Context: In the Union Budget 2023-24, the government has set a disinvestment target of Rs 51,000 crore, down nearly 21% from the budget estimate for the current year and just Rs 1,000 crore more than the revised estimate. 

• This is the lowest disinvestment target in seven years. Moreover, the Centre has also not met the disinvestment target for 2022-23 so far.

Disinvestment

• Disinvestment or divestment is when the government sells its assets or a subsidiary, such as a Central or State public sector enterprise.

Approaches to disinvestment

There are three main approaches to disinvestment

• Minority disinvestment: The government retains a majority in the company, typically greater than 51%, thus ensuring management control.

• Majority disinvestment: The government hands over control to the acquiring entity but retains some stake.

• Complete privatization: 100% control of the company is passed on to the buyer.

• Nodal Department: The Union Finance Ministry has a separate department for undertaking disinvestment-related procedures called the Department of Investment and Public Asset Management (DIPAM).

Objectives

• Reducing Fiscal Burden: The government undertakes disinvestment to reduce the fiscal burden on the exchequer.

• Improving Public Finances: To raise money for meeting specific needs, such as to bridge the revenue shortfall from other regular sources.

• Encourage Private Ownership: Disinvestment may be done to privatise assets. However, not all disinvestment is privatisation.

Significance & Benefits

• Disinvestment allows a larger share of PSU ownership in the open market, which in turn allows for the development of a strong capital market in India.

• Disinvestment proceeds can be used to finance the fiscal deficit, to invest in the economy and development or social sector programmes.

• It allows the government and even the company to reduce debt which means the government does not have to fund the losses of a loss-making unit anymore. Eg. Air India

• It can be helpful in the long-term growth of the country.

Strategic Disinvestment, Disinvestment & Privatisation

• Strategic Disinvestment: It implies the sale of a substantial portion of the government shareholding of a CPSE of up to 50%, or such higher percentage as the competent authority may determine, along with transfer of management control.

• In Disinvestment the government sells minority shares of public enterprises to another entity and retains ownership of the enterprise.

• In Strategic disinvestment/sale, the government sells majority shares in an enterprise and gives up the ownership of the entity as well.

• Majority Disinvestment: It refers to complete privatisation wherein 100 percent control goes to the private sector.

• Minority Disinvestment: The government retains a majority in the company, typically greater than 51%, thus ensuring management control.

• Privatisation: The government whenever it so desires, may sell a whole enterprise or a majority stake in it to private investors. This is known as privatisation where the resulting ownership and control of an organisation does not rest with the government.

Timeline of Disinvestment

• Post independence the government passed the Constitution (First Amendment) Act, 1951, following which nationalisation of private firms became a standard policy tool by the government.

• This led to nationalisation of airlines, insurance businesses, and banking systems through the Air Corporations Act, 1953; Life Insurance Corporation Act 1956, Banking Companies (Acquisition and transfer of Undertakings) Act, 1970, etc.

• After the 1991 LPG reforms, there was a transition in thinking about the public and private sector. The policy formulation gathered steam lately in 2001 when a separate ministry for disinvestment came into being. 

• The process of disinvestment continued intermittently over the next decade 2004-2014. After 2014, the disinvestment policy was renewed with stake sales in PSEs.

• Against this backdrop, New Public Sector Enterprise (PSE) Policy for Atmanirbhar Bharat was notified in 2021.

New Public Sector Enterprise Policy (PSE),2021

• The policy intends to minimize the presence of the Government in the PSEs across all sectors of the economy.

• Under the new PSE policy, public sector commercial enterprises have been classified as Strategic and Non-Strategic sectors.

Four broad strategic sectors have been delineated

• Atomic Energy, Space and Defense

• Transport and Telecommunication

• Power Petroleum, Coal, and other minerals

• Banking, Insurance, and Financial Services

• Non-Strategic Sector: In this sector, CPSEs will be privatised, otherwise shall be closed.

• Moving forward task: Further to fast forward the policy, NITI Aayog has been asked to work out the next list of Central Public Sector companies that would be taken up for strategic disinvestment.

• Incentivising states for disinvestment: To incentivise States to take to disinvestment of their Public Sector Companies, an incentive package of Central Funds for them will be worked out.

• Special purpose vehicle (SPV) for monetising idle land: The SPV will contribute towards Atmanirbhar Bharat by monetising the non-core assets largely consisting of surplus land with the Ministries and PSEs.

Disinvestment in Recent years

• Different central governments over the last three decades have been able to meet annual disinvestment targets only six times.

• In 2017-18, the government earned disinvestment receipts of a little over Rs 1 lakh crore as against a target of Rs 72,500 crore, and in 2018-19, it brought in Rs 94,700 crores when the target was set at Rs 80,000 crores.

• In recent years, in cases of strategic disinvestment its stake was sold to another public sector enterprise.

• When the Centre exceeded its target in 2017-18, it earned Rs 36,915 crores by selling Hindustan Petroleum Corporation Limited (HPCL) to the state-owned Oil and Natural Gas Corporation (ONGC).

• In 2021-22, the Centre missed its high disinvestment target of Rs 1.75 lakh crore by a significant margin, raising just Rs 13,534 crores in disinvestment proceeds.

• The Strategic sale in many firms was called off due to a lack of bidders and lapses in the bidding process. Eg. BPCL and Central electronics.