Economics Fundas For You – What Is Disinvestment



The sale of the government’s shareholding in Public Sector Units (PSUs), to private parties, is termed ‘disinvestment‘. The Government also hands over management control to private parties, it is termed as ‘privatization’.

Ever since India launched the New Economics Policy (NEP) in July 1991, disinvestment has been an important policy area. Also, in recent years the issue of disinvestment has come to the fore due to the large scale fiscal deficit that the government has been running up.

The supporters of the disinvestment policy argue that the major problems that afflict the PSUs can be overcome if they are handed over to the private sector. Such transfer will:
promote competitive efficiency;
provide higher quality products;
provide better quality services;
reduce political interferences, and
reduce wastage and optimise resources.
The champions of disinvestment believe that the basic difference lies in the management style of the public and private sectors. Once disinvestment is done, private sector deals with the problems.

In order to promote disinvestment, the Government has, over the years, constituted the Disinvestment Commission under G.V. Ramakrishna; the Rangarajan Committee on PSU Disinvestments, and another Disinvestment Commission under R.H. Patil.

disinvestment 1

Between 1991 and today, the Government has managed to digest its stake in a few companies only. Several attempts to disinvest got enmeshed in controversies. There was scathing criticism about methodology, realisation, and the procedure to restructure the unit before its shares are sold, the timing of the disinvestment, the end use of sale proceeds, and even about the choice of the PSUs to be sold.

The Department of Disinvestment, a division of the Ministry of Finance, has laid down some guidelines for both advisors and bidders in the disinvestment process. Some of the guidelines are as follows:
Any conviction in a court of law or adverse order by a regulatory authority for a grave offence against the advising concern and its sister concerns would constitute disqualification.
With regard to bidders, in relation to matters other than the security and integrity of the country, any conviction or adverse order by regulatory authority that constitutes doubt on the part of the bidder to manage the PSU when it is disinvestment would be disqualification.
On security matters, the guidelines lay down that any charge-sheet by an agency of government/conviction by a court of law for an offence committed by the bidding partner or by any of its sister concern would result in disqualification.
A decision on the relationship with sister concerns would be taken on the basis of relevant facts and after examining whether the two concerns are substantially controlled by the same person.

The Government of India constituted the National Investment Fund in 2005, with the following objectives:
The proceeds from disinvestment of central public sector units will be channelized into NIF, which is to be maintained outside the Consolidated Fund of India.
The corpus of the NIF will be of a permanent nature.
The NIF will be professionally managed to provide sustainable returns to the Government, without depleting the corpus. Selected Public Sector Mutual Funds will be entrusted with management of the corpus of the NIF.
75% of the annual income of the NIF will be used to finance selected social sector schemes, which promote education, health and employment. The residual 25% of the annual income of the fund will be used to meet the capital investment requirements of profitable and revisable PSUs that yield adequate returns, in order to enlarge their capital base to finance expansion/diversification.


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