Types of Disinvestment and Policies

The term 'disinvestment' literally means the opposite of investment. Disinvestment is the process of reducing the share of government in public sector undertakings (PSUs). It is the sale of shares of the government in these companies to financial institutions, employees or the public at large. In disinvestment, also called divestment, there is no change in the management of PSUs from the public to private hands as the government still holds majority equity (51 percent). Even when the government's share falls below 51 percent, the rest of the equity may be sold in such a way that no one institution or individual holds enough stake to take control of the management. Disinvestment is primarily a money-raising exercise. The proceeds of disinvestment are treated as non-debt creating capital receipts. Though the government can technically hold a stake less than 51 percent and still be the largest shareholder in PSUs, it was not done on a large scale. This is because a PSU ceases to be a public sector company post such exercise.

Types of Disinvestment

Disinvestment of a minority stake in PSUs can be done in the following ways:

  • Initial Public Offering (IPO): an offer of shares by an unlisted PSU to the public for the first time.
  • Follow-on Public Offering (FPO): also known as Further Public Offering, it's an offer of shares by a listed PSU.
  • Offer for sale (OFS): shares of a PSU are auctioned on the platform provided by the stock exchange. This mode has been used extensively by the government since 2012.
  • Institutional Placement Programme (IPP): under this, only selected financial institutions are allowed to participate and the government stake is offered to only such institutions. E.g., mutual funds, insurance, and pension funds such as LIC etc.
  • CPSE Exchange Traded Fund (ETF): Through this route, the government can divest its stake in various PSUs across diverse sectors through a single offering. This mechanism allows the government to monetize its shareholding in those PSUs which form part of the ETF basket.
  • Cross-holdings: in this method, one listed PSU takes up the government stake in another listed PSU.

Disinvestment of a majority stake in PSUs:

  • Strategic sale: it is the sale of a substantial portion of government shareholding, 50 percent or higher, in a PSU, along with the transfer of management control.
  • Privatization: it's a type of strategic sale in which the government divests its entire shareholding, along with the transfer of management control, to a private entity.

Terms associated with Disinvestment

Corporatization is a type of reorganization of PSUs along commercial lines. They are required to operate in a level playing field along with private sector entities without any special privileges from the government. They are required to pay taxes, raise capital from the market (without any government backing), and operate based on commercial operations. Public sector companies, after corporatization, focus on maximizing profits and achieving a favourable return on investment. Buy-back is a corporate action in which a company buys back its shares from the existing shareholders usually at a price higher price than market price. When a buyback occurs, the number of shares of the company outstanding in the market reduces. Disinvestment Policy of India: The New Industrial Policy of 1991, introduced along with other economic reforms, talked about disinvestment and privatization of PSUs. The main elements of the government's disinvestment policy were:

  • Divestment of government's stake (minority and majority) to raise money for meeting its fiscal needs.
  • Restructure and revive potentially viable PSUs.
  • Profit-making PSUs not to be privatized.
  • Close down PSUs which cannot be revived or sold.
  • Listing all unlisted PSUs and sell a minimum of 25 percent of equity to the public, as mandated by SEBI.
  • Fully protect the interests of workers.

In 1998, the government has categorized the PSUs into two broad categories:

  • strategic PSUs: include arms and ammunition, railways, and nuclear energy. No disinvestment from these PSUs.
  • non-strategic PSUs: all other PSUs not included in the above category. Disinvestment in these PSUs to take place in a phased manner. To oversee the process of disinvestment, a separate Department of Disinvestment was created under the Ministry of Finance (in 2004).

National Investment Fund

In 2005, the government created the National Investment Fund (NIF) and all the proceeds of disinvestment were to be credited into the NIF. Until 2008-09, 75 percent of the funds under NIF were spent on selected central social welfare schemes (on health, education, employment etc.) and 25 percent of the funds were to be used to meet the capital requirements of profitable PSUs. Due to the economic difficulties created by the global economic recession, the government decided to utilize 100 percent of NIF funds for social welfare schemes until 2013. At present, the funds under NIF exist as a 'Public Account' which is outside the Consolidated Fund of India. The funds under NIF are permanent in nature and remain until they are withdrawn or invested for approved purposes. Advantages of Disinvestment:

  • It helps raise finances for the government which can be spent on social sector priorities and reduces the debt burden of the government.
  • It exposed the PSUs to market discipline forcing them to become more efficient and survive on their own financial and economic strength.
  • It reduces the burden on the government by limiting the budgetary support which it has to provide to PSUs.
  • The large manpower and other resources which remain locked in PSUs can be released which may be redeployed in high priority sectors.
  • It can end the public sector monopoly in many sectors, introduce competition, reduce the costs and improve the quality of services offered to consumers. E.g. telecom, civil aviation.

Drawbacks of Disinvestment

  • Government shareholding in PSUs is a public asset which should not be liquidated to meet the immediate needs.
  • PSUs contribute to public finances through dividends and disinvestment can reduce this important source of finance.
  • PSUs act as a check on private enterprises and safeguard the wider public interests in the market. For example, in the absence of PSUs, private enterprises may form a cartel.
  • When the government goes for a strategic sale/privatization, there are chances of a PSU being sold off at a lower value to a private entity which can be against the larger public interest.

Hence the government has adopted a prudent middle path with respect to disinvestment by proceeding in a phased manner. Other information on Disinvestment:

  • Until 2016, the government has raised around Rs. 1.8 lakh crores through disinvestments, beginning in 1992.
  • In 2016, the Department of Disinvestment was renamed as the Department of Investment and Public Asset Management (DIPAM).
  • The government holds a stake in 51 companies, both listed and unlisted, through the Specified Undertaking of Unit Trust of India (SUUTI).
  • In 2017, the government has launched Bharat-22, an exchange-traded fund (ETF) consisting of government's stake in 22 companies of which 19 are PSUs. It includes shares of companies across six sectors.
  • Against the target of Rs. 72,500 crores stipulated in the Budget 2017-18, the government has earned over Rs.1 lakh crores from disinvestment in 2017-18.
  • The Budget 2018-19 has set a disinvestment target of Rs. 80000 crore.

   

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