Modes of privatization

Well known techniques of privatization are present in developed as well as in developing and transition countries from Eastern and Central Europe.

3.4.1. Privatization by Selling Shares to the Public

A public listed company issues shares to the general public. For the issue of shares there are a number of options like, for instance, the shares can be issued on a national as well as an international platform or even to a group or one person in particular. In most cases an issuer is hired who sells bonds at his own risk. This thus eliminates the risk of the state. The issuer can be an investment bank. There are situations under which only parts of the shares of the public entity are sold to the private companies, this is done in

order to raise the number of shares. This can only be brought in to practice if two conditions are satisfied (Romer, 1998).

An entity that is to be privatized must have the potential to make profit in future, as then would it be an attractive factor for the invertors. There are a number of benefits that are obtained through the issuance of shares of public companies. It distributes the shareholding into the hands of a number of individuals, therefore not letting the shareholding to be concentrated in a few hands. This gives an open opportunity to the small investors, and this enables them to create popular capitalism. In addition to this privatization also brings transparency of the accounts (Kenawy, 2009).

Despite these advantages there are a number of demerits, which are attached to the issuance of shares (Ramanadham, 1995). One disadvantage is the complexity of issuing shares, if one company decides to issue shares it has to bear a huge transaction cost and would even have to devote a great deal of time. The cost is so high that it creates a crowding out effect. The crowding out effect basically explains the situations under which the access of a number of private investors becomes very hard. In countries that are not very developed the capital markets are not found to be that sound, therefore they do not have enough funds to support the companies financially. This causes the individual shareholders to lose their control over the managers who are supposed to be their agents. Those owners who have made big investments in the company have greater say over the management.

3.4.2. Privatizing Through Share-selling to Private Investors

Under this process the shares are issued to selected investors rather than offering to the general public. This process is less complicated and is subject to less transaction cost.

Those countries that do not have well established capital markets find this method more convenient. This practice is mostly adopted by those companies that are not very productive and require necessary expertise for the technological domain (Starr, 1990).

If shares are being issued by this process then there should be proper selection criteria for potential buyers. The buyer should be competent, must have experience as well as financial power. Only if the buyer meets the criterion would he be able to become a successful new owner and bring about better results (Kenawy, 2009).

The future owners get more flexible with the upcoming policies of the companies. Apart from these advantages there are a few disadvantages as well, which are listed by (King and Levine, 1993). The disadvantages are as follows:

Propriety and revenue creates danger for the organizations. By acquiring shares the private investors gain control and possess the ability to throw the unwanted individuals, groups and institutions out of the domain. The investors should be selected as per a specific criteria, if this is not done then it is highly likely that the chances of corruption would increase. Even greater transparency can be achieved if a proper mechanism is followed for the assortment of potential buyers.

3.4.3. Management Buy-in Privatization (MBI)

MBI is a new methodology adopted by the managers in which the managers buy the share stock of the enterprise as entrepreneur. This is an effective alternative to the previous buying procedure of the stock carried out by private sector investors.

MBI methodology is specifically designed for the enterprises where not only the capital is required but also the enterprise possesses high technology that is being used in different developed countries regarding the sales and marketing fields along with an effective costing system (Levine, 1999).

3.4.4. Management and Employee Buy-out Privatization (MBO or EBO)

MBO/EBO (management or employee buy-out) is the advanced methodology adopted by the management as well as the entire staff of the enterprise who themselves buy the company for privatization. MBO/EBO generally adopted by the public sector organizations. These organizations are mostly facing critical economic conditions but possess sound management, which comprises highly skilled and qualified workers who can run the organization effectively. Sometimes firms adopt this method for fulfilling the market demands by restructuring (Plane 1997), as discussed below:

The sale of an enterprise depends upon the maintaining of the jobs that exist in the enterprise, without which the sale could not be done.

The management of the organization must be highly motivated to handle all the new responsibilities of every staff member. In the method of EBO, the misunderstandings and distrust present among the workers against the management is restrained and there are also chances that external participation of personnel could also take place.

Along with the advantages related to this method there are also several drawbacks, which are discussed below. The two main disadvantages given by McKinnon (1993) are: One of the drawbacks of this method is that it is not considered

to lead the enterprise towards the desired aims and long-term replacements of employees selected socially or politically. The power relating to bureaucracy remains the same as in the old system. The major point, which is not acceptable by the people, as it is very hard to believe that a professional enterprise manager selected from the system of the centralized economy could be hired on the basis of market demands.

In such situations where the transference of ownership to the previous management is considered conservative it could lead to the reduction of the required capital and the economy of the running market.

3.4.5. Privatization Through the So Called Phenomenon of “Leveraged-buy-out”

The Leveraged-Buy-out is another method of privatization to MBO/EBO, which was known before these new methods. In this method of privatization a large number of workers, either including managers or not, are involved and their wages are so high that it can support the capitalization of funds as well as the external funds required by the organizations, involvement of credit companies, owners of the public enterprises or government. Warranties are also offered for organizations‟ equity or future income (Levine, 1999).

3.4.6. Privatization through Selling of the Privatization Individual Assets

This is also a new method of privatization by selling the privatization of individual assets. This method involves straight selling of goods regarding the individual assets of an enterprise, whether they are connected by any relation or not, also the assets correlated to each other involving different working organizations. Liquidation is also once involved in direct trade of patrimonial goods that is the privatization of materials of correlated organizations could not be possible economically as well as financially

Some of the cases involve the selling of isolated parts with the brain of the companies remaining untouched. Auctions, shares and communication mediums are taken under consideration for selling to the interested parties (Porta et al., 2002).

3.4.7. Privatization Through Restitution to Former Owners

This method is under practice in the former socialist countries of Eastern and Central Europe, where with the restoration of the economy, many people were deprived of their assets. Therefore, returning these enterprises to former owners, will involve many legal complications while identifying the former owners and keeping them away, which makes the method more expensive in such circumstances (Beesley and Littlechild, 1994).

3.4.8. Privatization Through Coupons (Voucher Privatization)

Privatization through direct selling has limitations in Europe because in these countries different forms of contributions have been evolved, which hinder the fast transfer of ownership rights associated with a certain social parity. The issuance of vouchers is one of the common factors of privatization that enables the citizens of countries involved in this process to receive an equal number of coupons, without any payment or at a little price, which can later be exchanged for shares of a public company or land (Kenawy, 2009).

Fast and low cost privatization is one of the benefits of this method (Cook and Uchida, 2003). In this type of privatization, political acceptance is projected because of the full participation of the population. Therefore, it is commonly considered a widespread technique. This process of privatization is in the interests of the public as

they become direct owners of the government property, and gain benefit in the form of future earnings and fiscal facilities rather than indirect participation.

Conversely, through this method the dearth of internal economic resources is compensated. The initial cases have, by this time, ascertained that the bulk of privatization plays a positive role in the advancement of investment markets. The amount of swapped certificates for each company exhibits the worth the citizens attach to it. This also serves as a basis for deciding the price for the retained stock, for prospective selling on the external and internal capital markets.

There are some drawbacks of this means of privatization: the government is unable to draw any revenue obtained from the selling of an organization and also the companies fail to acquire the financial stability required for executing the means of reorganization. Apart from this, at the initial stage, there exists a comparatively high difference in the rights of ownership due to the inability of the shareholders to efficiently control the companies.

Ikram (1980) stated that due to the fact that shareholders do not have adequate knowledge of the way the financial position of a country is evaluated, the way financial statements are interpreted, the performance of the meeting of the shareholders and the administration of the company, it is quite difficult for them to protect their own rights.

As a result, the dearth of financial efficiency and progress could be viewed after privatization has taken place.

CHAPTER FOUR: RESEARCH METHODOLOGY

This chapter gives an overview of the research approach, research design, sampling design, data types, data collection and interpretation methodologies involved in carrying out the research and to test the proposed research questions the statistical tools are used.