Disinvestment of Public

Enterprises
Course: BBA-II
Subject: Business Environment
Unit-II
Faculty: Dr. Priya Sharma
 DISINVESTMENT
At the very basic level, disinvestment can be explained as follows:

“Investment refers to the conversion of money or cash into securities, debentures,

bonds or any other claims on money. As follows, 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.’

In most contexts, disinvestment typically refers to sale from the government, partly
or fully, of a government-owned enterprise.
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.
 WHY DISINVESTMENT??
• The new economic policy initiated in July 1991 clearly indicated that PSUs had
shown a very negative rate of return on capital employed. Inefficient PSUs had
become and were continuing to be a drag on the Government’s resources turning
to be more of liabilities to the Government than being assets. Many undertakings
traditionally established as pillars of growth had become a burden on the
economy. The national gross domestic product and gross national savings were
also getting adversely affected by low returns from PSUs. About 10 to 15 % of the
total gross domestic savings were getting reduced on account of low savings from
PSUs. In relation to the capital employed, the levels of profits were too low. Of the
various factors responsible for low profits in the PSUs, the following were
identified as particularly important:
• Price policy of public sector undertakings

• Under–utilisation of capacity

• Problems related to planning and construction of projects

• Problems of labour, personnel and management

• Lack of autonomy
 Objectives of disinvestment
Hence, the need for the Government to get rid of these units and to concentrate on core activities was
identified. The Government also took a view that it should move out of non-core businesses, especially the
ones where the private sector had now entered in a significant way. Finally, disinvestment was also seen by
the Government to raise funds for meeting general/specific needs.
In this direction, the Government adopted the 'Disinvestment Policy'. This was identified as an active tool to
reduce the burden of financing the PSUs. The following main objectives of disinvestment were outlined to
reduce the financial burden on the Government:

• To meet the budgetary needs

• To reduce fiscal deficit
• To improve public finances and overall economic efficiency
• To diversify the ownership of PSU for enhancing efficiency of individual enterprise
• To raise funds for technological upgradation, modernization and expansion of PSUs
• To raise funds for golden handshake (VRS)
• To introduce, competition and market discipline
• To fund growth and development programmes
• To encourage wider share of ownership
• To depoliticise non-essential services
• Transfer of Commercial Risks
 Different approaches to disinvestment
• Minority disinvestment: It is one, at the end of which, the
govt. Retains a majority stakes in the company, typically
greater then 51%, thus ensuring management control.

• Majority disinvestment: It is one in which the government,

post disinvestment, retains a minority stake in the company
i.e. It sells of a majority stakes.

• Complete privatisation: It is a form of majority disinvestment

wherein 100% control of the company is passed on to a buyer.
 Disinvestments- A Historical Perspective
• For the first four decades after Independence, India pursued a path of development in which the public
sector was expected to be the engine of growth.
• However, the public sector overgrew itself and its shortcomings started manifesting in low capacity
utilisation and low efficiency due to over manning, low work ethics, over capitalisation due to substantial
time and cost overruns, inability to innovate, take quick and timely decisions, large interference in decision
making process etc. Hence, a decision was taken in 1991 to follow the path of Disinvestment.
• The change process in India began in the year 1991-92, when 31 selected PSUs were disinvested for
Rs.3,038 crore.

– In August 1996, the Disinvestment Commission, chaired by G V Ramakrishna was set up to advise,
supervise, monitor and publicize gradual disinvestment of Indian PSUs. However, the Disinvestment
Commission ceased to exist in May 2004.
• The Department of Disinvestment was set up as a separate department in December, 1999 and was later
renamed as Ministry of Disinvestment in September, 2001. From 27th May, 2004, the Department of
Disinvestment was brought under the Ministry of Finance.

– The Department of Disinvestment has been renamed as Department of Investment and Public Asset
Management (DIPAM) from 14th April, 2016 which has been made the nodal department for the
strategic stake sale in the Public Sector Undertakings (PSUs).
• National Investment Fund (NIF) was constituted in November, 2005, into which the proceeds from
disinvestment of Central Public Sector Enterprises were to be channelized.
 Recent Developments

• Government sets ₹2.1 trillion disinvestment target

https://www.livemint.com/budget/news/government-sets-2-1-tril
lion-disinvestment-target-11580578212248.html

• https://www.financialexpress.com/budget/budget-2020-disinv
estment-target-doubled-it-is-ambitious-and-daunting-but-is-it-
achievable/1848614
/

• 'Cabinet approved disinvestment of stake in NINL, not NMDC'

Read more at:

https://economictimes.indiatimes.com/industry/indl-goods/sv
Why strategic disinvestment is a concern:
Case study of ONGC
• https://www.businesstoday.in/union-budget-2
020/news/budget-2020-strategic-disinvestme
nt-as-source-of-off-budget-financing/story/39
4626.html
 Importance of Disinvestment

• In the short run, it is helpful in financing the increasing fiscal deficit.

• Disinvestment funds can be utilised for long-terms goals such as:

– Financing large-scale infrastructure development.

– Investing in the economy to encourage spending
– Expansion and Diversification of the firm.
– Repayment of Government Debts: Almost 40-45% of the Centre’s revenue receipts go towards
repaying public debt/interest
– Investing in social programs like health and education
• It can help in generating a better environment for investment.
• 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
the value of the public assets making it critical to disinvest early to realize a high value.
• It is expected that the strategic buyer/acquirer may bring in new management/technology/investment for
the growth of these companies and may use innovative methods for their development.
• While government presence may be a necessary evil in strategic sectors such as defence or oil exploration,
there’s really no call for it to be running fuel retailing outlets, building ships or running container freight
operations. Government presence in such non-strategic sectors not only distorts competitive dynamics for
private players, it also results in consumers and taxpayers bearing the brunt of inefficient PSU operations.

– In other words, ‘government has no business being in business’

• While strategic sale deals in the past have seen a few mis-steps, they’ve also yielded convincing success
stories like Hindustan Zinc’s, which has seen a hundred-fold increase in its profits on the back of a six-fold
expansion in capacities, since its takeover by Vedanta in 2002.
 Challenges of disinvestment
• Sale of profit-making and dividend paying PSUs would result in the loss of regular
income to the Government
• There would be chances of “Asset Striping” by the strategic partner. Most of the
PSUs have valuable assets in the plant and machinery, land and buildings, etc.
• Strategic and National Security Concerns: Strategic Disinvestment of Oil PSUs is
seen by some experts as a threat to National Security since Oil is a strategic
natural resource and possible ownership in the foriegn hand is not consistent
with our strategic goals.
• Disinvestment affects labour forces' social security.
• It also raises concerns about cronyism.
• The depressed state of the markets and the paucity of reasonable buyers would
land in a bad deal.
• Using funds from disinvestment to bridge the fiscal deficit is an unhealthy and a
short term practice. It is said that it is the equivalent of selling 'family silver' to
meet short term monetary requirements.
• Complete Privatisation may result in public monopolies becoming private
monopolies, which would then exploit their position to increase costs of various
services and earn higher profits
• A majority stake sale done to another CPSE results in no real change in
ownership, and is thus just hogwash.
 History of shortfalls
(https://
dipam.gov.in/en/majorachievements/current-year-2019-20-target-and-achievement)

Financial Year Disinvestment raised (in Target

crore) ( in crore)

2010-2011 22,144 40,000

2011-12 13,894 40,000
2012-13 23,956 30,000
2013-14 15,819 40,000
2014-15 24,277 43,425
2015-16 23,997 69,500
2016-17 46,246 56,500
2017-18 1,00,056 100,000
2018-19 84,972 80,000
2019-2020 34,845 1,05,000
AGAINST of disinvestment
• Socialist / leftist ideology: private sector cannot
achieve equal distribution of resources for all classes.
• Private enterprises only focus on profit maximization.
They won’t cater poor people.
• Therefore Government needs to control all or some
industrial sectors.
• Government’s dividend income will decline.
(Because they’ll have less shares).
• Consequently, Fiscal deficit will increase.
• A survey indicated 0.5% retail participation (i.e. Aam
Admi investment) in equity market.
• Meaning, only Large corporates and financial
institutions will benefit from this drive.
• It’ll not help in “financial inclusion”
• After disinvestment employees of PSUs will loss their
jobs
• If board of directors have many private sector
experts- they may approve plans to reduce staff
strength, to increase profitability.
• To complete the disinvestment targets, Government
asks one PSUs to buy shares of another PSU.
• e.g. ordering LIC to buy ONGC’s shares…Iski topi uske
sir pe…. In such cases, disinvestment doesn’t
decrease Government control over those companies.
IN FAVOUR of disinvestment
• Such Government controlled units cannot
compete in free market economy due to political
interference and price control mechanisms.
• Ultimately more public money is wasted in
running these loss making entities.
• Whatever “dividend” Government earned so far-
compared to that, Government has spent far
more crores rupees to revive these PSUs.
• There is no point in throwing good money after
bad money.
• Absurd logic, that just because corporates will
benefit, we shouldn’t begin disinvestment.
• Government already taken plenty of initiatives on
financial inclusion front.
• Overstaffing = One of the main reasons why PSUs
don’t make optimum profit. At some point we’ve
to swallow the bitter pill.
• Besides, such employees are given attractive VRS
offers.
• That used to happen in 90s era, when
Government sold shares to specific private
companies at an arbitrary price.
• But, Unlikely to happen if shares directly sold via
stock exchange. + CAG, Media very active these
days.
 Conclusion

• It needs to be ensured that Privatisation (Strategic

Disinvestment ) leads to greater competition in all cases.
• It should be ensured that the proceeds of such strategic sales
aren’t frittered away in interest or salary payouts but are
reinvested prudently in long-term infrastructure assets that
can yield enduring returns to the economy.
• To allay concerns of cronyism, the strategic sale process needs
to be fair and transparent with a minimum reserve price that
does justice to the valuable assets being auctioned off. A
third-party valuation of every PSU’s assets and a minimum
number of bidders, should be necessary pre-conditions to
going ahead with each sale.
 Thank You
Priya.sharma1@vips.edu