Disinvestment: Away from the public eye, the government's attempts to shut sick state-run firms is worthy of notice

Many public sector undertakings (PSUs) have long been sick or unviable, and an acknowledged drain on public money. Therefore, for decades now, successive governments have been considering disinvestment and closure of these undertakings. There is occasional movement on disinvestment - in the news currently is the high-profile divestment of Air India (AI). Closures have been few and far between.

In the case of the private sector, the Insolvency and Bankruptcy Code (IBC) has brought in dynamism in the restructuring and sell-offs of chronically sick companies, and since big industrial houses are involved, everyone knows of the happenings there.

 Disinvestment: Away from the public eye, the governments attempts to shut sick state-run firms is worthy of notice

Representational image. Reuters.

But away from the public eye, few know that the government has cracked the whip on its own defaulters as well, and successfully closed down chronically sick public companies. This story too needs to be told.

Having been an early part of this story, I know that there was a lot of action in this direction, made possible by practical and clear-headed decisions that helped unravel the complex systemic knots blocking closures. The little noticed Guidelines of the Department of Public Enterprises (DPE) on ‘Time bound Closure of Sick/Loss making Central Public Sector Enterprises (CPSEs) and Disposal of Movable and Immovable Assets’ encapsulate these decisions.

The test case, early in the regime, was the Department of Heavy Industry (DHI), a department looking after as many as 32 PSUs. DHI had been regularly seeking, and routinely getting, what was called ‘salary support’ from government budgetary resources, to pay employees of sick and loss-making enterprises. In 2014, the government decided that no further salary support would be made available to chronically sick and loss-making enterprises.

In the DHI, we initially identified five PSUs – HMT Watches, HMT Chinar Watches, HMT Bearings, Tungabhadra Steel, and Hindustan Cables Limited (HCL) - that could not survive in the absence of such support, and decided in principle to close them down. The closure proposals, framed after considerable confabulations, tried to tackle the systemic constraints that had bogged down past efforts. Many rounds of consultations on these proposals at different levels under the umbrella of the Niti Aayog culminated in the DPE Guidelines of 2016.

What were the key constraints and how were they addressed? Two were very important: disposal of land and employee opposition.

Disposal of land

The first was that of disposal of land assets. Officialdom tends to be extremely reluctant to be a part of any decision-making on disposal of land to private parties. Why is this so? It’s primarily because of the existing legal framework. No matter how transparently land assets are disposed of, their post disposal value tends to shoot up over time.  When this happens, and a complaint is filed, the concerned officers are rendered vulnerable to the charge of criminal misconduct under Section 13(1)(d)(iii) of the Prevention of Corruption Act.

Notably, it is not necessary under this provision for the public servant to have had criminal intent and to have personally benefited (quid pro quo) from the decision. Any land sale in a growing and urbanising economy, would, with the passage of time, lead to a ‘pecuniary advantage’ to some person, and it is up to the agency investigating to determine whether this was ‘without public interest’, which is all that needs to be determined. Unfortunately, there have been a number of such cases in the past wherein the investigating agency has determined the absence of public interest, and the officers dealing with the case were hung out to dry. This possibility, of assigning a criminal motive post facto, has bedeviled the bureaucracy, preventing many officers from taking decisions.

The problem was tackled by restricting the disposal of immovable assets primarily to central and state governments, their enterprises and state entities. This makes sense if we look at government as a whole, and not departmentally. Meeting fresh requirements of urban land for public entities is not easy as costs of acquiring land are high, and good locations are not readily available. With this guideline, idle productive assets of PSUs could potentially be gainfully utilised for alternative public purposes. Most importantly, there would be no real reason for any reluctance on the part of the concerned officials to take decisions, since there would be no possibility of allegations of providing pecuniary advantage to any private buyer.

Employee oppostion

The second key constraint in any closure, always, is employee opposition. Past efforts had often been derailed by the understandable reluctance of employees to sever their ties with their company. Brought up in a welfare state ethos, managements were also less than enthusiastic in implementing steps for separation of employees. Government efforts to force the pace usually ended up in protracted litigation.

The new guidelines provide for a Voluntary Retirement Scheme (VRS) and the calculation of a generous separation package for the VRS based on the 2007 CPSE pay scales. This was a departure from existing policy of the DPE, which provided for VRS based on the actual pay scales in operation. Most sick/loss-making PSUs were paying employees on the 1992 or 1997 CPSE pay scales, as and when they could afford to pay them at all. The new guidelines stipulated that the severance package be calculated on the basis of a higher notional scale not actually being received by the employees of these PSUs. In the cases of the initially identified PSUs under the DHI, employee groups found this package fair and indeed urged its early implementation.

Along with the VRS, the guidelines require the invoking of the Industrial Disputes Act, 1947. Invoking this Act puts in place a hard time-constraint. Just as in the IBC, there is a deadline of nine months for the process, following which the unit is closed and the assets sold. This Act permits the employer to announce the closure of the enterprise and seek permission from the Labour Ministry for implementing closure in 90 days. This creates a supporting incentive structure so that incomplete acceptance of VRS by a few holdout employees (as happened in some cases in the past) does not indefinitely hold up the closure process. Once the deadline is reached, any remaining employees who do not opt for the generous VRS would have to be retrenched as per law. The retrenchment package would obviously be less generous than the VRS.

The new guidelines iron out many other nitty gritties. These include the modalities for settlement of liabilities with creditors; farming out of the functions of auctioning of movable assets and management of immovable assets to specialised agencies hired for the purpose; recognising the prior claim of state governments to land originally leased or made available by them for the setting up of the PSU.

As someone who has been part of the system, I would say that a sound framework has been worked out and has, for the first time, delivered concrete results. As of today, all the five initially identified PSUs have been closed and employees retired peacefully. With the only exception of the Ranibagh unit of HMT Watches, where the Uttarakhand High Court has stayed the closure to ask the government to consider the possibility of reviving the unit!

Instrumentation Limited, Kota, a subsequently identified PSU with a history of industrial discord, has also been closed down without opposition from employees. Lands have been smoothly transferred to entities like the J&K government, the Karnataka government and the Indian Space Research Organisation (ISRO), enabling a scarce resource to be productively utilised for public benefit.

If the proof of the pudding is in the eating, this is truly a great job done.

With general elections a year away, and local ‘sensitivities’ associated with PSUs, we can expect a hiatus but hopefully, from this firm policy foundation, more deserving cases may attain ‘closure’ in the future.

The writer is former secretary in the Department of Heavy Industry (DHI).

Updated Date: May 08, 2018 15:53:35 IST