Home Blog Strategic Disinvestments of Public Sector Undertakings

Strategic Disinvestments of Public Sector Undertakings

By Vishnu Pillai

Disinvestment is the opposite of Investment. In investment, one acquires an earning asset with the help of money.  Contrarily, disinvestment means the sale of earning assets at one’s disposal in order to generate cash. India today has 264 operating central PSU’s.

Is it worth staying on a sinking boat when you have a life jacket? Probably No. Then why to hold on to a firm which eats on to the pie of another well-governed profit making firm?

If by strategic disinvestment the enterprise is privatized then the control shifts from the government to a private entity which may help in efficient functioning. Even if the government retains control of the unit, the induction of private ownership will increase the accountability of management.

The industrial policy adopted by the government in 1991 had reduced the role of PSU’s. The government was intended to run the PSU’s on sound commercial principles and the sick PSU’s were to be referred to BIFR for examining their viability. It was decided that government organization can typically disinvest an asset as a strategic move for the company, for raising capital to meet its needs, to encourage wider share of ownership and reduce the burden on the government. According to the proponents, this progressive & strategic expansion of PSU’s was initiated to attain the goal of moving towards the socialistic pattern of society.

But like a coin, disinvestments too have another side, a critical one. The deprecator term disinvestment as selling the family silver to meet daily expenditure. They believe disinvestments reduced current account deficit but lose robust funds like dividends. In 2015-16 the government received Rs.36,000 Crore from dividends which itself was 50% of the targeted amount of Rs. 69,500 Crore to raised from disinvestments. Even wider ownership claim by the government failed since large corporates and financial institutions benefitted with the disinvestment than the common man. Moreover, the most of the disinvestments funds received were used to fund fiscal deficit.

So before jumping the “Disinvestment” trigger, the government should restructure PSUs to enhance the value of shares and increase sale proceeds. They should focus on areas like corporate governance, financial restructuring, and business & technological restructuring. The process of disinvestment should take into account the conditions in the capital market and not result in “crowding out” resources available for the private sector. The government has lowered the target by 19% in the last budget. Let’s hope this is a beginning towards a better and rational approach towards disinvestments.

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