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Objectives of Disinvestment of PSUs in India

Updated on :  

08 min read.

We all have read, heard, and talked about investing money in various investment products. Some of us might have also invested in various products and know the necessary steps to do so. Similarly, there is a certain defined best practice to redeem the investments you have made as well, and this phase is called ‘disinvestment’.

This article gives you a basic picture of disinvestment in India.

What is disinvestment? Why is it necessary?

While investment refers to converting cash into securities, debentures, bonds, or other instruments, disinvestment means converting money claims or securities into cash. From another perspective, disinvestment can be seen as a strategy to dispose of or sell assets for cash. 

In terms of government, the disinvestment strategy means the market activity in which the government sells or liquidates government-owned assets. That is, the government may have an ownership stake in Central and State public sector enterprises. Further, government assets may include other project undertakings and fixed assets.

The government chooses a disinvestment strategy to reduce the fiscal burden and raise money to meet public needs. They may also be done to privatise the assets. Disinvestment can realise the long-term growth of the country. Since disinvestment gives out a larger share of PSU ownership to the open market, it sets the groundwork for India’s firm capital market.

What are the main objectives of disinvestment in India?

Here are the main objectives of disinvestment in India:

  1. Reducing the financial burden on the government
  2. Improving public finances
  3. Encouraging an open share of ownership
  4. Introduction, competition, and market discipline
  5. Depoliticising essential services
  6. Upgrading the technology used by public enterprises to become competitive
  7. Rationalising and retraining the workforce
  8. Building competence and strength in R&D
  9. Initiating the diversification and expansion programmes

How is disinvestment related to privatisation?

At challenging times, the government may decide to sell a whole enterprise or a majority stake in an enterprise to private investors. This results in privatisation, where the ownership and control of operations will not remain with the government any longer. This is known as complete privatisation or majority disinvestment. However, this is a rare case in reality.

Usually, the government retains more than half the stake in PSUs, so the control remains in the government’s hands. 

What is the disinvestment policy followed in India?

A separate team under the Ministry of Finance handles all the disinvestment-related tasks called the Department of Disinvestment. The department is now made a separate entity called the Department of Investment and Public Asset Management.

The targets of the department are set in every Union Budget and may vary every year. Since the 1990s, all the successive governments have been setting a disinvestment target to raise funds by selling a stake in PSUs. 

The government inspects several factors, such as the government’s existing stake in a company, the private sector’s interest in ownership of the enterprise, market conditions, expected value realisation, before deciding in disinvesting a company.

Current Disinvestment Target (FY 2021-22)

During the announcement of the Union Budget 2021, Finance Minister Nirmala Sitharaman has proposed the privatisation of two public sector banks (other than IDBI Bank) and one general insurance company in FY 2021-22. She also stated that LIC would be open for initial public offering (IPO). 

She confirmed the government’s approval of the policy for strategic disinvestment of public sector enterprises. According to the policy, the bare minimum CPSEs will be held on to, and the rest will be privatised. A list of Central public sector companies will be prepared by NITI Aayog ready for disinvestment in the next round.

Further, an incentive structure will be laid out to encourage states to disinvest their public sector companies.

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