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The Role and Importance of Disinvestment in India

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Published Date: 20 Jun 2024Updated Date: 27 Dec 20246 mins readBy MOFSL

Introduction

Over the years, disinvestment has gained significant traction in India. If you wonder what disinvestment means and its importance, this blog will help you understand it better.

Meaning of Disinvestment

Disinvestment happens when the government sells its stake in a public sector enterprise (PSE) to a private entity or general public. Many people confuse disinvestment with privatisation. However, both are different. While privatisation involves selling the entire ownership of a PSU to a private entity, disinvestment entails selling only a particular part of government’s ownership. Even after disinvestment, the government controls the company’s stakes, which doesn’t happen in privatisation.

Objectives of Disinvestment

Given below are the various objectives for which the Indian government has opted for disinvestment from time to time:

  • Raise Revenue​​​​​​​

Disinvestment helps the government generate revenue. This income is crucial for bringing down fiscal deficits and funding developmental projects. By selling stakes in public enterprises, the government can finance various infrastructure, education, and health programs for the country’s development.

  • Enhance the Efficiency of PSEs

Private ownership can lead to better management and operational efficiency. Disinvestment transfers control from the public sector to private entities. This can bring professional management, boost productivity, and reduce operational costs.

  • Promotes Competition

Disinvestment reduces the government’s role in a PSE, resulting in a competitive environment. This encourages private players to enter the market, which could lead to better services and lower prices for consumers.

  • Reduces the Government’s Financial Burden

Maintaining public sector enterprises can be a costly affair. Disinvestment reduces the government’s financial burden. This allows the government to focus on other core activities, such as policy-making and regulations essential for the country’s growth.

  • Bring Down Inefficiencies

PSEs often suffer from bureaucratic inefficiencies and a lack of accountability. Disinvestment, by introducing discipline and accountability, can greatly address these issues.

Importance of Disinvestment

Let’s now take a look at the importance of disinvestment. Disinvestment can lead to:

  • Economic Growth

Disinvestment plays a crucial role in boosting economic growth. The funds raised from disinvestment can be invested in critical sectors like infrastructure and power. This, in turn, catalyses economic activity and job creation.

  • Attraction of Foreign Investment

Disinvestment can attract foreign investors seeking opportunities in emerging markets. The government can benefit from increased capital inflows and technological advancements by opening up sectors to private and international investments.

  • Reduction in Public Debt

The government can use the revenue from disinvestment to reduce public debt. This helps create a more solid fiscal position, which is vital for the country’s long-term economic stability.

  • Promotion of Better Corporate Governance

Disinvestment can help promote better corporate governance that ultimately benefits the overall economy. 

Types of Disinvestment

The various types of disinvestment are as follows:

  • Minority Disinvestment

In this type of disinvestment, the government retains a majority of stakes in a company, more than 51%. Hence, the company’s control remains with the government. The government seeks this type of disinvestment through an offer for sale.

  • Majority Disinvestment

Here, the government gives up a majority stake and holds only a minority stake, less than 50%. The government makes such decisions based on certain strategies and policies.

  • Complete Disinvestment

It’s akin to privatisation, where the government gives complete control to a private entity. In such a scenario, the company turns to a private company.

Modes of Disinvestment

The various modes of disinvestment are as follows:

  • Initial Public Offering

An initial public offering (IPO) occurs when a company offers its shares to the public for the first time. The government receives the proceeds from the IPO.

  • Follow-on Public Offer

This is another mode of disinvestment. In a follow-on public offer, a company issues additional shares to the public. An FPO takes place after a company gets publicly listed on stock exchanges.​​​​​​​

  • Offer for Sale

Commonly used for large PSEs, an offer for sale allows the government to reduce its stake in public sector enterprises (PSEs) by selling shares to investors in the open market.

Wrapping it Up​​​​​​​

Disinvestment is vital for the Indian government to enhance economic efficiency, generate revenue, and reduce its involvement in business operations. It plays a vital role in boosting economic growth and improving public finances.


 

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