Disinvestment is defined as the action of an organisation (or government) selling or liquidating an asset or subsidiary.
The new economic policy initiated in July 1991 indicated the poor state of PSUs. Inefficient PSUs had become and were continuing to be a drag on the Government’s resources turning to be more of liabilities to the Government than being assets. Many undertakings traditionally established as pillars of growth had become a burden on the economy. The national gross domestic product and gross national savings were also getting adversely affected by low returns from PSUs.
Hence, the need for the Government to get rid of these units and to concentrate on core activities was identified. The Government also took a view that it should move out of non-core businesses, especially the ones where the private sector had now entered in a significant way. Finally, disinvestment was also seen by the Government to raise funds for meeting general/specific needs.
In this direction, the Government adopted the ‘Disinvestment Policy’. This was identified as an active tool to reduce the burden of financing the PSUs.
The following main objectives of disinvestment were outlined:
• To reduce the financial burden on the Government
• To improve public finances
• To introduce, competition and market discipline
• To fund growth
• To encourage wider share of ownership
• To depoliticise non-essential services
Different approaches to disinvestments are:
• A minority disinvestment is one such that, at the end of it, the government retains a majority stake in the company, typically greater than 51%, thus ensuring management control.
• A majority disinvestment is one in which the government, post disinvestment, retains a minority stake in the company i.e. it sells off a majority stake.
• Complete privatisation is a form of majority disinvestment wherein 100% control of the company is passed on to a buyer.
Importance of Disinvestment
Presently, the Government has about Rs. 2 lakh crore locked up in PSUs. Disinvestment of the Government stake is, thus, far too significant. The importance of disinvestment lies in utilisation of funds for:
• Financing the increasing fiscal deficit
• Financing large-scale infrastructure development
• For investing in the economy to encourage spending
• For retiring Government debt- Almost 40-45% of the Centre’s revenue receipts go towards repaying public debt/interest
• For social programs like health and education
Disinvestment also assumes significance due to the prevalence of an increasingly competitive environment, which makes it difficult for many PSUs to operate profitably. This leads to a rapid erosion of value of the public assets making it critical to disinvest early to realize a high value.