2012

Top Stories: International

Know Your Basics: Disinvestment EUROZONE

Know Your Basics:

FIN-O-PEDIA
Lets Talk FINANCE!!

A SIMSREE Finance Forum Initiative | Issue 37

SYDENHAM INSTITUTE OF MANAGEMENT STUDIES, RESEARCH & ENTREPRENEURSHIP EDUCATION

Know Your Basics:

Disinvestment
What is disinvestment? Disinvestment involves the conversion of money claims or securities into money or cash. Disinvestment can also be defined as the action of an organisation (or government) selling or liquidating an asset or subsidiary. It is also referred to as divestment or divestiture. A company or a government organisation will typically disinvest an asset either as a strategic move for the company, or for raising resources to meet general/specific needs.In most contexts, disinvestment typically refers to sale from the government, partly or fully, of a governmentowned enterprise. In Indian context the new economic policy initiated in July 1991 the government has always had plans for disinvestment with targets in mind with regard to the money it wants to raise funds for meeting general/specific needs. Objectives Following objectives were stated in July, 1991 while propounding the disinvestment policy: 1. To meet the budgetary needs. 2. To improve overall economic efficiency. 3. To reduce fiscal deficit. 4. To diversify the ownership of PSU for enhancing efficiency of individual enterprise. 5. To raise funds for technological up gradation, modernization and expansion of PSUs. 6. To raise funds for golden handshake (VRS). Different Approaches to Disinvestments There are primarily three different approaches to disinvestments (from the sellers i.e. Governments perspective) Minority Disinvestment A minority disinvestment is one such that, at the end of it, the government retains a majority stake in the company, typically greater than 51%, thus ensuring management control. The present government has made a policy statement that all disinvestments would only be minority disinvestments via Public Offers. Examples of minority sales via Offer for Sale include recent issues of Power Grid Corp. of India Ltd., Rural Electrification Corp. Ltd., NTPC Ltd., NHPC Ltd. etc. Majority Disinvestment A majority disinvestment is one in which the government, post disinvestment, retains a minority

stake in the company i.e. it sells off a majority stake. The sale can be to private entities, like the sale of Modern Foods to Hindustan Lever, BALCO to Sterlite, CMC to TCS etc. Complete Privatisation Complete privatisation is a form of majority disinvestment wherein 100% control of the company is passed on to a buyer. Examples of this include 18 hotel properties of ITDC and 3 hotel properties of HCI. Importance of Disinvestment Presently, the Government has about Rs 2 lakh crore locked up in PSUs. Disinvestment of the Government stake can be in utilised for: Financing the increasing fiscal deficit Financing large-scale infrastructure development For investing in the economy to encourage spending For retiring Government debt- Almost 40-45% of the Centres revenue receipts go towards repaying public debt/interest For social programs like health and education Disinvestment also assumes significance due to the prevalence of an increasingly competitive environment, which makes it difficult for many PSUs to operate profitably. This leads to a rapid erosion of value of the public assets making it critical to disinvest early to realize a high value.

Euro zone
The Eurozone officially called the euro area, is an economic and monetary union (EMU) of 17 of the 27 European Union (EU) member states that have adopted the euro () as their common currency and sole legal tender. The eurozone currently consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. Most other EU states are obliged to join once they meet the criteria to do so. No state has left and there are no provisions to do so or to be expelled. Monetary policy of the zone is the responsibility of the European Central Bank (ECB) which is governed by a president and a board of the heads of national central banks. The principal task of the ECB is to keep inflation under control. Though there is no common representation, governance or fiscal policy for the currency union, some co-operation does take place through the Euro Group, which makes political decisions regarding the eurozone and the euro. The Euro Group is composed of the finance ministers of eurozone states, however in emergencies; national leaders also form the Euro Group.

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