Disinvestment & Privatisation
🟠 Topic 34: Disinvestment & Privatisation
📌 Introduction
The public sector has historically played a dominant role in India’s industrial and economic development, especially after Independence. However, over time, many Public Sector Enterprises (PSEs) became inefficient, incurred heavy losses, and became a fiscal burden.
To improve efficiency, unlock value, and reduce fiscal pressure, the government adopted Disinvestment and Privatisation as key components of economic reforms, especially after 1991.
🔹 What is Disinvestment?
📖 Definition
Disinvestment refers to the sale of the government’s equity stake in public sector enterprises (PSEs) to private investors or the public through stock exchanges.
🔎 Objectives of Disinvestment
1️⃣ Reduce Fiscal Burden – Raise funds to meet fiscal deficit targets.
2️⃣ Enhance Efficiency – Improve managerial autonomy and market discipline in PSEs.
3️⃣ Promote Private Sector Participation – Encourage private investment in key sectors.
4️⃣ Widen Shareholding Base – Promote people’s ownership in profitable PSEs through public offerings.
5️⃣ Unlock Value – Realize the true economic value of government assets.
🔹 What is Privatisation?
📖 Definition
Privatisation is the process of transferring ownership and control of a public sector enterprise to the private sector, either fully or partially.
🔎 Objectives of Privatisation
1️⃣ Enhance operational efficiency.
2️⃣ Encourage competition and innovation.
3️⃣ Promote foreign investment and technology transfer.
4️⃣ Improve resource allocation by reducing political interference.
🔹 Evolution of Disinvestment Policy in India
1️⃣ Pre-1991 Era – Limited Disinvestment
- Focused on creating PSEs in strategic sectors.
- No systematic disinvestment policy.
2️⃣ Post-1991 Economic Reforms
- Disinvestment Commission (1996) set up to advise on PSE sales.
- Emphasis on partial disinvestment (minority stake sale).
3️⃣ 2000s – Strategic Sales
- Full/majority stake sales in BALCO, Hindustan Zinc, VSNL.
- Focus on strategic disinvestment.
4️⃣ Recent Reforms (2014 Onwards)
- Aggressive disinvestment target-setting.
- Focus on strategic sectors, reducing presence in non-strategic sectors.
- Air India privatisation (2021) – milestone transaction.
Key Terms Explained
| Term | Meaning |
|---|---|
| Minority Disinvestment | Sale of less than 50% stake, govt retains control |
| Majority Disinvestment | Sale of more than 50%, loss of control |
| Strategic Disinvestment | Sale of substantial stake along with transfer of management control |
| Privatisation | Transfer of full ownership and control to private sector |
🔹 Strategic Disinvestment Policy (2021)
The government classified sectors into:
| Sector | Policy |
|---|---|
| Strategic Sectors | Minimal presence (bare minimum PSEs retained) |
| Non-Strategic Sectors | All PSEs to be privatised or closed |
🔹 Key Methods of Disinvestment
| Method | Description |
|---|---|
| Initial Public Offering (IPO) | First-time sale of shares to public |
| Offer for Sale (OFS) | Sale of existing shares via stock exchange |
| Institutional Placement | Direct sale to institutional investors |
| Strategic Sale | Sale to a strategic investor with transfer of control |
| Exchange Traded Funds (ETF) | Bundling PSE shares into a single investment product |
Important Disinvestments (Past Examples)
| Enterprise | Type of Disinvestment |
|---|---|
| Air India | Strategic Sale (100% stake) |
| Coal India | IPO |
| LIC | IPO |
| Hindustan Zinc | Strategic Sale |
| IRCTC | IPO |
🔹 Role of DIPAM
📖 Definition
Department of Investment and Public Asset Management (DIPAM) is the nodal agency under the Ministry of Finance responsible for:
- Formulating disinvestment policy.
- Managing government equity in PSEs.
- Executing strategic sales and public offers.
- Managing exchange-traded funds (CPSE ETF, Bharat 22 ETF).
🔹 Benefits of Disinvestment & Privatisation
✔️ Unlocks capital for infrastructure spending.
✔️ Improves PSE performance and competitiveness.
✔️ Attracts foreign and domestic investment.
✔️ Reduces fiscal deficit and public debt.
✔️ Promotes economic efficiency through competition.
🔹 Challenges in Disinvestment & Privatisation
1️⃣ Valuation Controversies
- Difficulty in determining fair market value.
- Allegations of assets being undervalued.
2️⃣ Political Opposition
- Privatisation often faces resistance from trade unions and opposition parties.
3️⃣ Limited Investor Appetite
- Global downturns or sectoral downturns can reduce investor interest.
4️⃣ Social Concerns
- Job losses in privatised entities.
- Concerns about essential services being profit-driven.
5️⃣ Regulatory Issues
- Sectors like defense, banking face additional regulatory hurdles.
🔹 Disinvestment Targets & Achievements
| Year | Target (₹ crore) | Achievement (₹ crore) |
|---|---|---|
| 2021-22 | 1,75,000 | 13,500 (Air India sale delayed) |
| 2022-23 | 65,000 | ~30,000 |
| 2023-24 | 51,000 | (Ongoing) |
🔹 Case Study – Air India Privatisation (2021)
- 100% stake sold to Tata Sons.
- Debt transfer mechanism – large chunk transferred to Air India Asset Holding Ltd (AIAHL).
- First major privatisation of national carrier.
- Paved the way for faster disinvestment processes.
📚 Practice MCQ
1️⃣ Consider the following statements regarding Disinvestment:
- It involves selling the government’s equity stake in public sector enterprises.
- It always results in the complete transfer of ownership to the private sector.
- DIPAM is the nodal agency for disinvestment.
Which of the above statements are correct?
✅ Options:
(a) 1 and 3 only
(b) 2 and 3 only
(c) 1 and 2 only
(d) 1, 2, and 3
2️⃣ What is the primary objective of Privatisation?
✅ Options:
(a) Increase government control
(b) Promote economic efficiency
(c) Increase public sector employment
(d) Enhance fiscal deficit
3️⃣ Which department manages India’s disinvestment programme?
✅ Options:
(a) NITI Aayog
(b) DIPAM
(c) SEBI
(d) Ministry of Corporate Affairs
4️⃣ Consider the following examples of strategic disinvestment:
- Hindustan Zinc
- Air India
- ONGC
Which of the above is/are correct?
✅ Options:
(a) 1 and 2 only
(b) 1 and 3 only
(c) 2 and 3 only
(d) 1, 2, and 3
