1. Disinvestment
“The action of an organisation or
government selling or liquidating
an asset or subsidiary”

2. Objectives of Disinvestment
 To reduce the financial burden on
government
 To improve public finances
 To introduce, competition and market
discipline
 To increase growth of the firm
 To encourage wider share of ownership

3. Reasons for Disinvestment
• To meet fiscal deficit
• Expansion or diversification of the firm
• To repayment of government debts
• Implementation of government plan
• PSU's give negative rate of return on
capital

4. The Indian economy had virtually embraced
bankruptcy during the period of 1980-92.
In 1991, there was 236 operating public sector
undertakings, of which only 123 were profit making.
The top 20 profit making PSU’s were responsible for
80 percent of profits.
The return on public sector investment for the year
1990-91 was just over 2 percent.
Background of Disinvestment

5. Criteria for Disinvestment
The decision regarding disinvestment or liquidation
viewed in the light of following criteria:
 Whether the objectives of the company are achieved
 Whether there is decrease in number of beneficiaries
 Whether serving the national interest will be affected
because of disinvestment
 Whether private sector can efficiently operate and manage
the undertaking.
 Whether the original rate of return targeted could not be
possible to achieve.
 Whether socio-economic objectives lots its purpose

6.  The govt. in July 1991 initiated the disinvestment process in
India, while launching the New Economic Policy (NEP).
 The govt. had appointed the Krishnamurthy committee in
1991 and Rangarajan committee in 1992 to look after the
disinvestment process.
 Both the committees have recommended disinvestments to
fulfill objectives of modernization of the PSE’s through:
(a) Strengthening R &D
(b) Initiating diversification/expansion programme.
(c) Retaining and reemployment of employees.
(d) Funding genuine needs of expansion.
(e) Mitigating fiscal deficit of the government.
Process of Disinvestment
Contd..

7.  These committees also distinguished between the
short term and long term goals of the disinvestment
and advised the govt. not to sacrifice the long term
goals for the sake of fulfilling the short term
objectives.
 The govt. has announced in its NEP that mitigating the
fiscal deficits is the only objective of disinvestment.
 The crucial shift in govt. policy for disinvestment of
PSU’s was mainly attributed to poor performance of
these enterprises and burden of financing their
requirements through budget allocation.
Contd..
Process of Disinvestment

8.  Further in 1996, the govt. constituted a five member public
sector disinvestment commission under the chairmanship
of G.K.Ramakrshna for drawing a long term disinvestment
programme for the PSU’s.
 The committee submitted its report covering 58
enterprises, out of 70 enterprises referred to it by the govt.
recommendations ranged from strategic sales in various
proportions to disinvestments ant various level.
 This committee was ultimately abolished in 1999.
Contd..
Process of Disinvestment

9.  The govt. set up a new Department of Disinvestment in 1991
to establish a systematic policy approach to disinvestment and
to give fresh impetus to the programme of disinvestment,
which will increasingly emphasize strategic sales of identified
PSU’s.
 In 2001, the govt. reconstituted the disinvestment
commission with R.H.Patil as its chairman.
 The govt. has decided to refer all ‘non-strategic’ PSU’s and
their subsidiaries, excluding IOC, ONGC, and GAIL to the
commission for its independent advice.
Process of Disinvestment

10. Privatization implies a change in ownership, resulting in a
change in management.
The privatization of public sector enterprises will occur only
when govt. sells more than 51% of its ownership to private
entrepreneurs.
Disinvestment on the other hand, has a much wider
connotation as it could either involve dilution of govt. stake to
a level that result in a transfer of management or could also
be limited to such a level as would permit govt. to retain
control over the organization.
Disinvestment beyond 50% involves transfer of management,
where as disinvestment below 50% would result in the govt.
continuing to have a major say in the undertaking.
Privatization and Disinvestment