What is Disinvestment? Learn the objective and reasons for disinvestment Swastika
Disinvestment

Disinvestment

Disinvestment is defined as the action of an organization (or the government) usually central and state selling or liquidating an asset or subsidiary. 

It is known by other names such as ‘divestment’ or ‘divestiture.’

Background

In the wake of economic policy known as ‘liberalization, privatization, globalization ‘ in the 1990s, the Indian government then began to divest its stake in the public-sector companies which further helped the centre trim its fiscal deficits.

Governments would often sell stakes in the public sector companies in order to raise revenue. During recent times, the central government would use this route to make up for the loss-making ventures and then increase the non-tax revenues. 

The National Democratic Alliance government made some strategic disinvestment in the key PSUs like Bharat aluminium company and Hindustan zinc, Indian petrochemicals corporation limited and VSNL.

Under Narendra Modi, the NDA tried retiring government debt as mostly 41-45% of the centre’s revenue receipts would go towards the repayment of public debt or interest so the government decided to exceed its divestment target of 2017-18, after failure to retire the debt of Air India. 

This could have been possible by the method of strategic cross-divestment which can be defined as one PSU buying a stake in another, helping the government to raise revenues but keep the company’s control with themselves.  

Objectives of Disinvestment

   The following are the main objectives of disinvestment

  • The government will no longer burden themselves. 
  • The public finances will also get improved.
  • They are opening up markets for private firms, which will then lead to the formation of better capital markets.
  • To raise funds for the government to facilitate the long-term government objectives of growth and development in the country.
  • The channelization of resources for more productive avenues and large-scale infrastructure development projects by reducing capital expenditures on existing non-performing assets or loss-making firms.
  • The return on investment (ROI) of underperforming firms will get improved.
  • The government will require funds for social programs like health and education and for investing in the economy so that it encourages spending.

Means of Disinvestment

Disinvestment can be done in the following ways

Types of Disinvestment

  • Minority disinvestment is, after this disinvestment, the government will retain a majority stake in the company, which is greater than 51%, hence the control lies in the hands of the management example is auctioning to institutions where Andrew yule & co. ltd., CMC Ltd. etc.
  • Majority disinvestment is the one in which the government, post disinvestment, will retain a minority stake in the company. An example is krl to bpcl.
  • Complete privatization is a form of majority disinvestment where there is 100% control of the company will be passed on to a buyer. Example 18 hotel properties of itdc and 3 hotel properties of hci.

Reasons for Disinvestment

  • Disinvestment is done in order to meet the fiscal deficit.
  • There is expansion or diversification of the firm.
  • The government can repay its debts.
  • There is the implementation of a government plan.
  • PSUs will give a negative rate of return on the capital.

The new industrial policy of 1991, introduced along with other economic reforms, discussed the disinvestment and privatization of PSUs. The government’s disinvestment policy stated that

  • The divestment of the government’s stake is done in order to raise money to meet its fiscal needs.
  • They wanted to protect the interests of workers.
  • The government wanted to restructure itself through the help of PSUs.
  • They had to deal with the profit-making PSUs that could not be privatized.
  • They had to do something about the closed down PSUs which cannot be revived or sold.

The listing of all the unlisted PSUs and would then sell a minimum of 25 per cent of equity to the public

Drawbacks

  • Government shareholding in PSUs is the public asset which should not be liquidated to meet the immediate needs.
  • PSUs contribute to public finances through dividends and disinvestment can reduce this important source of finance.
  • There is no clear policy or framework. as the PSUs then in the absence of PSUs, the private enterprises might form a cartel.
  • There are multiple control authorities. When the government goes for privatization, there is a possibility of a PSU being sold off at a lower value to a private entity which can be against the larger public interest.
  • It was unable to attract foreign buyers.

Recent Divestments

The sale of Air India and its subsidiaries were not able to attract a single bid in 2018-19. 

Dipam and the civil aviation ministry will again go for it in 2019-20.

Dipam and the ministry of tourism will be making a deal which will be placed in front of the cabinet committee on economic affairs in 2019-20.

By December 2019 the government is also looking to find a potential operator for its hospitality property, hotel Ashok.

Some of the IPO’s which will face disinvestment are telecommunications consultants India, Railtel corporation India, national seeds corporation Kudremukh Iron Ore Company, Garden Reach Shipbuilders, and IRCTC.

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