Survey on Disinvestment

Disinvestment is a government exercise introduced in 1991 by the new economic policy. It was stated that the public sector undertakings (PSUs) have failed to return on capital employed. They are unable to sustain their growth in tandem with globalisation and liberalisation of the Indian economy. To introduce rapid economic growth and to build a proper infrastructure, the concept of disinvestment became important.

The term disinvestment was introduced during the interim budget of 1991. To understand the basic meaning of disinvestment, first, we shall understand what investment is. Investment is the process in which money or cash is converted into securities, debentures, bonds or any other claims on money. Whereas disinvestment is a process where the claims on money are converted into money or cash. Disinvestment happens when an organisation or government acts on liquidating (selling) assets or subsidiaries. 

Disinvestment

In simpler words, disinvestment is the withdrawal of capital or money or cash from an organisation or government. Disinvestment is a strong instrument for the government of India since it improves the efficiency of the public sector and makes it more responsive to the public. 

Selling the part of the equity holdings of the government to the private investors is one of the main features of disinvestment. There is, however, no full transfer of ownership from government to the private sectors, i.e., partial privatisation occurs in disinvestment. Selling shares in return for funds or capital is disinvestment. Disinvestment is the sale of assets of the government where the share of the government should not be less than 51%.

When the public sector undertakings turn into liabilities and exhibit loss from investment, it becomes a burden on the resources of the government. Under such circumstances, the government implements disinvestment to bring down the financial pressure on public finances caused due to the financial losses in the public sector undertakings.

Types of Disinvestment

There are two major types of disinvestment:

1. Minority disinvestment: It is the form of disinvestment where the government possesses the majority of the assets of a company. More particularly, it means that this is the type of disinvestment where the share of the government in the assets of the company could be more than 51%. A few examples of these companies are Corporation of India Limited, Rural Electrification Corporation Limited, NTPC Limited, NHPC Limited, etc. 

The different ways in which minority disinvestment is carried out are: 

– Initial public offering

– Offer for sale

– Institutional placement programme

– Cross holdings

2. Majority Disinvestment: In majority disinvestment, the government completely retains the minority assets in the company, i.e. its majority assets are completely sold. The two important ways by which majority disinvestment can be attained are strategic sale, and complete privatisation, wherein the majority of the assets can be taken from a company. 

Objectives of Disinvestment 

The major objective of the disinvestment policy of the government is to overcome the financial burden imposed by the public sector undertakings over the public finances. The other objectives are: 

• Reduce the financial pressure on the government by the public sector undertakings 

• Improve public finances

• Introduce a fair market competition

• Grow funds

• Encourage a wider share of ownership 

Factors Responsible for Disinvestment 

The important economic factors responsible for disinvestment are particularly those which result in low profit for the PSUs – 

• Pricing policy of the PSUs 

• Planning and construction of projects 

• Least utilisation of capacity 

• Problems with labour, personnel and their management. 

In view of these economic factors, the government has been required to adopt the preventive measures and focus on the core activities to raise funds for meeting specific requirements. 

Economic Survey 2022

The emergence of the concept of disinvestment is the result of the economic reforms of Budget 1991. In the year 1999, under the Prime Ministership of India, Mr. AB Vajpayee, a   Department of Disinvestment was established as a separate department. This department was later renamed the Ministry of Disinvestment in 2001. From 2004, the department came to function under the Ministry of Finance.

As per the Survey 2022, the concept of disinvestment has continued to grow and was renewed with stake sales in public sector enterprises in the decade 2004-2014. The economic survey 2022 on disinvestment stated that “the government has given approval for disinvestment of 35 Central Public Sector Enterprises (Subsidiaries/ Units/ Joint Ventures of the Central Public Sector Enterprises) and IDBI Bank”.

The economic survey 2022 on disinvestment has focussed on the four broad sectors:

(i) Atomic Energy, Space and Defence 

(ii) Transport and Telecommunications

(iii) Power, Petroleum, Coal and Other Minerals  

(iv) Banking, Insurance and Financial Services

Conclusion 

Disinvestment is a strategy by which the government or any organisation brings into action to liquidate an asset or a subsidiary to raise funds. In light of the failing public sector undertakings, the government of India took to disinvestment as a major economic reform in 1991. Disinvestment was undertaken with the aim of improving the efficiency of the public sector and making it more responsive to the public.   

Other major objectives are ensuring the existence of proper utilisation of financial assets, development of infrastructure, and allocating more financial assets for various social programs, such as various diseases and the status of education in the country.