Disinvestment

Disinvestment means sell or liquidates a stake that one holds in a company, subsidiary or any other investment. It is motivated by boosting of resources to give maximum returns.

Most of the time Disinvestment is used in context with Public sector undertakings. Whenever the government sells the shares of PSUs or the companies with more than 51% government ownership, it is called Disinvestment.

In another words, disinvestment is when the government reduces its holding in corporations / companies belonging to it. The present government set massive disinvestment targets each year. We must see disinvestment as a first step to privatization, which is also a primary objective of the government. Disinvestment is usually started by an initial public offering (IPO) where people can buy a small piece of the company or a “share” in the company. Each share will be given a small value and represents ownership of a part of a company, which means that shareholders will have some say in the decisions taken by the company.

Disinvestment is also a budgetary process because, whenever the government wants to disinvest something, they make this plan once a year during the budget. And they include the estimated profit of disinvestment in the budget itself. For example, the government has estimated a target to earn Rs 1.05 Lakh Crore with disinvestment in the financial year 2020. In the year 2019, this target was Rs 80,000 Crore.

Last year, LIC conducted the IPO between 4th May 2022 and 9th May 2022. The government then sold 3.5 percent of the LIC. Importantly, before the IPO, the government amended the LIC Act in 2021 to allow for disinvestment. Importantly, after this amendment, the Embedded Value of LIC jumped from 1.04 lakh crore to 5.4 lakh crore, because the funds that were previously in the control of the participating shareholders have been divided and control has been given to shareholders.

Right now the government is planning to disinvest in major public sector companies. They are BPCL, Shipping Corporation of India, Container Corporation of India, etc

Types of disinvestments:

There are two types of Disinvestment. First one is Token Disinvestment and second is Strategic disinvestment. In token disinvestment, only about 49percent to 5 percent of the share or equity of a company is sold. In Strategic disinvestment, 51 percent or above share is sold.

The Strategic disinvestment is also known as Privatization. But there is a difference in privatization and disinvestment. When the share sold by the government is more than 51 percent to a private company, then it is called as privatizations. And when it is below 49 percent, it is termed as disinvestment. After independence, most of the independence done by the government was Token Disinvestment. But now most of them are Strategic.

In India, the beginning of the process of the disinvestment started in the year 1992. The government has constituted a committee on the disinvestment of shares in PSE’s headed by Dr C Rangarajan to recommend on the policy of disinvestment.