Get the most updated and recent current affair content on

What is disinvestment?

  • IAS NEXT, Lucknow
  • 02, Feb 2022
Image Not Found

  • Disinvestment is the action of a government or an organisation selling or liquidating an asset or a subsidiary. It is also referred to as divestment or divestiture.
  • In India, disinvestment is an economic policy under which a government sells its stakes in Public Sector Enterprise (PSE) (state owned enterprises).
  • India’s new disinvestment policy is based on the philosophy that PSEs are the wealth of the Nation and this wealth should rest in the hands of the people.

New Disinvestment Policy of 2021:

  • The new disinvestment policy of 2021 was announced as part of the reforms introduced by the Union Budget 2021-2022. The new policy marked a difference for India, as the policy now details out the sectors that have been identified, and lays out the plan India intends to follow for disinvestment.

The Policy has the following objectives:

  1. To minimize the presence of the Central Government in the Public Sector Enterprises and to create new spaces for the private sector.
  2. To initiate economic growth among PSUs, financial institutions with infusion of private funding, technology, and management practices.
  3. The proceeds from the disinvestment will help finance various social sector development

Main Provisions

  1. The Policy is applicable to central public sector undertakings, public sector banks, and public sector insurance companies.
  2. It marks out sectors as ‘strategic’ and ‘non-strategic’.
    1. Strategic sectors have been identified based on criteria such as national security, energy security, infrastructure, availability of important minerals, etc.
    1. The presence of the Indian government in such sectors will be limited, and only the bare minimum presence at the existing public sector commercial enterprise at the holding company will be retained by the government.
    1. Other enterprises will be privatized, subsidized or merged with other PSUs.

The following sectors have been classified as ‘strategic’:

  • Atomic energy, space, and defence.
  • Transport and telecommunication, Power, petroleum, coal, and other minerals.
  • Banking, insurance, and financial services.

Niti Aayog’s Role in the Disinvestment

  • The complete list of central public sector enterprises to be disinvested from the above sectors, will be provided by Niti Aayog with the recommendation of other ministries.
  • Sectors other than the ones mentioned above will be considered as ‘non-strategic’ sectors.
  • These sectors will be considered for privatization or mergers with other PSUs, as and when applicable.

Main approaches to disinvestment

The three main approaches to disinvestment are minority disinvestment, majority disinvestment and complete privatisation.

  1. Minority disinvestment :A minority disinvestment is one such that, at the end of it, the government retains a majority in the company, typically greater than 51 per cent, thus ensuring management control.
  2. Majority disinvestment: In the case of majority divestment, the government retains a minority stake in the company.
  3. Complete privatization: Complete privatization is a disinvestment where 100 percent control of the company is passed on to a buyer.

Value of Central Government shareholding in Central Public Sector Enterprises (CPSEs)

  • A CAG report put out in the year 2020 highlighted that the total paid up capital of 434 covered CPSEs stood at ₹5,45,338 crore as of March 2019. Of this central government holding is about ₹400,909 crore.
  • The long-term loans taken by these 434 CPSEs stood at ₹16,46,888 crore. The market capitalisation of the then 54 listed traded government companies was ₹14,29,111 crore (equity investment being ₹85,041 crore) as on March 31, 2019.

Central Government’s performance been on disinvestment

  1. It has been sub- optimal. The Modi-led government has achieved its disinvestment target (budget estimate) only in two (2017-18 and 2018-19) of the seven years.
  2. In 2019-20, the government had set a disinvestment target of ₹1 lakh crore and the actual receipt was only ₹ 50,000 crore.
  3. Similarly, the government garnered just over ₹ 30,000 crore in the financial year 2020-21 against a budget estimate of ₹2 lakh crore.
  4. For the current fiscal, it has budgeted ₹1.75-lakh crore and so far, disinvestment receipts is about ₹9,291 crore. The government is betting big on the upcoming LIC IPO to help meet its disinvestment target.

Challenges in the disinvestment process

  1. The Sale of profit-making and dividend-paying PSUs would result in the loss of regular income to the Government. It has become just a resource raising exercise by the government. There is no emphasis on reforming PSUs.
  2. The valuation of shares has been affected by the government’s decision not to reduce government holdings below 51 percent. With the continuing majority ownership of the government, the public enterprises would continue to operate with the earlier culture of inefficiency.
  3. The process of disinvestment is suffering from bureaucratic control. Almost all processes starting from conception to the selection of bidders are suffering due to it. Moreover, bureaucrats are reluctant to take timely decisions in the fear of prosecution after retirement.
  4. Strategic Disinvestment of Oil PSUs is seen by some experts as a threat to National Security. Oil is a strategic natural resource and possible ownership in the foreign hand is not consistent with our strategic goals. For example, disinvesting Bharat Petroleum Corporation Limited (BPCL).
  5. Loss-making units don’t attract investment so easily. It depends upon the perception of investors about the PSU being offered. This perception becomes more important in the case of strategic sales, where the amount of investment is very high.
  6. Complete Privatization may result in public monopolies becoming private monopolies, which would then exploit their position to increase costs of various services and earn higher profit.
  7. Using funds from disinvestment to bridge the fiscal deficit is an unhealthy and short-term practice. It is said that it is the equivalent of selling ‘family silver’ to meet short term monetary requirements.

Importance of disinvestment in funding the Budget

  • They are useful in part-funding the deficit.
  • The decision to disinvest is mainly to reduce the fiscal burden and bridge the revenue shortfall of the government.
  • Disinvestment proceeds are mostly used to finance fiscal deficit, finance large-scale infrastructure development, for investing in the economy, for retiring government debt, and for social programmes like health and education.
  • Successful divestment of a loss-making unit also means that the government does not have to fund its losses going forward.


  • In a liberalized economy both private sector and state action play complementary roles in socioeconomic development. It is the duty of the state to ensure that the necessary gaps in governance can be plugged to ensure the flourishing of the private sector and economy.
  • The government should increase the operational autonomy in CPSEs. It can be supplemented by strong governance measures like listing on stock exchanges. It will increase the transparency in their performance.
  • The government must also try to provide the bidders with a fair valuation of the PSUs. It will boost their confidence in the disinvestment process.