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DISINVESTMENT
In India, the new economic policy have given
rise to significant focus for privatization of
public sector enterprises.

Hence, disinvestment is one of the method of
privatization, which started in the year 1992.

It implies selling of govt. equity shares of
public sector units in the market.

It is a concrete step towards privatization and
liberalization of our economy.
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Privatization and Disinvestment
Privatization implies a change in ownership, resulting in
a change in management.
The privatization of public sector enterprises will occur
only when govt. sells more than 51% of its ownership to
private entrepreneurs.
Disinvestment on the other hand, has a much wider
connotation as it could either involve dilution of govt.
stake to a level that result in a transfer of management
or could also be limited to such a level as would permit
govt. to retain control over the organization.
Disinvestment beyond 50% involves transfer of
management, where as disinvestment below 50% would
result in the govt. continuing to have a major say in the
undertaking.
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Background of Disinvestment
The Indian economy had virtually embraced
bankruptcy during the period of 1980-92.

In 1991, there was 236 operating public
sector undertakings, of which only 123 were
profit making.
The top 20 profit making PSUs were
responsible for 80 percent of profits.

The return on public sector investment for the
year 1990-91 was just over 2 percent.
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The basic charges against the public
sector for its poor performance are as
follows:
(a) Low rate of return on Investment
(b) Declining contribution to national savings
(c) Poor capacity utilization
(d) Overstaffing, bureaucratization leading to
excessive delays and wastage of scares
resources.
(e) On account of these phenomenon, many
public sector enterprises have become more
a burden than an asset to the government.
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Process of Disinvestment
The govt. in July 1991 initiated the disinvestment
process in India, while launching the New Economic
Policy (NEP).
The govt. had appointed the Krishnamurthy committee
in 1991 and Rangarajan committee in 1992 to look
after the disinvestment process.
Both the committees have recommended
disinvestments to fulfill objectives of modernization of
the PSEs through:
(a) Strengthening R &D
(b) Initiating diversification/expansion programme
(c) Retaining and reemployment of employees
(d) Funding genuine needs of expansion
(e) Mitigating fiscal deficit of the government.
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These committees also distinguished between the short
term and long term goals of the disinvestment and
advised the govt. not to sacrifice the long term goals for
the sake of fulfilling the short term objectives.
The govt. has announced in its NEP that mitigating the
fiscal deficits is the only objective of disinvestment.
The crucial shift in govt. policy for disinvestment of
PSUs was mainly attributed to poor performance of
these enterprises and burden of financing their
requirements through budget allocation.
Further in 1996, the govt. constituted a five member
public sector disinvestment commission under the
chairmanship of G.K.Ramakrshna for drawing a long
term disinvestment programme for the PSUs.
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The committee submitted its report covering 58
enterprises, out of 70 enterprises referred to it by the
govt. recommendations ranged from strategic sales in
various proportions to disinvestments ant various level.
This committee was ultimately abolished in 1999.
The govt. set up a new Department of Disinvestment in
1991 to establish a systematic policy approach to
disinvestment and to give fresh impetus to the
programme of disinvestment, which will increasingly
emphasize strategic sales of identified PSUs.
In 2001, the govt. reconstituted the disinvestment
commission with R.H.Patil as its chairman.
The govt. has decided to refer all non-strategic PSUs
and their subsidiaries, excluding IOC, ONGC, and GAIL
to the commission for its independent advice.
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Objectives of Disinvestment:
The following are the main objectives of the
disinvestment policy of the government:
(a) To reduce financial burden on the government
(b) To encourage wider share of ownership
(c) To introduce competition and market discipline
(d) To help public enterprise upgrade their technology
to become competitive
(e) To rationalize and retain their workforce
(f) To improve efficiency and productivity in public
enterprise through new industrial policies.
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Modalities of Disinvestment:
In order to achieve the various objectives and
goals of disinvestment many methods have been
formulated and implemented. These includes:
(1) Public Offer: offering shares of public sector
enterprises at a fixed price through a general
prospectus.
the offer is made to the general public
through the medium of recognized market
intermediaries.
(2) Cross Holding: In the case of cross holding, the
govt. would simply sell part of its share of one PSU
to one or more PSUs.
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(3) Golden Share: in this model, the govt. retains a
26 percent share in the PSU. This 26 percent share
will continue to give the govt. the status of majority
share holder.
(4) Warehousing: Under this model, the govt. owned
financial institutions were expected to buy the
govt.s share in select PSUs and holding them until
third buyer emerged.
(5) Strategic Sale: Under this model, govt. sells a
major portion (51% and above) of its stake to the
strategic buyer and also gives over the
management control.

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Progress of Disinvestment:
Disinvestment has also been undertaken in
states.
Out for the 222 state level public enterprises
identified for disinvestment, the process has been
initiated in 124 enterprises.
Out of which 30 enterprises have been privatized
and 68 have been closed down.
The reason for such low proportion of
disinvestment proceeds against the target are:
(a) The unfavorable market conditions.
(b) Stringent bureaucratic procedure.
(c) The Govt. is not transparent about its approach
towards privatization of PSEs.