Disinvestment in India

Disinvestment means the government selling some or all of its shares in a company it owns. These companies are called Public Sector Enterprises (PSEs) or Public Sector Undertakings (PSUs). When the government sells only a small part and keeps control, it is a minority stake sale. When it sells a big part along with control of the company, it is called a strategic disinvestment, which is the same as privatisation.

Why does the government sell its companies?

After Independence, the government set up companies in steel, oil, power, banking, airlines and more, because private businesses were too small to build them. Over time, many of these companies became slow, made losses or needed repeated help from the budget. Selling shares helps in four ways:

• It brings money to the government without borrowing, which can be spent on roads, schools or health.
• It reduces the burden of loss-making companies on taxpayers.
• Private owners often run businesses more efficiently, because their own money is at stake.
• Listing shares on the stock market makes the company more open and accountable to investors.

Where did it come from?

India's disinvestment began after the 1991 economic crisis, as part of the liberalisation reforms. In 1991-92, the government sold small minority stakes in some PSEs. In 1992, a committee led by C. Rangarajan (then RBI Governor) studied the subject. Its report, received in April 1993, suggested how much government ownership to keep in different kinds of PSEs and called for a separate body to run the programme.

A separate Department of Disinvestment was set up on 10 December 1999. It became a full Ministry of Disinvestment in September 2001. The major privatisations of that period included Bharat Aluminium Company (BALCO, 2001) and Hindustan Zinc (2002). From 27 May 2004 it went back to being a department under the Ministry of Finance. On 14 April 2016, it was renamed the Department of Investment and Public Asset Management (DIPAM).

The New Public Sector Enterprise Policy, 2021

This is the current rulebook. The Union Cabinet approved it on 27 January 2021 and it was notified on 4 February 2021. It divides all sectors into two groups:

• Strategic sectors (four of them): (1) atomic energy, space and defence; (2) transport and telecommunications; (3) power, petroleum, coal and other minerals; (4) banking, insurance and financial services. Here the government keeps only a "bare minimum presence" of PSEs at the holding-company level. The rest may be privatised, merged with another PSE, made a subsidiary, or closed.
• Non-strategic sectors: All PSEs here are to be privatised where possible, otherwise closed.

Some PSEs are kept out of this, such as not-for-profit companies and those that support weaker groups or have a development role.

How does a strategic sale work, step by step?

A strategic sale is like selling a house through an open auction, with strict checks at each stage:

1. The NITI Aayog and DIPAM identify a company for sale, and the Cabinet Committee on Economic Affairs gives "in-principle" approval.
2. DIPAM appoints advisers and invites an Expression of Interest (EoI), which is an early, non-binding signal from interested buyers.
3. Shortlisted buyers study the company's books (this checking is called due diligence) and then put in financial bids.
4. Independent valuers fix a reserve price, the minimum price the government will accept.
5. The highest bid above the reserve price wins. A senior group of ministers, called the Alternative Mechanism, gives final approval, and then the share purchase agreement is signed.

Other ways of selling shares

Not all disinvestment is privatisation. The government also uses:

• Initial Public Offering (IPO): listing a company on the stock exchange for the first time, for example LIC's IPO in 2022.
• Offer for Sale (OFS): selling more shares of an already listed company through the stock exchange.
• Exchange Traded Funds (ETFs): bundling shares of many PSEs into one fund that people can buy, such as the CPSE ETF and Bharat 22 ETF.
• Buyback: the PSE itself buys back some of its shares from the government.

India's examples

The best-known recent strategic sale is Air India. On 8 October 2021, the government approved the sale of 100% of Air India to Talace Private Limited, a company of the Tata group, at an enterprise value of ₹18,000 crore. Only about ₹2,700 crore of this was cash; the rest was debt the buyer took over.

The handover was completed on 27 January 2022. For IDBI Bank, the Cabinet approved strategic disinvestment in May 2021, and DIPAM invited EoIs on 7 October 2022 for a combined 60.72% stake from the government and LIC.

Where does the money go?

Money from disinvestment is a non-debt capital receipt in the Union Budget. It is "capital" because the government gives up an asset, and "non-debt" because it does not have to be repaid. In recent budgets, the government stopped showing a separate disinvestment target. It now shows this money under "miscellaneous capital receipts", together with asset monetisation.

Commonly confused concepts

• Disinvestment vs privatisation: All privatisation is disinvestment, but not all disinvestment is privatisation. Selling 5% of a PSE through an OFS is disinvestment; the government still controls the company. Selling 51% or more along with management control is privatisation (strategic disinvestment).
• Disinvestment vs asset monetisation: In disinvestment, the government sells ownership (shares). In asset monetisation, it leases out an asset, such as a highway or a stadium, for a fixed period and gets money upfront, but ownership stays with the government.
• DIPAM vs Department of Public Enterprises (DPE): DIPAM sells government shares and manages government investments. DPE (under the Ministry of Finance) makes policy for how PSEs are run, such as giving Maharatna or Navratna status.

Issues, criticism and the way forward

• Missed targets: For many years, actual receipts fell far short of budget targets. Market conditions, legal hurdles and valuation disputes delay sales.
• "Family silver" debate: Critics argue that selling profitable PSEs to fund the budget is like selling family jewellery to pay household bills. Supporters reply that the money is better used in new assets than locked in businesses the government need not run.
• Workers and jobs: Employees fear job losses after privatisation, so sale agreements often include job protection for a fixed period.
• Strategic interests: Some argue that sectors like banking and energy need public ownership to serve national goals, such as lending in villages.
• Way forward suggested by experts: clear timelines for each sale, independent valuation, selling in good market conditions, and using the money for new infrastructure instead of everyday spending.

Concepts to Know

• Share (equity): A small piece of ownership in a company. If you own 10% of the shares, you own 10% of the company.
• Management control: The power to appoint the board and run the company. Usually whoever holds more than 50% of the shares has it.
• Enterprise value: The total value of a company counting both what is paid for its shares and the debt the buyer takes on.
• NITI Aayog: The government's main policy think tank, which replaced the Planning Commission in 2015.