What is disinvestment?

Disinvestment refers to the process of selling off a company's assets or shares to raise capital.
This can be done voluntarily by a company to restructure its operations or as a result of
financial distress. Disinvestment can also refer to the withdrawal of funds from an
investment, such as a mutual fund or a pension plan. It's a common strategy used by
companies to manage their finances and by governments to reduce their debts.

Types of disinvestment
The choice of disinvestment method depends on factors such as the entity's financial goals,
market conditions, and the specific circumstances surrounding the decision to divest. Each
type of disinvestment has its own implications and can be used strategically to achieve
different objectives.

1. Equity Disinvestment: Selling a portion of the government's or a company's equity

holdings in a public sector enterprise (PSU) or a corporation. This can involve selling
shares to the public through an initial public offering (IPO) or through a strategic sale to
private investors.
Example, Tesla’s issuance of additional shares to raise capital, diluting the ownership stake
of existing shareholders.

2. Asset Sale: Selling specific assets or business units rather than equity shares. This
could include divesting subsidiaries, divisions, or non-core assets to generate funds.
For example, general electric’s sale of its transportation business to Wabtec Corporation as a
strategic move to focus on core operations.

3. Privatisation: Transferring ownership and control of a public sector enterprise to

private entities. This often involves selling the majority or entirety of government shares to
private investors or corporations.
For example, the privatisation of British Telecom in 1980s, where the UK government
sold its entire stake in the telecommunications company.

4. Share Buyback: Companies repurchase their own shares from the open market,
reducing the number of outstanding shares. This can be a way to return cash to shareholders
or
improve earnings per share. Example, Apple’s share buyback programs, where the
company repurchases its own shares to return excess cash to shareholders and boost stock
value.

5. Strategic Alliances and Joint Ventures: Forming partnerships or joint ventures with
other companies, where the disinvesting entity reduces its stake in a particular business
by bringing in a partner.
For example, the Indian government’s strategic disinvestment in Air India, aiming to exit the
national carrier and reduce its financial burden.

What is the need for disinvestment?

Disinvestment is undertaken for various reasons, and the decision to divest assets or shares
can be driven by both economic and strategic considerations.

1. Capital Generation: One of the primary reasons for disinvestment is to raise funds.
Governments or companies may sell their stakes in public sector enterprises or divest non-
core assets to generate capital for new investments, debt reduction, or meeting fiscal
targets.
2. Enhancing Efficiency and Performance: Disinvestment can be a strategic move to
improve the efficiency and performance of an organisation. Private ownership may bring
in better management practices, innovation, and a more competitive environment, leading
to improved operational results.

3. Reducing Fiscal Burden: Governments may engage in disinvestment to reduce the

financial burden of maintaining and subsidising public sector enterprises. This can help in
cutting down budgetary deficits and reallocating resources to priority areas.

4. Promoting Private Sector Participation: Encouraging private sector involvement in

industries traditionally dominated by the public sector can lead to increased competition,
innovation, and overall economic growth. Disinvestment facilitates the transfer of
ownership and control to private entities.

5. Market Liberalisation: Governments may pursue disinvestment as part of broader

economic reforms to liberalise markets and reduce state intervention. Opening up sectors to
private investment can lead to increased competition, efficiency, and innovation.

6. Debt Reduction: Disinvestment proceeds can be used to pay down debt, improving the
financial health of the entity. This is particularly relevant for companies looking to strengthen
their balance sheets and reduce interest payments.

DIPAM and Role

The Department of Investment and Public Asset Management (DIPAM) was established on
December 5, 2016, in India. It was created as a separate department under the Ministry of
Finance to centralise and streamline the management of the government's disinvestment and
asset monetization activities. DIPAM plays a key role in formulating policies, planning and
executing disinvestment transactions, and promoting efficient use of government assets to
boost economic growth and fiscal sustainability. The department appoints advisors, ensures
regulatory compliance, and promotes transparency and fairness in the disinvestment process.
Beyond disinvestment in public sector enterprises, DIPAM is actively involved in the
monetization of non-core government assets. By engaging in policy advocacy and
collaborating with various stakeholders, DIPAM contributes to the efficient utilisation of
government resources, promotes private sector participation, and supports economic growth
and fiscal sustainability.

Procedure for disinvestment

The procedure for disinvestment can vary depending on the specific circumstances, the
entity involved , and the chosen method of disinvestment. However, here is a general outline
of the typical procedure for disinvestment:

1. Policy Formulation: The first step involves formulating disinvestment policies. This
includes determining the overall objectives, the sectors or companies for disinvestment,
and the preferred methods of divestment.

2. Identification of Candidates: The entity undertaking disinvestment (government or

company) identifies potential candidates for divestment. This could involve evaluating the
financial performance, strategic relevance, and market conditions related to the entities
under consideration.
3. Appointment of Advisors: Financial advisors, legal experts, and other
professionals are appointed to assist in the disinvestment process. They help with
valuations, due diligence, legal compliance, and overall transaction management.

4. Valuation: Valuation of the assets or shares to be divested is conducted. This step is

crucial in determining the fair market value and setting an appropriate price for the
disinvestment.

5. Approval: The disinvestment proposal, including the chosen method and other
relevant details, is presented for approval. In the case of government disinvestment, this
may involve obtaining approval from the cabinet or relevant authorities.

6. Regulatory Compliance: Ensure compliance with regulatory requirements and

obtain necessary approvals from regulatory bodies, stock exchanges, and other relevant
authorities.

7. Preparation for Transaction: Prepare all necessary documentation, including

information memoranda, prospectuses (in case of public offerings), and other legal
documents.

8. Announcement: Announce the disinvestment plan to the public, investors, and

stakeholders. Provide relevant information about the entity being divested, the method
of disinvestment, and the timeline.

9. Bidding or Sale Process: Conduct the bidding process or initiate the sale of
shares/assets through the chosen method. This may involve auctions, public offerings,
strategic sales, or other methods, depending on the disinvestment strategy.

10. Transaction Execution: Execute the disinvestment transaction, ensuring that all
legal and procedural requirements are met. This includes the transfer of ownership, the
sale of shares, or the transfer of control to the new owners.

11. Post-Transaction Compliance: Complete post-transaction compliance, including

updating records, ensuring the transfer of funds, and complying with any regulatory or
legal obligations.

12. Monitoring and Evaluation: Monitor the performance of the divested entity and
evaluate the outcomes of the disinvestment. This step helps in assessing the success of the
disinvestment strategy and refining future plans.
SPEECH
Disinvestment refers to the process of selling off a company's assets or shares
to raise capital. This can be done voluntarily by a company to restructure its
operations or as a result of financial distress. Disinvestment can also refer to
the withdrawal of funds from an investment.

Disinvestment is a strategic financial move which involves reducing or

completely divesting ownership in a business entity. Various methods are
employed based on financial goals and market conditions:
1. Equity Disinvestment where a portion of government or company equity in a
public entity through methods like IPOs is sold.
2. Asset Sale which includes Selling specific assets or business units instead of
equity shares.
3. Privatisation which is Transferring ownership and control of a public entity
to private entities, often by selling government shares.
4. Share Buyback where Companies repurchase their own shares from the
market, reducing outstanding shares.
5. Strategic Alliances and Joint Ventures where partnerships or ventures with
other companies, reducing stake in a business.
Each disinvestment type has unique implications and is chosen based on
specific objectives and circumstances.

Disinvestment serves diverse economic and strategic purposes, driven by both

capital needs and efficiency goals. Governments and companies divest to
generate funds for new investments or debt reduction, aiming to enhance
operational performance through private ownership. This strategic move can
relieve governments of fiscal burdens tied to public enterprises, promoting
efficiency and innovation. Encouraging private sector participation fosters
competition and economic growth, aligning with broader market liberalization
goals. Additionally, disinvestment aids debt reduction, improving financial
health for companies and reducing interest payments. Overall, these motives
reflect a nuanced approach to optimizing financial resources and fostering a
competitive economic environment.

Established on December 5, 2016, the Department of Investment and Public

Asset Management (DIPAM) in India operates under the Ministry of Finance,
serving to centralize and streamline government disinvestment and asset
monetization. DIPAM formulates policies, plans and executes disinvestment
transactions, appoints advisors, ensures regulatory compliance, and advocates
for transparency. Beyond disinvesting in public sector enterprises, DIPAM
actively engages in monetizing non-core government assets, contributing to
efficient resource utilization, promoting private sector involvement, and
supporting economic growth and fiscal sustainability.

The disinvestment process, adaptable to specific circumstances and entities,

typically follows a systematic approach. It begins with policy formulation,
identifying candidates based on financial and strategic considerations. Advisors
are appointed for valuations and due diligence. Approval is sought, complying
with regulations, and obtaining necessary clearances. Transaction preparation
involves documentation, leading to a public announcement. Bidding or sales
processes are executed, ensuring legal compliance. Post-transaction, records
are updated, funds transferred, and compliance upheld. The divested entity's
performance is monitored and evaluated, facilitating the assessment of the
disinvestment strategy's success for future refinements.