NATIONAL INSTITUTE OF CONSTRUCTION MANAGEMENT AND

RESEARCH, PUNE.

Economics for Projects

Assignment
on

What is disinvestment and why is India planning

for disinvestment?

by
Srinath Vijaysampath (PP14114)
Pronoy Banerjee (PP14090)
Deepankar Sahu (PP14107)
Ankush Shama (PP14100)

Disinvestment
Investment refers to the conversion of money or cash into securities, debentures, bonds or any
other claims on money. As follows, disinvestment involves the conversion of money claims
or securities into money or cash. 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.
In most contexts, disinvestment typically refers to sale from the government, partly or fully,
of a government-owned enterprise.
A company or a government organisation will typically disinvest an asset either as a strategic
move for the company, or for raising resources to meet general/specific needs.

Disinvestment in context to Indian policies

Disinvestment policy
The present disinvestment policy has been articulated in the recent Presidents addresses to
Joint Sessions of Parliament and the Finance Ministers recent Parliament Budget Speeches.
Salient features of the policy are1.

2.

Citizens have every right to own part of shares of public sector undertakings.
Public Sector Undertakings are the wealth of the Nation and this wealth should

3.

rest in the hands of the people.

While pursuing disinvestment, Government has to retain majority shareholding,
i.e. at least 51% and management control of the Public Sector Undertakings.

Objectives of Disinvestment
The new economic policy initiated in July 1991 clearly indicated that PSUs had shown a very
negative rate of return on capital employed. Inefficient PSUs had become and were
continuing to be a drag on the Governments resources turning to be more of liabilities to the
Government than being assets. Many undertakings traditionally established as pillars of

growth had become a burden on the economy. The national gross domestic product and gross
national savings were also getting adversely affected by low returns from PSUs. About 10 to
15 % of the total gross domestic savings were getting reduced on account of low savings
from PSUs. In relation to the capital employed, the levels of profits were too low. Of the
various factors responsible for low profits in the PSUs, the following were identified as
particularly important:

Price policy of public sector undertakings

Underutilization of capacity

Problems related to planning and construction of projects

Problems of labour, personnel and management

Lack of autonomy

Hence, the need for the Government to get rid of these units and to concentrate on core
activities was identified. The Government also took a view that it should move out of noncore businesses, especially the ones where the private sector had now entered in a significant
way. Finally, disinvestment was also seen by the Government to raise funds for meeting
general/specific needs.
In this direction, the Government adopted the 'Disinvestment Policy'. This was identified as
an active tool to reduce the burden of financing the PSUs. The following main objectives of
disinvestment were outlined:

To reduce the financial burden on the Government

To improve public finances

To introduce, competition and market discipline

To fund growth

To encourage wider share of ownership

To depoliticise non-essential services

Importance of Disinvestment in India

Presently, the Government has about Rs. 2 lakh crore locked up in PSUs. Disinvestment of
the Government stake is, thus, far too significant. The importance of disinvestment lies in
utilization of funds for:

Financing the increasing fiscal deficit

Financing large-scale infrastructure development

For investing in the economy to encourage spending

For retiring Government debt- Almost 40-45% of the Centres revenue receipts go
towards paying public debts.

For social programs like health and education

Disinvestment also assumes significance due to the prevalence of an increasingly competitive

environment, which makes it difficult for many PSUs to operate profitably. This leads to a
rapid erosion of value of the public assets making it critical to disinvest early to realize a high
value.

Approach for Disinvestment

There are primarily three different approaches to disinvestments (from the sellers i.e.
Governments perspective)
1. Minority Disinvestment: A minority disinvestment is one such that, at the end of it,
the government retains a majority stake in the company, typically greater than 51%,
thus ensuring management control. The present government has made a policy
statement that all disinvestments would only be minority disinvestments via Public
Offers. Examples of minority sales via Offer for Sale include recent issues of Power
Grid Corp. of India Ltd., Rural Electrification Corp. Ltd., NTPC Ltd., NHPC Ltd. etc.

2. Majority Disinvestment: A majority disinvestment is one in which the government,

post disinvestment, retains a minority stake in the company i.e. it sells off a majority
stake. Historically, majority disinvestments have been typically made to strategic
partners. These partners could be other CPSEs themselves, a few examples being
BRPL to IOC, MRL to IOC, and KRL to BPCL. Alternatively, these can be private
entities, like the sale of modern Foods to Hindustan Lever, BALCO to Sterlite, CMC
to TCS etc.
3. Complete Privatisation: Complete privatisation is a form of majority disinvestment
wherein 100% control of the company is passed on to a buyer. Examples of this
include 18 hotel properties of ITDC and 3 hotel properties of HCI.
On 5th November 2009, Government approved the following action plan for disinvestment in
profit making government companies:
1.

Already listed profitable CPSEs (not meeting mandatory shareholding of 10%) are
to be made compliant by Offer for Sale by Government or by the CPSEs through
issue of fresh shares or a combination of both.

2.

Unlisted CPSEs with no accumulated losses and having earned net profit in three
preceding consecutive years are to be listed.

3.

Follow-on public offers would be considered taking into consideration the needs
for capital investment of CPSE, on a case by case basis, and Government could
simultaneously or independently offer a portion of its equity shareholding.

4.

In all cases of disinvestment, the Government would retain at least 51% equity
and the management control.

5.

All cases of disinvestment are to be decided on a case by case basis.

6.

The Department of Disinvestment is to identify CPSEs in consultation with

respective administrative Ministries and submit proposal to Government in cases
requiring Offer for Sale of Government equity.

Recent Disinvestment plans by Cabinet Committee on Economic Affairs

1. The Cabinet Committee on Economic Affairs approved disinvestment of 5% paid up
equity of Bharat Heavy Electricals Limited (BHEL), a Central Public Sector
Enterprise (CPSE), engaged in execution of heavy engineering / electrical equipment
manufacturing projects.
2. The Union Cabinet gave its approval for divestment of 10% of total paid up equity of
National Buildings Construction Corporation Ltd. (NBCC) out of its holding
through Initial Public Offering (IPO) in the domestic market.
3. The Cabinet Committee on Economic Affairs approved the disinvestment of 10% of
total paid up equity of MOIL out of its holding through Initial Public Offering (IPO).
The State Governments of Maharashtra and Madhya Pradesh have also decided to
divest 5% each of total paid up equity in MOIL out of their shareholding along with
the Government of India.
4. The Cabinet Committee on Economic Affairs (CCEA) approved the proposal for
disinvestment of 10% equity of the Coal India Ltd. out of its holding of 100%
through book building process in the domestic market. 1% of the equity will be
offered to the employees of CIL and its eight subsidiaries. The CCEA has also
decided to allow 5% price concession to the retail investors in order to encourage
greater public ownership of the PSE.
5. The Cabinet Committee on Economic Affairs (CCEA) approved the proposal for
disinvestment of 10% paid-up equity capital of Engineers India Ltd., out of
Governments shareholding in the domestic market through Public Offering. After this
disinvestment, the Government shareholding in the company would come down to
80.40%.
6. The Cabinet Committee on Economic Affairs approved the disinvestment of 10%
equity of the SJVN out of its shareholding, through book building process in the
domestic market. After this disinvestment, Government of Indias shareholding in the
company would come down to 65% and Government of Himachal Pradeshs
shareholding in the company would remain same at 25%.

7. The Cabinet Committee on Economic Affairs today gave its approval for sale of 10%,
5% and 5% of the pre-issue paid up equity of Rural Electrification Corporation
Limited (REC), Power Grid Corporation of India Ltd. (PGCIL) and National
Hydro-electric Power Corporation Limited (NHPC) respectively.

Problems realized with disinvestments

The number of bidders for equity has been small not only in the case of financially
weak PSUs, but also in that of betterperforming PSUs. Financial institutions have not
been very enthusiastic in listing and trading of shares purchased by them as it would
reduce their control over PSUs. Instances of insider trading of shares by them have

also come to light. All this has led to low valuation or under pricing of equity.
Further, in many cases, disinvestment has not really changed the ownership of PSUs,
as the government has retained a majority stake in them. There has been some
apprehension that disinvestment of PSUs might result in the crowding out of private

corporates from the primary capital market.

The assumption of higher efficiency, better / ethical management practices and better
monitoring by the private shareholders in the case of the private sector all of which
supposedly underlie the disinvestment rationale is not always borne out by business

trends and facts.

To the extent that the sale of government equity in PSUs is to the Indian private
sector, there is no decline in national wealth. But the sale of such equity to foreign
companies has far moreserious implications relating to national wealth, control and

power, particularly if the equity is sold below the correct price.

For disinvestments in public interests it is necessary to examine systematically, issues
such as - the correct valuation of shares, the crowding out possibility, the appropriate
use of disinvestment proceeds and the institutional.

Conclusion

Since independence PSUs are the main pillars of the Indian economy, which includes central,
state and local bodies. It is due to many reasons the performance of PSUs was poor over the
years and caused for monitory losses, over capitalization, wrong policies, faulty control and
inefficient management. The privatization policy that the government adopted was closely
related to efficient channelization and utilization of resources, but the progress often was not
that satisfactory. Finally the privatization root was led to the concept of Disinvestment that
had reflection over the needs of economy for the both productive and non productive entities.
However, Disinvestment has not yielded desired results in majority of dimensions which may
be virtually due to variety of problems faced by PSEs even after disinvestment, such as
inefficient, high cost and non-competitive industrial structure, operational inefficiency due to
high governmental interference, environment restrictions (delegation of operational and
functional autonomy to the managers through performance contracts), less proportion of
disinvestment and capital market discipline.
Therefore, it is recommended that the government henceforth should aim for strategic
disinvestment; as small and modest sizes of disinvestment are not likely to be fruitful. Also,
keeping in view the global experience as a cusion and caution agent, the government should
aim to improve the efficiency of inefficient units and create competitive market in the present
bloodthirsty environment to enable the PSUs to work efficiently for the good health of the
economy and in turn the nation.