After the announcement of the budget 2021 by the Finance Minister – Mrs. Nirmala Sitharaman before the Lok Sabha, one term which has gained a lot of popularity is disinvestment. Although the term is not anything new and has been here in the budget for years. But the disinvestment in one of the leading PSUs of India – LIC has caught a lot of attention from the Indian masses.
PSUs or Public Sector Undertakings are those companies which are owned either wholly or partially by the government. While most of these companies are owned by the central government, some of these are owned by the territorial or state government too. The Indian Ordnance Factories which manufacture firearms for the Indian Armed Forced as well as the eligible civilians is one of the oldest PSU in India whose origin dates back to the year 1712. Government as a part of its disinvestment strategy sells a part of these PSUs to the public sector for raising funds.
Today, we will take a look at the meaning of disinvestment in PSUs and also find out about the merits and demerits of the same.
Table of Content
Disinvestment of PSUs in India
What is disinvestment in PSUs?
The basic meaning of disinvestment is to sale or liquidate assets, usually by the government. The government at times disinvest in certain Public Sector Undertaking companies with the aim of reducing the exchequer’s fiscal burden, or simply for raising funds for meeting some specific requirements. These requirements may include bridging the shortfall of revenue from other sources of regular income. In certain cases, it has been observed that disinvestment was done by the government for simply privatizing the assets.
Disinvestment vs Privatization
It is important to understand that disinvestment and privatization are different and should not be mixed with each other. With privatization the government sells an entire subsidiary or a majority stake, which results in the government losing its control and ownership. However, with disinvestment the government sells only a minor stake to a private entity and holds the majority stake with itself, which ensures that the control and ownership remains in their hands.
Advantages of Disinvestment
Disinvestment allows for the redirection of huge amounts of public funds from non-strategic public sector subdivisions to fields with a far higher societal priority, such as health, family, and philanthropy. Disinvestments also contribute to the reduction of the large public sector debt burden in the international arena. The following are some of the advantages of disinvestment:
- Privatization would help to reduce the outflow of scarce public resources, thereby supporting "non-strategic public sector entities."
- The process of privatization facilitates the transfer of commercial risks, in which taxpayer money locked up in the public sector is left vulnerable to the private sector anytime a corporation steps in.
- The release of tangible and intangible assets, such as large manpower locked in PSU administration, would be ensured during the privatization process, and such assets would be reallocated to areas of greater priority.
- When private enterprises are subjected to a variety of market procedures as part of the Disinvestment process, they become more self-sufficient.
Disadvantages of Disinvestment
- From 1990 to 2004, the amount collected by disinvestment was 2056 crore per year, which is insufficient given the Indian government's debt ratio. Furthermore, the disinvestment process lacks transparency because the use of the money generated from disinvestment is never disclosed.
- Only the government can ensure that the market system is sufficiently regulated and that private enterprises are not solely motivated by profit and are concerned about the interests of their customers.
- Monopolies will never produce anything beneficial; only a fair and healthy competition can benefit customers. From this perspective, disinvestment may not be the most effective alternative.
Ways to Disinvest
The government can achieve its goal of disinvestment by using number of strategies and methods, the most common one being the public offer, where the shares are sold to the private entities at a pre-determined price. The expected disinvestment in the Life Insurance Corporation of India is proposed to follow the public offering route. Another method is to sell the equities of the company to pre-determined clients. Offer for Sale method allows the sell by the process of bidding, where the shares are allotted to the bidder who places the highest bid. These are some of the common methods which are used by the Government of India for disinvestment in PSUs.
Conclusion
As we discussed, it can be perceived that there are competing effects to disinvestment. The updated disinvestment policy of the Indian government is better left to time for ascertaining its effectiveness. However, it is evident that with the upcoming policy, there is soon going to be a plethora of opportunities for the investors. The investors only need to put in their money at the right time. Detailed insights into the same can be discussed with a registered investment advisor who can also help you in planning your investments as per the upcoming opportunities in the market.
Happy Investing!
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