Disinvestment Decoded

Nirupam Banerjee says........

Disinvestment Decoded
What is disinvestment?
Disinvestment is selling off by the government, a part of the government’s stake in a Public Sector Undertaking (PSU’s). In simple words, the govt. is selling part of the company to a public/private individuals or bodies in order to earn money.
For example, suppose a company has a total of 100 shares. If all these 100 shares are owned by the govt., then the ownership of the govt. in that particular company is 100 percent. Now the govt. is in need of money. So it wishes to sell a part of the total shares (100) to the public/private. Let’s say, it wishes to sell 20 shares, which is 20 percent of the total shares. So we can say that the govt. wishes to disinvest (divest) 20 percent equity shares of the company.
Why disinvest?
There are many reasons for disinvestment but the most important reason is to fight against fiscal deficit in the annual budget of the country. Another reason is that the company requires more money for expansion. Disinvestment is a process through which the goodwill of a company is en cashed. Disinvestment provides a huge financial support to the already bleeding govt. accounts. In 2010-11, the govt. targets revenue of around Rs.40000 crore out of disinvestment. Moreover, disinvestment is not a new thing and it is going on, since1991, for the last two decades, with the government making Rs.58000 crore in the last two decades.
Which PSU’s are going to be divested?
There is a basic criteria for the divestment of PSU’s. The PSU’s which are earning profit consecutively for the last three fiscal years are eligible for disinvestment. There is a bouquet of 65-70 govt. PSU’s that are eligible for divestment (according to the financial year 2008-09). However this list may increase or decrease depending upon the financial results of 2009-10. Some of the companies that are lined up for divestment are SAIL, Coal India Limited, Engineers India etc.
Advantages of disinvestment
There are various advantages of disinvestment. The first is that, it helps in fighting deficit budgeting. After disinvestment the financial deficit in the budget is limited to 5.5 percent in 2010-11 as compared to 6.7 percent of 2009-10. So, it is clearly evident that divestment reduces the financial burden of the government. Apart from this, divestment increases the enterprise value significantly along with providing stability to the market. Moreover, people get the opportunity to enjoy profit by buying shares in these companies. Due to disinvestment, there is a significant growth in sales, assets, dividend, profit after tax, market capitalisation and salary of the employees.
Disadvantages of disinvestment
The basic disadvantage of divestment is that the govt. is losing stake in its companies. It can disinvest upto 49 percent equity shares but what will happen after that is the question that is being asked by economist. Disinvestment is a big tool in the hands of the govt., but at the same time it is also the only tool to earn revenue apart from the direct and indirect routes (Read, direct and indirect taxes). After selling 49 percent equity shares if it wants to sell more; then it will have to open the road for privatisation of some important govt. assets which will affect the overall economy of the country in the long run.
Consequence of disinvestment
Disinvestment was perhaps the last resort of the govt. in order to fight the fiscal deficit. But in the long run its effects can prove to be very dangerous and there is a possibility that it can change the very nature of Indian economy.