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In business, disinvestment means to sell off certain assets such as a
manufacturing plant, a division or subsidiary, or product line. Some
people use the term divestiture, or to divest when discussing
disinvestment.
For example, an electric generator manufacturer might sell off its
consumer generator product lines and manufacturing facilities in
order to raise money that can be used to expand its industrial
generator product line.
Another example is a consumer products company selling off a
profitable division that no longer meets its long range goals. The
proceeds from this disinvestment are then used to improve the
company͛s financial position by reducing its debt.

Investment refers to conversion of money or cash into securities,

debentures, bonds or any other claims on money. At the same time,
disinvestment involves the conversion of money claims or securities
into money or cash.

Disinvestments, also known as divestments, are processes utilized by

companies when there is a need or desire to initiate a reduction
in capital investment. Essentially functioning as the polar opposite of
an investment, the process of divestment involves selling off current
investments in order to generate assets that can be used to better
advantage in some other manner. Businesses sometimes
use disinvestment as a means of changing the direction of the
company in order to meet changing consumer needs and remain
competitive.

One of the easiest ways to understand divestment is to think in

terms of a company that has successfully produced a product for
many years. However, changing technology is shrinking the demand
for the company͛s product. A new product is developed that is
anticipated to recapture the interest of consumers. However, this
will leave the company with several physical facilities and a great
deal of equipment that is not required for the production of the new
product.

In order to generate revenue that will aid in the manufacturing of the

new product, the company will undergo a period of disinvestment.
The plants and other facilities that are no longer required for
production are sold off, along with the now obsolete equipment. By
generating income from the sale of these divested holdings, the
company creates resources that constitute a capital investment in
the new product.

At times, a company may choose to sell off a subsidiary or business

unit as part of a disinvestment strategy. Doing so allows the
company to begin the migration from focusing on one market sector
to a different sector that holds more promise. In some
cases, disinvestment involves selling the business unit to another
company. At other times, the business unit is spun off into a separate
company altogether.

Disinvestment can also occur when there is a decision to make

changes in the regulation of an industry. Perhaps the most well
known example of this type of disinvestment application would be
the deregulation of the communications industry in the United
States during the 1980͛s. As part of the process, the Bell System was
completely divested and emerged as eight different entities: the new
AT&T, and seven regional Bell companies that were known
collectively as the Baby Bells.

Because disinvestment does involve the sale of resources, companies

often look very closely at the process before actually implementing
any type of divestiture action. It is important to make sure that the
investments that are released are not likely to be required in the
future, and that the revenue generated from the sale of the
investments is highly likely to result in increased profitability for the
company in the long run.

     

The following are the main objectives of disinvestment policy of

the government.
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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 an
active tool to reduce the burden to financing the public sector
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The functioning of many public sector units (PSUs) has been

characterized by low productivity, unsatisfactory quality of goods,
excessive manpower utilization, inadequate human resource
development and low rate of return on capital. For instance,
between 1980 and 2002, the average rate of return on capital
employed by PSUs was about 3.4% as against the average cost of
borrowing, which was 8.66%. Disinvestment (or divestment) of the
PSUs has therefore been offered as one of the solutions in this
context.
Disinvestment involves the sale of equity and bond capital
invested by the government in PSUs. It also implies the sale of
government͛s loan capital in PSUs through securitization. However, it
is the government and not the PSUs who receive money from
disinvestment.
The fixation of share/bond price is an important aspect of
disinvestment. Now, the Disinvestment Commission determines the
share/bond price. Disinvested shares are listed, quoted and traded
on the stock market. Indian and foreign financial institutions, banks,
mutual funds, companies as well as individuals can buy disinvested
shares / bonds.
 Disinvestment is generally expected to achieve a greater inflow
of private capital and the use of private management practices in
PSUs, as well as enable more effective monitoring of management
discipline by the private shareholders. Such changes would lead to
an increase in the operational efficiency and the market value of the
PSUs. This in turn would enable the much
needed reveue eertio by the government and help reduce
deficit financing.
However, to date the market experience has been otherwise.
The large national budgetary deficit on revenue account has been
increasing. The government has not used the disinvestment
proceeds to finance expenditure on capital account; i.e. the
disinvestment policy has resulted in capital consumption rather than
generation. Administrative costs of the disinvestment process have
also been unduly high.
The actual receipts through disinvestment have often fallen far
short of their target .During the period 1991-92 to 2002-2003, the
government had targeted the mobilization of about Rs. 78,300 crores
through disinvestment, but it could actually mobilize only Rs. 30,917
crores.

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A number of problems and issues have bedevilled the disinvestment
process. The number of bidders for equity has been small not only in
the case of financially weak PSUs, but also in that of better-
performing PSUs.Instances of insider trading of shares have also
come to light. All this has led to low valuation or under pricing of
equity.
Further, in many cases, disinvestment has not really changed the
ownership of PSUs, as the government has retained a majority stake
in them. There has been some apprehension that disinvestment of
PSUs might result in the crowding out of private corporate (through
lowered subscription to their shares) from the primary capital
market.
An important fact that needs to be remembered in the context
of divestment is that the equity in PSUs essentially belongs to the
people. Thus, several independent commentators have maintained
that in the absence of wider national consensus, a mere government
decision to disinvest is not enough to carry out the sale of people.s
assets. Inadequate information about PSUs has impeded free,
competitive and efficient bidding of shares, and a free trading of
those shares. Also, since the PSUs do not benefit monetarily from
disinvestment, they have been reluctant to prepare and distribute
prospectuses. This has in turn prevented the disinvestment process
from being completely open and transparent.
It is not clear if the rationale for divestment process is well-
founded. The assumption of higher efficiency, better / ethical
management practices and better monitoring by the private
shareholders in the case of the private sector all of which
supposedly underlie the disinvestment rationale is not always borne
out by business trends and facts.
Total disinvestment of PSUs would naturally concentrate
economic and political power in the hands of the private corporate
sector. While the creation of PSUs originally had economic, social
welfare and political objectives, their current restructuring through
disinvestment is being undertaken primarily out of need of
government finances and economic efficiency.
Lastly, to the extent that the sale of government equity in PSUs is
to the Indian private sector, there is no decline in national wealth.
But the sale of such equity to foreign companies has far more serious
implications relating to national wealth, control and power,
particularly if the equity is sold below the correct price!
If the disinvestment policy is to be in wider public interests, it is
necessary to examine systematically, issues such as - the correct
valuation of shares, the crowding out possibility, the appropriate use
of disinvestment proceeds.

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The following are the three methods adopted by the Government of
India for disinvesting the Public sector undertakings. There are three
Methods of valuation approved by the Disinvestment Commission 

  ]   This will indicate the net assets of the
enterprise as shown in the books of accounts. It shows the historical
value of the assets. It is the cost price less depreciation provided so
far on assets. It does not reflect the true position of profitability of
the firm as it overlooks the value of intangibles such as goodwill,
brands, distribution network and customer relationships which are
important to determine the intrinsic value of the enterprise. This
model is more suitable in case of liquidation than in case of
disinvestment.
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is generally based on the profits actually earned or anticipated. It
values a company on the basis of the underlying assets. This method
does not consider or project the future cash flow.

 
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incremental cash flows are forecasted and discounted into present
value by applying cost of capital rate. The method indicates the
intrinsic value of the firm and this method is considered as superior
than other methods as it projects future cash flows and the earning
potential of the firm, takes into account intangibles such as brand
equity, marketing & distribution network, the level of competition
likely to be faced in future, risk factors to which enterprises are
exposed as well as value of its core assets. Out of these three
methods the Discounted cash flow method is used widely though it is
the most difficult.

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The government on Friday13 November

2009 said it is expecting to raise about Rs
8,100 crore from the five per cent stake
sale in power PSU NTPC through a
Follow-on Public Offer (FPO).

We anticipate more than three times

what we got last time (at the time of IPO
in 2004), Disinvestment Secretary Sunil
Mitra said in New Delhi.

In 2004, NTPC had raised about Rs 2,700

crore through the IPO when the government diluted 5.24 per cent of
its stake, he said.

The Cabinet Committee on Economic Affairs (CCEA)last month had

approved the stake sale in NTPC.

After stake dilution, the government's holding in NTPC would come

down to 84.5 per cent from the current 89.5 per cent.

There are alsoTalks on for selloff in 60 CPSUs: said the Disinvestment

secretary on 13 November 2009

The disinvestment department said it is in talks with administrative

ministries of 60 CPSUs, including SAIL, BSNL, Coal India, for selling
government stake.

The NTPC stock rose 0.37 per cent to Rs214.90 in late afternoon
trade on the Bombay Stock Exchange (BSE), after gaining as much as
1.63 per cent midway through trading.
The government is focusing on divesting stake in PSUs to curb its
burgeoning fiscal deficit. India has run up a high deficit this year due
to its spending to counter the effects of the global financial crisis.

In his first interactions with the media, disinvestment secretary Sunil

Mitra said, We are in interactions with the ministry of steel for SAIL,
we are in interactions with the coal ministry on coal India. On BSNL
also, we are in interaction with the IT and communication ministry.

However, Mitra refused to set a time-frame for the process. A lot of

factors have to be taken into consideration before the process is set
in motion, he said.

The government recently stated that profitable unlisted PSUs should

hit capital markets and all profitable listed PSUs should increase their
public holding to at least 10%.

Mitra informed that there are 10 listed PSUs where the public
holding is less than 10% and around 50 state-run firms which are
profitable but unlisted.

We are in interaction on a large number of these 60 companies with

their administrative ministries. We are in interaction with them but it
does not mean that we are close to divesting them... All this is a
function of a number of factors, he said.

To a query whether the opposition by Trinamool Congress chief

Mamata Banerjee and DMK would mean that PSUs located in West
Bengal and Tamil Nadu would not be on the priority list of
disinvestment, Mitra said there was no such guidance from the
government.


 


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