Proceeds of Disinvestment: Debate Concerning the Use

In the very next year of disinvestment, there started a debate in the country concerning the suitable use of the proceeds of disinvestment (i.e., accruing to the government out of the sale of the shares in the PSUs). The debate has by now evolved to a certain stage coming off basically in three phases:

Phase I: This phase could be considered from 1991–2000 in which whatever money the governments received out of disinvestment were used for fulfilling the budgetary requirements (better say bridging the gap of fiscal deficit).48

Phase II: This phase which has a very short span (2000–03) saw two new developments. First, the government started a practice of using the proceeds not only for fulfilling the need of fiscal deficit but used the money for some other good purposes, such as—re-investment in the PSEs, pre-payment of public debt and on the social sector. Second, by the early 2000–01 a broad concensus emerged on the issue of the proposal by the then Finance Minister.49 The proposal regarding the use of the proceeds of disinvestment was as given below:

Some portions of the disinvestment proceeds should be used:

(i) in the divested PSU itself for upgrading purposes

(ii) in the turn-around of the other PSUs

(iii) in the public debt repayment/pre-payment

(iv) in the social infrastructure (education, healthcare, etc.)

(v) in the rehabilitation of the labour-force (of the divested PSUs) and

(vi) in fulfilling the budgetary requirements.

Phase III: Two major developments of this phase are as given below:

1. National Investment Fund: In January 2005, the Government of India decided to constitute a ‘National Investment Fund’ (NIF)50 which has the following salient features:

(a) The proceeds from disinvestment will be channelised into the NIF, which is to be maintained outside the Consolidated Fund of India.

(b) The corpus of the National Investment Fund will be of a permanent nature.

(c) The Fund will be professionally managed, to provide sustainable returns without depleting the corpus, by selected Public Sector Mutual Funds (they are, UTI Asset Management Company Ltd.; SBI Funds Management Company Pvt. Ltd.; LIC Mutual Fund Asset Management Company Ltd.).

(d) 75 per cent of the annual income of the Fund will be used to finance selected social sector schemes, which promote education, health and employment. The residual 25 per cent of the annual income of the Fund will be used to meet the capital investment requirements of profitable and revivable PSUs that yield adequate returns, in order to enlarge their capital base to finance expansion/diversification.

The income from the NIF investments was utilised on selected social sector schemes, namely the Jawaharlal Nehru National Urban Renewal Mission (JNNURM), Accelerated Irrigation Benefits Programme (AIBP), Rajiv Gandhi Gramin Vidyutikaran Yojana (RGGVY), Accelerated Power Development and Reform Programme, Indira Awas Yojana and National Rural Employment Guarantee Scheme (NREGS).

2. Restructuring of NIF: In November 2009, the governement approved a change in the policy on utilisation of disinvestment proceeds. In view of the difficult situation caused by the global slowdown of 2008–09 and a severe drought in 2009–10, a one-time exemption was accorded to disinvestment proceeds being deposited into NIF—to be operational for the fiscals 2009–12, which was furhter extended to 2012–13, in view of the persistent difficult condition of the economy. All disinvestment proceeds (in place of the income accruing out of the investment of the NIF corpus) obtained during the three year period were to be used for selected social sector schemes.

Current Policy: In January 2013, the government approved restructuring of the NIF and decided that the disinvestment proceeds with effect from the fiscal year 2013–14 will be credited to the existing ‘Public Account’ under the head NIF and they would remain there until withdrawn/invested for the approved purpose. It was decided that the NIF would be utilised for the following purposes:

(a) Subscribing to the shares being issued by the CPSE including PSBs and public sector insurance companies, on rights basis so as to ensure 51 per cent government ownership in them.

(b) Preferential allotment of shares of the CPSE to promoters, so that government shareholding does not go down below 51 per cent in all cases where the CPSE is going to raise fresh equity to meet its Capex 51 programme.

(d) Investment by the government in RRBs, IIFCL, NABARD, Exim Bank;

(e) Equity infusion in various metro projects;

(f) Investment in Bhartiya Nabhikiya Vidyut Nigam Limited and Uranium Corporation of India Ltd.;

(g) Investment in Indian Railways towards capital expenditure.

The allocations out of the NIF will be decided in the government budget. This way, the policy regarding use of the disinvestment proceeds has become

flexible enough to adjust to the current socio-economic needs.