Coupon Accepted Successfully!




Privatization can be carried out in many ways and in India it has been mainly done by disinvestment. Disinvestment means selling of an investment. In the context of privatization, it means selling of Government share in public sector units in the market.

Conditions Leading To Disinvestment


As stated earlier, Indian economy was passing through severe resources crunch during the period 1981-91. It was on the verge of bankruptcy. In order to revive the economy, many efforts were undertaken. One of them was the announcement of the New Economic Policy Committee in 1982. Both Committees suggested disinvestment of public sector units. Hence, disinvestment was incorporated as one of the elements of the NEP 1991.


The following are the main objectives behind disinvestment:

  • To raise resources from within the public sector for meeting:
  1. the cost related with the closure of sick units
  2. restructuring those units which are sick but can be revived
  3. retraining the displaced or affected workers
  • To improve performance of the Public Sector Units in order to make them globally competitive;
  • To modernize public sector units through strengthening R & D;
  • To retire public debt;
  • To fund the genuine needs of expansion;
  • To widen the capital market base;
  • To mitigate fiscal deficits.

Methods Of Disinvestment

Disinvestment has been carried out in many ways.
Important ones are:
  • Equity shares of Public Sector Units were offered to the retail investors through domestic public Issues.
  • Government selling part of its share in one public sector unit to another is also one of the ways of disinvestment. (cross holding)
  • Another way of disinvestment in selling Government's take in selected public sector units to its own financial.(ware housing)
  • Still another method of disinvestment which has been used by the Government is keeping 26 percent stake in public sector unit and but holding major say in the decision-making.
  • Currently, the method of strategic sale is being used by the Government.

Accordingly, the Government sells a major portion of its stake to a strategic buyer and hands over the management control (Strategic sale method).


The whole process of disinvestment has been carried out in a very 
lackadaisical and hasty manner. There was no well-planned strategy for selling out Government's shares in public sector units and there was much adhocism in the procedures adopted. Consequently, the public sector equity has been underpriced and sold for a fraction of what it could actually fetch. It has been claimed that the whole process of disinvestment tantamounts to transferring legitimate public sector funds to private pockets.


Not only the actual realizations from the disinvestment programme have been considerable below target, the proceeds from disinvestment have been used in an objectionable manner. The Government has used this capital receipts to offset the shortfalls in revenue receipts and thus reduce the fiscal deficits. The programme has deprived the government of future yields from these (profitable) enterprises. Although the Disinvestments Commission was set up in 1996, its status remained that of an advisory body only. Its recommendations were not mandatory for the Government. The Commission was abolished in 1999 and a new Department was set up for expediting the process of disinvestment.

Test Your Skills Now!
Take a Quiz now
Reviewer Name