Disinvesting is used by investors to offload a stake in an asset, or the entire asset. It is also known as an exit strategy, since it means moving out of an existing investment. Disinvestment strategies are usually adopted by governments to rebalance and allocate resources more efficiently. The Indian government, for instance, recently announced the disinvestment in BPCL, which is a government owned oil and gas corporation.
Here, we will discuss the concept of disinvestment in detail, along with understanding its objectives and benefits.
Meaning of disinvestment
The word disinvestment is related to the term ‘investment’. Investment is the allocation of funds or liquid cash into stocks, bonds, or other avenues that can fetch returns. On the other hand, disinvestment is about converting the investments or assets back into liquid cash or funds.
In basic terms, disinvestment means:
- an action taken by an organization or government
- selling or liquidating a company or an asset
- divestment or divestiture
Disinvestment involves a sale by the government, whether partly or fully, of a government-owned asset or enterprise. It is usually done either as part of a strategic decision for the benefit of the company or to raise additional resources for catering to general or specific business needs.
The assets or enterprises in question are usually under Government’s ownership and may include:
- Central Public Sector Enterprises (CPSEs)
- State public sector enterprises (SPSEs)
- Project undertakings
- Other fixed assets
What are the key objectives of disinvestment?
As per the indications of the new economic policy that was launched in July 1991, PSUs reflected a highly negative rate of return on the overall capital employed. The inefficiency surrounding PSUs continued to result in wastage of Government’s resources and eventually turning into liabilities rather than being assets.
The government had established many enterprises with an objective to make them the pillars of growth for the country, however, these became burdensome for the economy. The country’s GDP or gross domestic product and GNS or gross national savings were adversely impacted due to the low returns generated by these PSUs. Some of the factors that contributed to continued low profits from the PSUs were:
- Lack of autonomy
- Pricing decisions
- Inefficient utilization of capacity
- Lack of planning and proper execution of projects
- Problems related to labor, manpower and management
Therefore, a need arose for the Government to detach itself from these units and focus on other core areas for overall development. The Government took a stand that it is best to shift from non-core businesses and allow the private sector to make significant contributions for faster growth. Disinvestment was also viewed as an opportunity for the Government to raise additional funds to cater to general/specific project requirements.
The Government’s decision to adopt the ‘Disinvestment Policy’ was viewed as a tool to minimize the financial burden associated with PSUs. Mentioned below are the main objectives of disinvestment:
- Reduce government’s financial burden
- Improvise public finances
- Boost competition and encourage market discipline
- Fund economic growth
- Spread share ownership among wider investor base
- Depoliticise non-core services
Why is disinvestment important?
At present, the Government of India is said to have nearly Rs. 2 lakh crore of assets locked in various PSUs. With such a high stake, disinvestment can mainly offer the benefit of appropriate fund utilization. Here are the top reasons why disinvestment is essential in current scenario:
- Arranging additional finances to control the rising fiscal deficit
- To raise funds for certain large-scale infrastructure projects
- Additional investment in the economy to boost spending and further economic growth
- To close existing government, debt as nearly 40-45% of the government’s earnings are used in repaying the public debt plus interest
- To arrange funds for financing social programs, including health and education
Disinvestment is also considered important, as the Indian market sees an increasing amount of competition across all sectors. This is seen as a challenging scenario for most PSUs to operate with continued profitability. As higher competition can easily result in a rapid reduction in the value of public assets, it makes early disinvest all the more critical to ensure that full or higher value can be realized from the sale of government-owned assets and enterprises.
Proposed disinvestment for FY 2021-22
As part of the Union Budget 2021 announcement, Finance Minister of India, Nirmala Sitharaman, proposed privatization of two Indian public sector banks and a government-owned insurance company to take place in FY 2021-22. This has led to LIC, Life Insurance Corporation being open for initial public offering (IPO) this year.
It was announced that the Central government has approved the strategic disinvestment policy covering various public sector enterprises. As per the policy, the government will ensure that only bare minimum CPSEs are held and the remaining are privatized. Accordingly, a list of center-owned public sector enterprises will be generated by NITI Aayog to take forward the disinvestment process to the next round.
The government also intends to set up an incentive structure to encourage state governments to disinvest different public sector companies.
Disinvestment has been a common feature adopted by various governments in most union budgets since the 1990s. Each year, the government aims to raise funds by selling stakes in various public sector enterprises. Assets and enterprises are selected for disinvestment based on various factors like portion of government stake, interest from the private sector, general market conditions, valuation, etc. Disinvestment has shown mixed results as far as achieving government revenue targets is concerned.
When the government decides to sell a whole or a part of its stake in an enterprise or asset, it is called disinvestment. Since the stake is sold to private investors, disinvestment results in privatization. Disinvestment can result in partial or whole privatization. While disinvestment results in dilution of ownership, privatization results in a transfer of ownership.
Some of the disinvestment styles followed by the government include minority disinvestment, majority disinvestment, strategic disinvestment, and complete disinvestment.
Some of the ways in which the government can go about disinvestment are initial public offering/IPO, offer for sale/OFS, institutional placement, ETFs or exchange-traded funds, etc.
Disinvestment involves selling some or all shares of a public enterprise to a public or private entity. Here the government retains some ownership of the enterprise.Strategic sale, however, involves the government selling a majority stake in an enterprise by giving up the ownership of the entity.
Yes, the upcoming LIC IPO is part of the government’s plan to disinvest some of the PSUs. Through the IPO, the government plans to reduce its stake in the enterprise and make it more transparent and efficient.