The status and proceeds of disinvestment

Category
Economy
Published
10th Feb, 2023

Context

The Centre has not met the disinvestment target for 2022-23 so far, having realised ?31,106 crore to date, of which, ?20,516 crore or close to a third of the budgeted estimate came from the IPO of 3.5% of its shares in the Life Insurance Corporation (LIC).

Why does the government undertake disinvestment?

Divestment is when the government sells its assets or a subsidiary, such as a Central or State public sector enterprise.
Three main approaches to disinvestment are:
Minority disinvestment: The government retains a majority in the company, typically greater than 51%, thus ensuring management control.
Majority disinvestment: The government hands over control to the acquiring entity but retains some stake whereas in complete privatisation.
Complete privatisation: 100% control of the company is passed on to the buyer.

There is a separate department for undertaking disinvestment-related procedures called the Department of Investment and Public Asset Management (DIPAM).

Reason for disinvestment:

The government may disinvest in order to reduce the fiscal burden or bridge the revenue shortfall for that year.
It also uses disinvestment proceeds to finance the fiscal deficit, to invest in the economy and development or social sector programmes, and to retire government debt.
Disinvestment also encourages private ownership of assets and trading in the open market.

Disinvestment vs. Strategic Disinvestment

If the government is selling minority shares in a PSE (less than 50%), it will continue to be the owner of the PSE. This is normal disinvestment procedure.
But if the government is selling majority shares (50% or more) of PSE to some other entity (mostly to a private sector entity), then this method is called strategic disinvestment or strategic sale). Unlike the simple disinvestment, strategic sale implies some sort of privatization, along with transfer of management control.
PSEs for strategic disinvestment are selected based on certain criteria.
- They may be incurring losses
- Or it may be operationally difficult for the government to continue with the PSE.

What are CPSEs likely to be divested in 2023-24?

The government decided to include IDBI Bank, the Shipping Corporation of India (SCI), the Container Corporation of India Ltd (Concor), NMDC Steel Ltd, BEML, HLL Lifecare, and so on in its disinvestment list.
Incidentally, the disinvestments of Bharat Petroleum Corporation Limited, SCI, and ConCor had been approved by the government in 2019 but have not gone through yet.
The divestments of both SCI and ConCor were stuck as some of the physical assets of these companies were properties of the States they are located in and had to be demerged.
The divestment of major holdings of the IDBI bank is also in the pipeline and is likely to be concluded by mid-FY24.

Benefits of disinvestment:

The importance of disinvestment by the government lies in utilisation of funds for:

To improve public finances and fund increasing fiscal deficit.
Financing large-scale infrastructure development.
For investing in the economy to encourage spending and fund growth.
For retiring Government debt- since a big part of Centre’s revenue receipts go towards repaying public debt/interest.
For expenditure on social programs like health and education.

- To encourage wider share of ownership in an enterprise, and reduce monopoly like enterprises.
- To introduce, competition, market discipline and efficiency.
- To depoliticize non-essential services and move out of non-core businesses, especially ones where private sector has now entered in a significant way.
- It also sends a positive single to the market and can boost economic activity.

What have been the challenges to disinvestment?

It is argued that government is selling profit-making enterprises and is weakening the public sector
It is diverting attention from the economic slowdown
It is skipping the normal channel of parliamentary procedures