Disinvestment usually refers in respect of a wholly-owned Govt enterprise/undertaking, where its valuation is done in monetary terms, with a view to raising capital from the market. Usually, Investment Bankers or such expert entities carry out a necessary exercise to assess the worth of the company, and the net worth so arrived at are divided into units, which are known as Shares. So, when the Govt decides to retain the ownership as well as control over the management of the company, it goes with selling a portion of the total shares subject to a maximum of 49% and gets the fund. And in the given situation, henceforth Govt will get 51% of the total profit of the company, and balance 49% will go to those whosoever purchased those Shares.
The objectives of disinvestment / privatisation are broadly classified into:
- Improving the efficiency of public enterprises
- Improving the Government’s budgetary position through reduced financial support to enterprises
- Attracting private investment, both domestic and foreign and developing Indian capital markets;
- Infusing competitive business environment
- Achieving political objectives through reducing the size and influence of the public sector and wider distribution of asset ownership.
Approaches to Disinvestments
There are primarily 3 different approaches to disinvestments
- Minority Disinvestment – Minority disinvestment in PSUs is such that, at the end of it, if the government of India retains a majority stake (typically more than 51%) in the company, it ensures management control.
- Majority Disinvestment – Majority disinvestment in PSUs is such that, at the end of it, the government of India retains a minority stake in the company i.e. it sells off a majority stake. It is also called Strategic Disinvestment.
- Complete Disinvestment – Complete disinvestment or privatization is a form of majority disinvestment wherein 100% control of the company is passed on to a buyer i.e government of India completely disinvests from that PSU.
Disinvestment or Privatization Models
The disinvestment process is based on opting for one or more of the models or a combination of various models of disinvestment. It refers to prescribed means of disinvestment suitable for the concerned sector or company. It is carried through direct public offering through prospectus; Private placement or limited offering to select financial institutions, Transferring shares to an intermediary authority, which in turn sell the shares in blocks of individual enterprises, etc and Selling the shares of desired quantities in a single lot or over a period of time in small lots.
Direct public offering
Direct public offering refers to a model of disinvestment where the offer of equity is made directly to the public for subscription of divested equity.
Private placement of equity
Private placement of equity is a model of disinvestment offered to the financial institutions, investing institutions, mutual funds and foreign investors with a prescribed limit on subscription.
Corporate Restructuring
Corporate restructuring is a comprehensive process by which a company can consolidate its business operations and strengthen its position for achieving the desired objectives-staying, synergetic, slim, competitive, and successful.
Leasing & Management Contract
Leasing and management contract is an organizational measure where the managing of the assets of the CPSU is given to private operator without transfer of ownership by the Government.
Strategic Sale
Strategic sale implies the sale of a substantial block of Government holdings to a single party which would not only acquire substantial equity holdings of up to 50 percent but also brings in the necessary technology for making the CPSU viable and competitive in the global market. Where Government continues to hold 51 % or more of the shareholding, the valuation relates to the shares of the companies and not to the assets of the company. On the other hand, where shares are sold through strategic sale and management is transferred to the strategic partner.
Auction
An auction is a mechanism utilized to fulfill the obligations to a counter party member when a member fails to deliver good securities or make the payment.
Trade Sale
Trade Sale is a sale of a business or a division or a non-core activity. The auction takes into account price and other factors such as capital investment to which the bidder is willing to commit and guarantees the bidder makes to employees and customers.
Cross sale
The Government permits the purchase of equity of a CPSU by another related enterprise as a part of government policies.
Demerger
Sections 391-394 of the Companies Act 1956 govern demerger. The basic concept of demerger requires transfer of an undertaking from an existing company (“Transferor Company”) to another existing company (Transferee Company”). It refers to the process where a business, division, or product line of a company is separately reorganized into a different entity.
Challenges of Disinvestments
- Sale of profit-making and dividend-paying PSUs would result in the loss of regular income to the Government
- There would be chances of “Asset Stripping” by the strategic partner.
- Strategic Disinvestment of Oil PSUs is seen by some experts as a threat to National Security since Oil is a strategic natural resource and possible ownership in the foreign hand is not consistent with our strategic goals.
- Disinvestment affects labour forces’ social security.
- The depressed state of the markets and the paucity of reasonable buyers would land in a bad deal.
- Using funds from disinvestment to bridge the fiscal deficit is an unhealthy and short term practice.
- Complete Privatisation may result in public monopolies becoming private monopolies, which would then exploit their position to increase costs of various services and earn higher profits
