Public Sector Undertakings in India

What is PSU?

Public Sector Undertaking (PSU) is a government-owned corporation. An alternative title for a PSU is a Public Sector Enterprise, where federally owned PSUs are termed Central Public Sector Enterprises (CPSEs) and are administered by the Ministry of Heavy Industries and Public Enterprises. Government own a majority (51 percent or more) of the company equity. There are at present 251 PSU companies in India as of 2012.

The level of financial autonomy is currently divided into three categories:

• Maharatna
• Navratna
• Miniratna CPSEs (itself divided into Category I & Category II)

In 1997, the Government identified eleven PSUs as Navratnas. These enterprises were BHEL, VSNL, MTNL, BPCL, HPCL, GAIL, IOC, IPCL, NTPC, ONGC and SAIL. Two of these, IPCL and VSNL were privatised and now India has 9 navratnas. The Government has also created a category called Miniratna, which is for companies that have made profits continuously for the last three years or earned a net profit of Rs 30 crores or more in three years. As on 21 July, 2014 there are 7 Maharatna, 17 Navratna and 72 Miniratna CPSE's.

The problem:

Governance at public sector undertakings (PSUs) has been abysmal. Social obligations have taken a toll on their profits. Further, most PSUs do not have clearly defined succession planning in place. They function as per the whims and fancies of government. As a result, most of them are bleeding. Further, regulations and inefficient management is another issue to deal with PSUs.

Divestment plan for such companies is not finding any takers due to ridiculous pricing expectations and waning investor interest amidst depressed market conditions.

Why are PSUs in loss?

Let’s take two perennial bleeding giants. They are Bharat Sanchar Nigam Ltd (BSNL), and Mahanagar Telephone Nigam Ltd (MTNL). The latter’s losses are larger than its revenues, and the former’s losses are a third as much as revenues.

The biggest problem for these companies is high employee cost. BSNL has 25 times more employees than Bharti Airtel, the top telecom operator, with half the revenue. MTNL has three-and-a-half times more employees, with barely a tenth of Bharti’s revenue.

Present Situation:

The fate of some PSUs hangs in balance as government officials discuss proposals to shut down some loss-making state-owned companies.

Some of these PSUs include Air India, BSNL, ONGC, SAIL, Hindustan Photofilms, Hindustan Fertilisers Corporation and HMT have been consistently bleeding cash and have survived only on budgetary allocations.

Loss incurred:

A quarter of the country's 277 state-run firms, which produce everything from condoms to scooters, have lost about $16 billion over the last decade, according to government records.

HMT: Government ordered to shut down HMT Watches and HMT Chinar Watches due to their continued losses since 2000.

BSNL: State-run Telecom Company incurred a loss of Rs. 14,979 crore in landline services during 2013-14, where as its overall loss was recorded at Rs. 7,085 crore.

Air India: This airline has been incurring losses and is trying to refuel its pockets via heavy discounts on fare prices. The state-run carrier halved its operating loss in the financial year. It suffered a loss of Rs. 2,120 crore in 2013-14, down from Rs. 3,800 crore in 2012.

Hindustan Photofilms: Incorporated in 1960, the company was well-known for making film rolls. Its overall losses are around Rs. 82.33 billion rupees which is about 40 times its paid-up capital.

At least 20 loss-making companies owned by the central government have stopped production or have almost no activity yet still pay staff full salaries, according to an official at the Board for Financial and Industrial Reconstruction, the agency charged with expediting restructuring or liquidation.

Ministers are reluctant to close these zombie companies because it will lead to job losses, which in turn could cost them votes.

Government stance:

After two decades of halting privatisations, the central government still owns about 260 firms and thousands more at the state level. Government is looking for ways to revive some of the sick companies through capital infusion, joint ventures and by bringing in new management. The government also expects stronger PSUs to come to the aid of weaker ones.

Finance Minister Arun Jaitley has indicated a willingness to consider privatisation of some PSUs. However, for the time being, it will stick to selling minority stakes in profit-making public sector companies.

A senior government official confirmed that a Cabinet note proposing the closure of six firms has been circulated. The list includes Hindustan Photo Films, HMT Bearings, HMT Chinar Watches, Tungbhadra Steel, Hindustan Cable and the iconic HMT Watches. In the second round, 15 more loss-making firms will be under consideration, including British India Corporation, IDPL and their subsidiaries.

Conclusion:

Government policy is adversely affected by PSU commercial interests. For India, which has the world's highest number of starving children and people who can't read, paying the factories' running costs and salaries diverts money that could be spent on healthcare and education.

India's labour laws, which the World Bank says are the most restrictive anywhere, also make it hard to sack staff for any reason other than criminal misconduct.

However selling the big loser PSUs will at least signal the government’s intent to prevent more taxpayer money going down the drain. If the NDA can dump three of its biggest no-hopers, it would be a positive. The NDA government may not be keen on the ‘P’ word (privatisation) for banks or profitable public sector companies, but surely it can at least get rid of its white elephants that serve no public purpose any longer.

Sources:

Govt says no to PPP model for reviving sick PSUs

Govt May Shut Down Loss-Making PSUs Like ONGC, Air India and BSNL

Which is the largest PSU in India today?

Govt mulls closing PSUs hit by losses

Narendra Modi seeks to revive India's 'zombie factories', not abandon them

Can PSU divestment change the face of India Inc?

Sick PSU sell-off, reforms top of Arun Jaitley's mind

Jaitley wants to sell bleeding PSU ulcers: He should start with Air India, BSNL and MTNL

Government to finally shut terminally ill PSUs like HMT Watches, Tungbhadra Steel and others

Cover Image: http://www.freedigitalphotos.net Contributor: Stuart Miles

Cover Image: http://www.freedigitalphotos.net Contributor: renjith krishnan

Cover Image: http://www.freedigitalphotos.net Contributor: Stuart Miles