Disinvestment Policy – Methods & Challenges
🟠 Topic 73: Disinvestment Policy – Methods & Challenges
📌 Introduction
Disinvestment refers to the process of the government selling its equity stake in public sector undertakings (PSUs) to private investors, institutions, or the general public. It is a crucial component of India’s economic reforms, aimed at improving public sector efficiency, mobilising resources for development, and reducing the fiscal burden.
The disinvestment policy in India has evolved from partial sale of minority stakes to strategic sales, where management control is transferred to private players.
🔹 What is Disinvestment?
📖 Definition
Disinvestment refers to the sale of government-owned equity in public sector enterprises to the private sector, retail investors, or institutional investors, either fully or partially.
Objectives of Disinvestment
✔️ Mobilise resources for infrastructure and social welfare spending.
✔️ Improve efficiency and competitiveness of PSUs.
✔️ Reduce fiscal deficit by monetising non-core assets.
✔️ Encourage wider ownership of public assets among citizens.
✔️ Foster a competitive market environment.
🔹 Evolution of Disinvestment Policy in India
| Phase | Key Features |
|---|---|
| Pre-1991 | Dominance of PSUs, limited private role |
| 1991-2000 | Gradual disinvestment, sale of minority stakes |
| 2001-2010 | Focus on strategic sales (BALCO, VSNL) |
| 2011-Present | Strategic disinvestment, asset monetisation, and focus on non-core assets |
🔹 Key Methods of Disinvestment
1️⃣ Initial Public Offering (IPO)
- Government offers shares to public through stock exchanges.
- Example: Coal India IPO (2010) raised over ₹15,000 crore.
2️⃣ Offer for Sale (OFS)
- Sale of shares by government via stock exchanges, primarily for listed PSUs.
- Faster than IPO, focused on institutional buyers.
- Example: Hindustan Aeronautics OFS (2018).
3️⃣ Strategic Sale
- Sale of controlling stake (50%+), including transfer of management control.
- Example: Air India’s sale to Tata Group (2021).
4️⃣ Institutional Placement Programme (IPP)
- Shares offered to qualified institutional buyers (QIBs).
- Faster process, limited to institutional investors.
5️⃣ Exchange-Traded Funds (ETFs)
- Government clubbing PSU shares into a fund and selling ETF units to investors.
- Example: CPSE ETF launched in 2014.
6️⃣ Asset Monetisation
- Monetising idle land, buildings, pipelines, roads owned by PSUs.
- Focus on long-term leases rather than outright sale.
- Example: National Monetisation Pipeline (NMP).
🔹 Examples of Major Disinvestment Cases
| PSU | Buyer | Type |
|---|---|---|
| Air India | Tata Group | Strategic Sale |
| VSNL (now Tata Comm) | Tata Group | Strategic Sale |
| BALCO | Vedanta | Strategic Sale |
| Coal India | IPO | Public Offering |
🔹 Disinvestment Targets & Achievements
| Year | Target (₹ crore) | Actual (₹ crore) |
|---|---|---|
| 2017-18 | 72,500 | 1,00,057 |
| 2018-19 | 80,000 | 84,972 |
| 2019-20 | 1,05,000 | 50,298 |
| 2020-21 | 2,10,000 | 32,835 |
| 2022-23 | 65,000 | 35,293 |
🔔 Shortfalls due to COVID-19 disruptions, political opposition, and market volatility.
🔹 Strategic Disinvestment – Current Focus
- Government to retain presence only in strategic sectors: ✔️ Atomic Energy.
✔️ Defence.
✔️ Space.
✔️ Transport Infrastructure. - All non-strategic sectors open for privatisation.
🔹 Benefits of Disinvestment
1️⃣ Fiscal Resource Mobilisation
- Funds generated can be used for: ✔️ Infrastructure.
✔️ Health & education.
✔️ Welfare schemes.
2️⃣ Enhanced Efficiency
- Private sector brings: ✔️ Better governance.
✔️ Efficient resource allocation.
✔️ Market-driven management practices.
3️⃣ Reduced Political Interference
- Reduces political meddling in operational decisions.
- Ensures commercial focus over populist pressures.
4️⃣ Market Development
- Increases: ✔️ Free float of PSU stocks. ✔️ Retail participation in stock markets.
Case Study – Air India Privatisation (2021)
- Sold to Tata Group after years of losses.
- Benefits: ✔️ Eliminated government’s subsidy burden. ✔️ Ensured professional management. ✔️ Boosted airline sector competition.
🔹 Challenges in Disinvestment
1️⃣ Political Opposition
- Labour unions resist PSU sale, citing: ✔️ Job losses.
✔️ Erosion of worker benefits. - Political parties oppose sale of strategic assets.
2️⃣ Valuation Concerns
- Critics argue that PSUs are often undervalued.
- Strategic sales at discounted prices raise transparency issues.
3️⃣ Market Volatility
- Poor market conditions reduce investor appetite.
- Stock prices of PSUs fall after disinvestment announcements.
4️⃣ Legal & Regulatory Hurdles
- Land ownership disputes.
- Litigation by minority shareholders.
5️⃣ Strategic vs Non-Strategic Confusion
- Definition of strategic sectors is often unclear.
- Sectors like banking and energy see partial sale despite strategic importance.
🔹 Case Study – CPSE ETF Success
- CPSE ETF launched in 2014 to monetise PSU holdings.
- Collected over ₹38,000 crore across multiple tranches.
- Enabled retail and institutional participation in PSU wealth creation.
🔹 Disinvestment vs Privatisation – Key Differences
| Parameter | Disinvestment | Privatisation |
|---|---|---|
| Objective | Raising funds | Transfer of ownership & control |
| Extent of Sale | Partial or full | Majority stake |
| Management Control | Usually retained | Transferred |
| Example | Coal India OFS | Air India sale |
📚 Practice MCQ
1️⃣ Which of the following is a key objective of disinvestment policy?
✅ Options:
(a) Encourage foreign direct investment
(b) Improve operational efficiency of PSUs
(c) Protect small-scale industries
(d) Promote rural employment
2️⃣ Under the current disinvestment policy, the government will retain presence only in:
- Atomic Energy
- Banking
- Defence
- Space
✅ Options:
(a) 1 and 3 only
(b) 1, 3, and 4 only
(c) 2 and 4 only
(d) 1, 2, 3, and 4
3️⃣ Which of the following is an example of strategic disinvestment?
✅ Options:
(a) Sale of PSU shares through IPO
(b) Sale of controlling stake to private player
(c) Dividends from PSU profits
(d) Buyback of PSU shares by government
