Background
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Divestment in India is a by-product of the economic reforms initiated in 1991.
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Divestment Commission was set up in 1996 to examine and suggest withdrawal from non-strategic sectors
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The department of divestment was formed in December 1999, which later was made the ministry of disinvestment in September 2001. In May 2004, it was shifted to the ministry of finance as one of the departments under it.
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Now, the department has been renamed as Department of Investment and Public Asset Management (DIPAM)
Definitions:
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Disinvestment of PSUs simply means withdrawal of government’s investment in public sector undertakings.
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Strategic Disinvestment involves a sale of 50% or more in a PSU along with transfer of management control.
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IPO means the offering of a company’s shares to the public which results in a change of ownership. Post-IPO a company gets listed on a stock exchange.
Why divestment is good?
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Reduces financial burden on the Government.
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Improves public finances.
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Introduces competition and market discipline.
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Funds growth.
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Encourages wider share of ownership.
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Depoliticizes non-essential services.
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Improves efficiency with more efficient private management.
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Allows government to focus on core and crucial tasks.
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Reduce government’s burden to consistently support and fund sick units.
Why divestment is not so good?
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Government’s dividend income will decline and hence fiscal deficit will increase.
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If government’s role is reduced, the goal of equal distribution of resources for all classes cannot be achieved.
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In future, this might also lead to private monopolies
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Sale of profitable PSUs is like selling family’s silver for short term gain and long term loss for ex. a privatised LIC might be reluctant to meet long-term financing needs for infrastructure projects with long gestation periods.
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Government sometimes undervalues the companies to favour some industrialists. This was seen in the sale of Videsh Sanchar Nigam Limited (VSNL) and is criticised for strengthening crony capitalism.
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Disinvestment ignores social justice as private players are not bound to give reservations to vulnerable sections. Further, they fire large numbers of workers and are reluctant to invest in backward regions, unlike PSUs.
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Privatization of Public sector banks may not yield desired results. Private banks are driven by profit motives, and they are also suffering from corruption as seen in the recent Yes Bank case. Further, private players may shut down loss-making rural branches unlike public banks who also work for social welfare.
Land Bank of loss making PSUs
The government is looking at creating a bank from the land available at loss-making state-run enterprises as part of its efforts to sell these entities and push the overall disinvestment programme. The idea is to create a special purpose vehicle (SPV) which will hold all the land resources from loss-making public sector enterprises. The SPV then can give the land for other projects which may come up.
National Investment Fund: In 2005, the government formed a National Investment Fund or NIF, to which the proceeds of disinvestment were channelled. The mandate of the Fund, managed by professional investment managers, was to utilise 75% of annual funds in social sector schemes to promote education, health and employment. But with the economic slowdown of 2008-09, and later a drought, this was waived for three years — and later, in 2013, restructured to provide flexibility in using the Fund.
It was decided that the NIF would be utilized for the following purposes:
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Subscribing to the shares being issued by the CPSE including PSBs and Public Sector Insurance Companies, on rights basis so as to ensure 51% ownership of the Government in those CPSEs/PSBs/Insurance Companies, is not diluted.
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Preferential allotment of shares of the CPSE to promoters as per SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 so that Government shareholding does not go down below 51% in all cases where the CPSE is going to raise fresh equity to meet its Capex programme.
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Recapitalization of public sector banks and public sector insurance companies.
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Investment by Government in RRBs/IIFCL/NABARD/Exim Bank.
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Equity infusion in various Metro projects.
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Investment in Bhartiya Nabhikiya Vidyut Nigam Limited and Uranium Corporation of India Ltd.
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Investment in Indian Railways towards capital expenditure.