Disinvestment

• Disinvestment is the action of an organization or government selling or liquidating An asset or subsidiary. In the absence of an asset sale, disinvestment also refers to cutbacks in capital expenditure (CapEx), which might allow resources to be reallocated to more productive areas within an organization or government-funded project.
• Whether disinvestment involves a sale or a decrease in financing, the fundamental goal is to optimize the return on investment (ROI) for capital goods, labor, and infrastructure.
• From a government perspective, the disinvestment strategy might be of the following types:
• Minority Disinvestment: The government intends to keep management control over the firm by owning a majority interest (equal to or greater than 51%). Because public-sector firms serve people, the government must be able to influence corporate policy to benefit the broader public. In most cases, the government sells the minority ownership to possible institutional investors or issues an offer for sale (OFS) allowing the public to participate.
• Majority disinvestment occurs when the government sells the majority of its share in a government-owned enterprise. Following the disinvestment, the government is left with a minority ownership in the corporation. This decision is made on strategic considerations and in accordance with government policy. Typically, the bulk of disinvestments benefit other public-sector firms. For example, Chennai Petroleum Corporation Limited, previously Madras Refineries Limited, is now a group business of Indian Oil Corporation after the government’s disinvestment. The objective is to consolidate resources inside a corporation, which will eventually lead to operational efficiency.
• Strategic disinvestment occurs when the government sells a public sector undertaking (PSU) to a non-governmental, private enterprise. The objective is to transfer ownership of a non-performing organization to more efficient private market participants, hence reducing the financial load on the government balance sheet.
• Complete disinvestment/privatization: When the government sells its whole investment in a PSU, the corporation is privatized, and the buyer has total ownership and control.
• Disinvestment in India may be broadly classified into the following categories:
• Organize the market segment: A corporation may decide to cut investments in one of its failing divisions while other divisions continue to provide better profits despite requiring equal resources and expenditure. Such a disinvestment plan aims to shift the company’s emphasis to high-performing segments and expand them up.
• Offloading superfluous assets: When an asset purchase does not align with a company’s long-term plan, it is forced to take this technique. Companies after a merger are left with assets they do not want to employ. A corporation may decide to stop investing in acquired assets and instead concentrate on its competitive advantages.
• Social and legal issues: To ensure fair competition, a business may be required to disinvest if its market holdings exceed a specified level. Another example is an endowment fund withdrawing its investments in energy businesses due to environmental concerns.
• Advantages
• Privatization would assist to reduce additional outflows of limited public resources used to support the unviable non-strategic public sector entity.
• To achieve the release of a vast number of public resources locked up in non-strategic public sector units for re-employment in areas of considerably greater social importance, such as health, family, and welfare, as well as to decrease the public debt, which is reaching dangerous levels.
• Privatization would make it easier to shift the commercial risk to which taxpayer money locked up in the public sector is exposed to the private sector, wherever the private sector is ready to step in.
• Privatization would free up real and intangible resources, such as vast amounts of people that are now tied up in administering PSUs, for use in the high-priority social sectors.
• Disinvestment would subject privatized enterprises to market discipline and help them become self-sufficient.
• Disinvestment would result in a more equitable distribution of wealth by allowing small investors and workers to own shares in privatized enterprises.
• Disinvestment would be advantageous for the capital market. The growth of floating stock would boost the market’s depth and liquidity, provide investors with early exit alternatives, and aid in the establishment of more realistic standards for valuation and money raising by privatized firms for projects and expansion.
• Opening up the public sector to private investment would boost economic activity and have a positive impact on the economy, employment, and tax revenues in the short and long run.
• Provide customers with more options and higher-quality goods and services, such as in the telecom industry.
• Disadvantages
• The loss of PSUs is increasing. It was 9305 crores in 1998, and 10060 crores in 2000.
• This is positive, but disinvestment in profitable public-sector organizations will deprive the government of decent returns. Furthermore, if the Department of Disinvestment intends to avoid commercial risks, why should it keep shares in disinvested PSUs such as Balco (49%), Modern Foods (26%), and so on?
• The sum generated from disinvestment from 1991 to 2001 was Rs. 2051 crores per year, which is insufficient. Furthermore, the utilization of disinvestment proceeds remains unknown.
• This is true, but only when the government guarantees that the market system governs and punishes privatized enterprises while protecting the public interest.
• The privatization project has been mostly unaffected by public share sales. Previously, the sale of shares (1991-96) only attracted a restricted number of employees and was unfriendly to small investors and workers.
• The lack of people in the social sector has no impact on its expansion.
• In most situations, disinvested PSU shares are mostly held by institutions with minimal floating stock. The current approach of privatization via strategic partnerships would similarly fail to attain these goals.
• Hindustan Lever has officially indicated that it has no intentions for capital injection into Modern Food Industries, which it bought in January 2002. Disinvestment supporters believed that private sector investment would save taxpayers money.
• No monopoly is beneficial. Only fair and open competition can provide relief to consumers.