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Disinvestment in India

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.

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