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Reviewed by Jul 30, 2021| Updated on
Disinvestment refers to an act of an organisation or the government of a state to raise funds by selling ownership stake. The sale can also be a liquidation of asset or stake in a subsidiary of an organisation or government undertaking.
The aim of disinvestment is to facilitate re-allocation of funds or resources to better use or monetise assets. Disinvestment also helps in lowering debt and restructuring of business. The process helps in increasing the return on investment.
In many instances, disinvestment occurs as a policy decision of the government when a state government decides to transfer the ownership and management of undertakings to private hands. The reasons for disinvestment could be a high cost of debt, ineffective management, liquidity issues, or any political reasons.
The process of disinvestments mainly seeks to optimise the resources of an undertaking to enhance the return on investment. The different forms of disinvestment include a stock sale, asset sale, spin-off, or demerger of the undertaking. Disinvestment may also be due to inefficient manufacturing methods, outdated technologies, and so on.
A company may spin-off or demerge an undertaking due to its losses. A particular unit may be loss-making while the others are in profit. The unit may not align completely with the business plan for the entire company. In such instances, a company may sell the unit to another suitable investor. The process raises funds which could be useful for the expansion as per the existing business plan.
In certain instances, the policies of the government may necessitate disinvestment in a particular business. A country may change its trade policy or curb imports of essential ingredients or components. The policy shift may make the business unviable, resulting in a sale of stake or ownership. In other instances, the policy shift may make the business illegal and hence necessitate a liquidation of the business.
Companies globally disinvest for financial, political, legal, or strategic reasons. The assets or undertakings which are no longer profitable or fit in the business strategy, are sold. Similarly, a company should comply with the legal policies and rules of the country in which it operates or is headquartered. The policy may require a relook at its strategic partnerships or assets held globally.