9 December 2012


Disinvestment, sometimes referred to as divestment, refers to the use of a concerted economic boycott, with specific emphasis on liquidating stock, to pressure a government, industry, or company towards a change in policy, or in the case of governments, even regime change.  
The term was first used in the 1980s, most commonly in the United States, to refer to the use of a concerted economic boycott designed to pressure the government of South Africa into abolishing its policy of apartheid. The term has also been applied to actions targeting Iran, Sudan, Northern Ireland, Myanmar, and Israel.

Definition of 'Disinvestment'
1.The action of an organization or government selling or liquidating an asset or subsidiary. Also known as "divestiture".
2. A reduction in capital expenditure, or the decision of a company not to replenish depleted capital goods.

Investopedia explains 'Disinvestment'
1. A company or government organization will divest an asset or subsidiary as a strategic move for the company, planning to put the proceeds from the divestiture to better use that garners a higher return on investment.
2. A company will likely not replace capital goods or continue to invest in certain assets unless it feels it is receiving a return that justifies the investment. If there is a better place to invest, they may deplete certain capital goods and invest in other more profitable assets. Alternatively a company may have to divest unwillingly if it needs cash to sustain operations.

The role of the State vs. Market has been one of the major issues in development economics and policy. In a mixed economy such as India, historically the public sector had been assigned an important role. However, in the year 1991 the national economic policy underwent a radical transformation. The new policy of liberalization, privatization and globalization de-emphasized the role of the public sector in the nation’s economy.  
Several arguments have been proffered by the apologists of market-oriented economic structures:
The government must not enter into those areas where the private sector can perform better.  Market-driven economies are more efficient than the state-planned economies. The role of the state should be as a regulator and not as the producer. Government resources locked in commercial activities should be released for their deployment in social activities.

It is also contended that the functioning of many public sector units (PSUs) has been characterized by low productivity, unsatisfactory quality of goods, excessive manpower utilization, inadequate human resource development and low rate of return on capital. For instance, between 1980 and 2002, the average rate of return on capital employed by PSUs was about 3.4% as against the average cost of borrowing, which was 8.66%. Disinvestment (or divestment) of the PSUs has therefore been offered as one of the solutions in this context.

Disinvestment involves the sale of equity and bond capital invested by the government in PSUs. It also implies the sale of government’s loan capital in PSUs through securitization. However, it is the government and not the PSUs who receive money from disinvestment.
The fixation of share/bond price is an important aspect of disinvestment. Now, the Disinvestment Commission determines the share/bond price. Disinvested shares are listed, quoted and traded on the stock market. Indian and foreign financial institutions, banks, mutual funds, companies as well as individuals can buy disinvested shares / bonds.

The Need For Disinvestment.

One basis rational for privatization in the concept that private ownership leads to better use of resources and their more efficient allocation. Throughout the world, the preference for market economy received a boost after it was realized that the State could no longer meet the growing demands of the economy and the state share holding inevitably had to come down. The ‘State in business’ argument thus lost out and so did the presumption that direct and comprehensive control over the economic life of citizen from the Central government can deliver results better than those of a more liberal system that directly responds according to the market driven forces.
Another reason for adoption for privatization policy around the globe has been the inability of the Governments to raise high taxes, pursue deficit / inflationary financing and the development of money markets and private entrepreneurship.
Further, technology and W.T.O. commitments have made the world a global village and unless industries, including PSEs do not quickly restructure, they would not be able to survive.
Public enterprises, because of the nature of their ownership, can restructure slowly and hence the logic of privatization gets stronger.  Besides, techniques are now available to control public monopolies by regulation/competition, and investment of public money to ensure protection of consume interests is no longer a convincing argument.
Objectives of the Disinvestment
Following objectives were stated in July, 1991 while propounding the disinvestment policy:
  • To meet the budgetary needs.
  • To improve overall economic efficiency.
  • To reduce fiscal deficit.
  • To diversify the ownership of PSU for enhancing efficiency of individual enterprise.
  • To raise funds for technological up gradation, modernization and
            expansion of PSUs.
  • To raise funds for golden shake hand.

Disinvestment in India
The new industrial policy statement 1991 based on economic reform measures envisaged disinvestment of a part of government holding in the case of select public sector enterprises to provide financial support and improve the performance of public sector enterprises. This became necessary because of the withdrawal of the budgetary support of 60 percent by the government to the loss making units. The Common Minimum Programme of the United Front Government, has also, emphasized that it would be a democratic disinvestment.
Disinvestment Process in India was there in some public sector undertakings. However, now the focus has shifted to strategic sale of the identified public sector units. For the period 1991-2008, the progress of disinvestment has been a normal one. Against the budgeted disinvestment of Rs.96, 800 cores, only an amount of Rs.51, 609crores approximately could be collected. The pressure of the left party’s has largely restricted the pace of disinvestment. Now, we don’t have the ministry of disinvestment also.

Rangarajan Committee (1993)
RangarajanCommittee of 1993 constituted by the government for this purpose made important observations. It maintained that the units to be disinvested should be identified and disinvestment could be made up to any level, except in defense and atomic energy where the government should retain the majority holding in equity. Further disinvestment should be a transparent process duly protecting the rights of the workers. Further, it suggested setting up of an autonomous body for the smooth functioning and monitoring of the disinvestment programme.
 Disinvestment Commission was thus constituted in 1996 as an advisory body having a full time chairman and four part-time members. The Commission was required to advise the government on the extent made timing and pricing of disinvestment.
It suggested four modes of disinvestment
  • Trade sale
  • Strategic Sale
  • Offer of shares
  • Closure or sale of Assets.
In its budget speech of 2000-01, the government emphasized that more emphasis would now be paid on the strategic sale of public sector enterprises. Up to November 1999, the commission had submitted 12reports to the government covering 58 public sector enterprises. On 30th November 1999, the term of the Commission expired. However, it was reconstituted in July 2001. Initially the Department of Disinvestment was constituted which was later on upgraded as the ministry of disinvestment in order to streamline and speed up the process of disinvestment including restructuring.
The Disinvestment Commission also recommended creation of separate disinvestment fund in which the disinvestment proceeds would be placed to be used for the purpose of financial restructuring of the concerned unit before disinvestment and for carrying out voluntary retirement schemes. It also suggested merger of National Renewal Fund with the disinvestment fund.
Challenges Before Disinvestment
Disinvestment was a very bold and important step initiated by the government as a part of its reform measures. But the way it was handled has defeated its very purpose.
Social Problem—Process of disinvestment is not favored socially as it is against the interest of socially disadvantageous people and society at large. This process will definitely affect the social objectives of the government.
 Political Problem— The coalition government at the centre with a number of parties has posed a serious threat to this programme. Conflicting interest has made it difficult to arrive at a national consensus.
Economic Problem—Most of the units identified for disinvestment are in a very bad shape which does not offer good returns. The Government due to paucity of funds is also not in a position to revive it.

Present Disinvestment Policy
The present disinvestment policy has been articulated in the recent President’s addresses to Joint Sessions of Parliament and the Finance Minister’s recent Parliament Budget Speeches.
The salient features of the Policy are:

Citizens have every right to own part of the shares of Public Sector Undertakings

Public Sector Undertakings are the wealth of the Nation and this wealth should rest in the hands of the people

While pursuing disinvestment, Government has to retain majority shareholding, i.e. at least 51% and management control of the Public Sector Undertakings.
 Approach for Disinvestment
On 5th November 2009, Government approved the following action plan for disinvestment in profit making government companies:

Already listed profitable CPSEs (not meeting mandatory shareholding of 10%) are to be made compliant by ‘Offer for Sale’ by Government or by the CPSEs through issue of fresh shares or a combination of both

Unlisted CPSEs with no accumulated losses and having earned net profit in three preceding consecutive years are to be listed

Follow-on public offers would be considered taking into consideration the needs for capital investment of CPSE, on a case by case basis, and Government could simultaneously or independently offer a portion of its equity shareholding

In all cases of disinvestment, the Government would retain at least 51% equity and the management control

All cases of disinvestment are to be decided on a case by case basis

National Investment Fund
On 27 January 2005, the Government had decided to constitute a 'National Investment Fund' (NIF) into which the realization from sale of minority shareholding of the Government in profitable CPSEs would be channelized. The Fund would be maintained outside the Consolidated Fund of India. The income from the Fund would be used for the following broad investment objectives:-
Investment in social sector projects which promote education, health care and employment;
Capital investment in selected profitable and revivable Public Sector Enterprises that yield adequate returns in order to enlarge their capital base to finance expansion/ diversification
Salient features of NIF:
The proceeds from disinvestment of CPSEs will be channelized into the National Investment Fund which is to be maintained outside the Consolidated Fund of India
The corpus of the National Investment Fund will be of a permanent nature
The Fund will be professionally managed to provide sustainable returns to the Government, without depleting the corpus. Selected Public Sector Mutual Funds will be entrusted with the management of the corpus of the Fund
75% of the annual income of the Fund will be used to finance selected social sector schemes, which promote education, health and employment. The residual 25% of the annual income of the Fund will be used to meet the capital investment requirements of profitable and revivable CPSEs that yield adequate returns, in order to enlarge their capital base to finance expansion/ diversification
Fund Managers of NIF
The following Public Sector Mutual Funds have been appointed initially as Fund Managers to manage the funds of NIF under the ‘discretionary mode’ of the Portfolio Management Scheme which is governed by SEBI guidelines.
UTI Asset Management Company Ltd.
SBI Funds Management Company (Pvt.) Ltd.
LIC Mutual Fund Asset Management Company Ltd.

Corpus of NIF
The corpus of the Fund is Rs.1814.45 crore being the proceeds from the disinvestment in Power Grid Corporation and Rural Electrification Corporation. The pay out on NIF was Rs.84.81 crore in the year 2008-09, Rs.248.98 crore in the year 2009-10, Rs.107.32 crore in 2010-11 and Rs. 163.19 crores in 2011-12.
Use of Disinvestment Proceeds
The income from the Fund is to be used for the following broad investment objectives:

75% to finance selected social sector schemes, which promote education, health and employment.

25% to meet the capital investment requirements of profitable and revivable CPSEs that yield adequate returns, in order to enlarge their capital base to finance expansion/diversification
However, in view of the difficult economic situation caused by the global slowdown of 2008-09 and a severe drought that was likely to adversely affect the 11th Plan growth performance, the Government, in November 2009, decided to give a one-time exemption to utilization of proceeds from disinvestment of CPSEs for a period of three years – from April 2009 to March 2012 – i.e. disinvestment proceeds during this period would be available in full for meeting the capital expenditure requirements of selected social sector programmes decided by the Planning Commission/Department of Expenditure. Now as the Country is facing very difficult economic conditions due to Continued financial/economic problems in Europe, impacting the economic growth in India, higher subsidy burden relating to petroleum, food and fertilizers, high Interest rate impacting the manufacturing sector, affecting excise collection, falling revenue collection, the exemption cited above has been extended upto March 2013.
Accordingly, from April 2009, the disinvestment proceeds are being routed through NIF to be used in full for funding capital expenditure under the social sector programmes of the Government, namely:-

Mahatma Gandhi National Rural Employment Guarantee Scheme

Indira Awas Yojana

Rajiv Gandhi Gramin Vidyutikaran Yojana

Jawaharlal Nehru National Urban Renewal Mission

Accelerated Irrigation Benefits Programme

Accelerated Power Development Reform Programme
Progress of Disinvestment in India (1991-Present day)The 1991 economic reforms introduced the privatization process when the sale of minority stake was there in some public sector undertakings. However, now the focus has shifted to strategic sale of the identified public sector units. The Government does not have a well defined disinvestment policy with a time bound programme. From the period of 1991-2012 the progress of disinvestment has been a normal one. The pressure of the left parties has largely restricted the pace of disinvestment. Now, we don’t have the ministry of disinvestment also.
AS ON 31.12.2011

Budgeted receipt
Total receipts
No target fixed
No target fixed
No target fixed
No target fixed
No target fixed
Grand Total

List of main Public Sector Units in which partial/ full disinvestment has already been made
1. Shipping Credit and Investment Corporation of India
2. Container Corporation of India Ltd.
3. Videsh Sanchar Nigam Ltd. (VSNL)
4. Oil and Natural Gas Corporation (ONGC)
5. Gas Authority of India Ltd. (GAIL)
6. Steel Authority of India Ltd. (SAIL)
7. Mahanagar Telephone Nigam Ltd. (MTNL)
8. Indian Petrochemicals Corporation Ltd. (IPCL)
9. Power Grid Corporation
10. Shipping Corporation of India
11. National Aluminum Company (NALCO)
12. National Fertilisers Ltd. (NFL)
13. Indian Airlines
14. Dredging Corporation
15. LNG Petro Net
16. Madras Refineries Ltd.
17. Hindustan Zinc Ltd.
18. Maruti Udyog Ltd.
19. Modern Food Industries (India) Ltd.
20. Indian Tourism Development Corporation (10 Hotels)
21. Hotel Corporation of India etc.
Finance Minister P. Chidambaram said on May 26, 2004 that the present government will not further disinvest the strategic, profit-making and navratan PSUs like Oil and Natural Gas Corporation (ONGC), Indian Oil Corporation (IOC), Hindustan
Petroleum Corporation Ltd. (HPCL), Bharat Petroleum Corporation Ltd. (BPCL), Oil India Limited (OIL), National Thermal Power Corporation (NTPC), Steel Authority of India Ltd. (SAIL) etc. However, disinvestment of sick PSUs will be allowed.

As on 30 November 2012, the 50 Central Public Sector Enterprises (CPSEs) listed on the stock exchanges contributed about 18% of the total market capitalization.

Table  3

Market Capitalisation

The Union Government finally unveiled its disinvestment programme for the current fiscal year 2012-13.The Cabinet Committee on Economic Affairs (CCEA), on Friday, gave the go-ahead to equity stake sale in four PSUs, namely, Hindustan Copper, Oil India Ltd., MMTC and Nalco,  which is likely to mop up nearly Rs.15,000 crore or about 50 per cent of the Rs.30,000-crore divestment target set for 2012-13.


If disinvestment policy is to be in wider public interests, it is necessity to examine systematically issues such as correct valuation of shares and appropriate use of disinvestment proceeds. The disinvestment of public sector units which is, in fact, the public’s money is done without even due amount of debate in the parliament. This, therefore, calls for utmost care and meticulous planning.
To conclude, it may be argued that disinvestment in India, though slow, has helped considerably the government to unlock value of central PSEs, though admittedly the process needs to be hastened to ensure that the market is able to benefit from this exercise. Progressively, the government should move away from commercial activity and leave it best to the private players who are driven more by markets. Even globally the thought process is that  the proportion of the GNP due to Government economic activity should be reduced to the extent possible. This is possible even for natural monopolies where effective regulatory surrogates for competition have been created to protect consumers.

1. Government of India, Economic Survey 2001-02, 2002-03, 2003-04, 2004-05,
2005-06, 2006-07, 2007-08 New Delhi.
2. Aswathappa K., Essentials of Business Environment 7th edition 2004 Himalayan Publishing House, New Delhi.
3. Datt Ruddar and Sundharam K.P.S., Indian Economy, S, Chand and Company Ltd. New Delhi 2008.
4. Mishra and Puri, Indian Economy, Himalayan Publishing House, New Delhi 2007.
5. G. S. Batra, Emerging trend in Globalization, Liberalization and privatization (edited) 17-36, 2001
6. Wikipedia.
7. G.O.I-Ministry of Finance, Department of Disinvestment.
8. Disinvestment of India’s Public Sector Units- L M Bhole
9. Disinvestment: the need of the hour in India -D.R. Dogra
          10. Disinvestment back on agenda -ASHOK DASGUPTA

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