This article has been written by Ms. Aarsha Prem, a 5th year LL.B. student from CLS GIBS college.

ntroduction

In India, Central Public Sector Enterprises (CPSEs) are normally privatised in one of the following ways: since 2004, the most common technique has been the public offer. In the early years, government equity was sold through an auction to financial investors. There have been very few strategic transactions in which control of the public sector is transferred to private corporations, and they mostly occurred between 1999 and 2004. As a result, disinvestment rather than privatisation is the term used in India when selling government stock. Disinvestment is a government policy in India whereby the government partially or completely sells off its holdings in public sector enterprises. Disinvestment was decided upon primarily to lighten the budgetary burden and fill the government’s revenue gap.

What is Disinvestment?

Disinvesting is a tactic used by investors to offload or dispose of an asset or an interest in it partially. Disinvesting, or withdrawing from an existing investment, is an exit strategy. Governments frequently implement disinvestment programmes to more effectively allocate resources. 

Government disinvestment refers to the market activity used to sell or liquidate assets that are owned by the government. These assets generally, but not only, refer to the government’s ownership interest in state public sector enterprises (SPSEs) and central public sector enterprises (CPSEs). Projects under way and other fixed assets are also considered to be government assets.

It can be done to:

1. Lighten the budgetary load on government resources 
2. Open up markets to private companies, which will eventually result in improved capital markets and more effective resource allocation 
3. As demand and consumption increase, support market liquidity measures by providing assistance. 
4. Redirect resources to more productive channels and projects by lowering capital expenditures on current non-performing assets or loss-making businesses in order to promote long-term Government goals of growth and development in the nation. 
5. Boost the Return on Investment (ROI) of struggling businesses

Types of Disinvestment

The disinvestment in India can generally be divided into the following categories: 

Organising the market segment: If a division is underperforming and other divisions continue to produce better profits while requiring comparable resources and expenditures, a corporation may decide to stop investing in that division. With such a disinvestment plan, the corporation will concentrate on and expand up the divisions that are functioning successfully. 

Offloading superfluous assets: When the acquisition of an asset does not align with a company’s long-term plan, it is forced to use this technique. After a merger, companies are left with assets they do not want to use. A business may decide to forego investing in recently acquired assets in favour of concentrating on its competitive advantages.

Social and legal factors: In order to promote fair competition, a corporation may be required to reduce its market holding if it exceeds a specific threshold. An endowment fund withdrawing from investments in energy businesses due to environmental concerns is another illustration. 

The following types of disinvestment strategies are possible from a government perspective:

Minority Disinvestment: By keeping a majority share in the company, the government wants to maintain managerial control over it (equal to or more than 51 percent). The government must have the ability to influence corporate decisions in order to advance the interests of the general public because public sector businesses serve the needs of the people. The minority ownership is often auctioned off to potential institutional investors or made available through a public offer for sale (OFS) by the government. 

Majority Disinvestment: Giving away the majority ownership of a government-owned business. Following the disinvestment, the government is left with a small ownership position in the business. Such a choice is supported by government policy and strategic considerations. Majority disinvestments are typically made in favour of other public sector companies.

Strategic Disinvestment: The government sells a PSU, typically to a private, non-public company. The goal is to lessen the financial load on the government balance sheet by transferring ownership of a non-performing organisation to more effective private sector participants. 

Full disinvestment or privatisation: Entire ownership and management of the company are transferred to the buyer upon the sale of the Government’s entire stake in a PSU. 

Public offer: The most popular way of disinvestment has been the public offer. There have been 21 offer for sale (OFS) transactions among the 37 public offering transactions since FY 2015. The public offer method is thought to be an open way to sell government stock and strives to increase public involvement.

Buyback: A firm can buy back its shares from current shareholders using this approach. This aids in capital restructuring and raises the share’s intrinsic worth for the company. The repurchased shares must be cancelled by the firm. The government has utilised buybacks as a means of disinvestment in the past. Yet beginning in 2016, buyback became required for CPSEs with the required net worth and financial reserves. 

Every current shareholder must get a buyback offer from the corporation. In this scenario, the decline in total equity is greater than the decline in government shares, which could result in a rise in the percentage of government stock following the buyback. The total number of shares will be lowered (extinguished) by the same number of shares purchased back, though, if a CPSE is fully controlled by the government. Hence, after the buyback, the government will still hold the same percentage of shares. 

Selling to employees: As part of its disinvestment policy, the government frequently sets aside a fixed number of its shares for offering to the CPSE staff. These shares are frequently provided at a discount. These transactions should motivate the workforce and produce distributed shareholding.

Exchange traded funds (ETFs): A pool of equities known as an ETF represents the makeup of an index, such as the S&P BSE SENSEX. This strategy, when the government sells shares in specific CPSEs to a fund house that owns the ETF, has been utilised frequently in recent years to disinvest. The ETF fund manager first creates the plan and makes it available for public subscription through a new fund offer (NFO). Shares of the member firms with similar compositions and weights according to the underlying index are purchased using the subscription funds. Typically, shares are sold to the scheme at a discount, and the fund management then generates and distributes units of the plan to the participants. The units are listed on the exchanges once the NFO closes.

Procedure Followed in Disinvestment

In light of the technical and complicated character of transactions, the need for transparency and fair play, and the evolution of the disinvestment process for specific CPSEs, decision-making is based on inter-ministerial consultations and the engagement of professionals and experts. The following steps are included in the present disinvestment process:

1. The Administrative Ministry of the CPSE in question has given its preliminary approval. 
2. Acceptance of CCEA’s recommendation to divest. 
3. Establishment of an Inter-Ministerial Group (IMG) to direct and oversee the disinvestment process, with the Finance Minister’s agreement. 
4. IMG names advisers, such as merchant bankers, book running lead managers (BRLMs), and legal advisers, for the transaction. 
5. BRLMs’ appraisal presentation to the High Level Committee (HLC). 
6. Considering the advice of the BRLMs, HLC suggests a price band or floor price to the “Alternative Mechanism.” 
7. The “Alternative Mechanism” must approve the suggested price band or floor price, the disinvestment procedure, the price reduction for employees and retail investors, etc.

Disinvestment policy of the Government?

India’s public sector outgrew itself, and its flaws began to show inefficient use of resources and low capacity utilisation. So, the decision to pursue disinvestment was made in 1991. India’s transformation process started in 1991–1992, when 31 PSUs were chosen and disinvested for a total of Rs. 3,038 billion. The Disinvestment Commission, presided over by G. V. Ramakrishna, was established in August 1996 to provide guidance, oversee, track, and publicise the gradual disinvestment of Indian PSUs. It presented 13 studies that included advice for privatising 57 PSUs.

Once, the Department of Disinvestment was a separate cabinet ministry. The ministry was combined with the Ministry of Finance in 2004, but it continued to function as a separate department. The Department of Disinvestment was renamed as the Department of Investments and Public Asset Management later that year, under the BJP-led Government (DIPAM). DIPAM’s main responsibilities include managing the Central Government’s equity stake in PSUs and carrying out disinvestment activities in accordance with the annual targets established by the Finance Ministry.

Every year, the government includes a target for disinvestment in its budget for the upcoming fiscal year, and the targeted amount is actually disbursed. The disinvestment target for FY22 has been reduced from the FY21 target of Rs. 2.1 lakh crore to Rs. 1.75 lakh crore.

According to DIPAM, the following characteristics of India’s disinvestment strategy are: 

1. Encourage public ownership of CPSEs to ensure and enhance accountability to the Indian public by pursuing minority disinvestment or strategic disinvestment 
2. Use an OFS, FPO, or both to reach the minimum public shareholding criterion of 25% for each listed CPSE. 
3. CPSEs that have returned a net profit for the three years before must be listed and have no accumulated losses. 
4. Disinvestment shall be explored for CPSEs on a case-by-case basis, with CPSEs to be identified for divestiture after consultation with the relevant ministries overseeing such CPSEs. 
5. The Government shall evaluate OFS of Government Equity proposals
6. Niti Aayog, the government think tank, should be seen as a significant participant in talks about potential strategic disinvestment methods. 
7. Niti Aayog will recommend the form of sale, the proportion of stake to be sold, and the valuation of CPSEs that need strategic disinvestment.

Conclusion

Disinvestment aims to enhance public finances and lessen the financial burden placed on the government by ineffective PSUs. It encourages market discipline and competitiveness while also depoliticizing non-essential services. 

Disinvestment in India, however, has advanced slowly in comparison to the rapid privatisation progress made by developing nations in East and Southeast Asia, Latin America, Central America, and Eastern Europe, particularly in the areas of financial services and basic infrastructure (power, telecommunications, oil, and minerals). Public Sector Businesses served as the main driver of post-independence growth in India (PSE). The social and developmental obligations of the country were the most significant of the PSE’s post-independence duties, hence these divisions were exempt from competitive competition. Subsequently, the PSUs’ activities diverged, focusing on more non-core industries like hotels and consumer products, among others. Moreover, political and bureaucratic manipulation of the public businesses resulted in low capacity utilisation, decreased productivity, a lack of innovation, and convoluted decision-making procedures on crucial development-related issues.

References

1. https://dipam.gov.in/disinvestment-procedure
2. https://blog.theleapjournal.org/2020/07/disinvestment-of-cpses-in-last-6-years.html#gsc.tab=0
3. https://tavaga.com/blog/understanding-disinvestment-policy-objectives-purpose-and-recent-developments/
4. https://byjus.com/free-ias-prep/disinvestment-policy-in-india-and-dipam/
5. https://en.wikipedia.org/wiki/Disinvestment_in_India
6. http://www.bsepsu.com/approaches-disinvestment.asp

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