Disinvestment
Definition of Disinvestment
Disinvestment in India refers to the government’s strategic move to reduce its ownership in Public Sector Undertakings (PSUs) and allow private ownership or participation in these enterprises. This process involves selling a part of the government’s stake in these companies through various means like public offerings, strategic sales, or exchange-traded funds
Department of Investment and Public Asset Management
DIPAM stands for the Department of Investment and Public Asset Management, a government department under the Ministry of Finance in India. It is primarily responsible for managing the government’s investments in Public Sector Undertakings (PSUs) and handling disinvestments, strategic sales, and asset monetization initiatives.
Key Functions of DIPAM:
- Planning and executing the sale of government equity in PSUs through various methods such as public offerings, strategic sales, exchange-traded funds (ETFs), and Offer for Sale (OFS)
- Identifying PSUs for strategic disinvestment, which involves ceding management control to private entities while retaining minority stake or completely divesting government ownership
- Exploring and executing strategies to unlock value from government-owned non-core assets by leasing, selling, or utilizing them more efficiently
- Formulating disinvestment policies and strategies to optimize returns, enhance efficiency, and attract private capital in PSUs
- Providing advice and guidance on investment matters, restructuring, and improving the performance of PSUs
Disinvestment Objectives
- Selling shares of PSUs generate funds for the government, which can be utilized for various developmental and infrastructure projects or to reduce fiscal deficits
- Reducing government control and bringing in private participation can lead to improved management practices, efficiency, and accountability in PSUs
- Disinvestment encourages competition in sectors dominated by PSUs, fostering a more competitive market environment.
- It helps in deepening and broadening the stock market by increasing the availability of tradable stocks and attracting more investors
- Disinvestment allows the government to reallocate resources from non-strategic sectors to priority areas, promoting better utilization of resources
The disinvestment process in India has evolved over time. It began in the early 1990s with the liberalization of the economy and has been a consistent strategy since then, with varying degrees of success. The government identifies PSUs for disinvestment based on strategic and economic considerations.
Various methods are employed for disinvestment, including Initial Public Offerings (IPOs), Offer for Sale (OFS), Exchange-Traded Funds (ETFs), strategic sales, and stake sales to private companies or institutional investors.
However, disinvestment has been a subject of debate, with discussions around the choice of companies for disinvestment, the timing of sales, the impact on employment, and concerns about privatization’s effects on social welfare and equity.
Criticism of Disinvestment Policy
- Criticism of the disinvestment policy in India encompasses various viewpoints and concerns:
- Disinvestment often raises concerns about potential job losses in PSUs undergoing privatization or stake sales. Critics argue that the restructuring and efficiency drives may result in layoffs or reduced benefits for employees
- Privatizing or reducing government stakes in certain strategic sectors, such as defence, can raise concerns about national security and control over critical assets
- Critics argue that privatization might lead to reduced accessibility or increased costs for essential services previously provided by PSUs, impacting marginalized or low-income groups
- Disinvestment decisions, particularly the timing of sales and valuations of PSUs, have faced criticism. Critics highlight instances where shares were sold at undervalued prices, resulting in potential loss of public wealth
- Selling off PSUs could lead to market consolidation, potentially resulting in reduced competition and monopolistic behaviour, particularly in sectors dominated by these entities
- There are concerns that reducing government ownership might lead to a loss of strategic control over critical sectors, affecting policy direction and long-term planning
- Critics often point out the need for greater transparency and accountability in the disinvestment process to ensure fair practices, avoid conflicts of interest, and protect public interests
- In cases of strategic sales, where management control is handed over to private entities, concerns arise regarding the potential for asset stripping or neglect of the company’s core functions in favour of short-term gains
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MCQs on Disinvestment
1.Which of the following best describes disinvestment?
A) Investment in a company’s shares by the government
B) Government reducing its stake in a public-sector enterprise
C) Selling shares of a private company to the government
D) Liquidation of a company’s assets by the government
2.Which entity oversees the process of disinvestment in India?
A) Ministry of Finance
B) Reserve Bank of India (RBI)
C) Securities and Exchange Board of India (SEBI)
D) Disinvestment Commission of India
3.The primary aim of disinvestment is to:
A) Generate revenue for the government
B) Nationalize private-sector companies
C) Increase government control in public-sector units
D) Reduce the government’s budget deficit
4. Which method of disinvestment involves selling government shares to the public?
A) Strategic sale
B) Offer for Sale (OFS)
C) Private Placement
D) Exchange-traded funds (ETFs)
5.The ‘Strategic Disinvestment’ method involves:
A) Selling a minority stake in a public-sector company
B) Selling a majority stake in a public-sector company
C) Direct sale of shares to the stock market
D) Allowing foreign direct investment in public-sector enterprises
6.Which committee recommended the policy of disinvestment in India?
A) Rajiv Kumar Committee
B) Rakesh Mohan Committee
C) Rangarajan Committee
D) Yashwant Sinha Committee
7.Disinvestment in Public Sector Enterprises (PSEs) aims to:
A) Reduce the size of the public sector
B) Increase government control over industries
C) Privatize all government-owned enterprises
D) Promote socialism in economic policies
8.Which financial instrument was introduced for disinvestment purposes and allows retail investors to invest in government-owned companies?
A) National Investment Certificate (NIC)
B) Public Sector Unit Bonds (PSU Bonds)
C) Disinvestment Bonds
D) Exchange-Traded Funds (ETFs)
Answers:
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