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What is disinvestment?

In general terms Disinvestment(Dis-investment) is simply selling the equity(share) invested by the government in Public Sector Enterprises(PSU).PSUs are enterprises which are either owned completely by the government or whose shares are maximum owned by the government(51% or above).Examples include BHEL,ONGC etc. The action of an organization or government selling or liquidating an asset or subsidiary. Also known as "divestiture Disinvestments, also known as divestments, are processes utilized by companies when there is a need or desire to initiate a reduction in CAPITAL

INVESTMENT.

In business, disinvestment means to sell off certain assets such as a manufacturing plant, a division or subsidiary, or product line. Disinvestment is sometimes described as the opposite of capital expenditures. Some people use the term divestiture, or to divest when discussing disinvestment.

Why Disinvestment ?
If there is no progress achieved by the PSU or if there are no profits obtained(some times government may not be able to recover the investment capital also) by it,government sells some part of the equity to private companies.The funds raised by this sale can be used to develop other under performing PSUs. Businesses sometimes use disinvestment as a means of changing the direction of the company in order to meet changing consumer needs and remain competitive. Disinvestment can also occur when there is a decision to make changes in the regulation of an industry

History and Statistics of Disinvestment.


During the fist five year plans government possessed 5 PSUs with investment of Rs 29 crores.At the end of the Seventh Plan in 1990,there were 244 PSUs and the investment in them had gone up to Rs.99,000 crores. The idea of disinvestment first came in 1991-1992.First only a small share of equity in was sold until 2000-2001. During 2000-2001,there were 122 profit making enterprises with a net profit of Rs 19,000 crores.These include NTPC,ONGC,IOC,VSNL etc.111 companies bore losses with a total loss of Rs 12,839 crores.These include Hindustan Fertilizers,the Fertilizer Corporation of India(FCI), Bharat Coking Coal etc.

CURRENT POLICY ON DISINVESTMENT


The policy on disinvestment has been articulated in paragraph 34 of Presidents Address to Joint Session of Parliament on 4th June, 2009 and reads as under:

Our fellow citizens have every right to own part of the shares of public sector companies while the Government retains majority shareholding and control. My Government will develop a roadmap for listing and people-ownership of public sector undertakings while ensuring that Government equity does not fall below 51 %. The Public Sector Undertakings are the wealth of the nation, and part of this wealth should rest in the hands of the people. While retaining at least 51 per cent Government equity in our enterprises, I propose to encourage peoples participation in our disinvestment programme. Here, I must state clearly that public sector enterprises such as banks and insurance companies will remain in the public sector and will be given all support, including capital infusion, to grow and remain competitive.
The Government, on 5th November 2009 has approved the following action plan for disinvesting Government equity in profit making CPSUs : i) Already listed profitable CPSUs, not meeting the mandatory public shareholding of 10%, are to be made compliant; ii) All CPSUs having positive net worth, no accumulated losses and having earned net profit for the three preceding consecutive years are to be listed through Public Offerings, out of Government shareholding or issue of Fresh Equity by the company or a combination of both; and iii) The proceeds from disinvestment would be channelized into National Investment Fund and during April, 2009 to March, 2012 would be available in full for meeting the capital expenditure requirements of selected social sector programmes decided by the Planning Commission / Department of Expenditure. The status quo ante will be restored from April, 2012.

Process of Disinvestment
There are two ways of disinvestment. Transfer of complete management to private enterprises. Modern Food Industries,Bharat Aluminum Company Limited (BALCO),VSNL,Centaur Hotel Airport are examples of this kind. Partial selling of shares Here government sells some part of shares.But still it retains majority of them(51% or higher).This has been adopted in majority of cases.

Advantages of Disinvestment
To achieve greater inflow of private capital. This revenue can be used to compensate the deficit finance. Allows new firms to enter into the market and thus increases competition. Brings the low productivity PSUs back on track thereby improving the quality of goods,eliminating excessive manpower utilization and enabling high profits.

Disadvantages of Disinvestment
Loss of public interests

PSUs are resources of the nation.They belong to the people.By selling them to private companies,government is seriously affecting the people's welfare.
Fear of foreign control Selling equities to foreign companies result in serious consequences shifting the nation's wealth,power and control to outsiders. Issues with workers The jobs of Lakhs of workers in the PSUs will fall in danger by privatization. Less number of bidders Even though government plans to disinvest,there are actually less number of people willing to place their bids. Apart from these,it is the government and not PSUs who receive funds from disinvestment.This raises conflicts between the government and the employment union of the PSU

More than Rs 25,000 cr from disinvestment this year


Disinvestment proceeds of the government could be higher than the estimate of Rs 25,000 crore for 2009-10. The government has already raised Rs 13,621 crore through disinvestment in four public sector companies. The original budgetary target for disinvestment was Rs 1,120 crore for 2009-10. A senior official in the Department of Disinvestment said the government earned Rs 882.51 crore from Rural Electrification Corporation (REC) issue and Rs 8,480 crore from National Thermal Power Corporation (NTPC) follow-on offer. The figures for the two companies have been finalised after issue of shares, said the official. The government raised Rs 2,012 crore through dilution of equity in National Hydro Power Corporation (NHPC) and Rs 2,247 crore from stake sale in Oil India Ltd (OIL). Besides, it got interest income of Rs 5.25 crore from NTPC issue and Rs 1.25 crore from REC. For 2010-11, the government has set a much higher disinvestment target of Rs 40,000 crore. Coal India, Bharat Sanchar Nigam Ltd, Steel Authority of India Ltd and Engineers India Ltd are expected to come up with their public offers next year. Satluj Jal Vidyut Nigam Ltd, earlier scheduled for disinvestment in the current fiscal, will now hit the market in 2010-11.

People's ownership of PSUs


While presenting the Budget for 2009-10, Finance Minister invited people to participate in Government's disinvestment programme to share in the wealth and prosperity of the Central Public Sector Undertakings. Since then, ownership has been broad based in Oil India Limited, NHPC, NTPC and Rural Electrification Corporation while the process is on for National Mineral Development Corporation and Satluj Jal Vidyut Nigam. The Government will raise about Rs.25,000 crore during the current year. Through this process, I propose to raise a higher amount during the year 2010-11. The proceeds will be utilised to meet the capital expenditure requirements of social sector schemes for creating new assets. Listing of Central Public Sector Undertakings improves corporate governance, besides unlocking the value for all stakeholdersthe government, the company and the shareholders. Market capitalization of five companies which have been listed since October, 2004 has increased by 3.8 times from the book value of Rs.78,841 crore to Rs.2,98,929 crore.

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