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Disinvestment | UPSC 

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UPSC Syllabus: Mains – GS Paper III – Indian economy

Context: Union Cabinet has cleared approval for the strategic disinvestment of IDBI bank. It is based on the budget announcement.

Decision By: Cabinet Committee on Economic affairs. It is chaired by Prime Minister.

Background: Finance Minister Nirmala Sitharaman earlier announced in the budget to raise up to rupees 1.75 lakh crore through privatisation of Public sector banks and institutions.

Objective: to get new investments in the entity from the expected buyer. It would raise bank’s business potential.

Disinvestment is the action of an organization or government selling or liquidating an asset or subsidiary. Disinvestment also refers to capital expenditure (CapEx) reductions, which can facilitate the re-allocation of resources to more productive areas within an organization or government-funded project.

  • In disinvestment, also called divestment, there is no change in the management of PSUs from the public to private hands as the government still holds majority equity (51 percent).
  • Even when the government’s share falls below 51 percent, the rest of the equity may be sold in such a way that no one institution or individual holds enough stake to take control of the management.
  • Disinvestment is primarily a money-raising exercise. The proceeds of disinvestment are treated as non-debt creating capital receipts.

Drawbacks of Disinvestment

  • Government shareholding in PSUs is a public asset which should not be liquidated to meet the immediate needs.
  • PSUs contribute to public finances through dividends and disinvestment can reduce this important source of finance.
  • PSUs act as a check on private enterprises and safeguard the wider public interests in the market. For example, in the absence of PSUs, private enterprises may form a cartel.
  • When the government goes for a strategic sale/privatization, there are chances of a PSU being sold off at a lower value to a private entity which can be against the larger public interest.

Types of Disinvestment

Disinvestment of a minority stake in PSUs can be done in the following ways:

  • Initial Public Offering (IPO): an offer of shares by an unlisted PSU to the public for the first time.
  • Follow-on Public Offering (FPO): also known as Further Public Offering, it’s an offer of shares by a listed PSU.
  • Offer for sale (OFS): shares of a PSU are auctioned on the platform provided by the stock exchange. This mode has been used extensively by the government since 2012.
  • Institutional Placement Programme (IPP): under this, only selected financial institutions are allowed to participate and the government stake is offered to only such institutions. E.g., mutual funds, insurance, and pension funds such as LIC etc.
  • Cross-holdings: in this method, one listed PSU takes up the government stake in another listed PSU.
  • CPSE Exchange Traded Fund (ETF): Through this route, the government can divest its stake in various PSUs across diverse sectors through a single offering. This mechanism allows the government to monetize its shareholding in those PSUs which form part of the ETF basket.

Disinvestment of a majority stake in PSUs:

  • Strategic sale: it is the sale of a substantial portion of government shareholding, 50 percent or higher, in a PSU, along with the transfer of management control.
  • Privatization: it’s a type of strategic sale in which the government divests its entire shareholding, along with the transfer of management control, to a private entity.
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