Disinvestment in India

The government has set a disinvestment objective in the Union Budget for 2023-24 of 51,000 crores. Disinvestment is taken up by the government to reduce the fiscal load on the exchequer. Read here to understand more about the disinvestment policy in India.

The government has set a disinvestment objective in the Union Budget for 2023-24 of 51,000 crore, which is barely 1,000 crores more than the revised estimate and down about 21% from the budget forecast for the current year.

Additionally, it is the lowest goal in seven years.

In addition, the Center has not yet achieved the disinvestment goal for 2022–23 despite having made a total profit of 31,106 crores so far, of which 20,516 crore, or nearly a third of the planned estimate, came from the IPO of 3.5% of its shares in the Life Insurance Corporation (LIC).

Table of Contents

What is Disinvestment?

When the government sells its assets or a subsidiary, such as a Central or State public sector firm, this is referred to as disinvestment or divestment.

The three basic methods of disinvestment are:

majority disinvestment
complete privatization
minority disinvestment

When minority disinvestment takes effect, the government keeps a majority stake in the business (typically more than 51%) ensuring managerial control.

In the case of a majority divestiture, the government transfers control to the acquiring corporation while holding onto a portion of the company, whereas, in the case of a complete privatization, the buyer receives complete ownership of the business.

The main goal of disinvestment is to maximize the return on investment (ROI) related to capital goods, labor, and infrastructure, regardless of whether this entails divestiture or a reduction in funding.

Disinvestment is carried out for a variety of reasons, such as strategic, political, or environmental.

Means of Disinvestment

Disinvestment of a minority stake in a government-owned entity is done in one of the following ways:

Initial Public Offering (IPO)
Follow On Public Offer (FPO)
Offer For Sale (OFS)
Institutional Placement: Government stake is auctioned off to select financial institutions
Exchange-Traded Funds (ETFs): Monetize shareholding simultaneously across multiple sectors and companies that form a constituent of the ETF.
Cross-holding: Listed PSUs are allowed to buy a government stake in another PSU

Disinvestment in India

In India, the Department of Investment and Public Asset Management (DIPAM) deals with all matters relating to the management of Central Government investments in equity including disinvestment of equity in Central Public Sector Undertakings.

The Department of Disinvestment was set up as a separate Department in 1999 and was later renamed as Ministry of Disinvestment in 2001.
Since 2004, the Department of Disinvestment falls under the Ministry of Finance.
The Department of Disinvestment has been renamed as Department of Investment and Public Asset Management (DIPAM) in 2016.

The four major areas of its work related to:

Strategic Disinvestment
Minority Stake Sales
Asset Monetisation
Capital Restructuring

It also deals with all matters relating to the sale of Central Government equity through an offer for sale or private placement or any other mode in the erstwhile Central Public Sector Undertakings.

DIPAM is working as one of the Departments under the Ministry of Finance.

Strategic disinvestment and privatization

Strategic Disinvestment Policy of 2015-20 rests on key pillars – Minority stake stale by SEBI approved modes and Strategic Disinvestment along with transfer of management control.

Strategic disinvestment of CPSEs lies at the heart of the disinvestment policy.
Strategic disinvestment would imply the sale of a substantial portion of the Government shareholding of a central public sector enterprise (CPSE) of up to 50%, or a such higher percentage as the competent authority may determine, along with transfer of management control.

Minority stake sales

Minority Stake Sale happens when the Government intends to sell a part of the PSU from its overall shareholding, given that post-stake sale the GOI ownership is still above 51%.

Post the sale control over management is retained by the Government of India.
Historically, Minority Stake Sales have been auctioned off to institutions or offloaded to the public by the means of an Offer for Sale.
Presently, government policy states that all disinvestments would only be minority disinvestments via Public Offers.

As per the present Allocation of Business Rules, the mandate of the DIPAM is as follows:

All matters relating to the management of Central Government investments in equity including disinvestment of equity in Central Public Sector Undertakings.
All matters relating to the sale of Central Government equity through offer for sale or private placement or any other mode in the erstwhile Central Public Sector Undertakings.
Decisions on the recommendations of Administrative Ministries, NITI Aayog, etc. for disinvestment including strategic disinvestment.
All matters related to Independent External Monitor (s) for disinvestment and public asset management.
Decisions in matters relating to Central Public Sector Undertakings for purposes of Government investment in equity-like capital restructuring, bonuses, dividends, disinvestment of government equity, and other related issues.
Advise the Government in matters of financial restructuring of the Central Public Sector Enterprises and attracting investment in the said Enterprises through the capital market.
The Unit Trust of India Act, 1963 (52 of 1963) along with subjects relating to Specified Undertaking of the Unit Trust of India (SUUTI).

The vision of the Department of disinvestment is:

Promote people’s ownership of Central Public Sector Enterprises to share in their prosperity through disinvestment.
Efficient management of public investment in CPSEs for accelerating economic development and augmenting the Government’s resources for higher expenditure

Mission includes:

List CPSEs on stock exchanges to promote people’s ownership through public participation and improve efficiencies of CPSEs through accountability to its shareholders.
To bring operational efficiencies in CPSEs through strategic investment, ensuring their greater contribution to the economy.
Adopt a professional approach for the financial management of CPSEs in the national interest and investment aimed at expanding public participation in ownership of CPSEs.

National Investment Fund (NIF)

The government had constituted the National Investment Fund (NIF) in November 2005 into which the proceeds from the disinvestment of Central Public Sector Enterprises were to be channelized.

The corpus of NIF was to be of a permanent nature and NIF was to be professionally managed to provide sustainable returns to the Government, without depleting the corpus.

Selected Public Sector Mutual Funds, namely UTI Asset Management Company Ltd., SBI Funds Management Private Ltd., and LIC Mutual Fund Asset Management Company Ltd. were entrusted with the management of the NIF corpus.

As per this Scheme, 75% of the annual income of the NIF was to be used for financing selected social sector schemes that promote education, health, and employment.
The residual 25% of the annual income of NIF was to be used to meet the capital investment requirements of profitable and revivable PSUs.

Disinvestment Plan 2023-24

The list of CPSEs to be divested in 2023–2024 will not be expanded by the Center with any more enterprises.
The government has chosen to proceed with the privatization of State-owned enterprises which was previously stated and planned.
The Container Corporation of India Ltd. (Concor), NMDC Steel Ltd., BEML, HLL Lifecare, and IDBI Bank are a few examples.
Interestingly, the government had approved the disinvestments of Bharat Petroleum Corporation Limited, SCI, and ConCor in 2019, but they have not yet taken place.

Advantages of disinvestment

The government may reduce spending or make up for a year’s worth of lost revenue by disinvesting.
Disinvestment also promotes open market trading and private asset ownership.
As private sector ownership and management can introduce new ideas and a more market-oriented attitude, the government can increase the efficiency and competitiveness of these businesses by divesting from public sector corporations.
The government can reallocate the funds made available by disinvestment to support other objectives like infrastructure and social advancement.
Since private ownership and management can result in more rigorous financial and operational reporting, disinvestment can increase openness and accountability in the operation of public sector firms.

Challenges

Political parties and labor organizations who oppose the sale of public sector firms have frequently resisted disinvestment, which is a contentious subject in India.
Because of their bureaucratic and non-market-oriented architecture, public sector businesses may not be able to compete successfully in the market, making their valuation a difficult task.
Disinvestment can also result in labor-related problems because employees of public sector businesses may worry about losing their jobs or seeing their pay decrease once these businesses are sold.
In some instances, the government may have trouble selling its holdings in public sector companies, particularly if they are not doing well financially.
A number of rules and approval procedures must be followed during the disinvestment process, which can cause delays and increase complexity.
As litigants may contest the legality of the transaction or the terms and conditions under which it was performed, the process of disinvestment may also be contested in court.

Conclusion

Disinvestment is regarded as a crucial instrument for fostering economic development and prosperity in India.

The goal of the Indian government’s disinvestment policy is to increase revenue, boost public sector enterprise productivity, encourage economic growth, and contribute to the development of a more vibrant and sustainable economy.

-Article written by Swathi Satish