What is Disinvestment?

The government needs money to run the country, do construction and development works. The government has many ways to raise this money such as taxes, fines, fees and loans etc. Disinvestment is also one such method by which the government raises money by selling its stake in public sector companies or government agencies. Today in this article, we will try to understand the concept of disinvestment and also know why it is important.

What is Disinvestment?

When the government sells its stake or investment in a public sector company, it is called disinvestment. In simple language, we can say that through disinvestment, the government or an organization arranges funds by selling its shares to some other party. This reduces the expenses of the government and the money that the government gets from disinvestment is used in repaying the debt, in long term government schemes and in development works. In India, a separate department has been formed to look after the work of disinvestment, whose name is DIPAM i.e. Department of Investment and Public Asset Management.

Due to disinvestment, private companies get the opportunity to manage government undertaking, which improves their management and increases profits. Due to introduction of private management, monopoly in the market also ends and competition gets promoted. Recently, the stake of Air India was sold by the Indian government to Tata under disinvestment.

Importance of Disinvestment

The government may choose the path of disinvestment for many reasons. One of the main reasons for this could be when the government has a huge debt and needs money to repay it or a large amount is needed for a specific project.

Apart from this, many times government departments do not work properly and due to this, they start incurring losses instead of profits. Through disinvestment, the government encourages private companies to participate in government management and invest, so that management can be improved and losses can be controlled. This also improves the service and common people are able to avail the benefits of government facilities properly.

The importance of disinvestment was first emphasized by the government in its 1992 economic policy. At that time, due to negative returns on PSUs i.e. government institutions for many years, the government started incurring huge losses. Under Disinvestment, the government focused on those sectors where the government was incurring losses due to improper functioning. At this time, private companies were also emerging in the country, hence the government decided to give opportunity to private companies by selling their stake in these institutions. This not only led to improvement in management, secondly the entry of new people in the market gave rise to new ideas and skills.

Types of Disinvestment?

Disinvestment can be mainly divided into two parts.

• Minority Disinvestment
• Majority Disinvestment

Minority Disinvestment: In Minority Disinvestment, the government keeps the majority share of the company with itself which can be 51% or more. Here it is kept in mind that the management of the company should remain in the hands of the government. The government can sell minority stake in many ways, which include IPO, FPO and OFS.

Majority Disinvestment: In this type of disinvestment, the government sells most of its stake in the company and keeps only a small stake with itself. This can be done mainly in three ways, which include strategic sale, privatization and complete privatization.

Why does the government disinvest?

The government can do disinvestment for many reasons, some of the main ones are:

To raise funding from the market which is used by the government to repay the debt and for the development works taking place in the country.

By placing under-performing firms in the hands of capable people so that performance can be improved and investment returns can be increased.

To raise money by the government for its long term projects.

To promote the contribution of private companies in the market.

To promote competition in the market so that service can be improved and costs can be reduced.

Difference between disinvestment and privatization

Under privatization, the government sells its entire stake in the public company to the private company. Whereas in disinvestment, the government sells only some stake of the public company, due to which complete or some control of the management remains in the hands of the government.

In privatization, the entire ownership of a company is transferred from the government to the private company, on the other hand, in disinvestment, there is no change in the ownership of the company.

In privatization, strategic sales, IPO and auction etc. are used, whereas in disinvestment, all methods of privatization including stake sale are also used.

Privatization promotes improvement in management, new ideas and competition, on the other hand, disinvestment improves management but does not guarantee other things.

After privatization, the main objective of the company is to earn profit and expansion but in disinvestment the main objective remains to provide better service.

Conclusion

Through disinvestment, the government sells its stake in those companies from which it is not getting profit or the management is facing problems due to which the condition is very bad. If the government wants, it can sell some or more of its stake in the company, but only so that the control of the management remains in its hands and the interest of the people remains the main objective.