Disinvestment: ‘Selling the family silver’
FIGURES OVER YEARS
What is disinvestment? Disinvestment (divestment or divestiture) is the devolution of government’s stake in central public sector enterprises (CPSE) such as ONGC, Sail and Gail etc. Devolution of stake is done through sale of shares held by the government in these companies to prospective buyers.
When was it started? Disinvestment was first started by the PV Narasimha Rao government after it took charge in 1991. Total stakes worth `3,038 crore were disinvested in 31 PSUs. A disinvestment commission was set up in 1996 to advise the government on the process, and it ceased to exist in 2004. The ministry of disinvestment was formed in 1999, which now functions as a separate department under the ministry of finance.
Why was disinvestment needed?
The Industrial Policy 1991 observed that public sector enterprises (PSE) had shown a poor rate of return, and many of them had become a “burden Total revenues through disinvestment till date, against a target of `2,83,725 cr*
Total no of CPSEs in which the govt has divested stakes.
rather than being an asset”. In order to correct the course, the policy batted for increased competition through private sector participation and stake sales in selected enterprises.
How does it help?
According to the government, disinvestment helps improve corporate governance and increase CPSEs’ productivity and profitability. Retail investors participating in Disinvestment target 2010-11
the process means that some stakeholding in public sector remains with the people. Importantly, disinvestment helps raise resources for the government and bridge the fiscal deficit.
How is the stake sale done? The stake sale is done through any of the five processes: initial public offerings (IPO), further public offering (FPO), offer for sale – the government’s Total receipts most preferred option since 2012, institutional placement program and CPSE exchange traded funds.
What are the types of disinvestment?
The stake sales can be broadly classified into minority sales (upto 49% shareholding) in profitable companies; strategic sales of loss making companies, in which management control may also be transferred;
Where do the funds generated from disinvestment go? Receipts from disinvestment are transferred to the National Investment Fund. Besides being used for subscription of shares issued by CPSE so that the government is maintained, NIF is also used to recapitalise banks and fund social sector and government initiatives such as the metro projects and railways.
What do critics say?
Critics term disinvestment as “selling the family silver”. They argue that it reduces, or even dilutes, the government’s direct control in CPSEs, in order to meet short-term fiscal goals. But the government holds that the devolution of stakes help realise the true value of a CPSE, and hence opens up possibility of higher yields.
Is disinvestment done in other countries also?
Yes. Notably, the MargaretThatcher regime in UK privatised around 670 PSUs during its 11-year rule. Meanwhile, countries such as Germany, Taiwan, Korea, China and much of south America have also used disinvestment.