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Context

• The government on October 7, 2022, kicked off the process for strategic disinvestment of IDBI Bank with the transfer of management control.

 

Disinvestment

• Disinvestment means sale or liquidation of assets by the government, usually Central and state public sector enterprises, projects, or other fixed assets. Disinvesting is an exit strategy that means taking out an existing investment. Disinvestment policies are commonly followed by governments to allocate resources more efficiently.
• For example: The Government of India will sell 30.48% of its stake in the IDBI bank, and Life Insurance Corporation of India (LIC) shall sell 30.24%, aggregating to 60.72% of IDBI Bank’s share capital, along with transfer of management control in the lender.
• In a nutshell, Disinvestment by the government means the market activity through which the Government conducts sale or liquidation of Government-owned assets. Such assets usually refer to the Government’s ownership stake in Central Public Sector Enterprises (CPSEs) and state public sector enterprises (SPSEs), but are not limited to that. Government assets also include project undertakings and other fixed assets.

 

Disinvestment in India

Why Disinvestment is done?

• Reducing the financial burden on the Government finances
• Opening up markets for private firms, which eventually leads to better capital markets and efficient allocation of resources
• Supporting the liquiditymeasures in the market by aiding to consumption and demand as the need arises
• Raise money to facilitate long-term Government goals of growth and development in the country
• Channelize resources to more productive avenues and projects by reducing the capital expenditures on existing non-performing assets or loss-making firms
• Improve the Return on Investment (ROI) of underperforming firms.

In a nutshell,
Main objectives of Disinvestment in India:

• Reducing the fiscal burden on the exchequer.
• Improving public finances.
• Encouraging private ownership.
• Funding growth and development programmes.
• Maintaining and promoting competition in the market.
• Reducing the financial burden on the government.
• Improving public finances.
• Encouraging an open share of ownership.
• Introduction, competition, and market discipline.
• Depoliticizing essential services.
• Upgrading the technology used by public enterprises to become competitive.
• Rationalizing and retraining the workforce.
• Building competence and strength in R&D.
• Initiating the diversification and expansion programmes.

 

Importance of Disinvestment

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

 

Types of Disinvestments

From a general point of view, the disinvestment in India can be categorized in the following manner:

1. Organizing the market segment: A company may disinvest in one of its underperforming divisions, as other divisions continue to deliver higher profitability while demanding similar resources and expenditure. Such a disinvestment strategy is to shift the focus of the company on the divisions performing well and to scale them up.
2. Offloading unnecessary assets: A company is cornered into adopting this strategy when the acquisition of an asset does not fit its long-term strategy. Companies post-merger are stuck with assets they do not intend to use. A company may choose to disinvest in acquired assets and instead focus on their competitive abilities.
3. Social and legal considerations: A company may have to disinvest if they cross a certain threshold limit in the market holding to enable fair competition. Another example is of an endowment fund pulling out of investments in energy companies given environmental concerns.

 

From a government point of view, the disinvestment strategy can be of the following types:

• Minority Disinvestment: The Government wishes to retain managerial control over the company by maintaining the majority stake (equal to or more than 51 percent). Because public sector enterprises cater to the citizens, the Government needs to be able to influence company policies to further the interests of the general public. The Government generally auctions the minority stake to potential institutional investors or announces an offer for sale (OFS) inviting participation by the public.
• Majority Disinvestment: The Government gives up the majority stake in a government-held company. After the disinvestment, the government is left holding a minority stake in the company. Such a decision is based on strategic grounds and policies of the Government. Typically, majority disinvestments are done in the favor of other public sector enterprises. For example, Chennai Petroleum Corporation Limited, formerly known as Madras Refineries Limited is a group company of Indian Oil Corporation after disinvestment by the Government. The idea is the consolidation of resources in a company which ultimately leads to operational efficiency.
• Strategic Disinvestment: The government sells off a PSU to usually a non-government, private entity. The intention is to transfer the ownership of a non-performing organization to more efficient private players in the market and reduce on the financial burden on the government balance sheet. Selling minority shares of Public Enterprises, to another entity be it public or private is disinvestment. In this the government retains ownership of the enterprise. On the other hand, when the government sells majority shares in an enterprise, that is strategic disinvestment/sale. Here, the government gives up the ownership of the entity as well. Government carefully choses enterprises to be put up for sale.
• Complete Disinvestment/Privatization: 100 percent sale of Government stake in a PSU leads to the privatization of the company, wherein complete ownership and control are passed onto the buyer.

 

Means of Disinvestment

Disinvestment of a minority stake in a Government-owned entity is done in one of the following ways:

1. Initial Public Offering (IPO)
2. Follow On Public Offer (FPO)
3. Offer For Sale (OFS)
4. Institutional Placement – Government stake is auctioned off to select financial institutions
5. Exchange-Traded Funds (ETFs) – Monetize shareholding simultaneously across multiple sectors and companies that form a constituent of the ETF. For example, Bharat-22 is an ETF comprising of 22 companies (19 PSUs) with a Government stake in them.
6. Cross-holding – Listed PSUs are allowed to buy a Government stake in another PSU.

Disinvestment v/s Divestment

• Divestment and disinvestment are terms used interchangeably. However, there is a slight point of difference between the two.
• Disinvestmentin an asset, or division, or stake is typically carried out without the intent of reinvesting capital back into the same entity. Divestment, on the other hand, is generally done temporarily to deal with say, tight finances, or social/political pressures that may arise as a result of certain business activities. While disinvestment might also mean selling off the entity in its entirety, divestment only means the reduction of investment.

 

Disinvestment v/s Privatization

Privatization is the partial or complete sale of Government-owned assets to a privately held firm or a group of individuals where the Government gives up majority control to the buyer of assets. Privatization can be done by:

• Stake sale of Government-owned equity in PSUs.
• Lifting regulations restricting private participation in Government-regulated industries.
• Offering public services contracts to private corporations.
• Offering subsidies on various business activities.

 

Point of Difference	Disinvestment	Privatization
Control	Dilution of ownership, Government retains control	Transfer of ownership, control changes hands
Shareholding threshold	More than 50 percent	Less than 50 percent
Purpose	To ease public finances and increase productivity of Government capital	Strategic in terms of achieving operational efficiency

 

What are the advantages of Disinvestment?

Some of the benefits of disinvestment, irrespective of the approach are as follows:

 

For the Government:

• Reduce the burden on the government by raising valuable resources for the government, which could be used to bridge the fiscal deficit and also can be used for various social infrastructure projects or invest towards profit-making PSUs
• The government can focus more on core activities such as infrastructure, defense, education, healthcare, and law and order.
• A leaner government.

 

For the Markets and Economy

• Brings about greater efficiencies for the economy and markets as whole increasing competitiveness.

 

For the Employees:

• Monetary gains through ESOPs and preferential issue of shares.

 

For the PSUs:

• Greater autonomy and introduction of corporate governance that may lead to higher efficiency.

 

For retail investors:

• Unlocking of shares from disinvestment through various means like IPO allows retail investors to invest.

 

Drawbacks of IPO

• Fear of price rise due to monopoly
• Fear of foreign control when a foreign company buys the major stake of the disinvested company
• Loss of employment due to privatization
• Loss of public interest, etc

 

Disinvestment Policy of India

• In 1999, the Department of Disinvestment was set up as a separate department and later renamed as Department of Investment and Public Asset Management, functioning under the Ministry of Finance at present.
• Disinvestment targets are set under each Union Budget, and every year the targets change. The government takes the final decision on whether to raise the divestment target or not.
• Disinvestment has tended to achieve mixed results for the Government of India in terms of receipts and estimated projections. For the FY 2022-23, the targets of disinvestment are downward revised. For 2022-23, the government has set a modest disinvestment target of Rs 65,000 crore. After a 3.5% stake sale in LIC through IPO, the big tickets that are in pipeline for FY 2022-23 are Shipping Corporation of India (SCI) and IDBI Bank.

 

https://indianexpress.com/article/business/banking-and-finance/rbi-to-launch-e-rupee-pilot-soon-can-be-based-on-token-or-account-8196666/