Disinvestment meaning and purpose

Disinvestment

Investing and disinvesting is the two sides of coin on long term investments by governments and corporates. Investing is when a government and corporates invests in money in future prospective ventures. Governments usually invests in public friendly opportunities, which may not yield any monetary profit in the short run. These projects over a time create a value and may grow big in sizes.

Corporates initially invest in future growth oriented projects and once it grows they appreciate in value.

In the case of government, when the government needs to diversify its funds or need funds in new areas, they usually go for disinvestment in prosperous ventures. In the case of corporates either for new investment or profit booking they go for disinvestment.

Disinvesting is a strategy by which an investor offloads or disposes of an asset or a partial stake in the asset. Disinvesting is an exit strategy that means taking out an existing investment. Disinvestment policies are commonly followed by governments to allocate resources more efficiently.

Disinvestment by the government means the market activity through which the Government conducts sale or liquidation of Government-owned assets. Such assets usually refer to the Government’s ownership stake in Central Public Sector Enterprises (CPSEs) and state public sector enterprises (SPSEs), but are not limited to that. Government also sell their stake in their undertakings, fixed assets or even in intangible assets.

Disinvestment purpose

1.One of the main purpose is to provides funds for future oriented new projects of the government or finding funds for the public benefit programmes. So this will reduce the financial burden on the Government finances.

2. Disinvestment also enable and motive entrepreneurship. 

3. Disinvestment will help to infuse more capital to needy government undertakings, which will improve their profitability and efficiency.

4. Another benefit is big and efficient capital markets and efficient allocation of resources.

5. Providing liquidity to government in times of need.

6. Helps in national growth.

7. It is natural that most of the government firms are run by bureaucrats and thus become burden to the exchequer. Disinvestment helps these companies to move to private professional management and become profitable.

Types of Disinvestment

Organizing the market segment: A company may disinvest in one of its underperforming divisions, as other divisions continue to deliver higher profitability while demanding similar resources and expenditure. Such a disinvestment strategy is to shift the focus of the company on the divisions performing well and to scale them up.

Offloading unnecessary assets: A company is cornered into adopting this strategy when the acquisition of an asset does not fit its long-term strategy. Companies post-merger are stuck with assets they do not intend to use. A company may choose to disinvest in acquired assets and instead focus on their competitive abilities.

Social and legal considerations: A company may have to disinvest if they cross a certain threshold limit in the market holding to enable fair competition. Another example is of an endowment fund pulling out of investments in energy companies given environmental concerns.

When we look on government view point, the disinvestment can be

Minority Disinvestment: The Government wishes to retain managerial control over the company by maintaining the majority stake (equal to or more than 51 percent). Because public sector enterprises cater to the citizens, the Government needs to be able to influence company policies to further the interests of the general public. The Government generally auctions the minority stake to potential institutional investors or announces an offer for sale (OFS) inviting participation by the public.

Majority Disinvestment: The Government gives up the majority stake in a government-held company. After the disinvestment, the government is left holding a minority stake in the company. Such a decision is based on strategic grounds and policies of the Government. Typically, majority disinvestments are done in the favor of other public sector enterprises. The idea is the consolidation of resources in a company which ultimately leads to operational efficiency.

Strategic Disinvestment: The government sells off a PSU to usually a non-government, private entity. The intention is to transfer the ownership of a non-performing organization to more efficient private players in the market and reduce on the financial burden on the government balance sheet.

Complete Disinvestment/Privatization: 100 percent sale of Government stake in a PSU leads to the privatization of the company, wherein complete ownership and control are passed onto the buyer.

Points to be remembered in Disinvestment

1. Disinvestment means sale or liquidation of assets by the government, usually Central and state public sector enterprises, projects, or other fixed assets.

2. The government undertakes disinvestment to reduce the fiscal burden on the exchequer, or to raise money for meeting specific needs, such as to bridge the revenue shortfall from other regular sources.

3. Strategic disinvestment is the transfer of the ownership and control of a public sector entity to some other entity (mostly to a private sector entity).

4. Unlike the simple disinvestment, strategic sale implies a kind of privatization.

5. The disinvestment commission defines strategic sale as the sale of a substantial portion of the Government shareholding of a central public sector enterprises (CPSE) of upto 50%, or such higher percentage as the competent authority may determine, along with transfer of management control.

6. The Department of Investment and Public Asset Management (DIPAM) under the Ministry of Finance is the nodal department for the strategic stake sale in the Public Sector Undertakings (PSUs).

7. Strategic disinvestment in India has been guided by the basic economic principle that the government should not be in the business to engage itself in manufacturing/producing goods and services in sectors where competitive markets have come of age.

8. The economic potential of such entities may be better discovered in the hands of the strategic investors due to various factors, e.g. infusion of capital, technology up-gradation and efficient management practices etc.