Disinvestment demystified

Disinvestment (sometimes referred to as divestment or deivestiture) refers to the action of an organization or government to sell or liquidate, wholly or partially, an asset or subsidiary. It is the opposite of an investment. There could be several motives for disinvestment:

• A firm may divest (sell) businesses that are not part of its core operations so that it can focus on its core operations. For example, selling of cement business by L&T.
• Another motive for divestitures is to obtain funds by selling one of its businesses in exchange for cash. For example, Unitech selling its Hotel properties to generate cash.
• A third motive for divesting is that a firm's "break-up" value is sometimes believed to be greater than the value of the firm as a whole. This process is sometimes referred to as 'Spin off'.

The term 'Disinvestment' is seen in the Indian context from the point of view of divestment of Govt. stake in state run enterprises. The markets were visibly upset when there was no concrete announcement on divestment in the FM's budget speech. The history of disinvestment goes back to the liberalisation of the Indian economy in 1991. The Department of Disinvestment was set up as a separate department on 10th December,1999 and was later renamed as Ministry of Disinvestment from 6th September,2001. From 27th May, 2004, the Department of Disinvestment is one of the Departments under the Ministry of Finance. Total proceeds from stake sale in state run enterprises till 2007-08 is Rs.51,600 crores. There are diverse views on the use of funds generated from divestment.

The major advantages perceived are:

• Public investment in PSU's would make them more accountable, thereby increasing profitabilty and resource mobilisation.
• The proceeds of divestment could be used to improve urban/ rural infrastructure.
• Govt. protection for its labour force is a hindrance in improving productivity of labour.

On the other hand, the disadvantages of Divestment are:

• The proceeds may be used to fund fiscal deficit, leading to overspending by Govt. on unproductive purposes.
• Profit making PSU's are the highest dividend payers to the Govt., thus a stake sale in them could dent Govt.'s ability to generate huge cash flows in the future.

The endless debate continues. It would be in the interest of the nation if disinvestment is pursued selectively, with the objective of improving productivity of PSU's, to bring them at par with the Private sector enterprises thus creating a healthy competitive environment.