DISINVESMENT

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Disinvestment
Disinvestment is a process in which the
public undertaking reduces its portion in
equity by disposing its shareholding.
“Disinvestment” as per SEBI (substantial
acquisition of shares) guideline, means
the sale by the central government/state
government, of its shares or voting rights
and/or control, in PSUs. The
disinvestment reduces government
participation in the company.

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 Privatization and Disinvestment
 Privatization implies a change in ownership, resulting in a change in
management.

 The privatization of public sector enterprises will occur only when govt. sells
more than 51% of its ownership to private entrepreneurs.

 Disinvestment on the other hand, has a much wider connotation as it could either
involve dilution of govt. stake to a level that result in a transfer of management or
could also be limited to such a level as would permit govt. to retain control over
the organization.

 Disinvestment beyond 50% involves transfer of management, where as

disinvestment below 50% would result in the govt. continuing to have a major
say in the undertaking.

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 Criteria for disinvestment
 The decision regarding disinvestment or liquidation
viewed in the light of following criteria:
 a) Whether the objectives of the company are achieved
 b) Whether there is decrease in number of beneficiaries
 c) Whether serving the national interest will be affected
because of disinvestment
 d) Whether private sector can efficiently operate and
manage the undertaking.
 e) Whether the original rate of return targeted could not
be possible to achieve.
 f) Whether socio-economic objectives lots its purpose

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 Merits of disinvestment
 In Private Sector, the decision making process is quick
and decisions are linked with the competitive market
changes.
 The disinvestment process would bring in better
corporate governance, exposure to competitive,
corporate responsibility, improvement in work
environment etc.
 The market participation in capital of PSUs through
stock exchanges would enable the market to discover
the latent worth of PSUs.
 The Loss making PSUs can be successfully revived by
asking the strategic partner to infuse fresh capital and
exercising excellent management control over sick
PSUs
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 Demerits of disinvestment
 Selling of profit-making and dividend paying PSU
would result in loss of regular source of income to the
government.
 There would be chances of ‘asset stripping’ by the
strategic partner. Most of the PSUs have valuable assets
in the shape of plant and machinery, land and buildings
etc.
 The Government’s Policy or disinvestment includes the
disposal of both profit making, as well potentially viable
PSUs.

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 Background of Disinvestment

 The Indian economy had virtually embraced bankruptcy during the

period of 1980-92.

 In 1991, there was 236 operating public sector undertakings, of

which only 123 were profit making.

 The top 20 profit making PSU’s were responsible for 80 percent of

profits.

 The return on public sector investment for the year 1990-91 was just
over 2 percent. 7
The basic charges against the public sector for its
Poor performance are as follows:
(a) Low rate of return on Investment
(b) Declining contribution to national savings
(c) Poor capacity utilization
(d) Overstaffing, bureaucratization leading to
excessive delays and wastage of scares
resources.
(e) On account of these phenomenon, many public
sector enterprises have become more a burden
than an asset to the government.
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 Process of Disinvestment

 The govt. in July 1991 initiated the disinvestment process in

India, while launching the New Economic Policy (NEP).
 The govt. had appointed the Krishnamurthy committee in 1991
and Rangarajan committee in 1992 to look after the
disinvestment process.
 Both the committees have recommended disinvestments to fulfill
objectives of modernization of the PSE’s through:
(a) Strengthening R &D
(b) Initiating diversification/expansion programme
(c) Retaining and reemployment of employees
(d) Funding genuine needs of expansion
(e) Mitigating fiscal deficit of the government. 9
 The committee submitted its report covering 58 enterprises, out of 70
enterprises referred to it by the govt. recommendations ranged from strategic
sales in various proportions to disinvestments ant various level.
 This committee was ultimately abolished in 1999.
 The govt. set up a new Department of Disinvestment in 1991 to establish a
systematic policy approach to disinvestment and to give fresh impetus to the
programme of disinvestment, which will increasingly emphasize strategic sales
of identified PSU’s.
 In 2001, the govt. reconstituted the disinvestment commission with R.H.Patil as
its chairman.
 The govt. has decided to refer all ‘non-strategic’ PSU’s and their subsidiaries,
excluding IOC, ONGC, and GAIL to the commission for its independent
advice.

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 Objectives of Disinvestment:
 The following are the main objectives of the disinvestment policy of the
government:
(a) To reduce financial burden on the government
(b) To encourage wider share of ownership
(c) To introduce competition and market discipline
(d) To help public enterprise upgrade their technology to become competitive
(e) To rationalize and retain their workforce
(f) To improve efficiency and productivity in public enterprise through new
industrial policies.

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 Modalities of Disinvestment:
In order to achieve the various objectives and goals of
disinvestment many methods have been formulated and
implemented. These includes:
(1) Public Offer: offering shares of public sector enterprises at a
fixed price through a general prospectus, the offer is made to the
general public through the medium of recognized market
intermediaries.

(2) Cross Holding: In the case of cross holding, the govt. would
simply sell part of its share of one PSU to one or more PSU’s.

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(3) Golden Share: in this model, the govt. retains a 26 percent share
in the PSU. This 26 percent share will continue to give the govt. the
status of majority share holder.
(4) Warehousing: Under this model, the govt. owned financial
institutions were expected to buy the govt.’s share in select PSU’s
and holding them until third buyer emerged.
(5) Strategic Sale: Under this model, govt. sells a major portion
(51% and above) of its stake to the strategic buyer and also gives
over the management control.

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 Progress of Disinvestment:

Disinvestment has also been undertaken in states.

 Out for the 222 state level public enterprises identified for disinvestment, the
process has been initiated in 124 enterprises.
 Out of which 30 enterprises have been privatized and 68 have been closed
down.
The reason for such low proportion of disinvestment proceeds against
the target are:
(a) The unfavorable market conditions.
(b) Stringent bureaucratic procedure.
(c) The Govt. is not transparent about its approach towards privatization of PSE’s.

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 Suggestion
1. The government has to form a policy framework for
the entire disinvestment process.

2. The government should de-link the disinvestment

process from the budgetary exercise.

3. Government should stop setting up of the targets in

every year annual budget and should have a long-term
plan.

4. Timing of disinvestment is crucial and the government

should follow a specific method or process in order to
reap more chunks.

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 RECENT DISINVESTMENTS
1. ONGC
2. BHEL
3. PGCIL Ltd.
4. NHPC Ltd.
5. STC Ltd.
6. ITDC
7. NLC Ltd.
8. NFL Ltd.
9. MMTC Ltd.
10.NALCO Ltd.
* Disinvestment should be avoided in the sectors which
are directly connected to common people like oil,
sugar etc.