 141 1,520 1,967 12
premium over the
HTL 388 350 550 4,955 37
suggested
VSNL 12184 171 14,393 202 19
reserve price.
IBP 3770 507 11,537 1,551 63

PPL 1761 550 1,517 474 Loss making


In the case of the
Paradeep HZL 3532 32 4,450 41 26

Phosphate (PPL) JESSOP 120 2 182 3 Loss making

divestment it IPCL 8450 131 14,908 231 57

displayed its
flexibility by
selling at a price
lower than the
suggested
reserve price.

The government has performed exceptionally well on the divestments undertaken till date

 14
THE IMPACT OF PRIVATISATION ON EMPLOYMENT AND
EMPLOYEES

 15
Work Force – in India

1. Total workforce in India Rural: 269 million


(Source NSSO 1997) Urban: 86 million
Total: 355 million

2. Total workforce in organised sector Government: 20 million*


Private: 7 million
Total: 27 million
3. Total workforce in CPSEs About 2 million

4. Investment supporting retention


of this workforce (as on 31.3.01) Rs. 274,114 cr.

Despite these investments, and no privatisation until 1999, the PSUs


workforce is declining.

( *Includes Central / State / Semi Government, Central / State / Semi Public Sector)
16
Employment in Central Government owned Public Sector
Undertakings

Year No. of employees


(millions)
91-92 2.18
92-93 2.15
93-94 2.07
94-95 2.06
95-96 2.05
96-97 2.00
97-98 1.96
98-99 1.90
99-2000 1.80
2000-01 1.74

 17
Growth in Employment

Growth rate of employment during the past decade


 1983-1994 – increased at the rate of 2.04% p.a.c.

 1994-2000 – increased at the rate of 0.98% p.a.c.

Public Sector Employment Growth


 1983-1994 – increased at the rate of 1.52% p.a.c.

 1994-2000 – declined at the rate of 0.03% p.a.c.

Private Sector Employment Growth


 1983-1994 – increased at the rate of 0.45% p.a.c.

 1994-2000 – increased at the rate of 1.87% p.a.c.

Labour Force
Labour force increased at the rate of 2.05% p.a.c.during 1983-94 and by 1.03% p.a.c. during
1994-2000

 18
Gap in Employment Avenues

1983-1994 (%) 1994-2000

Growth in labour 2.05 1.03


force
Growth in 2.04 0.98
employment in
organised sector

 19
ROLE OF LABOUR UNIONS IN IMPLEMENTING PRIVATISATION
 The disinvestment policy and procedure has been discussed and debated at several levels
with the national level Labour Unions. One such forum is the Indian Labour Conference held
annually.
 Disinvestment has been one of the important topics discussed in such conferences with wide
and active participation of national level labour unions.
 Apart from discussion at the national level, in each case of privatisation, discussions are
initiated with labour unions of the company at the beginning of the process in which the
disinvestment policy, the rationale behind it and the various safeguards built into the
agreements are elaborately explained to the labour unions.
 The concerns of the labour regarding their service conditions, past liabilities, if any, pension
benefits, severance scheme, employees stock options, are discussed in detail and
suggestions received from the labour incorporated as best as possible.
 Such interaction with the labour unions are then followed up at regular intervals as the
disinvestment process proceeds.
 The disinvestment process has been supported by prominent national level Labour Unions
such as the Indian National Trade Union Congress (INTUC); even at the cutting edge level
tremendous support has been received from labour unions and now there is increased
consensus and support at the State levels as well.
 This approach has had a huge impact and resulted in smooth transfer of companies.

20
PRIVATISATION RESTRUCTURING AND EMPLOYEE
RETRENCHMENT – ISSUES AND POLICY RESPONSES

 21
Protection of Employee Interests

Protection of employee interest is one of the predominant aspects of privatisation.

Suitable provision related to employees interest provided for in the Shareholders’ Agreement
(SHA).
“Best efforts” clause is also incorporated in SHA mentioning the benefits given by the
Government to physically challenged persons and members of social disadvantaged categories
of the society stating that the Strategic Partner shall use its best efforts to cause the company to
provide adequate job opportunities to such persons.
The concerns among the employees, namely, retrenchment from duty, pay scales and other
service conditions are also addressed.
Companies that have been privatised have not retrenched even a single person.

Voluntary Retirement Scheme (VRS) given by the disinvested PSUs are at scales which are
normally higher or equal to the VRS given by the Government to Central Public Sector
employees.
Reduction in the workforce is a continuous process as during the last 10 years the workforce in
PSUs has reduced from 2.3 million to 1.7 million even without any privatisation or strategic sale.

 22
PSUs – Social Benefits and Amenities

 PSUs - Complete freedom for wage settlement with unionised staff.


 PSUs – As a model employer provided housing facility to the employees and other
essential community facilities like health care, education, shopping and creation centres etc.
in their township.
 Capital expenditure on township incurred by PSUs

31.3.1999 US$ 1446 million


31.3.2000 US$ 1637 million
31.3.2001 US$ 1367 million
 Recurring expenditure on township maintenance, administration and social overheads.

1998-99 US$ 689 million


1999-2000 US$ 731 million
2000-2001 US$ 790 million

 23
Severance Package
Voluntary Retirement Scheme (VRS)

Model Voluntary Retirement Scheme notified by the Government was in force since 1988 till
April, 2000 and was uniformly applicable to all public sector enterprises.
New liberalised scheme of VRS notified on 5.5.2000.

3,69,277 employees opted for Voluntary Retirement Scheme (VRS) till 31.3.2001 in PSUs.

VRS in Profit Making PSUs

May frame their own schemes of VRS and make it attractive enough for employees to opt
for it. Compensation:-60days salary for every completed year of service may be offered
subject to the condition that such compensation will not exceed the salary for the balance
period of service left.
VRS in Marginally Profit or Loss Making PSUs
Permitted to introduce an improved VRS scheme.

Compensation :- 35 days salary for each completed year of service and 25 days per year
of service for the balance of service left till retirement subject to the condition that such
compensation will not exceed the salary for the balance period of service left.
VRS in Non-Viable Enterprises

In the non-viable enterprises facing closure, VRS will be extended as Voluntary Separation
Scheme (VSS) already approved by the Government.

 24
Social Safety Net – Retraining, Redeployment

Social Safety Net is an integral part of the Economic Reform Progress

Government of India set up the National Renewal Fund (NRF) in February,1992.

Of the 73,194 workers counseled, 55,374 workers were retrained upto 31.3.2001 and out of
which 19,458 have been redeployed.
Department of Public Enterprises has taken up a fresh scheme for PSUs from the year 2001-
02 with a budget provision of Rs. 80 million with a target to benefit about 800 people under the
Counseling, Retraining and Redeployment Scheme.

 25
Experience in Employee matters post disinvestment -
Case Study
(A) Bharat Aluminium Company Ltd. (BALCO)
 Introduced Voluntary Retirement Scheme (VRS) : 1675 employees applied for, but granted to
only about 400 employees working in units that have closed down.
 In spite of losses of Rs 200 crore due to the strike, ex gratia payment of Rs 5000 per employee
paid.
 Long-term wage agreement for a period of 5 years on 7.10.2001.

 Workmen get a guaranteed benefit @ 20% of basic pay.

(B) Modern Food Industries (India) Ltd. (MFIL)


 Wages increased by an average of Rs. 1600/- per employee. VRS higher than Government VRS
offered to the employees.
(C) Paradeep Phosphates Ltd. (PPL)
 Average emolument of the employees increased by 30% within one month of taking over of the
management control by the Strategic Partner.
 Additional financial burden - Rs.37.9 million per annum.
Contd …

Successful integration of labour union with the new management

26
Experience in Employee matters post disinvestment -
Case Study

(D) Hindustan Zinc Ltd. (HZL)


 Employees’ benefits which were withheld in the year 2001-2002, have been restored.

 It is pertinent to note that as long as a venture is an ‘industrial establishment’ the

protection provided to the employees under the various labour laws continues. These
labour laws are applicable to the company irrespective of whether it is a public sector
undertaking or is in the private sector.

Successful integration of labour union with the new management

27
THE EFFECT OF STATE-OWNED ENTERPRISE PENSION CONSIDERATIONS
ON PRIVATISATION
 In all cases of privatisation through strategic sale route, the protection of employee
interest has been of paramount consideration.
 The existing service conditions of the employees are protected including any pension
obligations which the company may be having .
 Mostly, past liabilities of the employees are settled prior to disinvestment.

 In several cases, the strategic partner has also undertaken to meet past liabilities related
to employees.
 In many cases, where the employees favoured voluntary retirement before sale, liberal
severance pay has been offered pre privatisation.
 At the beginning of the process itself, discussions are held with employees and all issues
relating to service conditions, past employees liabilities etc. are settled. These are fine
tuned through further discussions as the disinvestment process proceeds.
 Payment of past liabilities, VRS etc. do involve budgetary allocations by the Government
which is worked out in consultation with the Administrative Ministry and Ministry of
Finance.
 It has been the experience that the value of enterprise is considerably enhanced as a
result of resolution of these issues before hand. That the Government has so far got high
value for the companies sold, one of the reasons is perhaps this.
28
EMPLOYEE PARTICIPATION IN PRIVATISATION TRANSACTIONS:
POLICIES AND PERFORMANCE
 In every PSU selected for disinvestment the employees are involved right from the
beginning and therefore the privatizations so far have been smooth.
 As an incentive, employees are offered the company’s shares at a substantial
discount to the strategic sale price/market price.
 The protection to the employees built into the agreements with the strategic partner
are evolved after discussion with the employees at several stages.
 There is protection against retrenchment, protection of service conditions, severance
pay in case of rationalization, protection of retirement benefits including medical
facilities post retirement etc. Though employee buy outs have not been successful
so far, these are under negotiation in several cases and the structure being worked
out.
 The agreements also envisage that Government could offer stakes to employees
from its balance shares in future as well.
 A great amount of transparency has been achieved in the whole process regarding
the employees.

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