Disinvestment in India: A Key Agenda for the Next Government
Kartavya Desk Staff
#### GS3 Paper
Syllabus: Indian Economy: LPG Reforms/Disinvestment Policy
Source: BS
Context: The Union Finance Minister recently reaffirmed the government’s commitment to the privatisation policy. The policy, part of the Aatmanirbhar Bharat package, aims for disinvestment in both strategic and non-strategic sectors, with a plan to maintain minimal presence of central public-sector enterprises (CPSEs).
What is Disinvestment?
Disinvestment is the process of reducing or liquidating government ownership in a company or asset, typically through the sale of shares or assets to private or public investors. It is often undertaken to raise capital, improve efficiency, or reduce government intervention in the economy.
Process of Disinvestment in India:
In India, the disinvestment process is overseen by the Department of Investment and Public Asset Management (DIPAM), operating under the Ministry of Finance. DIPAM’s main goal is to manage the government’s investments in public sector enterprises and supervise the disinvestment of government equity in these enterprises. Additionally, in 2005, the government established the National Investment Fund (NIF) to serve as a channel for the proceeds generated from the disinvestment of Central Public Sector Enterprises. The creation of NIF aimed to ensure transparent and efficient utilization of these funds for various developmental purposes.
Approaches:
• Minority Disinvestment: Govt. retains >51%, ensuring control.
• Majority Divestment: hands control but retains some stake.
• Complete Privatisation: 100% control transferred (full privatisation)
Methods of Disinvestment:
Methods | Description
Initial Public Offering (IPO) | Offer of shares by an unlisted Public Sector Enterprise (PSE) or the Government to the public for subscription for the first time.
Further Public Offering (FPO) | Offer of shares by a listed Public Sector Enterprise (PSE) or the Government to the public for subscription.
Offer for Sale (OFS) | Auction of shares by promoters through the Stock Exchange platform. This method has been extensively used by the Government since 2012.
Strategic Sale | Sale of a substantial portion of Government shareholding (up to 50% or as determined) of a PSE along with transfer of management control.
Institutional Placement Program (IPP) | Offering where only Qualified Institutional Buyers can participate. These buyers are perceived to possess the expertise to invest in capital markets.
CPSE Exchange Traded Fund (ETF) | Disinvestment through the ETF route allows the simultaneous sale of the Government’s stake in various PSEs across diverse sectors through a single offering.
Trends of Disinvestment in India:
The trend of disinvestment in India has evolved significantly since 1991. Initially slow due to political constraints, it gained momentum in the late 1990s and early 2000s, with significant earnings between 1999 and 2004. However, between 2004 and 2009, disinvestment slowed again due to political pressures. From 2009 to 2014, there was a resurgence, with earnings rising to INR 1.2 lakh crore. Since 2014, there has been a rapid increase in disinvestment revenues, totalling INR 4.48 lakh crore by 2020. Recent initiatives like the Atmanirbhar Bharat package and the National Monetisation Pipeline aim to further enhance private sector participation and unlock the value of public assets.
In recent years, the government has largely met or exceeded its disinvestment targets, notably surpassing goals in 2017-18 and 2018-19. In the fiscal year 2023-24, the revised estimate for disinvestment revenue was Rs 30,000 crore, lower than the initially budgeted Rs 51,000 crore.
Recent examples of disinvestment in India:
• IPO of 3.5% LIC shares
• Privatisation of Air India
• Sale of minority holdings in CPSEs including IDBI Bank, SCI, Concor, and others
Latest Disinvestment Policy
The latest disinvestment policy classifies the public sector into strategic and non-strategic sectors.
• In non-strategic sectors, the government will exit all businesses except for a ‘bare minimum’ presence in four key strategic sectors: Atomic energy, space and defence Transport and telecommunications
• Atomic energy, space and defence
• Transport and telecommunications
• Power, petroleum, coal, and other minerals
• Banking, insurance, and financial services
• States will be incentivized for disinvestment in their public sector companies.
This policy marks a departure from past approaches, providing a framework for deciding the ownership pattern of 439 CPSEs. It also includes the monetization of surplus land and the creation of the National Land Monetization Corporation.
Challenges related to Disinvestment in India:
Challenges | Description
Political Sensitivity | Disinvestment is a politically sensitive issue in India, with opposition from various political parties and trade unions.
Valuation Complexity | Valuing public sector enterprises can be challenging due to their unique structures and market conditions, leading to potential discrepancies.
Labour Concerns | Disinvestment often raises fears among employees regarding job security and wage cuts, leading to potential resistance and labour unrest.
Investor Appetite | Finding suitable buyers for shares in public sector enterprises (e.g., in the case of Air India), especially those with poor financial performance, can be difficult.
Regulatory Hurdles | Disinvestment processes are subject to complex regulatory frameworks, including approval requirements and compliance standards.
Legal Risks | Disinvestment decisions and processes can face legal challenges, including disputes over valuation, terms, and adherence to regulations.
Bureaucratic Delays | Bureaucratic procedures and decision-making processes can slow down the disinvestment process, leading to inefficiencies and delays.
Economic Impact | Disinvestment proceeds may impact government revenue streams and fiscal deficits, requiring careful management and planning for economic stability.
Private monopoly | Complete privatization can lead to public monopolies transforming into private monopolies, which may exploit their dominant position to raise service costs and maximize profits.
Way Forward:
• NITI Aayog recommends: Direct submission of disinvestment proposals to CCEA for faster processing.
• Direct submission of disinvestment proposals to CCEA for faster processing.
• Appointment of advisors and asset valuers to expedite disinvestment.
• Establishment of an independent professional agency to accelerate the Asset Monetization Program.
• Increase operational autonomy and governance measures for PSEs, such as listing on stock exchanges, to enhance transparency and performance.
• Provide fair valuation of government entities to boost bidder confidence in the disinvestment process.
• Reduce government involvement in the management and operations of PSEs by reforming boards and organizational structures to attract more buyers and achieve better valuations.
• Communicate the economic benefits of disinvestment to counter political resistance and public scepticism.
• Focus on selling assets based on market appeal rather than solely unloading underperforming ones, including profitable enterprises.
Conclusion:
Disinvestment is vital for India’s economic growth. Experts note that transferring ownership of PSEs to private entities through disinvestment enhances economic efficiency. They also suggest that the size of disinvestment alone doesn’t significantly improve PSU performance; rather, changes in leadership and market factors like innovation and technology drive economic efficiency.
Insta Links:
• Disinvestment of Public Sector Units (PSUs)
Prelims Links:
Q1. In the context of governance, consider the following: (UPSC 2010)
• Encouraging Foreign Direct Investment inflows
• Privatization of higher educational Institutions
• Down-sizing of bureaucracy
• Selling/offloading the shares of Public Sector Undertakings
Which of the above can be used as measures to control the fiscal deficit in India?
(a) 1, 2 and 3 (b) 2, 3 and 4 (c) 1, 2 and 4 (d) 3 and 4 only
Ans: D
Q2. Why is the Government of India disinvesting its equity in the Central Public Sector Enterprises (CPSEs)? (UPSC 2011)
• The Government intends to use the revenue earned from the disinvestment mainly to pay back the external debt.
• The Government no longer intends to retain the management control of the CPSEs.
Which of the statements given above is/are correct?
(a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2
Ans: D