Disinvestment in India: Trends and Challenges – Explained Pointwise

The Cabinet Committee on Economic Affairs has recently approved the strategic disinvestment of IDBI Bank. The strategic buyer, Fairfax Financial Holdings, will acquire a 60.72% stake in the bank. Upon completion of the transaction, LIC and the Government of India will retain a combined 34% stake in the bank.

What is Disinvestment?

• Disinvestment, or divestment, refers to sale of assets or a subsidiary by the Government like the sale of Public Sector Enterprise/Unit (PSE/PSU) by Union or State Government. The sale of Enterprise can be full (i.e., 100% of Government ownership is sold) or partial. Accordingly the disinvestment can be classified as minority disinvestment, majority disinvestment or complete privatisation.
• Types of Disinvestment:
  1. Minority Disinvestment: The government sells a small stake (e.g., 10% to 25%) while retaining majority ownership (at least 51%) and management control (e.g. via initial public offerings or offer-for-sale).
  2. Majority/Strategic Disinvestment: The government sells a controlling stake (51% or higher) along with the transfer of management control to a private strategic partner.
  3. Complete Privatization/Liquidation: The government completely exits the business by selling 100% of its equity or closing down a non-viable enterprise and liquidating its assets.

Methods of Disinvestment:

1. Initial Public Offering (IPO): It is offer of shares by an unlisted PSE or the Government out of its shareholding or a combination of both to the public for subscription for the first time.
2. Further Public Offering (FPO): It is offer of shares by a listed PSE or the Government out of its shareholding or a combination of both to the public for subscription.
3. Offer for Sale(OFS) of Shares by Promoters through Stock Exchange: This method allows auction of shares on the platform provided by the Stock Exchange. This method has been extensively used by the Government since 2012.
4. Strategic Sale: It refers to sale of substantial portion of the Government share holding of a PSE, up to 50%, or such higher percentage as the competent authority may determine, along with transfer of management control.
5. Institutional Placement Program (IPP)/Qualified Institutional Placement (QIP): Under IPP, only Qualified Institutional buyers can participate in the offering. Qualified Institutional Buyers are those institutional investors who are perceived to possess expertise to evaluate and invest in the capital markets.
6. CPSE Exchange Traded Fund (ETF): Disinvestment through ETF route allows simultaneous sale of Government’s stake in various PSEs across diverse sectors through single offering. It provides a mechanism for the Government to monetize its shareholding in those CPSEs which form part of the ETF basket.
7. Buyback of Shares: The government asks cash-rich PSUs to buy back their own shares using surplus reserves, transferring liquidity directly to the government exchequer.

What are the reasons for undertaking Disinvestment?

1. Government Revenue: With disinvestment the Government can earn revenue which can be used for meeting expenditure obligations including on welfare measures. Proceeds from disinvestment of assets are used to finance the budget deficit, invest in the economy and various development/social sector programmes, and pay the national debt.
2. Improve Competition: The privatisation of State-owned companies paves the way for the entry of increasing number of businesses into the industry. This boosts market competitiveness and ultimately results in an improvement in market efficiency. Additionally, it assists businesses that are run by the public sector in modernising their technology in order to boost their level of competitiveness.
3. Reduces Government’s Role: According to economy and policy experts, the Government should be involved only in strategic sectors. For rest of the sectors, the Government should let the private sector efficiencies take control (subject to effective regulation). Government should focus more on the welfare sector.
4. Improves Operational Efficiency: It is commonly believed that interference by the Government in the PSUs impact their independence and functioning e.g. in PSEs, new investments can driven by political factors rather than pure economic logic. Similarly PSEs may employ more workers than actually needed. Private sector firms tend to be more competitive. Hence, reduction in Government control enhances overall efficiency on one hand & on the another the private sector participation introduce better management practices, technology and professional expertise. So it makes sense to privatize inefficient public sector enterprises.
5. Enhancing Corporate Governance: Disinvestment can improve transparency, accountability and professional management in public sector enterprises by increasing market scrutiny and reducing political interference. For e.g. the listing of PSUs such as ONGC subjects them to SEBI’s disclosure and corporate governance requirements.
6. Unlocking Asset Value: Disinvestment enables the government to realise the financial value of its investments in public sector enterprises and redirect the proceeds towards infrastructure, social welfare and other productive sectors, improving the overall utilisation of public resources. For e.g. Proceeds from the sale of government shares can be used to finance capital expenditure and development projects.
7. Deepening Capital Markets: Disinvestment increases the availability of shares in the stock market, broadens the investor base and encourages greater public participation in equity markets. For e.g. the government’s stake sale in public sector enterprises provides investors with more investment opportunities.
8. Encouraging Economic Reforms: Disinvestment promotes economic liberalisation by reducing excessive government involvement in commercial activities and encouraging private-sector participation, competition and innovation. For e.g. the strategic disinvestment of Air India in 2022 marked a shift towards greater private-sector participation in India’s aviation industry.

What has been the trend of disinvestment in India?

The government also launched the National Monetisation Pipeline (NMP) to generate new revenue streams by unlocking the value of previously unutilised and underutilised public assets.

What is the latest policy on Disinvestment?

• The latest official policy framework continues to be based on the New Public Sector Enterprise (PSE) Policy, 2021, administered by the Department of Investment and Public Asset Management (DIPAM), Ministry of Finance.
• The government has classified the public sector under 2 categories:
  

  Strategic Sector	4 sectors are identified as strategic sectors: Atomic energy, Space and Defence; Transport and Telecommunications; Power, Petroleum, Coal, and other minerals; Banking, Insurance, and financial services The government will retain a bare minimum presence of public sector enterprises under government control in designated strategic sectors.
  Non- strategic Sector	CPSEs in all other sectors are slated for complete privatization or closure/liquidation if non-viable.

• NITI Aayog identifies specific CPSEs for strategic disinvestment, merger, or closure.
• The Core Group of Secretaries on Disinvestment (CGD) and the Alternative Mechanism (AM) – comprising key Union Cabinet Ministers – oversee fast-track approvals for valuations, pricing bands, and bidding mechanisms.
• The broader objective is to minimise government participation in commercial enterprises while retaining a presence where strategically necessary.
• The government will incentivize States for disinvestment of their Public Sector companies.
• The new policy is significant as it goes beyond the past case-by-case approach and lays down a rationale for deciding the future ownership pattern of 439 CPSEs, including their subsidiaries. For instance, it is now clear that 151 public sector firms in non-strategic sectors (including 83 holding companies and 68 subsidiaries) will either be closed or sold.
• The policy also brings public sector banks and insurance entities into the ambit of disinvestment for the first time.
• The Government will also monetize the surplus land with Government Ministries and Departments and PSEs. The Cabinet has already approved the creation of National Land Monetisation Corporation.

What are the challenges and concerns related to Disinvestment?

1. Undervaluation of Public Assets: Inadequate valuation, weak market conditions or limited competition among bidders may lead to the sale of public sector enterprises below their actual worth. This can result in the loss of public wealth and benefit private buyers at the taxpayers’ expense.
2. Loss of Government Revenue: Disinvestment in profitable public sector enterprises may reduce the government’s regular income from dividends and profits. Although it generates one-time receipts, it may affect long-term revenue if the sale proceeds are not invested productively. For e.g. selling stakes in profitable PSUs such as ONGC may reduce future dividend income for the government.
3. Job Insecurity: Disinvestment may lead to workforce restructuring, layoffs and changes in service conditions as new owners seek to reduce costs and improve profitability. This can create uncertainty among employees and trade unions.
4. Political and Trade Union Resistance: Disinvestment often faces opposition from political parties and trade unions due to concerns over job security, workers’ rights and the transfer of public assets to private entities. For e.g. trade unions have repeatedly protested against the proposed privatisation of public sector enterprises, including banks, fearing job losses and reduced employment benefits.
5. Lack of Transparency: Inadequate disclosure of valuation methods, bidding criteria and the selection of buyers can raise concerns about favouritism and the undervaluation of public assets. This may undermine public trust and lead to allegations of corruption in the disinvestment process.
6. Limited Investor Interest: High debt, operational inefficiencies, outdated technology and uncertain profitability may discourage investors from acquiring certain public sector enterprises. For e.g. repeated delays in the strategic disinvestment of Pawan Hans have highlighted the challenges of attracting investors to enterprises facing financial and operational difficulties.
7. Risk of Private Monopolies: Disinvestment may lead to the concentration of market power in the hands of a few private players, particularly when public sector enterprises operate in sectors with limited competition. This can result in higher prices, reduced consumer choice and exploitation of consumers. For e.g. privatisation in sectors such as electricity distribution requires strong regulatory oversight to prevent monopolistic practices.
8. Neglect of Social Objectives: Private investors may prioritise profit maximisation over broader social objectives, such as affordable services, employment generation and regional development. For e.g. State-owned enterprises mandate social reservation quotas (SC/ST/OBC) in recruitment and promotions. Privatization transfers ownership to entities where affirmative action quotas do not legally apply, raising social equity concerns.
9. One-Time Revenue versus Long-Term Benefits: Disinvestment generates immediate revenue for the government, but selling profitable public sector enterprises may result in the loss of future dividends and earnings. Therefore, excessive reliance on disinvestment for short-term fiscal needs may undermine long-term financial benefits.

What should be the approach going ahead?

1. Ensure Transparent Valuation: The government should undertake independent and fair valuation of public sector enterprises before disinvestment, supported by competitive bidding and transparent disclosure of relevant information. This would minimise the risk of undervaluation, prevent favouritism and ensure that taxpayers receive appropriate value for public assets.
2. Prioritise Strategic Interests: The government should retain control over public sector enterprises operating in critical sectors such as defence, atomic energy and essential infrastructure to safeguard national security and economic sovereignty. Disinvestment in non-strategic sectors should be assessed on commercial and public-interest considerations.
3. Strengthen Regulatory Framework: The government should strengthen independent regulatory bodies and competition laws to prevent the emergence of private monopolies, protect consumer interests and ensure fair market practices after disinvestment. For e.g. the Competition Commission of India (CCI) can scrutinise mergers and acquisitions to prevent excessive market concentration.
4. Protect Employees’ Interests: The government should ensure adequate compensation, reskilling opportunities, social security and protection against arbitrary layoffs for employees affected by disinvestment. This would reduce resistance and ensure that economic reforms remain inclusive and socially responsible.
5. Improve Utilisation of Proceeds: Disinvestment proceeds should be channelled towards productive capital expenditure, infrastructure development, healthcare and education rather than routine revenue expenditure. This can convert the sale of public assets into long-term economic benefits, promote growth and improve the government’s fiscal sustainability.
6. Ensure Stakeholder Consultation: The government should consult employees, trade unions, investors and local communities before undertaking disinvestment to address their concerns regarding job security, service delivery and public interest. This can reduce resistance, build trust and ensure smoother implementation of disinvestment decisions.

Conclusion: Disinvestment has several benefits. It can help enhance competition in various sectors and improve efficiencies. It also helps raise revenue for the Government, which can be spent on welfare measures. However, the Government should take care to ensure its presence in certain strategic sectors like banking, energy etc. It will ensure the social obligations and strategic interests intricately linked with these sectors are secured.