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It refers to the disposal of public sectors units’ equity in the market. It is the sale of a part of the equity holdings held by the government in any PSU to private investors.

Privatisation and disinvestment in India

In India, privatisation is mainly in the form of disinvestment of equity. Privatisation does not lead to 100% transfer of control from public sector to the private sector, other than in exceptional cases like that of Centaur Hotel. Examples for privatised PSUs are:
  • Lagan Jute Machinery Company Limited (LJMC)
  • Modern Food Industries Limited (MFIL)
  • Bharat Aluminium Company Limited (BALCO)
  • CMC Limited (CMC)
  • HTL Ltd. (HTL)
  • IBP Company (IBP)
  • Videsh Sanchar Nigam Limited (VSNL)
  • India Tourism Development Corporation (ITDC)
  • Hotel Corporation of India Limited (HCI)
  • Paradeep Phosphates Limited (PPL)
  • Jessop and Company Limited (JCL)
  • Hindustan Zinc Limited (HZL)
  • Maruti Udyog Limited (MUL)
  • Indian Petrochemical Corporation (IPCC)
  • National Thermal Power Corporation (NTPC)

Different methods of disinvestment deployed in India

  • Equity offer to retail investors through domestic public issues
  • Equity offer through Global Depository Receipts (GDRs) to tap overseas markets
  • Equity offer through differential pricing method when share of PSUs are sold to public sector financial institutions and banks
  • Cross holding, through which the Government sells a part of its shares in one PSU to other PSUs
  • Warehousing, through which the Government’s own financial institutions buy government’s stake in select PSUs and hold them until a third buyer emerges
  • Golden share, through which the Government retains stake upto 26% in the PSU to protect its interest
  • Strategic sale, under which the Government sells a major portion of its stake to a strategic buyer and also gives over the management. Here, the disinvestment price would be based on the market. This was one of the prominent methods that the Government pursued
The Government later called off the disinvestment of stake through strategic sale in 13 profit making central public sector enterprises and is now considering the public offer route to sell minority stakes. Due to some political reasons the disinvestment strategy was put on hold. In February 2008, Rural Electrification Corporation was the last PSU to tap the stock market. The government’s disinvestment programme is set to start again, with National Hydroelectric Power Corporation (NHPC) through which it seeks to tap the capital market with its Initial Public Offering (IPO)

Analysis of disinvestment

  • The disinvestment programme which started in 1991-92 has not been significant enough to affect the structure of the working of the PSUs
  • The disinvestment programme carried out by the Government has been in a hasty, unplanned and hesitant manner. The link between public enterprises and the capital market could not be created due to inadequate efforts by the Government.
  • By the end of 2011-12, the government could auction off a very small portion of its investment in the public sector, raising raising a little more than ₹ 1 lakh crores in the process.
  • The procedures adopted for disinvestment focused only on disinvestment of shareholdings, ignoring issues such as initial price offers, involvement of strategic partners, setting up of a trust, employee’s stock ownership and participation, etc.
  • The government has undertaken disinvestment of profit making enterprises only. Out of 39 PSUs chosen for disinvestment in 1991-98, only 3 PSUs viz., Hindustan Cables Ltd., Hindustan Copper Ltd. and Hindustan Photo films Manufacturing Co. Ltd. incurred losses, while all other 36 PSUs earned profits.
  • The government even failed to raise the budgeted disinvestment in the capital market in most of the years. The token privatisation to the degree of 8-10% of the shares of PSUs did not motivate the investors to buy them as they could hardly exercise any control on PSUs.
  • Public equity had been underpriced and sold at a value much below its actual worth.
Thus, the total realization of the government has fallen short of the target most of the times.

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