Capital Markets IV

Disinvestment
• Also called Divestment and is associated with sale of shares by PSUs
• Started in 1991 as a structural reform package. Reason for this
process to start : Government realized that it was not competent in
area of business and must be left to private sector
• Also as private sector comes in it would help in raising fresh capital,
increasing accountability, efficiency of the PSU enterprises
• First phase of Disinvestment was selling shares of limited quantity of
PSUs to Domestic and Foreign institutions (not to public)
 Disinvestment
• Second phase was strategic sale to any big private player
• Objective is that control and management remains with one entity
and then he can do his best to lift the PSU
• Third Phase belonged to selling public issue of Oil PSUs, ONGC, HP, BP,
Indian Oil .
• The Public issue was made as government received criticism why it
sold to single player strategically
• The PSU Disinvestment is somewhat similar to what happened in UK
IN 1970s
• However there it was very fast and a lot of air, railways, telecom etc
have been divested
 Disinvestment : For and Against

• For Reasons
• If objective is to improve efficiency of PSUs, Give necessary
autonomy in decision making
• If the Objective is to give a new life to PSU through stock
market listing
• Increases visibility of PSU, Most of the PSUs are Navratna
Companies (LIC, NTPC, GAIL, NHPC), investors/middle class
feels proud to own their shares
• Generates revenue for government,
 Disinvestment : For and Against
• Against
• Fear of Massive Layoff
• Loss of profits which go to exchequer
• Most PSUs are in critical sector /potentially risky to divest
• By not divesting PSU, a message can be sent to world that in India
everything is not for sale
• PSU Disinvestment does not necessary mean PSU reforms
 Disinvestment : For and Against
• Rather attempt should be made to bring in professionals on PSU
Boards and not merely bureaucrats
• Hands off Policy to PSUs; give more freedom, autonomy and don’t
make these scapegoat i.e. forcing PSUs to declare more dividend as
government needs money
• Use disinvestment proceeds fairly. Do not use money collected for
meeting current expenditure i.e. bridging fiscal deficit rather money
collected must go back to improve the health of the PSU
• Disinvestment targets are fixed in every budget