DISINVESTMENT

 Disinvestment involves the conversion of money claims or securities into money or

cash.”
 Disinvestment can also be defined as the action of an organization (or government)
selling or liquidating an asset or subsidiary. It is also referred to as ‘divestment’ or
‘divestiture.’
 In most contexts, disinvestment typically refers to sale from the government, partly or
fully, of a government-owned enterprise.
 A company or a government organization will typically disinvest an asset either as a
strategic move for the company, or for raising resources to meet general/specific needs.

What are the Objectives Of Disinvestment?

The Government opts for disinvestment to raise wealth to meet particular needs or lower its
fiscal burden. It may also undertake disinvestment with an aim to encourage investments from
private players.

As it allows an entity to reduce its debt, disinvestment can pave the way for the long-term growth
and development of a country. Moreover, it enables the open market to have a larger share of
PSU ownership, thereby facilitating the development of a stronger capital market.

In simple words, the main objectives of disinvestment in India can be summed up as follows:

1. Improving public finances

2. Lowering the Government’s fiscal burden

3. Allowing higher private ownership

4. Promoting and maintaining competition in the market

5. Funding programmes for growth and development

6. Depoliticising non-essential activities

What is the Importance of Disinvestment?

 The introduction of the New Economic Policy in 1991 aptly highlights the importance of
disinvestment in India.
 Public sector undertakings (PSUs) had indicated a negative return rate on capital
employed, thus becoming more of a liability to the Government than an asset. Further,
 low returns from PSUs had an adverse effect on the country’s gross national savings and
national gross domestic product.
 A Disinvestment Policy allowed the Government to eliminate these units and focus on
core activities instead. As a result, it moved out from non-core enterprises, especially
those wherein the private sector has now emerged as a prominent player.

Since the 1990s, all successive governments in India have set a disinvestment target in order to
raise funds by selling their stake in PSUs.

The importance of disinvestment in India includes:

1. Financing the surged fiscal deficit

2. Raising funds to enable large-scale infrastructural development

3. Investing in the economy to boost consumer spending

4. Initiating social programmes pertaining to education and health

5. Reducing government debt (as about 40% of the Centre’s revenue receipts are spent on
repaying public debt/interest.

Timeline of Disinvestment Policy in India

The period from 1947 – 1991

o After independence, the country was on a development path by emphasizing the

importance of the public sector as a growth engine.

o However, the public sector outgrew itself, and its flaws began to show up in low capacity
utilization and efficiency due to overstaffing, poor work ethics, overcapitalization, and
cost overruns.

o Government sector's inability to innovate, make quick and timely decisions, and
significant interference in decision-making processes, among other things.

o As a result, in 1991, the decision was made to pursue the disinvestment route.

The period from 1991-92 – 2020-21

o India’s transformation began in 1991-92, with the disinvestment of 31 public sector

undertakings.

o The Disinvestment Commission, chaired by G V Ramakrishna, was established in 1996

to provide recommendations, manage, monitor, and promote the gradual disinvestment of
Indian public sector undertakings.
 o It submitted several reports with suggestions for the privatization of 57 public-sector
enterprises.

o In July 2001, Dr. R.H. Patil was appointed Chairman of this Commission.

o The Disinvestment Commission, on the other hand, ceased to function in May 2004.

o In December 1999, the Department of Disinvestment was established as a separate

department, and in September 2001, it was renamed the Ministry of Disinvestment.

o The Department of Disinvestment became one of the Ministry of Finance’s departments

in May 2004.

o The most disinvestments occurred between 2001-02 and 2003-04.

o These took the form of strategic sales (which involved a transfer of control and
management to a private sector) or offers for sale to the government, with the
government maintaining management control in the company.

o From 2009-10 to 2020-21, the return of disinvestment policy of the government was
prompted by a stable government and improving stock market conditions.

o The government began by selling minority holdings in publicly listed and unlisted PSUs,
which are profit-making.

o During this time, public offers were disinvested in enterprises, including NHPC Ltd., Oil
India Ltd., NTPC Ltd., REC, NMDC, SJVN, EIL, CIL, MOIL, and others.

Current Disinvestment Policy (2021-22)

o The government has set an ambitious disinvestment target of Rs. 1, 75,000 crore for
2021-22.

o This target will be achieved through sales of shares in public sector enterprises and
financial institutions, including two PSU banks and one insurance company.

o Required legislative amendments will take place for LIC IPO, as it is considered a master
stroke by the government in the insurance sector.

o In her budget speech, the Finance Minister announced that most public sector enterprises
would be privatized except in four strategic areas.

o The policy would lay out a clear path for strategic and non-strategic disinvestment.

o Strategic sales of IDBI Bank, BPCL, Shipping Corporation, Container Corporation, and
Neelachal Ispat Nigam Ltd will be completed in the fiscal year 2021-22.
 o A special purpose vehicle (SPV) would be created to monetize CPSE-owned land to sell
or reuse unused land.

Types Of Disinvestment Policy in India

There are three different types of disinvestment policies in India.

Minority Disinvestment

o It is a disinvestment in which the government retains a majority of the share in the

company, generally more than 51 percent.

o This type of disinvestment policy assures that the government retains management
control.

o Recently few public enterprises have gone through minority disinvestments, such as
Power Grid Corporation Of India Limited, Rural Electrification Corporation Limited,
NTPC Limited, and NHPC Limited.

o The government announced a policy in 2018 that all disinvestments for 2018-19 will be
made through minority disinvestment policy of the government through public offerings.

Majority Disinvestment

o The government sells a majority share of the government-owned company.

o The government now owns a minority party in the corporation post-disinvestment.

o This choice is based on strategic considerations of the government based on futuristic

policy.

o Most disinvestments are typically made in favor of other government-owned companies.

o After the government disinvestment from the Chennai Petroleum Corporation Limited,
formerly Madras Refineries Limited, it became a group company of Indian Oil
Corporation.

o The concept is to pool resources within a corporation, resulting in increased operational

efficiency.

Complete Privatization

o Complete privatization is a type of majority disinvestment in which the company’s

ownership is transferred to a buyer.
 o ITDC’s 18 hotel properties and HCI’s three hotel properties are the perfect examples of
Complete privatization.

Impact of Disinvestment on India

Disinvestment in India has several impacts on the country's economy and society.

o Economic Impact: It helps reduce the fiscal burden on the government by generating
revenue through the sale of assets.

o Encourages Efficiency: Disinvestment promotes efficiency and competitiveness in

public sector enterprises by introducing private ownership and management practices.

o Attracts Investment: It attracts domestic and foreign investors, increasing economic

investment.

o Enhances Resource Allocation: Disinvestment allows resources to be allocated more

effectively by transferring them from inefficient public sector enterprises to more
productive sectors.

o Improves Governance: Privatization through disinvestment often improves corporate

governance and accountability in privatized entities.

o Job Creation and Skill Enhancement: Disinvestment can lead to new job opportunities
and skill development as privatized companies undergo restructuring and expansion.

o Social Impact: Care should be taken to ensure that disinvestment does not negatively
impact social welfare programs or lead to job losses in sensitive sectors.

o Infrastructure Development: Disinvestment proceeds can be used for infrastructure

development and public welfare programs, contributing to societal progress.

ADVANTAGES

1. Greater inflow of private capital

2. Competition
3. Improvement in quality and competence

DISADVANTAGES

1. Loss of public interest and welfare

2. Fear of foreign control ( when FDI is permitted)
3. Fall in employment.