INDEX

TOPICS PAGE NO.

ACKNOWLEDGEMENT 3

WHAT IS DISINVESTMENT? 4-7

OBJECTIVES OF DISINVESTMENT

TYPES OF DISINVESTMENTS 7-8

DISINVESTMENT VS DIVESTMENT 9-10

DISINVESTMENT TIMELINE 11-12

(1999-2021)

DISNVESTMENT: 13-14
(NDA VS UPA REGIME)

DISINVESTMENT TARGETS 15-17

VS RECEIPTS TRENDS
[2010-2021]

BIG TICKET DISINVESTMENTS 18

IN PIPELINE

CASE STUDY: RECENT 19-20

DEVELOPMENTS IN
DISINVESTMENT SECTOR

NEGATIVE IMPACTS OF 21
DISINVESTMENT

CONCLUSION 21

BIBLIOGRAPHY 22

ACKNOWLEDGEMENT
I would like to thank my economics teacher, Ms. Ruhani Matta who gave me this golden
opportunity to work on the project. Her valuable suggestions helped me achieve my target. I
also got to learn a lot from this project about the Disinvestment policy of our country and
various developments observed in this sector. I would also like to express my gratitude
towards my school principal, Dr. Sudha Acharya for providing the required facilities.

At last, I would like to extend my heartfelt thanks to my family members because without
their support this project would not have been successful.
WHAT IS DISINVESTMENT?
Before we dig deep into our country’s disinvestment policy, we should prior know what
disinvestment is about and how does it work.

Disinvestment refers to the action of an organization or the government in selling or liquidating an

asset or subsidiary. In simple words, disinvestment is the withdrawal of capital from a country or
corporation. Some of the salient features of disinvestment are:

• Disinvestment involves sale of only part of equity holdings held by the government to private
investors.
• Disinvestment process leads only to dilution of ownership and not transfer of full ownership.
While, privatization refers to the transfer of ownership from government to private investors. •
Disinvestment is also known as ‘Partial Privatization’.

It also refers to the sale or liquidation of assets by the government, usually the Central and State
public sector enterprises, projects, or other fixed assets. However, it is important to ponder upon as
to when did need of disinvestment arose in our country?

The economic policies of the colonial governments during the pre-independence era were mainly
focused on promoting their home country rather than India. Hence, most of the industrial activity
was centralised on exporting the raw materials and importing finished products from Britain.

India's Economic and Industrial policy after independence was worked out on the lines of the
Soviet Union, which was characterized as the 'Socialist framework'. However, this socialist policy
of industrialization regulated most of the private enterprises with rigid restrictions over its
operations, resulting in an ineffective industrial system to be replaced by Import-substitution
industrialization.

Further, disappointing performance by the industrial sector and Balance of Payment crisis of 1991
forced the policymakers to reassess the situation and program reforms towards a further open
market oriented policy. This is how the government of India in 1991 decided to follow the path of
disinvestment for the betterment and growth of the private sector enterprises.
OBJECTIVES OF DISINVESTMENT

Why Disinvestment is done? What is its need? The positive effects of disinvestment policies
can be stated as follows:

• To reduce the financial burden on the Government finances

• Opening up markets for private firms, which will eventually lead to better capital markets
and efficient allocation of resources
• Supporting the liquidity measures in the market by aiding to consumption and demand, as
the need arises
 • To raise money to facilitate long-term Government goals of growth and development in the
country
• To channelize resources to more productive avenues and projects by reducing the capital
expenditures on existing non-performing assets or loss-making firms

• To improve the Return on Investment1(ROI) of underperforming firms

PSUs (Public Sector Undertakings), which were meant to be the pillars of economic growth ended
up being more of a strain on government resources because of their inefficiency and low returns.
Inefficient PSUs had become and were continuing to be a drag on the Government’s resources
turning to be more of liabilities to the Government than being assets. The national gross domestic
product and gross national savings were also getting adversely affected by low returns from PSUs.
About 10 to 15 % of the total gross domestic savings were getting reduced on account of low
savings from PSUs. In relation to the capital employed, the levels of profits were too low.

The strategic sale of ownership in PSUs will help to spur competition and bring about market
discipline. It will induce optimisation of government resources to deliver maximum returns for the
country. Hence, the need for the Government to get rid of these units and to concentrate on core
activities was identified. Finally, disinvestment was also seen by the Government to raise funds for
meeting general/specific needs.

1. Return on investment (ROI) is a financial ratio used to calculate the benefit an investor will receive in relation
to their investment cost. The higher the ratio, the greater the benefit is earned by the investor.
.

Disinvestment will help facilitate the re-allocation of funds or resources to better use or aid asset
 monetisation

How will DISINVESTMENT impact the economy?

India’s fiscal deficit for 2020-21 is 9.5% of GDP. As such, funds garnered from disinvestment of
PSUs will help finance the widening fiscal deficit gap, especially in the medium term, finance large
scale infrastructure development and social welfare programmes, and enable retiring of government
debt. It will also lead to a competitive environment that will help lower prices and better product
quality. The proceeds from the stake sale will provide funds for infrastructure development.
Unlocking of key sectors will help in attracting sectoral investments and creating value via private
competencies.

Why should profit-making public-sector units be sold?

Role of the government is to act as a facilitator and not be in the business of making business.
Disinvestment of a profit-making public sector undertakings will help the Union government
extract maximum value. Besides, the private sector is also not keen on acquiring loss-making PSUs
with their massive debt and employee liabilities.

How are the sale proceeds utilized?

Successive governments have been resorting to disinvestment with different goals. The United
Front government used revenue for social welfare. The Vajpayee regime used the money for
retiring government debt, restructuring PSUs. The UPA government’s objective was to bridge
fiscal deficit. The NDA leadership, aims to utilize the proceeds to develop infra that will have a
multiplier effect on the economy and not just close the revenue deficit gap.
 TYPES OF DISINVESTMENTS
From a general point of view, the disinvestment in India can be categorized in the following
manner:

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.

From a government point of view, the disinvestment strategy can be of the following types:

Minority Disinvestment: The Government wishes to retain managerial control over the company
by maintaining the majority stake (equal to or more than 51 %). Since the 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 favour of other public sector enterprises. For example, Chennai
Petroleum Corporation Limited, formerly known as Madras Refineries Limited is a group company
of Indian Oil Corporation after disinvestment by the Government. 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 % sale of Government stake in a PSU leads to the
privatization of the company, wherein complete ownership and control are passed onto the buyer.
DISINVESTMENT VS DIVESTMENT

Divestment and disinvestment are terms used interchangeably. However, there is a slight point of
difference between the two.

Disinvestment in an asset, or division, or stake is typically carried out without the intent of
reinvesting capital back into the same entity. Divestment, on the other hand, is generally done
temporarily to deal with say, tight finances, or social/political pressures that may arise as a result of
certain business activities. While disinvestment might also mean selling off the entity in its entirety,
divestment only means the reduction of investment.

How does Disinvestment take place?

The disinvestment process of individual CPSEs has evolved over time and is based on decision
making through inter-ministerial consultations and involvement of professionals and experts, in
view of the technical and complex nature of transactions and the need for transparency and fair
play. The current disinvestment process involves the following steps:

• In-principle consent by the Administrative Ministry of the CPSE concerned. •

Approval of the proposal to disinvest by CCEA.
• Constitution of an Inter-Ministerial Group (IMG) with the approval of the finance minister
to guide and oversee the disinvestment process.
• IMG appoints Advisers for the transaction including Merchant Bankers/ Book Running
Lead Managers (BRLMs)/ Legal Advisers.
• Presentation by BRLMs before High Level Committee (HLC) on valuation. • HLC
recommends price band/ floor price to 'Alternative Mechanism' taking into
consideration the recommendation of the BRLMs.
• Approval by 'Alternative Mechanism' of recommended price band/ floor price, method of
disinvestment, price discount for retail investors and employees, etc.
 DISINVESTMENT TIMELINE

1999 to 2004

The disinvestment policy of the Vajpayee led NDA Government during 1999-2004 accelerated the
disinvestment process in the country. The Government made a significant change in disinvestments,
it was the same government that used the expression "Privatization" in place of disinvestment for
the first time. The new method used by the government was, classifying the PSUs in two
categories: ‘'Strategic'’ and ‘'Non-Strategic'’; all the industries dealing with defence-related
equipment were described as strategic resources and no disinvestments were recommended for
these sectors even though, it was proposed to bring down government stake to 26 % in all other
non-strategic sectors. The policy of the NDA government was to strengthen the PSUs in strategic
sectors by privatizing non-strategic companies. The government focussed on the privatization of the
non-strategic PSUs up to 26 % or lower if needed. Looking back at the Vajpayee led NDA term in
office, some economic scholars have applauded the earlier NDA government's effort towards
disinvestment and have observed: "the disinvestment policy witnessed a golden period during
late Prime Minister Atal Bihari Vajpayee-led NDA government".

2004 to 2014

The Manmohan Singh led UPA-I and UPA-II governments were in power from 2004 to 2014; data
from DIPAM indicates that the government did not take enough interest in the disinvestment
program and interrupted the long-term growth story of India. UPA-I government in 2004, devised a
National Common Minimum Programme (NCMP) in which, it laid out its policy towards
disinvestment briefly. Some of the excerpts of (NCMP) declared, “No profit-making enterprises
shall be privatized, all Navratna companies shall be retained and encouraged to mobilize resources
through the capital market, attempts shall be carried out to strengthen all loss-making PSUs and
chronically sick-industries shall be sold off, duly compensating the work-force, all the revenue
generated from privatization shall be used for selected social sector schemes”. The UPA
government in first among many other decisions taken discontinued the process of the "Strategic
sale" policy of earlier National Democratic Alliance; and particularly minority stake was auctioned
in some PSUs.
 DISINVESTMENT: (NDA VS UPA REGIME)

While there is no significant difference in the disinvestment achievement rates under these two
regimes, there is a huge difference in the average annual total receipts from disinvestment under the
two regimes. As outlined in the graph, the NDA-led government’s average receipts from
disinvestment are almost three times UPA-led government’s average receipts from disinvestment.

The NDA-led government’s average annual receipt from disinvestment stands at ₹ 29,381 crores –
more than threefold of UPA-led government’s average annual receipts from disinvestment at ₹
8,274 crores. This also analyses the data released by the Department of Investment and Public
Asset Management (DIPAM) up to 8 November 2018 which reiterates the above observation. The
article argues that the ‘total disinvestment’ done by NDA-led governments was almost twice than
that done by the UPA-led governments. It also highlighted the point that NDA-led governments
account for 58% of all the disinvestment that has taken place since 1991.

As per the Department of Disinvestment’s data, during the UPA period, the disinvestment policy
witnessed almost a complete pause and by 2011-12, only Rs 14,000 crore could be raised against a
disinvestment target of Rs 40,000 crore. The pace of disinvestment was even lower than what it
was during 1991 to 2001. Between 1991 and 2001, against the disinvestment target of Rs 54,300
crore, only Rs 20,078 crore was raised.

The comparative data suggests that Modi 1.0, which came to power in 2014, fared better than UPA I
and UPA-II. During the last fiscal 2018-19 alone, the Modi-led Central government has not only
achieved its disinvestment target of Rs 80,000 crore, but has surpassed it by Rs 5,000 crore. The
recent announcement of sale of five PSUs by Finance Minister Nirmala Sitharaman has made it
clear that Modi 2.0 is going to break its own record of surpassing the disinvestment target set by the
government’s think-tank NITI Aayog.

The PSUs got the nod for sale by the Cabinet Committee on Economic Affairs (CCEA) include the
blue-chip oil firm Bharat Petroleum Corporation Limited (BPCL), Shipping Corporation of India
(SCI), inland cargo mover Container Corporation of India (CONCOR), THDC India and North
Eastern Electric Power Corp Ltd (NEEPCO). The sale of these PSUs generated about Rs 1 lakh
crore for the Modi government which was even higher than the disinvestment target set for FY20
that is Rs 90,000 crore.
 DISINVESTMENT TARGETS VS RECEIPTS TRENDS [2010-2021]

Since 2010, barring two years (2017-18 and 2018-19), the central government’s actual receipts
from disinvestment have consistently fallen short of the budget estimate. In 2017-18, 37% of the
disinvestment receipts were raised from the strategic disinvestment of Hindustan Petroleum
Corporation Limited (HPCL), and 24% were raised from the listing of various central public sector
enterprises (CPSEs). In 2018-19, government raised Rs 45,080 crore from exchange-traded funds
and also concluded the sale of REC Limited.

Till October 2021, the central government raised only 5% of the disinvestment target that was set
in the Budget (Rs 9,111 crore, excluding receipts from the sale of Air India and its subsidiaries).
The Standing Committee on Finance has noted that the disinvestment process usually takes a long
time with some entities even undergoing a fourth iteration. In as many as 21 cases, cleared by the
Union Cabinet since 2015-16, the central government is yet to conclude strategic disinvestment
transactions.

Popular method of Disinvestment followed by the government [Exchange Traded Funds]

The government uses various methods for disinvestment. In the last six years, the most significant
modes of disinvestment have been exchange-traded funds (ETFs), offer-for-sale (OFS), strategic
disinvestment, buybacks, and initial public offer (IPO).

An ETF is a basket of stocks. The government has two primary ETFs: (i) CPSE-ETF and (ii)
Bharat 22 ETF. Between 2015-16 and 2020-21, the government raised the maximum
disinvestment receipts from ETFs. OFS involved the sale of government’s shareholding in listed
CPSEs in the stock market. However, even this has involved CPSEs buying significant stake in
other government companies. For instance, in 2015, Life Insurance Corporation of India (LIC)
picked up 45% of a 10% OFS in Coal India Limited. In March 2013, LIC bought 71% of 5.82%
stake sale in Steel Authority of India Limited.

Aim to privatise CPSE’s across sectors

According to the new PSE policy, the central government had divided most sectors into strategic
and non-strategic. Finance Minister Nirmala Sitharaman said that four sectors - Atomic energy,
Space and Defence; Transport and Telecommunications; Power, Petroleum, Coal and other
minerals; and Banking, Insurance and financial services - would be strategic sectors. In strategic
sectors, there would be bare minimum presence of the public sector enterprises. The remaining
CPSEs in the strategic sectors would be either privatised or merged or subsidiarized with.
 DISINVESTMENT TARGET OF 2021

In FY 2021, the Indian Government set up a target of Rs. 2.1 lakh crore. However, considering the
aftermath of Covid-19, it raised just 10% of the desired sum. In fact, it recorded the lowest sum
raised in the preceding seven financial years. The target for this fiscal year was three times more
than that of the previous year. Keeping that in mind, this year, GOI had set a target of gathering Rs.
1.75 lakh crore from disinvestments.

Disinvestment has remained the buzzword of 2021 and the most important event to mark this was
the successful sale of the national carrier Air India to Tata group for Rs 18,000 crore, out of which
only 15 per cent went to the government, the rest went to clear the huge debt of Air India. After
many initial hiccups, Air India sale provided confidence to achieve the disinvestment target which
was set at Rs 1.75 lakh crore for FY22.

After successfully pulling off the Air India sale, the government is now going to carry out the LIC
IPO going forward in 2022. But this year as well, the chances of meeting the disinvestment target
seems quite bleak as currently the government is running short of around Rs 60,000 crore to meet
its ambitious disinvestment target of Rs 1.75 lakh crore. As per experts' estimates, over a third of
the receipts were expected to come from LIC IPO and privatisation of BPCL.

According to Secretary of Department of Investment and Public Asset Management (DIPAM)

Tuhin Kant Pandey, the government had invited invite financial bids for privatisation of five to six
public sector undertakings (PSUs) in December-January, aiming to close these transactions in the
current financial year. After 19 years, privatisation of five to six PSUs will take place this year
itself, Pandey said at the Global Economic Policy Summit.

BEML, Shipping Corporation of India (SCI), Pawan Hans, Central Electronics, Nilachal
Ispat Nigam were the PSUs the government is looking to privatise this year, he said. The secretary
also said that privatisation of Bharat Petroleum Corporation Ltd (BPCL) was in the due diligence
stage. Three bidders had reportedly shown interest in acquiring the oil marketing company but the
government ended up missing the target as it remained unsold.
BIG TICKET DISINVESTMENTS IN PIPELINE

Life Insurance Corporation of India: The Government announced the disinvestment in the
largest insurer of the country this year. LIC holds approximately 69 % of the market share. LIC
disinvestment is a unique case as disinvestment in the state-owned insurer will demand
amendments to the LIC Act. LIC Act governs several operations of the company, such as the
transfer of surpluses, government guarantee on policies, etc.

Sources close to the matter say that the Government may be looking to sell a 25 % stake in the
company. However, the 25 % sale will be achieved in stages with the first stage only offering a 5 %
sale. The expectation from the 5 % sale is to raise over Rs 50,000 crores. The Government has
appointed Deloitte and SBI Capital markets as their transaction advisors, which is the first step of
the disinvestment process.

BPCL Disinvestment: In November 2019, the government of India announced the disinvestment
of 5 public sector units (PSUs), which included cutting the majority stake in Bharat Petroleum
Corporation of India (BPCL) and Shipping Corporation of India (SCI). Along with these two PSUs,
the government also announced its 31% stake sale plans in Container Corporation of India
(CONCOR).

According to a memorandum put out by DIPAM, Ministry of Finance, BPCL is the second-largest
oil marketing company in India cornering a market share of around 21 % in FY19.

The company also has the third-largest refining capacity in the country. The central government
intends to sell its entire stake of 52.98 % in BPCL. However, this excludes BPCL’s 61.65 % stake
in Numaligarh Refinery Limited.

The government has received three EOIs including one from Anil Aggarwal’s Vedanta and one
each from two international funds (Apollo Global Management and Think Gas promoted by I
Squared Capital). The expression of interest would be used to pre-qualify the interested parties.
Those who qualify would then be allowed to participate in the next stage.

Shipping Corporation of India (SCI): The government on 22nd December 2020 invited bids to
sell its 63.75 % stake in SCI, along with transfer of the management control. The deadline to
submit the initial bid had been set for 13th February 2021. The stock has zoomed around 75 % over
November 2020, on reports that several domestic and global players are in the fray to participate in
the privatization process.
CASE STUDY: RECENT DEVELOPMENTS IN DISINVESTMENT SECTOR

THE PECULIAR CASE OF AIR INDIA

The Government offered to sell a 76 % stake in the state-owned airliner in 2018. However, it could
not receive a successful bid then. The Government then reopened their process in January 2021,
this time with intention of disinvesting it completely.

The disinvestment involved a 100 % sale of the Government’s shareholding in the company,
including Air India Express Limited and Air India SATS Airport Services. The issue at hand was
that the company was neck-deep in debt.

The Government had already transferred 50 % of the company’s liabilities and debt to another
special purpose entity and plans to reduce further debt to attract bids for the company. The total
transfer of liabilities and debt currently stood at Rs 30,000 crore, leaving only about Rs 23,000
crore of debt on the balance sheet.

With pandemic in the picture, Air India had suffered huge operational losses worsening financial
health. Keeping this in mind, the government has already, by the end of the second quarter,
provided Rs 1000 crore to the troubled airline, having incurred a loss of Rs 2750 crore in the
quarter ended June 2020.

The response, after these tweaks, has been enthusiastic, with the government receiving several
expressions of interest (EOI) for the troubled airline. The foremost bidder has been the Tata Group,
which has a sentimental value attached to the airline since Air India emerged out of Tata Airlines in
1946.

The government followed the reserve price mechanism. The reserve price is the benchmark price,
below which the government would not have accepted bids. To arrive at this figure, the Modi
regime engaged an independent valuer who would consider aspects like future cash flow
projection, brand value and intangible assets like bilateral rights.

The reserve price for the deal was set at Rs 12,906 crore and it was finalised before the opening of
the sealed financial bids from the two final suitors – the Tata Group and a consortium led by
SpiceJet chairman Ajay Singh. The winning bid of the Tatas was comfortably above the reserve
price—Rs 18,000 crore which included a Rs 2,700 crore cash component and Rs 15,300 crore of
debt (remember, enterprise value and not equity value).

NEGATIVE IMPACTS OF DISINVESTMENT

• The disinvestment process lacks transparency because the use of the money generated from
disinvestment is never disclosed.
• Only the government can ensure that the market system is sufficiently regulated and that
 private enterprises are not solely motivated by profit and are concerned about the interests
of their customers.
• Monopolies will never produce anything beneficial; only a fair and healthy competition can
benefit customers. From this perspective, disinvestment may not be the most effective
alternative.

CONCLUSION
Disinvestment can lead to increase the efficiency through better utilization of resources but riskless
privatization may not provide the ultimate solution for longer period of time. The stress should be
on making PSUs work more efficiently rather than reducing public ownership in economy.
Efficiency may also be achieved by changing the quality of management and not only by changing
the ownership. The study concludes that disinvestment is good for a country’s economy as it
provides revenue for the government, increases operating and financial
performance of enterprises and also restructures those units which is continuously making loss.
However, the main problem behind the non-achievement of disinvestment targets is the passive
behaviour of the government. Our government should look after it if it wants to achieve its goals
and also set targets by keeping in mind various market conditions, elections and should issue
policies for it from time to time.
BIBLIOGRAPHY

• https://tavaga.com/blog/understanding-disinvestment-policy-objectives-purpose-and
recent-developments/
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bids-for-privatisation-of-5-6-psus-by-dec-jan-121111700756_1.html •
https://www.livemint.com/news/india/centre-bets-big-on-disinvestment-as-a-growth
tactic-11612286934615.html
• https://factly.in/data-the-history-of-disinvestment-in-india-political-trends/ •
https://prsindia.org/policy/vital-stats/disinvestment-in-india
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in-2016-govt-tells-lok-sabha/781423/
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fy22-317506-2021-12-31
• http://www.wikipedia.com/
• https://groww.in/blog/disinvestment-in-india-objectives-and-importance/ •
https://economictimes.indiatimes.com/topic/disinvestment
• https://pib.gov.in/PressReleasePage.aspx?PRID=1693899
• https://www.investopedia.com/terms/d/disinvestment.asp
• http://www.bsepsu.com/importance-disinvestment.asp
• http://www.dipam.gov/
• https://acadpubl.eu/jsi/2018-118-14-15/articles/15/10.pdf