Disinvestment is known as an action taken by an organization (or government) that involves selling or liquidating an asset or subsidiary. It is also called divestment or divestiture. It involves the sale from the government, partly or fully, of a government-owned enterprise. The types of disinvestment can be broadly segregated as minority and majority disinvestment. This article discusses the types of disinvestment based on ownership of individuals/organizations involved, which is important for UPSC aspirants.

What is Disinvestment?

• The shares of various government companies that are held by the Government act as earning assets at the disposal of the Government. These can be sold at any time to generate capital.
• Therefore, when these shares are sold to earn capital the process is known as disinvestment.
• It includes the sale or liquidation of assets or subsidiaries of an organization or government but never the Government’s share should go below 51%.

Types of Disinvestment

Disinvestment can be classified into the following types :

1. Minority disinvestment
2. Majority disinvestment

Minority disinvestment

• It is a type of disinvestment where the government retains a majority stake in the company, mostly greater than 51%, and ensures that the management control stays with the government.
• Minority disinvestment of institutions started in the early and mid-90s. Some of them were Andrew Yule & co. Ltd., CMC Ltd, etc.
• Examples of minority disinvestment by the offer for sale include recent issues of Power Grid Corporation Of India Limited, Rural Electrification Corporation Limited, NTPC Limited, NHPC Limited etc.
• The government also came up with the policy that for the financial year (FY) 2018-19 all the disinvestments would only be through minority disinvestments through public offerings.

Types of Minority Disinvestment

Disinvestment of a minority stake in a PSU can be carried out in the following ways:

Initial Public Offering (IPO)

• It is an offer of shares by an unlisted PSU to the public for the first time.
• It refers to offering shares of a private entity to the public in a new stock issuance and allows a corporation to raise capital from public investors.

Follow-on Public Offering (FPO)

• It is also known as Further Public Offering as it is an offer of shares by a listed PSU. A follow-on public offering (FPO) is the issuance of shares to investors by a company that is listed on a stock exchange.
• It is the issuance of additional shares offered by a company after an initial public offering (IPO). They are also called secondary offerings.

Offer for sale (OFS)

• It is when the shares of a PSU are auctioned on the platform provided by the stock exchange.
• This mode of minority disinvestment has been used extensively by the government since 2012.

Institutional Placement Programme (IPP)

• It includes only the selected financial institutions that are allowed to participate and the stake involved of the government is offered only to such institutions.
• For instance, mutual funds, insurance, and pension funds such as LIC are included in the Institutional Placement Programme.

Cross-holdings

• In this method of disinvestment, one listed PSU takes up the government stake in another listed PSU.
• It can result in double-counting, where the equity of each company is counted twice when determining value, which can result in estimating the wrong value of the two companies.

CPSE Exchange Traded Fund (ETF)

• Through this mode of disinvestment, the government can divest its stake in various PSUs across diverse sectors through a single offering.
• It enables the government to monetize its shareholding in those PSUs which form part of the exchange-traded fund ETF basket.

Majority disinvestment

• It is a type of disinvestment where the government, post disinvestment, retains a minority stake in the company, and completely it sells off its majority stake.
• Generally, majority disinvestments have always included strategic partners. These partners could be other CPSEs themselves, such as BRPL to IOC, and KRL to BPCL.
• Strategic partners in majority disinvestment could also be private entities such as the sale of Modern Foods to Hindustan Lever Limited, CMC to Tata Consultancy Services Limited (TCS).
• In the case of majority disinvestment instances, the stakes can also be offloaded through an offer for sale, separately or in conjunction with a sale to a strategic partner.

Types of Majority Disinvestment

Disinvestment of a majority stake in PSUs can be done in the following ways:

Strategic sale

It involves the sale of a major portion of government shareholding which can be 50 percent or higher in a PSU along with the transfer of management control.

Privatization

It is a type of strategic sale in which the government divests its entire shareholding, along with the transfer of management control to a private entity.

Complete privatization

• It is a type of majority disinvestment where 100% control of the company is passed on to a buyer.
• Its examples include 18 hotel properties of ITDC and 3 hotel properties of HCL.
• Disinvestment is different from privatization as it may or may not result in privatization. This can be explained by the following example:
  • If the government retains 26% of the shares having voting powers while selling the remaining to a strategic buyer, it would have disinvested, but would not have privatized as with 26% it can still stall vital decisions for which generally a special resolution (three-fourths majority) is required.

Conclusion

Disinvestment refers to an organization liquidating (selling) its stake in the company or its subsidiary or general sale of assets. This mode is generally undertaken so as to imply a reduction in capital expenditure. It can be undertaken by various means as discussed above. This helps to raise capital and decrease the inflow of resources in non-productive assets.

FAQs

MCQs

1. Which of the following is a type of disinvestment where the government retains less than 50% ownership?

A) Minority disinvestment
B) Majority disinvestment
C) Complete privatization
D) Strategic sale

2. What is the main objective of disinvestment?

A) To increase government control over industries
B) To reduce the fiscal burden and improve efficiency
C) To promote monopolies
D) To decrease private sector investment

3. What is complete privatization in the context of disinvestment?

A) Selling all of a company's shares to private investors
B) Retaining majority control of the company
C) Partial sale of government ownership
D) None of the above

4. In which year was the National Investment Fund (NIF) established?

A) 2000
B) 2005
C) 2010
D) 2015

5. What are the benefits of disinvestment?

A) Increased government control
B) Improved efficiency and fiscal consolidation
C) Decreased foreign investment
D) None of the above

GS Mains Questions and Model Answers

Q1: Analyze the impact of disinvestment on the performance of public sector enterprises. How does it contribute to economic growth?

Answer: Disinvestment plays a critical role in improving the performance of public sector enterprises by introducing private sector management practices. This enhances efficiency, reduces bureaucratic delays, and improves profitability. Additionally, disinvestment generates revenue for the government, which can be used for public welfare programs, infrastructure development, and fiscal consolidation. The introduction of private investment also spurs economic growth through increased productivity and competition.

Q2: Discuss the challenges associated with disinvestment. How can the government address these challenges?

Answer: Disinvestment faces several challenges, such as concerns over job losses, reduced public control over strategic sectors, and resistance from trade unions. There is also the risk of underpricing assets and the emergence of monopolies. The government can address these challenges by ensuring transparent valuation processes, protecting the interests of workers, and maintaining strategic control in key sectors through minority stakes. Clear communication about the benefits of disinvestment is also essential to gain public and political support.

Q3: Evaluate the role of disinvestment in reducing fiscal deficit and ensuring fiscal responsibility in India.

Answer: Disinvestment contributes to fiscal responsibility by reducing the fiscal burden on the government. By selling stakes in public sector enterprises, the government generates revenue that can be used to reduce the fiscal deficit and finance social welfare schemes. This helps in reducing public debt and achieving fiscal consolidation goals. However, disinvestment must be strategically planned to ensure long-term benefits and avoid short-term fiscal gains at the cost of valuable public assets.

Previous Year Questions on Disinvestment

1. UPSC CSE Prelims 2021:

Question: Which of the following refers to the sale of 100% government-owned stakes in public sector enterprises?

A) Minority disinvestment
B) Majority disinvestment
C) Complete privatization
D) Strategic sale

Answer: (C)

Explanation: Complete privatization refers to the government selling its entire stake in a public sector enterprise, leading to full private ownership.

2. UPSC CSE Mains 2020 (GS Paper 3):

Question: "Critically analyze the impact of disinvestment on the Indian economy. How can disinvestment help in improving the fiscal health of the country?"

Answer: Disinvestment has had a mixed impact on the Indian economy. While it has improved the efficiency and profitability of certain public sector enterprises, there are concerns about job losses and reduced government control in strategic sectors. Disinvestment helps improve the fiscal health of the country by generating revenue that can be used to reduce the fiscal deficit and finance infrastructure projects. It also encourages private sector participation, fostering competition and innovation. However, careful planning and transparent processes are essential to maximize the benefits of disinvestment.