Business Environment

EGMC002
Privatization and Disinvestment : Unit 5

Learning Objectives:

Why was Privatisation undertaken in India?

What is disinvestment? What progress has been made in the
disinvestment programme of India?
What is the implication of Privatisation/Disinvestment on business?
Meaning of Privatization and
Disinvestment
Privatization is selling an entity by the government resulting in a
change of ownership and management. Privatization of public sector
entities takes place when the government sells more than 51% of its
ownership to private entrepreneurs.

Disinvestment either involves dilution of government’s stake to a

level that will result in a transfer of management or could also be
limited to such a level that could permit the government to retain
control over the organization. Disinvestment beyond 50% results in
transfer of management.

• Disinvestment can also be defined as the action of an organisation (or

government) selling or liquidating an asset or subsidiary. It is also
referred to as ‘divestment’ or ‘divestiture.’
Role of Public Sector in India
1. Ensure rapid economic growth and industrialization.
2. Promote redistribution of income and wealth
3. Create employment opportunities
4. Assist the development of small-scale and ancillary industries
5. Promote import substitution and save foreign exchange
6. Earn return on investment and thus, generate resources for development

According to the Public Enterprises Survey 2018-19, there were 348 central
public sector undertakings as on March 31, 2019, out of which 249 were
operational. Out of 99 non operational 86 were under construction and
13 were under closure or liquidation.
https://economictimes.indiatimes.com/news/economy/policy/the-shape-of-indias-selloff-plan-300-psus-may-shrink-to-barely-two-dozen/articleshow/80741438.cms?utm_
source=contentofinterest&utm_medium=text&utm_campaign=cppst
Different types of Public
Enterprises
1.CPSEs (Central Public Sector Enterprises) - Companies where
the direct holding of the Central Government or of other CPSEs
is 51% or more

2.PSBs (Public Sector Banks) - Banks where the direct holding of

the Central/State Government or other PSBs is 51% or more

3.SLPEs (State Level Public Enterprises) - Companies where the

direct holding of the State Government or other SLPEs is 51%
or more
Major Objectives of
Privatization in India
1. Improvement in managerial efficiency
2. Improvement in financial discipline
3. Revival of sick units
4. Reduction in burden on public exchequer
5. Creation of competitive environment
6. Greater investment & employment opportunities
 Objectives of Disinvestment

1. To provide fiscal support - The fiscal support argument dictates

that the government’s resources are limited, and these resources
should be devoted to areas of social priority (such as health,
family welfare, education, etc). More resources can be devoted to
these priority areas by releasing resources locked up in non-
strategic public sector enterprises.
2. To improve the efficiency of the enterprise - If the extent of
disinvestment is such that a wider share of ownership is
encouraged, it will introduce competition and market discipline.
 Approaches to Disinvestment
• Minority disinvestment: The government retains a majority stake (typically more than 51%)
in the company and it ensures management control. Some examples of minority disinvestment
via Offer for Sale include recent issues of Power Grid Corp. of India Ltd., Rural
Electrification Corp. Ltd., NTPC Ltd, NHPC Ltd, etc.
• Majority disinvestment: The government retains a minority stake in the company i.e., it sells
off a majority stake. It is also called Strategic Disinvestment. These strategic partners could
be other Central Public Sector Enterprises (CPSEs) themselves, a few examples being the sale
of BRPL/MRL to Indian Oil Corporation Ltd. (IOC) and KRL to BPCL. Alternatively, these
strategic partners can be private entities, like the sale of Modern Foods to Hindustan Lever
Ltd., CMC to Tata Consultancy Services Ltd. (TCS).
• Complete disinvestment or privatization: It is a form of majority disinvestment wherein
100% control of the company is passed on to a buyer i.e. government completely disinvests
from that PSU. An example of this includes multiple hotel properties of India Tourism
Development Corporation (ITDC).
 Progress of Disinvestment in India
 1991-92 budget - Upto 20% equity of central PSU to be divested to financial institutions, mutual funds, etc.
These institutions will hold the shares for a specified period of time after which they will be permitted to sell
the shares in the share market. Report of Rangarajan Committee (1993) - For units reserved for public
sector upto 49% of equity to be divested & +74% for others.
 Aug.1996 Disinvestment Commission set up renamed as “Department of Investment and Public Asset
Management (DIPAM)” since April 20, 2016
 1999 - Classified PSEs into strategic and non-strategic units for the purpose of disinvestment. (a) Strategic
PSEs - defence production, atomic energy and railway transport. (b) Non-strategic - All other public sector
enterprises.
• 1998-99 – Govt. shareholding in CPSEs should be brought down to 26% excluding strategic CPSEs.
• 1999 - Dedicated ministry and Separate Cabinet Committee was set up.
• 1999 to 2004: Golden period of for privatisation. Divested majority stake or exited 16 PSUs, including VSNL,
Hindustan Zinc Ltd. and Bharat Aluminium Company.
• NCMP, 2004 - According to the Department of Disinvestment, in the strategic sale of a company, the
transaction has two elements: (a) Transfer of a block of shares to a Strategic Partner and (b)Transfer of
management control to the Strategic Partner. Prima facie, strategic stake sale means giving away
management control.
• 3rd Nov. 2005 - Creation of ‘National Investment Fund’. The income from the NIF corpus investments was
utilized for social sector programmes. From 2008-09 receipts used for plan projects.
• Governments have raised more than Rs. 5 lakh crores from 1991 to Feb.2021
 Progress of Disinvestment in
India
• A comprehensive approach for efficient management of Government investment in CPSEs has
been adopted by addressing issues such as capital restructuring, dividend, bonus shares, etc.
(i) The Department of Disinvestment is re-named as the “Department of Investment and Public
Asset Management (DIPAM)” since April 20, 2016
(ii) To ensure efficient management of GoI's investment in CPSEs, the Guidelines on "Capital
Restructuring of CPSEs" have been issued on 27th May, 2016 which supersede all previously
issued guidelines by various Ministries/Departments.
(iii) In the past strategic disinvestment would start with the recommendation of the
Disinvestment Commission. In a major departure, in the approved process the NITI Aayog
would perform the role of erstwhile Disinvestment Commission. In fact, the role of NITI Aayog
is larger as it would also identify CPSEs for strategic disinvestment and suggest methods for
valuation of the CPSE apart from advising the Government on mode and percentage of shares
to be disinvested.
https://www.dipam.gov.in/dipam/strategic-disinvestment
Progress of Disinvestment in India
Niti Aayog to empanel transaction advisor for PSU assets monetisation,
disinvestment (March 23, 2021)
•The Aayog is hand-holding the respective asset owners -- the statutory bodies, public
sector enterprises and other such undertakings within the purview of the GoI and state
governments -- in undertaking the detailed assessment of potential assets for
monetisation and subsequently the transaction process for monetisation of various
identified assets.
•As per the Request for Proposal (RFP) document, the Aayog has decided to carry out the
process of empanelment of consultants for providing financial consultancy services for the
monetisation pipeline and/or disinvestment pipeline projects and for providing transaction
advisory services.
•The RFP seeks to select three panels of consultants, one each -- 'Pipeline Consultant(s)';
'Monetisation Consultant(s)' and 'Disinvestment Consultant(s)'.

•https://economictimes.indiatimes.com/news/economy/policy/niti-aayog-to-empanel-transaction-advisor-for-psu-assets monetisationdisinvestment/articleshow/81656158.cms?from=mdr
 National Investment Fund
• Restructuring done in 2009 on usage of proceeds
• Restructuring in 2013 - Disinvestment proceeds w.e.f. the fiscal year 2013-14 credited to the
existing ‘Public Account’ under the head NIF and they would remain there until withdrawn/invested
for the approved purpose. The NIF would be utilized for the following purposes:
1.Subscribing to the shares being issued by the CPSE including PSBs and Public Sector Insurance
Companies, on rights basis so as to ensure 51% ownership of the Govt. in those
CPSEs/PSBs/Insurance Companies is not diluted.
2.Preferential allotment of shares of the CPSE to promoters as per SEBI (Issue of Capital and
Disclosure Requirements) Regulations, 2009 so that Govt. shareholding does not go down below
51% in all cases where the CPSE is going to raise fresh equity to meet its Capex programme.
3.Recapitalization of public sector banks and public sector insurance companies.
4.Investment by Govt. in RRBs/IIFCL/NABARD/Exim Bank.
5.Equity infusion in various Metro projects.
6.Investment in Bhartiya Nabhikiya Vidyut Nigam Limited and Uranium Corporation of India Ltd.
7.Investment in Indian Railways towards capital expenditure.

http://www.bsepsu.com/national-investment.asp
 Disinvestment Receipts

Source: BSESPU, DIPAM

 Disinvestment Trend

Source: BSESPU, DIPAM

Disinvestment Trend

Source: BSESPU, DIPAM

Disinvestment: 2021-22
• The government is targeting to conclude strategic sale of BPCL, Air India, Shipping
Corporation of India, Container Corporation of India, IDBI Bank, BEML, Pawan
Hans, Neelachal Ispat Nigam Ltd.
• Besides, the initial public offering of LIC would be launched and strategic sale
process of two PSU banks and one general insurance company would be initiated.
• BPCL disinvestment process to conclude sale by Sept-end. The government is
selling its entire 52.98 per cent stake in BPCL in the nation's biggest privatisation till
date. Vedanta Group and private equity firms Apollo Global and I Squared Capital's
Indian unit Think Gas have put in an expression of interest for buying the
government's stake.
Study Tips
• Privatisation is undertaken to improve the efficiency of the
PSEs, release financial resources for other sectors
• Disinvestment was undertaken in India with three
approaches - Minority Disinvestment, Majority
Disinvestment and Complete Disinvestment (Privatisation)
• Progress in disinvestment was initially slow since 1991-92
and improved from 2004 onwards.