Disinvestment: Objectives and Forms of Disinvestment

Disinvestment is defined as the shrinkage of capital investment which is caused by the failure of a firm to maintain or replace its capital assets which are being used-up or by the sale of the capital goods by the firm, such as the equipment owned by it. It also means the withdrawal of capital from a country or a corporation. It is also referred to as ‘divestment’ or ‘divestiture’.

Disinvestment is the sale of a part of equity holdings held by the government in any PSUs to private investor.’s or vestment has been a major strategy by which the government has financed fiscal deficit. Besides financing fiscal deficit, the economic motivation behind it is to improve efficiency of PSUs.

The disinvestment of public sector undertaking means the sale of public sector equity leading to a dilution of the government’s stake. In India, the term ‘disinvestment’ is used rather than ‘privatisation’. Privatisation implies a change in ownership resulting in a change of management while disinvestment may or may not lead to a change of management. A well-designed disinvestment program helps in the long-term growth process through increased foreign investment, technology transfer and the subsequent enhancements in productivity.

The process of disinvestment was initiated by the Government of Indian during 1991-92 as part of a package of PSU reform. The disinvestment of government of government stake from PSUs follows from the Industrial Policy Statement of 1991-91. Around Rs/- 200,000 crore are locked in PSUs.

Objectives of Disinvestment

  1. Releasing Large Amount of Public Resource: The primary objective of disinvestment is to release public resources for deployment in areas that are much higher on the social priority, such as, basic health, family welfare, primary education and social and essential infrastructure.
  2. Get Rid of Bureaucratic Set-up: Management of public sector does not have the independence to take decision. Most of decision of PSE is taken by the ministers. Their decisions are politically motivated and are delayed. As a result, production capacity is not fully utilized and there is fall in productivity.
  3. Reduce Burden on the Government: Atleast 53 public sector units are running at loss. This creates unnecessary economic burden of the government. The management and any other person are indifferent to profit earned or losses incurred. So government has promoted privatisation for reducing its economic burden.
  4. A vail Benefit of Capitalism: Capitalism is very successful countries like Japan, U.S.S., Hong Kong, Singapore, Korea, etc., considering the benefits of capitalism like increase in competition; increase in technology advancement, increased efficiency the government has decided to adopt privatisation.
  5. To Solve Financial Crises of Government: Government is falling shorts of funds to development infrastructure. This finance crises could be solved by selling part of government equity at remunerative prices and thereby getting funds from their sale.
  6. For Promoting Industrial Growth: Government thought that public sector will not be able to bear the burden of developing basic and heavy industries alone, because of shortage of funds. So privatisation was promoted to increase industrial growth.
  7. For Promoting Globalisation: Globalisation can only be promoted through privatisation, because foreign entrepreneurs prefer to join hands with private sector. By globalisation benefits of foreign investment and foreign technology can be availed.

Rationale for Disinvestment

  1. Improvement in the Economy: The development of public enterprises was seen as an appropriate policy response to bring about improvements in the economy, both in the development as well as the developing countries. There appeared to be an economic consensus around the world accepting public enterprises as an inevitable part of the economy, especially to manage natural monopolies and also core industry.
  2. Limited Entrepreneurship: Such industries could not have been developed by private sector during 1940’s or 1950’s as there was not enough money in the money market and entrepreneurship was limited. So government used high rates of taxation and deficit inflationary financing to develop public industries.
  3. Developing the Economy: A few public sector enterprises were established to balance or replace weak private sector, to develop the industrially backward areas, to generate employment and to make goods available at lower cost.

Benefits of Disinvestment

  1. Expose Private Companies.
  2. Wider Distribution of Wealth.
  3. Beneficial Effect on Capital Market.
  4. Increase Economic Activity.
  5. Cheaper and Better Quality of Products.