Disinvestment

Disinvestment is the action of an organization or government selling or liquidating an

asset or subsidiary. Absent the sale of an asset, disinvestment also refers to capital
expenditure (CapEx) reductions, which can facilitate the re-allocation of resources to
more productive areas within an organization or government-funded project.

Whether disinvestment results in the divestiture or the reduction of funding, the

primary objective is to maximize the return on investment (ROI) related to capital goods,
labor, and infrastructure.

Salient features of disinvestment policy are as follows

1. PSUs are the wealth of the nation and this wealth should remain in the hands of the
people.
2. Citizens had every right to own a part of the shares of PSU while following the process
of disinvestment.
3. Government had to retain majority shareholding that is at least 51% along with its
management control.

The main objective of disinvestment policy are as follows

● Reducing fiscal deficit: to reduce the financial burden of the government as part of the
proceeds from disinvestment could be used for retiring public debts by purchasing back
Treasury bills from the bank.
● Restructuring public sector enterprises: The proceeds from disinvestment would be used
to restrict and restructure PSUs which are chronically sick but can be revived. These
enterprises would be given additional capital after ensuring that their management
accountability system based on MoUs( memorandum of understanding) is in place.
● To fund growth and raise productive efficiency: It includes measures to reduce cost,
improve product quality, innovate production management and marketing practices and
encourage investments.
● To Depoliticize non essential services: The disinvestment policy aims to eliminate
political interference in PSUs, increase efficiency and make them more accountable.
● Modernizing and technological upgradation: Through disinvestment, the government
could modernize the public sector units and upgrade technology with the help of
resources generated.
● Rehabilitation of dispersed personnel: The disinvestment proceeds could be used for
retraining and rehabilitation of displaced workers on account of closure or internal
restructuring.
 ● Raising resources: Disinvestment of PSUs resulted in expenses related to VRS. These
resources could be used to create social and economic infrastructure, build basic health,
infrastructure, primary education and family welfare schemes.

Disinvestment Policy in India

● Focus on public sector enterprises began from the second five-year plan and
Industrial Policy Resolution, 1956.
● Disinvestment as a policy initiative began in the wake of economic liberalization,
globalization, and structural reforms launched in 1991.
● PV Narasimha Rao government in 1991 initiated a disinvestment policy and
announced that government would disinvest up to 20% of its equity in selected
PSUs mainly through mutual funds and FIIs (Financial institutions investors).
● The next phase of disinvestment allowed more individuals like FII, Employees of
the Company etc.
● C Rangarajan Committee was appointed that recommended 49% of
disinvestment.
● Major changes associated with disinvestment occurred during the regime of Atal
Bihari Vajpayee that involved stake sale in Paradeep Phosphates, Hindustan
Zinc and BALCO.
● National Investment Fund (2005) was formed to which the funds raised from
disinvestment were channeled.
 ● A new disinvestment policy was envisioned to utilize the investments in new
projects. The Department of Disinvestment was renamed the “Department of
Investment and Public Asset Management” (DIPAM).Department of Investment
and Public Asset Management (DIPAM) deals with all matters relating to
management of Central Government investments in equity including
disinvestment of equity in Central Public Sector Undertakings. The Four major
areas of its work relates to Strategic Disinvestment, Minority Stake Sales, Asset
Monetisation and Capital Restructuring. It also deals with all matters relating to
sale of Central Government equity through offer for sale or private placement or
any other mode
● Currently, the following method of disinvestment or Being pursued by the
government
1. Initial public offering IPO: It refers to offer of shares for the first time to the
public by an unlisted CPSE or the government out of its shareholding or
both.
2. Further public offering FPO: It is an offer of shares by listed CPSE or the
government out of his shareholding or a combination of both.
3. Offer for sale OFS: This method was pursued by government since 2012.
It allows promoters to auction shares through stock exchange mechanism.
4. Strategic sale: It involves sale of a large portion up to 50% or more of the
shareholding of a CPSE along with its management control.
5. Institutional placement programme IBP:This is restricted to participation of
only financial institution.
6. Exchange traded fund, ETF: It allows simultaneous sale of the
government shareholding in various CPSC is across diverse sectors
through single offering on the stock exchange programme platform.
7. Policy of a Safetynet for the displaced workers: This provides for a policy
of non-retrenchment of an employee for a period of one year after
privatization thereafter, VRS scheme or voluntary separation scheme had
to be followed.

Recent Trends in Disinvestment Policy

● The government has revised its disinvestment estimate for the current financial
year to ₹78,000 crores, down from ₹1.75 lakh crore envisaged in the budget
estimate (BE) on February 1 last year, which is a 55.4% reduction
● The disinvestment target for 2022-23 is Rs 65,000 crore. This is 17% lower than
the revised estimate of 2021-22 (Rs 78,000 crore).
● So far, the total disinvestment government proceeds is ₹12,029.9 crore, which
includes ₹2,700 crore receipt from Air India privatization and a balance of ₹9,330
crores through the sale of minority stakes in CPSEs.
● In the current financial year (2022), major disinvestments planned include the
IPO of LIC, Bharat Petroleum Corporation Ltd (BPCL), RINL and Pawan Hans.