Department of Disinvestment used to be an independent ministry in the cabinet. However, the ministry in 2004 was merged into the Ministry of Finance but remained an independent department. Later in 2016, under the BJP-led Government, the Department of Disinvestment was renamed as Department of Investments and Public Asset Management . CAs, experts and businesses can get GST ready with ClearTax GST software & certification course.
With privatization the government sells an entire subsidiary or a majority stake, which results in the government losing its control and ownership. However, with disinvestment the government sells only a minor stake to a private entity and holds the majority stake with itself, which ensures that the control and ownership remains in their hands. Disinvestment in India has progressed at a snail’s pace, considering the rapid strides in privatization that developing countries in East and Southeast Asia, Latin America, Central, and Eastern Europe have made by transfer of ownership of productive assets to private investors, especially in the area of basic infrastructure and financial services. Thatcher was of the firm belief that the government had no business to be in business and had led the UK in the 1980s to privatize 670 of its public sector enterprises. This policy was in tune with the theory of New Public Management which was gaining prominence. A Disinvestment Commission was established in 1996 by the government of India, to carefully evaluate the withdrawal of the public sector from non-core, non-strategic areas and assure workers of job security and opportunities for retraining and re-employment.
The Government has appointed Deloitte and SBI Capital markets as their transaction advisors, which is the first step of the disinvestment process. A divestiture strategy can benefit organizations that have a diverse range of assets spread across multiple locations. It offers transparency and valuable insights into business operations, helping organizations identify which of their assets are ready for divestment and are most likely to deliver maximum value from the divestiture.
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When implemented right, a divestment strategy allows an organization to free up funds and reallocate these toward the most profitable areas of business. Some organizations may also opt to reinvest the released funds in shares or use them to acquire new assets better share application account is in the nature of aligned with their core competencies. Under the equity carve-out scenario, a parent company sells to the public through a stock exchange a certain amount of equity in its subsidiary. Equity carve-outs are tax-free sales, including cash exchange for shares.
Critique of India’s Disinvestment Policy
Provided that nothing contained herein shall apply to any change incontrol which takes place in pursuance to a45 passed by the shareholders in a general meeting. Provided that, in case of a partnership firm,the share of such promoter or his relative, as the case may be, in suchfirm should not be less than 50%.]. The Board shall after affording reasonableopportunity to the concerned parties and after considering all the relevantfacts including the recommendations, if any, pass a reasoned order on theapplication undersub-regulation within 30days thereof.
Why do companies divest?
Through divestiture, a company can eliminate redundancies, improve operational efficiency, and reduce costs. Reasons why companies divest part of their business include bankruptcy, restructuring, to raise cash, or reduce debt.
PSUs contribute to public finances through dividends and disinvestment can reduce this important source of finance. Majority disinvestment is the one in which the government, post disinvestment, will retain a minority stake in the company. The channelization of resources for more productive avenues and large-scale infrastructure development projects by reducing capital expenditures on existing non-performing assets or loss-making firms. Only the government can ensure that the market system is sufficiently regulated and that private enterprises are not solely motivated by profit and are concerned about the interests of their customers.
Challenges of Disinvestments
The EY India Corporate Divestment Study 2021 highlights that organizations are increasingly looking at divestments as a way to build funds from non-strategic assets in the light of COVID-19. As much as 74% of organizations say they intend to divest in the next two years, while 40% plan to accelerate their divestment strategy. Leaders and decision-makers are going to be instrumental in planning and successfully executing a divestment strategy to meet business needs. As organizations expand, they sometimes find it difficult to pay equal attention to all of their business arms.
Shareholder, by a letter of offer or by block-transferto the existing shareholders in control in accordance with the decisionpassed by a special resolution. Market value in such cases shall be determinedin accordance with Regulation 20. For the purposes of this Regulation where thereare two or more persons in control over the target company, the cessorof any one such person from such control shall not be deemed to be a changein control of management nor shall any change in the nature and quantumof control amongst them constitute change in control of management. The acquirer shall, in case the escrow account consists of securitiesempower the merchant banker to realise the value of such escrow accountby sale or otherwise provided that if there is any deficit on realisationof the value of the securities, the merchant banker shall be liable tomake good any such deficit. The merchant banker shall ensure that the contents of the publicannouncement of offer as well as the letter of offer are true, fair andadequate and based on reliable sources, quoting the source wherever necessary.
Disinvestment In India: Objectives And Importance
The public announcement of offer to acquire the shares of thetarget company shall be made only when the acquirer is able to implementthe offer. For the purpose of computing the percentage referred to sub-regulation59bandthe voting rights as atthe expiration of 59c days after the closure of the public offer shall be reckoned. Governments would often sell stakes in the public sector companies in order to raise revenue.
Disinvestment of a percentage of shares owned by the Government in public enterprises emerged as a policy option in the wake of economic liberalization, globalization, and structural reforms launched in 1991. Hence, the need for the Government to get rid of these units and to concentrate on core activities was identified. The Government also took a view that it should move out of non-core businesses, especially the ones where the private sector had now entered in a significant way. Finally, disinvestment was also seen by the Government to raise funds for meeting general/specific needs. At the current market price, the stake of the government in SCI is valued at more than Rs 3000 crore. The divestment process in SCI is being implemented through a competitive bidding route.
It recommended the sale of equities or outright sale of several PSE’s, including Air India. Disinvestment is the act of selling the equity shares of public enterprises to the private sector. Shipping Corporation of India – The government on 22nd December 2020 invited bids to sell its 63.75 percent stake in SCI, along with transfer of the management control. The deadline to submit the initial bid had been set for 13th February 2021. The stock has zoomed around 75 percent over November 2020, on reports that several domestic and global players are in the fray to participate in the privatization process.
- The acquirer shall, along with the application referred to undersub-regulation,pay a fee of 27a to the Board, either by a bankers chequeor demand draft in favour of the Securities and Exchange Board of India,payable at Mumbai.
- The basic meaning of disinvestment is to sale or liquidate assets, usually by the government.
- Using funds from disinvestment to bridge the fiscal deficit is an unhealthy and a short term practice.
- However, due to political instability, the plans remained unimplemented.
- The provisions of these Regulations shall mutatis-mutandisapply to the competitive bid made under sub-regulation.
A Disinvestment Policy allowed the Government to eliminate these units and focus on core activities instead. As a result, it moved out from non-core enterprises, especially those wherein the private sector has now emerged as a prominent player. The new policy clearly highlights the distinction between privatization and disinvestment. While sales of equity greater than 50%, maybe even 100%, is privatization, any tinkering here and there constitutes disinvestment. Via strategic sales, privatization was envisaged only in non-strategic areas.
on Disinvestments in India
Citing the pandemic, the Government is unlikely to execute any planned disinvestments. The market value of assets has been adversely affected by the reduced economic activity due to multiple complete lockdowns imposed in the country. Any efforts by the Government to liquidate assets will not yield the potential market value, undermining the receipts from the disinvestment. This is precisely why theIBCproceedings had been suspended for most of the fiscal year 2021. The amount of disinvestment receipts this year sums up to Rs 21,303 crores (66%) as against the revised budgeted receipts of Rs 32,000 crores. The disinvestment will involve a 100 percent sale of the Government’s shareholding in the company, including Air India Express Limited and Air India SATS Airport Services.
- From this perspective, disinvestment may not be the most effective alternative.
- Further, low returns from PSUs had an adverse effect on the country’s gross national savings and national gross domestic product.
- Often known as the divestiture, it is the reverse of an acquisition which is generally achieved when the asset or division of the company does not meet expectations.
- The key role of a PSU is to maintain competition in the sector and limit excessive monopoly.
Every company whose shares are held by the persons referred to insub-regulationshall, within three months from the date of notification of theseRegulations, disclose to all the stock exchanges on which the shares ofthe company are listed, the aggregate number of shares held by each person. https://1investing.in/ The primary requirement for the divestment policy is to define the priority sectors for the government based on its strategic interests. Considering the limited resources with the government and its diverse role, it is evident that the government has a low capacity to manage PSUs.