Disinvestment

Disinvestment

Disinvesting is a strategy by which an investor offloads or disposes of an asset or a partial stake in the asset. Disinvesting is an exit strategy that means taking out an existing investment. Disinvestment policies are commonly followed by governments to allocate resources more efficiently. For example, the Indian government announced that they will carry out disinvestment in BPCL, a government oil and gas subsidiary.

Disinvestment by the government means the market activity through which the Government conducts the sale or liquidation of Government-owned assets. Such assets usually refer to the Government’s ownership stake in Central Public Sector Enterprises (CPSEs) and state public sector enterprises (SPSEs), but are not limited to that. Government assets also include project undertakings and other fixed assets.

From a general point of view, the disinvestment in India can be categorized in the following manner:

1. Organizing the market segment: A company may disinvest in one of its underperforming divisions, as other divisions continue to deliver higher profitability while demanding similar resources and expenditures. Such a disinvestment strategy is to shift the focus of the company on the divisions performing well and to scale them up.
2. Offloading unnecessary assets: A company is cornered into adopting this strategy when the acquisition of an asset does not fit its long-term strategy. Companies post-merger are stuck with assets they do not intend to use. A company may choose to disinvest in acquired assets and instead focus on its competitive abilities.
3. Social and legal considerations: A company may have to disinvest if they cross a certain threshold limit in the market holding to enable fair competition. Another example is an endowment fund pulling out of investments in energy companies given environmental concerns.

From a government point of view, the disinvestment strategy can be of the following types:

• Minority Disinvestment: The Government wishes to retain managerial control over the company by maintaining the majority stake (equal to or more than 51 percent). Because public sector enterprises cater to the citizens, the Government needs to be able to influence company policies to further the interests of the general public. The Government generally auctions the minority stake to potential institutional investors or announces an offer for sale (OFS) inviting participation by the public.
• Majority Disinvestment: The Government gives up the majority stake in a government-held company. After the disinvestment, the government is left holding a minority stake in the company. Such a decision is based on strategic grounds and policies of the Government. Typically, the majority of disinvestments are done in the favor of other public sector enterprises. For example, Chennai Petroleum Corporation Limited, formerly known as Madras Refineries Limited is a group company of Indian Oil Corporation after disinvestment by the Government. The idea is the consolidation of resources in a company which ultimately leads to operational efficiency.
• Strategic Disinvestment: The government sells off a PSU to usually a non-government, private entity. The intention is to transfer the ownership of a non-performing organization to more efficient private players in the market and reduce the financial burden on the government balance sheet.
• Complete Disinvestment/Privatisation: 100 percent sale of a Government stake in a PSU leads to the privatization of the company, wherein complete ownership and control are passed onto the buyer.

Means of Disinvestment

Disinvestment of a minority stake in a Government-owned entity is done in one of the following ways:

1. Institutional Placement – Government stake is auctioned off to select financial institutions
2. Exchange-Traded Funds (ETFs) – Monetize shareholding simultaneously across multiple sectors and companies that form a constituent of the ETF. For example, Bharat-22 is an ETF comprising 22 companies (19 PSUs) with a Government stake in them.
3. Cross-holding – Listed PSUs are allowed to buy a Government stake in another PSU