Disinvestment is a process in which the public undertaking reduces its portion in equity by disposing its shareholding.

Disinvestment as per SEBI (substantial acquisition of shares) guideline, means the sale by the central government/state government, of its shares or voting rights and/or control, in PSUs. The disinvestment reduces government participation in the company. In India, the new economic policy have given rise to significant focus for privatization of public sector enterprises. Hence, disinvestment is one of the method of privatization, which started in the year 1992. It implies selling of govt. equity shares of public sector units in the market. It is a concrete step towards privatization and liberalization of our economy. Criteria for disinvestment The decision regarding disinvestment or liquidation viewed in the light of following criteria: a) Whether the objectives of the company are achieved b) Whether there is decrease in number of beneficiaries c) Whether serving the national interest will be affected because of disinvestment d) Whether private sector can efficiently operate and manage the undertaking. e) Whether the original rate of return targeted could not be possible to achieve. f) Whether socio-economic objectives lots its purpose

Merits of disinvestment In Private Sector, the decision making process is quick and decisions are linked with the competitive market changes. The disinvestment process would bring in better corporate governance, exposure to competitive, corporate responsibility, improvement in work environment etc. The market participation in capital of PSUs through stock exchanges would enable the market to discover the latent worth of PSUs. The Loss making PSUs can be successfully revived by asking the strategic partner to infuse fresh capital and exercising excellent management control over sick PSUs

Demerits of disinvestment Selling of profit-making and dividend paying PSU would result in loss of regular source of income to the government.

There would be chances of asset stripping by the strategic partner. Most of the PSUs have valuable assets in the shape of plant and machinery, land and buildings etc. The Governments Policy or disinvestment includes the disposal of both profit making, as well potentially viable PSUs. Process of Disinvestment

The govt. in July 1991 initiated the disinvestment process in India, while launching the New Economic Policy (NEP). The govt. had appointed the Krishnamurthy committee in 1991 and Rangarajan committee in 1992 to look after the disinvestment process. Both the committees have recommended disinvestments to fulfill objectives of modernization of the PSEs through: (a) Strengthening R &D (b) Initiating diversification/expansion programme (c) Retaining and reemployment of employees (d) Funding genuine needs of expansion (e) Mitigating fiscal deficit of the government. These committees also distinguished between the short term and long term goals of the disinvestment and advised the govt. not to sacrifice the long term goals for the sake of fulfilling the short term objectives. The govt. has announced in its NEP that mitigating the fiscal deficits is the only objective of disinvestment. The crucial shift in govt. policy for disinvestment of PSUs was mainly attributed to poor performance of these enterprises and burden of financing their requirements through budget allocation. Further in 1996, the govt. constituted a five member public sector disinvestment commission under the chairmanship of G.K.Ramakrshna for drawing a long term disinvestment programme for the PSUs.

The committee submitted its report covering 58 enterprises, out of 70 enterprises referred to it by the govt. recommendations ranged from strategic sales in various proportions to disinvestments ant various level.

 This committee was ultimately abolished in 1999. The govt. set up a new Department of Disinvestment in 1991 to establish a systematic policy approach to disinvestment and to give fresh impetus to the programme of disinvestment, which will increasingly emphasize strategic sales of identified PSUs. In 2001, the govt. reconstituted the disinvestment commission with R.H.Patil as its chairman. The govt. has decided to refer all non-strategic PSUs and their subsidiaries, excluding IOC, ONGC, and GAIL to the commission for its independent advice. Objectives of Disinvestment The following are the main objectives of the disinvestment policy of the government: (a) To reduce financial burden on the government (b) To encourage wider share of ownership (c) To introduce competition and market discipline (d) To help public enterprise upgrade their technology to become competitive (e) To rationalize and retain their workforce (f) To improve efficiency and productivity in public enterprise through new industrial policies. Suggestion The government has to form a policy framework for the entire disinvestment process. 2. The government should de-link the disinvestment process from the budgetary exercise. 3. Government should stop setting up of the targets in every year annual budget and should have a long-term plan. 4. Timing of disinvestment is crucial and the government should follow a specific method or process in order to reap more chunks.