Steps have been taken to simplify tax administration and moderate the tax rates and broad base taxation, abolition of wealth tax on financial assets, and reduction in tax rates on foreign companies to 48%.

India has become a member of Multilateral Investment Guarantee Agency (MIGA). As a consequence, all investments approved by the Government are insured against expropriation / nationalisation by MIGA.

DISINVESTMENT
At the time of Independence in August, 1947, it was felt that political independence without economic self reliance would be detrimental to the country’s sovereignty and autonomy. Hence, the public sector was introduced with a view to :

• build infrastructure to promote rapid economic growth and industrialisation ;

• create employment opportunities and promote balanced regional development ;

• create a self reliant economy by developing local industries ; and

• prevent/reduce concentration of private economic power.

The public sector policy was largely guided by the Industrial Policy Resolution of 1956 which gave the public sector a strategic role in the economy. Massive investments have been made over the past four decades in the public sector. However, after the initial exuberance of the public sector had died down, some problems were observed in terms of low productivity, poor project management skills, overmanning, lack of modern technology, inadequate attention to R&D and low priority to human resource development. These and other economic compulsions led to the adoption of a new approach towards the public sector.

In 1991 the Government issued a Statement on Industrial Policy which called for a review of the portfolio of public sector investments, the selective opening of the public sector, to the private sector, the referral of sick public enterprises to the Board of Industrial and Financial Reconstruction, the offering a part of the Government share holding in the public sector to mutual funds, financial institutions, general public and workers, and making the boards of public sector companies more professional and performance oriented.

The Disinvestment Commission was constituted in August, 1996 and 40 PSUs were referred to the Commission for advice. Later, 10 more PSUs were referred to the Commission.

As per the recommendations of the Disinvestment Commission, the strategy on disinvestment revolves around four long term objectives :

• strengthen PSUs where appropriate in order to facilitate disinvestment ;

• protect employee interests ;

• broad base ownership ; and

• augment receipts for Government.

The Commission has recommended that a Disinvestment Fund (DF), administered by the Ministry of Finance, be set up and the proceeds of the disinvestment be placed separately in such Fund.

To ensure implementation of the recommendations of the Commission, it has recommended that a Standing Empowered Group (SEG) be formed comprising the Cabinet Secretary, Secretaries of the Ministry of Finance, Department of Public Enterprises, Administrative Ministry of the PSU, along with the CEO of the PSU concerned.

The Government has agreed with the view of the Disinvestment Commission that the essence of a long-term disinvestment strategy should be not only to enhance budgetary receipts, but also minimise budgetary support towards unprofitable units while ensuring their long-term viability and sustainable levels of employment.

A total amount of Rs. 12,455 crores has already been disinvested to the public sector financial institutions, mutual funds and general public.

Powergrid Corporation of India Limited (Powergrid). (Share capital : US $ 787 m). Powergrid was set up in 1989 to construct extra high voltage AC and high power direct current transmission lines, sub-stations, road dispatch centres and communication facilities to transmit power from central generating agency and surplus if any from State Electricity Boards, to load centres within and across the geographical regions, reliably and economically. Its share capital is Rs. 2992.24/- crore.

The Commission is of the view that until the entire power sector is reformed, Powergrid may not be able to attract the right kind of response from institutional or other investors to consider disinvestment.

Oil and Natural Gas Corporation Limited (ONGC) (Share capital : US $ 375.3 m). The principal activity of ONGC is the exploration and production of crude oil and natural gas. Its share capital is Rs. 1426 crores. The Government has disinvested 2% of its share to mutual funds, financial institutions and 2% to its employees. ONGC is undertaking a detailed review of its operations for the purpose of restructuring and reorganisation. The Commission has recommended that disinvestment in ONGC be considered after the organisational changes are in position and the new pricing policy is known.

Gas Authority of India Limited (GAIL) (Share capital : US $ 222.4 m). GAIL has an approximate 13% share in overall LPG production in the country and about 32% share in gas-based LPG production. Its paid-up share capital is Rs. 845.3 crores. Disinvestment to the extent of 25% of the total equity capital is recommended for distribution between the domestic and international market, depending upon the market conditions. The price, exact timing and selection of global coordinators for the GDR issue will be done by SEG.

Hindustan Copper Limited (HCL) (Equity : US $ 89 m). HCL was set up in 1967 to manufacture copper products. Its equity is Rs. 338.20 crores. In 1995, the Government of India disinvested about 1% of the total equity in favour of financial institutions. The Commission has recommended two options for disinvestment :

HCL may implement its expansion projects, after which the Government may select a strategic partner for the company through an open and competitive bidding process offering 51% equity of the company. The Government may also disinvest 23% of the equity through an offer of shares in the domestic market to financial institutions, small investors and employees; or

To select a strategic partner straight away and offer 51% equity. After the completion of its expansion project, the Government may disinvest further 23% of the equity in the domestic market to institutions, small investors and employees.

Bharat Aluminium Company Limited (BALCO) (Share capital : US $ 128.4 m). BALCO has a market share of around 17% (including exports) in the aluminum industry. Its paid-up share capital is Rs. 488 crores. The Commission has recommended that the Government may immediately disinvest its holding in the company by offering 40% of the equity to a strategic partner, either domestic or foreign, through a transparent and competitive bidding process.

India Tourism Development Corporation (ITDC) (Share capital : US $ 17.8 m). ITDC operates 26 hotels, 30 duty/tax free shops and provides travel and tourist services. It has an equity share capital of Rs. 67.5 crores with a tangible net worth of Rs. 1480 crores (US $ 389 m). The Commission has recommended that disinvestment can go up to 74% or more. In respect of hotels located in prime locations, they may be handed over to established hotel chains through a competitive bidding process to run on long term structured contract on lease-cum-management basis. Other hotels are to be demerged into separate corporate identities, whose shares will be issued to Government and other shareholders in exchange for ITDC shares.

Rail India Technical and Economic Services Limited (RITES) (Equity capital : US $ 0.3 m). RITES was incorporated in 1974 with the object of rendering consultancy services primarily in all areas of rail transportation, technology and management, both in India and abroad. Its equity capital is Rs. 1 crore. The Commission has recommended that no disinvestment be made in RITES as it is not likely to get a favourable response from small investors and the uncertainty surrounding certain dues would preclude any disinvestment effort till such issues are satisfactorily resolved.

Pawan Hans Helicopters Limited (PHL) (Equity capital : US $ 30 m). PHL was incorporated in 1985 for providing helicopter services primarily to meet the requirements of ONGC. Its equity capital is Rs. 113.8 crores. The Commission recommended that the Government should first offer its share holding to ONGC so that PHL could become its subsidiary. In the event that ONGC is not interested, the Government should sell its entire holding of 78.5% to an investor.

Shipping Corporation of India (SCI) (Equity : US $ 74.3 m). SCI was incorporated in 1961. It owns 122 vessels aggregating 5.44 million dwt and operates in practically all areas of the shipping industry. It also operates cargo and passenger vessels owned by other Government agencies. It has an equity of Rs. 282.3 crores. The Government has disinvested 19.88% of the equity to Unit Trust of India, General Insurance Corporation, Life Insurance Corporation and foreign institutional investors. The Commission has recommend that the Government should disinvest in SCI in favour of the oil refinery companies. Thirty per cent of the equity of SCI may be offered to Indian Oil Corporation, Hindustan Petroleum Corporation Limited, Bharat Petroleum Corporation Limited, Cochin Refinery Limited and Madras Refinery Limited in proportion to their net profits. In addition, 10% could be offered to the private sector and joint sector refineries. In the event this offer is not accepted by the private sector refineries it may be offered to the public sector refineries in the manner already indicated.

Mahanagar Telephone Nigam Limited (MTNL) (Equity base : US $ 157.9 m). MTNL provides basic telecom services in two metropolitan cities- Delhi and Mumbai. It has an equity base of Rs. 600 crores. The Government has disinvested 34.27% of its holding mainly in favour of financial institutions, mutual funds and nationalised banks. In November, 1997, GDR of equity shares amounting to $ 358.74 m was issued in the international market.

It is intended that the nine major PSUs (Navratnas)- Bharat Heavy Electricals Limited, Bharat Petroleum Corporation Limited, Hindustan Petroleum Corporation Limited, Indian Oil Corporation Limited, Indian Petrochemicals Corporation Limited, National Thermal Power Corporation Limited, Oil and Natural Gas Corporation Limited, Steel Authority of India Limited and Videsh Sanchar Nigam Limited should become global giants and the Cabinet has approved various measures to give greater autonomy to these PSUs and improve their operating environment.

FORMS OF FOREIGN DIRECT INVESTMENT

As part of the economic reforms programme, policies and procedures governing foreign investment and technology transfers have been significantly simplified and streamlined. Today, private sector participation including foreign investment is welcome in practically all sectors of the economy, except those of strategic importance such as railways, atomic energy, defence etc.

Under the new Policy, all foreign investments and returns on them are fully repatriable, except where the condition of dividend balancing is applicable. This condition of dividend balancing has been restricted to 22 industries in the consumer goods sector.

The Reserve Bank of India accords automatic approvals to all proposals for foreign investment upto 51% of the equity of the Indian company in high priority industries. In certain sectors this limit for automatic approvals has been raised to 74%.Foreign equity upto 100% is allowed in certain sectors on an individual case basis.

POLICY AND GUIDELINES ON PRIVATE INVESTMENT IN VARIOUS SECTORS

Power. The private sector can set up thermal, hydel, wind or solar energy based projects without any limitation to their size. Private sector companies may operate either as licensees distributing power in a licensed area from their own generation or from purchased power, or as generating companies generating power for supply to the grid. Foreign investment in the power sector is actively encouraged and can take place either in the form of a joint venture with an Indian partner or as a fully-owned operation with 100% foreign equity.

Various State Electricity Boards are planning to restructure their operations, with the state of Orissa leading the way. The Orissa State Electricity Board has been divided into two: Grid Corporation and Orissa Hydro Power Corporation. A regulatory commission has also been set up. The Grid Corporation of Orissa (Gridco) has invited bids from private parties interested in forming 51:49 joint ventures with Gridco to manage the distribution of power in Orissa.

Haryana and Rajasthan are two other states who are seeking Joint Ventures with the private sector in distribution of power.

Foreign companies have submitted 35 proposals, worth US $ 23 bn for a capacity addition of 22,432 MW.

Telecommunications. The Government has announced a comprehensive policy for attracting private, including foreign investment in Value Added and Basic Services. These are Electronic mail, voice mail, data services, audio text services and video text services. For paging and cellular mobile telephones, a policy of selection through a system of tendering is followed.

An autonomous body, the Telecom Regulatory Authority of India (TRAI) has been set up to set standards, regulate prices, ensure technical compatibility among different service providers, fix access charges, protect consumer interest and resolve disputes between service providers.

Licences have been issued to 14 companies for paging services in 27 cities, for e-mail, voice mail and cellular services. Cellular and paging services by private operators have commenced in most parts of the country. For providing basic telephone services, 18 bidders have submitted 80 bids covering all telecom circles except Jammu & Kashmir.

Hydrocarbons. Foreign companies can invest upto 100% of the equity in any venture in the Petroleum Sector subject to approval of the Government of India. To attract investment in this sector, the Government has gone in for a continuous round the year bidding scheme for exploration acreages, which provides regular opportunities for companies to take up blocks for exploration.

Private, including foreign companies, are required to enter into production sharing with the Government and can recover all their costs before sharing profits with the Government of India. An Empowered Negotiating Committee comprising representatives of the Ministry of Petroleum, Finance, Law, ONGC, and Oil India Ltd, has been set up to conduct negotiations with various companies.

The Government has opened up the refining sector to private investment. Private companies are also encouraged to invest in the marketing of petroleum products. In fact a number of well known multinational corporations namely Shell, Castrol, Mobil etc. have already set up operations in the country.

Roads. Private sector, including foreign equity participation upto 100% in the highways is envisaged under Build Operate and Transfer (BOT) concept. Private organisations who invest in identified highway projects will be permitted to recover their investment by way of collection of tolls for specific periods.

The Government has identified 27 road projects for investment by private parties, involving US $ 4 bn. Letters of intent have been issued for 5 highway projects involving investment of US $ 119 m on BOT basis.

Ports and Shipping. The Government grants automatic approval of foreign investment of up to 51% in Indian shipping companies. Private entrepreneurs are given leases of berths and dry docks have been privatised. Revised guidelines to facilitate private sector investment in 11 major ports have been approved by the Cabinet whereby private sector participation has been allowed in construction and operation of additional assets, container terminals, bulk, break bulk, multi purpose and specialised cargo berths. Private parties will also be invited for setting up captive power plants at the ports.

Air taxi operations. The policy envisages encouraging private sector participation in air taxi operations. Foreign equity participation up to 40% and 100% NRI equity are allowed, subject to the approval of FIPB. The recently announced Policy on Airport Infrastructure has allowed private participation in the development of airports.

Mining. Foreign equity up to 50% in the mining sector would be automatic, except for gold, silver, diamonds and precious stones.

Private, including foreign investment in coal mining is currently permitted for captive consumption only (generation of power, manufacture of steel etc. ) and for setting up washeries. The new Coal and Lignite (regulation and development ) Bill, 1997, envisages private participation in coal mining.

INVESTMENT UNDER GLOBAL DEPOSITORY RECEIPT MECHANISM

In 1992 a scheme was initiated to allow the Indian Corporate Sector to have access to the Global Capital Markets through the issue of Foreign Currency Convertible Bonds (FCCBs)/ Equity Shares under the Global Depository Mechanism. Under this scheme, companies with a consistent track record of good performance (financial or otherwise) for a minimum period of three years can have access to the international capital market. Like their private sector counterparts, various public sector entities like Videsh Sanchar Nigam Ltd., Mahanagar Telephone Nigam Ltd. and Steel Authority of India have accessed the global capital markets and issued GDRs to foreign investors.

Table 2: Inflow of Direct Foreign Investment (FDI)

Total - Rs. 317,617.3 m / US $ 8,358.4 m (1991 to November 1997) 
Source : Reserve Bank of India (National Information Centre).
Note: The dollar amounts, wherever mentioned, have been converted @ Rs. 38 per US $.

CONCLUSION

The Policy of Disinvestment has been viewed as a positive step towards liberalisation as is evident by the amelioration of PSUs being opened up for privatisation. The Government hopes to strengthen loss making PSUs so that disinvestment of governmental equity in them to the private sector becomes more favourable and thereby increases the country’s budgetary receipts.

The onset of liberalisation of the Indian economy brought in its wake a marked increase in total direct foreign investment inflows into India. However, the country’s political instability due to changing governments was a deterrent to many foreign investors.

With the formation of the new Government at the centre, the feeling is once again of buoyancy as it is envisaged that the liberalisation policies are going to gather force. Several sectors, such as the Insurance sector, are expected to be opened up for private participation. It is indeed a positive sign that the country’s economic policies are for long- term in nature and encourage private participation.