Disinvestment in India

According to the annual report of the Ministry of Finance, the disinvestment receipts for the financial year (FY) 2022-23 amount to only ₹35,282 crore, which is lower than the budgeted target of ₹65,0

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Context: According to the annual report of the Ministry of Finance, the disinvestment receipts for the financial year (FY) 2022-23 amount to only ₹35,282 crore, which is lower than the budgeted target of ₹65,000 crore and the revised estimates of ₹50,000 crore.

The Report has identified the following as the major obstacles to Disinvestment in India

Global crises: the report noted that the COVID-19 pandemic seriously impacted transactions in 2020 and 2021, followed by the Ukraine conflict last year, which hurt minority as well as strategic stake sales as “financial capacity and risk-reward options of potential bidders turned worse”.
Challenges to strategic disinvestment: The report noted that strategic disinvestment transactions must deal with the following matters:
- Resolving land title, lease, and land use issues with State government authorities, disposal of non-core assets, excess manpower, and labour unions, protection of process and functionaries.
- Multiple court cases filed by employees’ unions and other interest groups against the disinvestment policy as well as specific transactions were also hindering deals.
Challenges to minority investment: Challenges to disinvestment through minority stake sale include:
- Reduced availability of government stake over 51% for large listed central PSEs
- Relatively muted perception of investors in these stocks as compared to private sector peers.
- Price overhang in the market due to high disinvestment target and frequent use of exchange traded funds (ETF) route for stake sale till 2019-20.

What is Disinvestment?

Disinvestment or divestment is when the government sells its assets or a subsidiary, such as a Central or State public sector enterprise.
Types of disinvestments: Minority disinvestment, majority disinvestment, and complete privatization are the three main approaches to disinvestment.
- Minority disinvestment: In this, the government retains a majority in the company, typically greater than 51%, thus ensuring management control.
- Strategic/Majority disinvestment: In this, the government hands over control to the acquiring entity but retains some stake.
- Complete privatization: In this, 100% control of the company is passed on to the buyer.
Implementing agency: The Union Finance Ministry has a separate department for undertaking disinvestment-related procedures called the Department of Investment and Public Asset Management (DIPAM).
Arguments for and against disinvestment:

Arguments For

Arguments against

Fiscal Reduction: Disinvestment helps the government reduce its fiscal deficit by reducing its stake in loss-making PSUs and using the proceeds for debt reduction and other developmental initiatives.

Improved Efficiency: Disinvestment can lead to improved efficiency in PSUs as private sector ownership can bring in new management techniques, technology, and capital.

Increased Competition: Disinvestment can increase competition in various industries as private players enter and improve the market structure.

Resource Mobilization: Disinvestment can be a significant source of resource mobilization for the government as it can generate significant proceeds from the sale of its stakes in PSUs.

Job Losses: Disinvestment can result in job losses as private owners may reduce the workforce to increase efficiency and profitability.

Negative Impact on Vulnerable Sectors: Disinvestment in certain PSUs providing essential services such as healthcare, education, and electricity can have a negative impact on the vulnerable sections of society.

Strategic Assets: Some PSUs may be considered as strategic assets, and their disinvestment can result in a strategic disadvantage for the country. Short-Term Focus:

No long-term vision: Disinvestment can be motivated by short-term considerations such as debt reduction and may not consider the long-term benefits of maintaining government ownership.

How has Disinvestment Fared in recent years?

Failed targets: Different central governments over the last three decades have been able to meet annual disinvestment targets only six times.
- Since 2010, barring two years (2017-18 and 2018-19), the central government’s actual receipts from disinvestment have consistently fallen short of the budget estimate.
Strategic Disinvestment: The government has shifted its focus from minority stake sales to strategic disinvestments in recent years, with the aim of maximizing returns and improving the efficiency of PSUs.
Reasons for the failure of targets:
- Lack of investor interest: In some cases, the government has been unable to attract sufficient investor interest, resulting in low demand and low proceeds from disinvestment initiatives.
- Complex procedures: Disinvestment is complex, involving several regulations, approvals, and legal requirements, which can cause delays or derailment.
- Political opposition: Opposition from political parties, trade unions, and employee groups to disinvestment is common due to concerns over job losses and PSU’s strategic significance.
- Market conditions: Market and economic conditions affect disinvestment success; during downturns, the government may not achieve desired PSU stake prices.

Disinvestment Policy for FY 2023-24 as per the Union Budget

Target: The Centre aims to raise Rs 51,000 crore through disinvestment of its stake in several state-run firms in financial year 2023-24 (FY24), lowest in the nine years.
Companies scheduled for disinvestment: For the FY 2023-24, companies like Shipping Corporation of India, NMDC Steel Ltd, BEML, HLL Lifecare, Container Corporation of India and Vizag Steel, besides IDBI Bank, are in the government’s list for privatization.