Daily News Analysis

DISINVESTMENT

12th October, 2021 Economy

Figure 1: No Copyright Infringement Intended

Context

  • PSU Air India has been successfully disinvested after a long haul.

Background

  • Disinvestment is the action of an organization or government selling or liquidating an asset or subsidiary. Disinvestment also refers to capital expenditure reductions, which facilitate the re-allocation of resources to more productive areas within an organization or government-funded project.
  • Disinvestment is when governments or organizations sell or liquidate assets or subsidiaries.
  • Disinvestments can take the form of divestment or a reduction of capital expenditures (CapEx).
  • Disinvestment is carried out for a variety of reasons, such as strategic, political, or environmental
  • Disinvestment is primarily a money-raising exercise. The proceeds of disinvestment are treated as non-debt creating capital receipts.

Challenges in disinvestment

  • Government shareholding in PSUs is a public asset which should not be liquidated to meet the immediate needs.
  • PSUs contribute to public finances through dividends and disinvestment can reduce this important source of finance.
  • PSUs act as a check on private enterprises and safeguard the wider public interests in the market. For example, in the absence of PSUs, private enterprises may form a cartel.
  • When the government goes for a strategic sale/privatization, there are chances of a PSU being sold o at a lower value to a private entity which can be against the larger public interest.

Modes of Disinvestment

  • Initial Public Offering (IPO): an o er of shares by an unlisted PSU to the public for the first time.
  • Follow-on Public Offering (FPO): also known as Further Public O ering, it’s an o er of shares by a listed PSU.
  • Offer for sale (OFS): shares of a PSU are auctioned on the platform provided by the stock exchange. This mode has been used extensively by the government since 2012.
  • Institutional Placement Programme (IPP): under this, only selected financial institutions are allowed to participate and the government stake is offered to only such institutions. E.g., mutual funds, insurance, and pension funds such as LIC etc.
  • Cross-holdings: in this method, one listed PSU takes up the government stake in another listed PSU.
  • CPSE Exchange Traded Fund (ETF): Through this route, the government can divest its stake in various PSUs across diverse sectors through a single offering. This mechanism allows the government to monetize its shareholding in those PSUs which form part of the ETF basket.

 Disinvestment on Public sector undertaking

  • Strategic Disinvestment: it is the sale of a substantial portion of government shareholding, 50 percent or higher, in a PSU, along with the transfer of management control.
  • Disinvestment- Government sells its shares worth less than 49%.
  • Privatization: it’s a type of strategic sale in which the government divests its entire shareholding, along with the transfer of management control, to a private entity.

DIPAM

  • The Department of Disinvestment was set up as a separate Department on 10th
  • December, 1999 and was later renamed as Ministry of Disinvestment from 6th September, 2001.
  • From 27th May, 2004, the Department of Disinvestment was one of the Departments under the Ministry of Finance.
  • The Department of Disinvestment has been renamed as Department of Investment and Public Asset Management (DIPAM) from 14th April, 2016.

Vision of DIPAM

  • Promote people's ownership of Central Public Sector Enterprises to share in their prosperity through disinvestment.
  • Efficient management of public investment in CPSEs for accelerating economic development and augmenting Government's resources for higher expenditure
  • List CPSEs on stock exchanges to promote people's ownership through public participation and improving efficiencies of CPSEs through accountability to its shareholders.
  • To bring in operational efficiencies in CPSEs through strategic investment, ensuring their greater contribution to the economy.
  • Adopt a professional approach for financial management of CPSEs in the national interest and investment aimed at expanding public participation in ownership of CPSEs.