DEFINITION:

Disinvestment refers to the action of an organization or the government in selling or liquidating an asset
or subsidiary. In simple words, disinvestment is the withdrawal of capital from a country or corporation.
Some of the salient features of disinvestment are:

• Disinvestment involves sale of only part of equity holdings held by the government to private
investors.
• Disinvestment process leads only to dilution of ownership and not transfer of full ownership.
While privatization refers to the transfer of ownership from government to private investors.
• Disinvestment is called as ‘Partial Privatization’

PROBLEMS OF PUBLIC SECTOR UNDERTAKINGS:

The most important criticism levied against public sector undertakings has been that in relation to the
capital employed, the level of profits has been too low. Even the government has criticized the public
sector undertakings on this count. Of the various factors responsible for low profits in the public sector
Undertakings, the following are particularly important:-
• Price policy of public sector undertakings
• Under utilization of capacity
• Problem related to planning and construction of projects
• Problems of labor, personnel and management
• Lack of autonomy

REASONS FOR DISINVESTMENT

The public sector in India at present is at cross roads. The new economic policy initiated in July ±
1991, clearly indicated that the public sector undertakings have shown a very negative rate of return on
capital employed. On account of this phenomenon many public sector undertakings have become
burden to the government. They are in fact turning out to be liabilities to the government rather than
being assets.

This is a sector which the government clearly wants to get rid off. In this direction the government has
adopted a new approach to reform and improve the public sector undertakings performance i.e.’
Disinvestment policy'. This has gained lot of importance especially in latter part of 90s. At present the
government seriously perceives the disinvestment policy as inactive tool to reduce the burden to financing
the public sector

OBJECTIVE OF THE DISINVESTMENT:

Privatization intended to achieve the following:

• Releasing large amount of public resources
• Reducing the public debt
• Transfer of Commercial Risk
• Releasing other tangible and intangible resources
• Expose the privatized companies to market discipline
• Wider distribution of wealth
 • Effect on the Capital Market
• Increase in Economic Activity

MAJOR ISSUES IN DISINVESTMENT

1) Profitability:
The return on investment in PSE’s, at least for the last two decades, has been quite poor.

The PSE survey shows PSE’s as a whole, never earned post tax profit that exceeds 5% of total sales or
6% of capital employed , which is at least 3% points below the interest paid by the government on its
borrowings.

2) Recurring budgetary support to PSE’s:

Despite huge investment in the public sector, the Government is required to provide more funds every
year that go into maintaining of the unviable/week PSE’s

3) Industrial sickness in PSU’s:

To save the PSU’s from sickness, the government has been sanctioning restructuring packages from time
to time.

4) Employees issue:
Of the 1.6 million jobs added in the organized sector 1 million, or two third, were added in the private
sector during the year 1991 to 2000.

This indicates that the private sector has become the major sources for incremental employment in the
organized sector of the economy over the last decades.