Table of Contents
Abstract
This document explores the concept of strategic disinvestment in the Indian economy, which involves selling public sector holdings or undertakings to non-government organizations, typically in the private sector. It discusses the need for disinvestment, including fiscal consolidation, performance improvement, value unlocking, innovation and growth, and infrastructure development. The timeline of disinvestment in India is outlined, highlighting key reforms and initiatives. The current scenario of disinvestment in the country is also presented, including the government’s revised disinvestment goals and major upcoming disinvestment plans. The conclusion emphasizes the importance of disinvestment in achieving various economic objectives and highlights the need for transparency, fairness, and accountability throughout the process. Overall, disinvestment remains a significant component of India’s economic reforms aimed at promoting growth and development.
Introduction
Selling a public sector holding or undertaking to a non-government organization, usually in the private sector is referred to as strategic disinvestment. The government does this in order to relieve itself of the responsibility of running a non-performing public company.
Recently, On October 7, 2022, the government issued a preliminary information document to solicit expressions of interest from potential purchasers, kicking off the process for the strategic disinvestment of IDBI Bank with the transfer of management control. Along with the transfer of management control of the lender, the Indian government will sell 30.48% of its investment in the bank, and the Life Insurance Corporation of India (LIC) would sell 30.24%, totaling 60.72% of IDBI Bank’s share capital.
LIC, the bank’s current promoter, owns 49.24% of the company; the government owns 45.48%. 5.28% are held by public shareholders. Strategic investors who are interested in buying the bank have until October 28 to submit any questions they may have about the preliminary information memorandum released on Friday. Only parties who satisfy the requirements for the deal, obtain clearance as a “Fit & Proper” firm from the Reserve Bank of India, and then obtain a security clearance from the Government of India/Ministry of Home Affairs would be given consideration as eligible bidders.[1]
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Need for Disinvestment
Disinvestment refers to the liquidation of government-owned assets, often businesses, state and public sector undertakings (PSUs), or other physical assets. Usually, the government engages in it to ease financial pressure and raise money for predetermined uses.
The guiding idea of strategic disinvestment in India is that in the modern era of competitive markets, the government has little to no involvement in the manufacture/production of products and services. The potential of companies vulnerable to disinvestment is best stated by strategic investors who assess the situation in light of technological realities, effective management, and technological advancement.
The following methods can be used to approach strategic disinvestment:[2]
- Minor disinvestment: To maintain management control, the government hands up a little amount of its ownership but keeps the majority, preferably at 51%.
- Major disinvestment: The government sells out the majority of its stock while keeping a small share in the business.
- Competitive privatisation: In this process, the government cedes total authority over its properties to a private party.[3]
The Department of Investment and Public Asset Management (DIPAM) is a distinct division within the Union Finance Ministry that handles disinvestment-related operations. The government may decrease spending or make up for a year’s worth of lost revenue by [4]disinvesting. The fiscal deficit, investments in the economy and social sector initiatives, and debt repayment are all done with the help of disinvestment earnings.
Disinvestment also promotes open market trade and private asset ownership. If it is effective, it also implies that the government will no longer be responsible for covering a unit’s losses. A number of public sector companies got their shares listed on the stock market after the Atal Bihari Vajpayee-led NDA government’s privatization initiative. Following Prime Minister Narendra Modi’s declaration that the government had “no business to be in business” upon taking office in May 2014, a robust drive for disinvestment of the public sector was anticipated quickly.
Timeline of Disinvestment in India
Industrial Policy Resolution,1956
This policy is also known as Economic Constitution of India. India’s second five-year plan and Industrial policy Resolution 1956, which paved the way for the development of the Public Sector and license raj laid the foundation for disinvestment in our country.
New LPG Policy– In 1991 with the coming of new LPG policy i.e., Liberalization, Privatization and Globalization Disinvestment as a political movement got under way. The administration of PV Narasimha Rao started a disinvestment programme in 1991 and said that it would sell up to 20% of its stake in a few chosen PSUs, mostly to mutual funds and FIIs (financial institutional investors).
More people, including FIIs and company employees, were permitted during the subsequent phase of the disinvestment.
The C. Rangarajan Committee was constituted and advocated for a 49% disinvestment.
During the Atal Bihari Vajpayee administration, significant disinvestment-related reforms took place, including the selling of stakes in Paradeep Phosphates, Hindustan Zinc, and BALCO.
In 2005, the National Investment Fund was established, into which the proceeds from disinvestment were sent.
To make use of the investments in new projects, a new disinvestment policy was envisioned. The “Department of Investment and Public Asset Management” (DIPAM) replaced the “Department of Disinvestment.”
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Disinvestment and Indian Economy
The government established a separate Department of Disinvestment in 1999. The Department of Investment and Public Asset Management, or DIPAM, is its current name. It manages activities associated with disinvestment and functions as part of the Ministry of Finance. Each Union Budget includes a statement on this department’s disinvestment goals. Every year, it changes, with the Central Government having the last say as to whether or not to raise the disinvestment objective.
The Indian government set a goal of Rs. 2.1 lakh crore for FY 2021. However, given the effects of COVID-19, it only raised 10% of the targeted amount. In fact, it showed the lowest amount raised in the seven years prior. This fiscal year’s goal was three times higher than previous years goals.
Disinvestment’s primary goals in the Indian economy are as follows:
- Fiscal Consolidation: By selling its ownership in public sector companies, disinvestment enables the government to raise money. The budget deficit can be closed, infrastructure development can be funded, and social welfare initiatives may be funded with these revenues.
- Performance and Efficiency Improvement: The privatisation of or reduction in the amount of government ownership in public sector businesses attempts to increase their effectiveness and performance. Private ownership frequently results in improved management techniques, more intense competition, and more output.
- Value Unlocking: Through disinvestment, the government may increase the value of its holdings and turn them into readily usable cash. When the government’s investment in certain businesses is not producing sufficient profits, this can be very advantageous.
- Innovation and growth: Disinvestment increases private sector involvement and competitiveness in industries that were previously dominated by public sector firms. This encourages competition and innovation. This can encourage innovation, raise the standard of services, and promote economic expansion.
- Infrastructure Development: Construction of roads, ports, airports, and power plants are only a few examples of the infrastructure development projects that may be financed using the money raised by disinvestment. This promotes economic expansion and opens up job chances.
It is crucial to remember that the effect of disinvestment on the Indian economy relies on a number of variables, including the particular businesses being sold off, how the process is handled, and the general state of the economy. Disinvestment has a number of advantages, but in order to ensure openness, justice, and accountability, the process must be well planned [5]and carried out.
History of Disinvestment in India
- 1991: Under the direction of then-Finance Minister Dr. Manmohan Singh, the Indian government initiated economic reforms in response to a serious balance of payments crisis. The New Economic Policy changes sought to liberalise the Indian economy and lessen governmental influence over various industries.
- 1991-1992: Disinvestment Commission, founded by the government in 1991–1992, was tasked with identifying public sector units (PSUs) for disinvestment and recommending the terms of their sale. In India’s early steps of disinvestment, the commission was significant.
- 1991-2003: First Phase of Disinvestment, 1991–2003: The government started the first phase of disinvestment, mostly through selling minorities in PSUs. Companies like Maruti Udyog Limited, Hindustan Zinc Limited, VSNL (now Tata Communications), and Bharat Aluminium Company (BALCO) were among the first to be divested.
- 1999: The Department of Disinvestment was founded under the Ministry of Finance in 1999 with the goal of directing and managing the disinvestment process in a more concentrated and efficient manner.
- 2003-04: Second Disinvestment Phase, 2003–2004: The government established the idea of strategic disinvestment, authorising the sale of majority ownership in PSUs. The government sold its holdings in organisations like IPCL (Indian Petrochemicals Corporation Limited), CMC (Computer Maintenance Corporation), and IBP (Indian Oil Corporation) during this time.
- 2004-2014: Mixed Progress from 2004 to 2014: Only a few disinvestments occurred during this time as the disinvestment process slowed down. In order to implement a comprehensive disinvestment programme, the administration encountered opposition and political obstacles.2014-Present: Disinvestment has resumed after 2014: Disinvestment is a crucial part of the Narendra Modi administration’s economic plan. A number of PSUs, including well-known companies like Air India, Bharat Petroleum Corporation Limited (BPCL), and Container Corporation of India (CONCOR), have announced strategic disinvestments.
Role of NITI Aayog in 2017: Strategic disinvestment of PSUs was actively recommended and identified by the government’s policy think tank, NITI Aayog. PSUs are subject to a thorough examination by NITI Aayog, which evaluates their financial stability, viability, and strategic significance.
2020: Privatisation Policy: The Union Cabinet adopted a new framework for the privatisation process that highlighted the intention of the government to privatise a number of PSUs in industries including shipping, electricity, aviation, and the energy sector.
Current Scenario
In comparison to the 1.75 lakh crore estimated in the budget estimate (BE) on February 1 of last year, the government has lowered its disinvestment forecast for the current financial year to 78,000 crores, a fall of 55.4%.
The disinvestment goal is Rs 65,000 crore for 2022–2023. The revised projection for 2021–22 (Rs. 78,000 crore) is 17% higher than this.
The entire disinvestment government proceeds to date is $12,029.9 crore, of which $2,700 crore came from the privatisation of Air India and the remaining $9,330 crore came from the sale of minority holdings in CPSEs.
Major disinvestments are scheduled for the IPO of LIC, Bharat Petroleum Corporation Ltd (BPCL), RINL, and Pawan Hans during the current fiscal year (2022).
According to macro-stress tests based on regression modelling and the Financial Stability Report (FSR) published by the Reserve Bank of India (RBI) in July 2021, under the baseline scenario, the gross non-performing asset (GNPA) ratio of Scheduled Commercial Banks could rise from 7.48 percent in March 2021 to 9.80 percent in March 2022.
Finance Minister Nirmala Sitharaman revealed the PSE strategy in Budget 2021–2022 and stated that PSEs in other industries will be sold, with the exception of four critical areas.
The four industries include banking, insurance, financial services, and non-strategic sectors of atomic energy, space, and defence, as well as transportation and telecommunications, power, petroleum, coal, and other minerals.
Positive Impacts of Disinvestment in India
The overall DIPAM receipts for 2021–22 are Rs. 2,699.468 million, the disinvestment receipts are Rs. 932.99 million, and the dividend receipts are Rs. 1,766.478 million. Looking at certain achievements, the historic disinvestment of Air India served to highlight the Modi administration’s aggressive reform programme, inspire confidence in both local and foreign investors, and improve the commercial and economic outlook of the nation.
Similarly, there are various positive impacts of disinvestment for the Indian economy some of them are: –
Job Creation
Disinvestment’s influence on the entire economy might have indirect impacts on employment creation. Government may promote economic growth and draw private investment when it exits non-core industries and concentrates on key ones. As a result of increasing economic activity creating demand for products and services, economic expansion frequently results in the creation of jobs across a variety of industries.
Efficiency gain
By decreasing government intervention with the operation of public sector businesses, disinvestment fosters economic competitiveness and efficiency. Privatisation frequently results in better management techniques, higher output, and more efficient resource allocation. Innovation, entrepreneurship, and a concentration on profitability are all encouraged by private ownership.
Revenue generation
Through the sale of its interest in public sector companies, the government can raise money through disinvestment. This income may be used for a variety of things, including lowering budget deficits, paying for infrastructure improvements, social assistance programmes, or making investments in high-demand areas. Disinvestment profits can support economic expansion and progress.
Increase in FDI
Disinvestment invites foreign investors by giving them the chance to invest in privatised businesses, which in turn promotes foreign direct investment (FDI). Global best practises, finance, technology, and knowledge are all brought in through FDI. It may promote economic expansion, open up job possibilities, and aid in the establishment of companies, especially in those areas where India might lack native expertise.
Corporate governance
It is improved because of private ownership, which frequently results in better practices. Market forces, shareholder scrutiny, and governmental monitoring are all factors that affect private enterprises. This may result in increased accountability, openness, and adherence to best business practises, which will ultimately be advantageous to shareholders, staff members, and stakeholders.
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Successful Disinvestments in India
Maruti Suzuki India Limited
In 2002, the government sold Suzuki Motor Corporation of Japan a controlling ownership in Maruti Udyog Limited (now Maruti Suzuki India Limited), the nation’s largest automaker. Maruti Suzuki became a private firm as a result of this disinvestment, which opened the door for substantial expansion and success. Maruti Suzuki is currently a market leader in India, creating and offering a variety of well-liked automobiles.
Hindustan Zinc Limited
In 2002, the government sold Vedanta Resources, a large international natural resources corporation, the bulk of its ownership in Hindustan Zinc Limited. Hindustan Zinc’s activities were revived as a result of this disinvestment, and it later became one of the biggest integrated zinc-lead producers in the world.
Axis Bank
In 2003, the government sold a portion of its equity in UTI Bank (now Axis Bank). Axis Bank was able to improve its balance sheet, expand operations, and solidify its position as one of India’s top private sector banks as a result of this disinvestment.
Tata Communications
In 2002, the government sold the Tata Group a share in the state-owned telecoms firm Videsh Sanchar Nigam Limited (VSNL). VSNL became Tata Communications as a result of the disinvestment.
Bharat Petroleum Corporation Limited (BPCL)
One of India’s largest disinvestment initiatives is now under place, and it is expected to be successful. The government intends to give private investors full ownership of BPCL. This tactical disinvestment is anticipated to generate significant interest from local and foreign bidders, unlock value, and promote increased productivity in the oil and gas industry.
These instances demonstrate the beneficial effects of disinvestments in India, where private sector involvement has contributed finance, technological know-how, and improved management techniques, resulting in the expansion and improvement of businesses across a range of industries. It is important to remember that a disinvestment’s performance is dependent on a number of variables, including market circumstances, sector dynamics, efficient execution, and post-disinvestment measures.
Conclusion
Disinvestment is essential to the Indian economy and serves a variety of goals and purposes. In addition to collecting money for fiscal stabilisation, infrastructure development, and social welfare programmes, it enables the government to free itself from the burden of managing underperforming public firms. Disinvestment strives to increase efficiency, unleash value, foster competition, and spur innovation across a range of industries by privatising or decreasing government participation in public sector firms. Additionally, it promotes individual asset ownership and free market commerce.
The chronology of disinvestment in India shows how regulations and reforms aiming at expediting the procedure and maximising the advantages have evolved through time. The government’s dedication to efficiently managing public assets is demonstrated by the creation of the Department of Disinvestment, afterwards renamed the Department of Investment and Public Asset Management (DIPAM).
The COVID-19 epidemic and other problems have forced an adjustment in the disinvestment objective for the fiscal year, according to the present scenario. The government is still concentrating on significant divestments, including as the IPO of LIC and the privatisation of Pawan Hans, RINL, and Bharat Petroleum Corporation Ltd.
It is crucial to remember that the effect of disinvestment on the Indian economy relies on a number of variables, including the particular businesses being divested, how the process is carried out, and the general economic climate. To ensure the success of the disinvestment process and maximise the advantages for the economy as a whole, transparency, fairness, and [6]accountability must be upheld at all times. Overall, India’s economic reforms, which aim to promote growth, continue to include disinvestment as a key component.
This article is authored by Khushi Gupta, a fourth-year BA.LLB. (Hons.) Student at Institute of Law, Nirma University, Ahmedabad.
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[2] Davis, James V. “The strategic divestment decision.” Long Range Planning 7.1 (1974): 15-18.
[3] CHOUDHARY, V.K., SINGH, K. and GUPTA, V., 2020. Strategic Disinvestment of CPSEs in India: Literature Review. Finance India, 34(2).
[4] Novak DC, Sullivan JF, Sentoff K, Dowds J. A framework to guide strategic disinvestment in roadway infrastructure considering social vulnerability. Transportation Research Part A: Policy and Practice. 2020 Feb 1;132:436-51.
[5] Hafsi, T., Jorgensen, J.J. and Koenig, C., 1993. Strategic Divestment in the Public Sector: Patterns from France and Great Britain (pp. 277-311). Springer Netherlands.
[6] Venkatesan, R. and Choudhuri, P., 2017. Is Disinvestment of Air India Appropriate? A Strategic Management Viewpoint. Economic and Political Weekly, 52(27), pp.22-25.
