Privatization and Disinvestment

By: Ratika Chawla

Ratika Chawla, Assistant Professor

 Meaning
 It is the transfer of ownership and management from
public hands to private hands.
 Or, in other words:
 It is a process by which the government transfers the
productive activity from the public sector to the
private sector.

Ratika Chawla, Assistant Professor

 Definition
• “ Privatization is the process that reduces the
involvement of the State or the public sector in the
nation’s economic activities.”
- Prof D.R.Pendse

Ratika Chawla, Assistant Professor

 Ways of Privatization
 Divestiture –(or Divestment) It is the reduction of an asset or
business through sale , liquidation, exchange, closure or any
other means .
 Denationalization – It means selling an asset or operation such
as a large Government owned firm to private investors.
 Contracting*** – The Govt can contract out few services
 Franchising – By authorizing the delivery of certain services
in few geographical areas.
 Withdrawing from provision of some goods and services

Ratika Chawla, Assistant Professor

 Objectives
 Economic Objectives (enhances efficiency
through Competition)
 Fiscal objectives – to curtail the revenue deficits
 Administrative Objectives- (To check economic
inefficiency, inefficiency in provision of goods
and services, Rapid expansion of bureaucracy)
 Ideological Objectives- to strengthen capitalism
and providing better choices to customers.

Ratika Chawla, Assistant Professor

 Advantages
• Clarity of Objectives
• Reduction in Public Debt or the fiscal burden
• Reduction in political interferences
• More efficient operations
• Promotion of Capital market
• Promotion of technological advancement
• Helped to cut down the administrative machinery
• It enables the Govt to focus on important State functions
• Encouragement of Ownership

Ratika Chawla, Assistant Professor

 Disadvantages
 Concentration of economic power in few hands
 Fear of acquisition of national firms by foreign firms
 Privatization of concerns of strategic concerns may
be against national interest.
 The capital markets of developing countries are not
developed enough for carrying out the privatization
efficiently.

Ratika Chawla, Assistant Professor

 Disinvestment in India
• It is an important way of Privatization.
• It refers to selling of assets, shares of public
undertakings to public, employees, financial
institutions or private entrepreneurs.
• It is done to reduce the fiscal burden on the Govt.

Ratika Chawla, Assistant Professor

 It allows a larger share of PSUs ownership in the
open market, which allows for the development of a
strong capital market in India .
 It may be done by the issue of fresh shares in the
market*.

Ratika Chawla, Assistant Professor

Ratika Chawla, Assistant Professor