Disinvestment

Also called: PSU disinvestment, Strategic sale and minority sale, Minority sale · Topic: Industrial Policy, Public Sector, MSMEs and Disinvestment · NCERT: Class 11, Ch 3 "Liberalisation, Privatisation and Globalisation: An Appraisal"; Class 12, Ch 5 "Government Budget and the Economy"

Meaning

Disinvestment is when the government sells part or all of its equity (shares) in a public sector enterprise (PSE). After the sale the government may still control the company, or it may hand control to the buyer.

It matters because the sale money is a non-debt capital receipt: the government gets cash without borrowing, and this lowers the fiscal deficit (the total amount the government must borrow in a year). It also has a cost. The government now owns fewer assets and will get less dividend (profit paid to shareholders) every year after the sale.

• Sale receipt = shares sold × share price
• Yearly dividend lost = shares sold × dividend per share

Explanation

How it works in the budget

• It is a capital receipt, not a revenue receipt.
• The government sells an asset (its shares). It does not earn income from normal work.
• So the money is counted as a capital receipt.

• No loan is taken, so it is a non-debt capital receipt.

• It has three effects on the government's accounts.

• The fiscal deficit falls, and no new debt is created.
• The government's financial assets go down because it owns fewer shares.

• Future dividend income goes down, and the loss comes back every year.

• Worked example (from our notes)

• The government owns 60 crore shares of a CPSE (a central public sector enterprise: a company where the Centre and/or other CPSEs hold at least 51% of the shares). The share price is Rs 200 and the dividend is Rs 10 per share.
• It sells 6 crore shares, which is a 10% stake.
• Money received: 6 cr × Rs 200 = Rs 1,200 cr, a one-time non-debt capital receipt.
• Dividend lost: 6 cr × Rs 10 = Rs 60 cr every year.
• Lesson: the Rs 1,200 cr comes only once, but the Rs 60 cr loss repeats every year. Using this one-time money to pay regular, day-to-day expenses is unsound.

Types: minority sale vs strategic sale

• Minority stake sale
• The government sells a small share. It keeps majority ownership and control.

• Examples: LIC IPO (2022); Mazagon Dock OFS (April 2025) [4].

• Strategic sale

• The government sells a large stake (≥ 50%) plus management control. The buyer now runs the company.
• Examples: Air India to the Tatas (January 2022); NINL (2022) [6].

• Some attempts did not finish: the BPCL bid was withdrawn in 2022, and the IDBI Bank sale is still in progress (verify the current status).

• Trap: CPSE-to-CPSE sales

• HPCL was sold to ONGC (2017-18), and REC was sold to PFC for Rs 14,500 cr (2018-19) [5].
• In both cases one government company bought another, so control stayed with the state.
• These count as disinvestment, but they are not privatisation.

Instruments used

• IPO (initial public offering): the first time a company sells its shares to the public. FPO (follow-on public offer): a later share sale by a company that is already listed.
• OFS (offer for sale): the government sells its shares directly through the stock exchange.
• CPSE ETF / Bharat-22 ETF: an exchange-traded fund, which is one traded unit that holds shares of many CPSEs. Bharat-22 also holds some private firms and public sector banks (PSBs).

• Between 2015-16 and 2020-21, ETFs raised more disinvestment money than any other method [5].

• Buyback: the CPSE uses its own cash to buy its shares back from the government.

• Golden share: a special share the state keeps after privatisation. It gives the state a veto over key decisions even though it holds very little equity.

What makes receipts rise or fall

• Market conditions. Share sales raise more money when prices are high. The "Rolling Plan" (2014-15 to 2016-17) let the government time sales to good market conditions [7].
• Big one-off deals. In 2017-18, 37% of receipts came from the HPCL strategic sale alone [5].
• Delays in strategic sales. When big sales slip, receipts crash. Only 16% of the target was met in 2020-21 [5].

In India

• Why disinvestment started. The New Industrial Policy 1991 cut the list of sectors reserved for the public sector. CPSEs now had to compete with private and foreign firms, so the state began selling its stake in weak or non-core CPSEs.
• Aims stated by NCERT: better financial discipline, faster modernisation, bringing in private capital and management skills, and more FDI (foreign direct investment: long-term foreign money invested in Indian firms).
• The government also says disinvestment money is meant to fund social sector and development programmes, and to bring private capital, technology and better management into CPSEs [2].
• Phases of policy
• 1991-92: minority "bundled" sales, where shares of strong and weak CPSEs were sold together to financial institutions. The target was Rs 2,500 cr, and about Rs 3,040 cr was raised.
• 1993: the Rangarajan Committee on disinvestment of shares in PSEs.
• 1996: the Disinvestment Commission was set up to advise on which PSEs to sell and how.
• 1999-2004: strategic sales under a separate Disinvestment Ministry (Modern Foods, BALCO, VSNL, Hindustan Zinc, IPCL).
• 2005: the National Investment Fund (NIF), a fund that received disinvestment money for social sector and capital spending.
• 2014-15 to 2016-17: Rs 87,714 cr was raised, against Rs 53,670 cr in the previous three years [7].

• 2016: the Department of Disinvestment was renamed DIPAM (Department of Investment and Public Asset Management). Its job widened from selling shares to managing all government investment in CPSEs.

• New Public Sector Enterprise Policy 2021 [2][3]

• Strategic sectors are sectors the state wants to stay in for security or public-interest reasons. There are four groups:
  • atomic energy, space and defence;
  • transport and telecommunications;
  • power, petroleum, coal and other minerals;
  • banking, insurance and financial services.
• In these sectors the state keeps only a bare-minimum presence. The other CPSEs are privatised, merged, made subsidiaries of other CPSEs, or closed [2].
• In non-strategic sectors, all CPSEs are to be privatised, or else closed [2].

• In 2022 the Cabinet let the boards of parent CPSEs recommend and carry out the sale or closure of their subsidiaries, units and JV stakes. It also gave more powers to the Alternative Mechanism, a group of ministers that decides sale terms [8].

• Targets vs actuals. Since 2010, receipts fell short of the budget target in every year except 2017-18 and 2018-19 [5].

• 2017-18: Rs 1,00,045 cr against Rs 72,500 cr (138%) [5]

• 2020-21: Rs 32,886 cr against Rs 2,10,000 cr (16%) [5]

• Latest position

• Since 2024-25 there is no separate disinvestment target. The receipts are now counted under "miscellaneous capital receipts".
• In April 2025, 3.61% of Mazagon Dock Shipbuilders was sold through OFS, raising Rs 3,673.42 cr [4].
• Dividends from CPSEs have risen every year since 2020-21, even as government shareholding was reduced [4].

Don't confuse with

• Privatisation: the government gives up ownership or management of the enterprise. Disinvestment is wider. A minority sale is disinvestment but not privatisation, because the state keeps control.
• Asset monetisation (NMP 2021): the government leases a public asset (roads, pipelines, power lines) for a fixed period and keeps ownership. Disinvestment sells shares.
• Dividends from CPSEs: these are non-tax revenue receipts. They repeat every year. Disinvestment money is a one-time non-debt capital receipt.
• Ratna system (autonomy route): profitable CPSEs get more freedom while the state keeps ownership. Disinvestment reduces the state's ownership.

Prelims Hooks

• Disinvestment is a non-debt capital receipt. It is not a revenue receipt. CPSE dividends are non-tax revenue receipts.
• Strategic sale = stake (≥ 50%) + management control (Air India, January 2022). HPCL→ONGC and REC→PFC were CPSE-to-CPSE sales, so they were not privatisation [5].
• Timeline: Rangarajan Committee 1993 → Disinvestment Commission 1996 → NIF 2005 → DIPAM 2016 → New PSE Policy 2021 → no separate target from 2024-25.
• New PSE Policy 2021: 4 strategic groups keep a bare-minimum presence; non-strategic CPSEs are privatised or closed [2].
• Between 2015-16 and 2020-21, ETFs (CPSE ETF, Bharat-22) raised the most disinvestment money of any method [5].
• Golden share = a veto with little equity. Asset monetisation = leasing, not selling.

Mains Points

• Fiscal gain vs fiscal risk
• Disinvestment lowers the fiscal deficit without new debt.
• But the money comes only once, and it cuts dividends every year after.

• Missed targets (only 16% met in 2020-21 [5]) made budget numbers unreliable. This explains the move to no fixed target from 2024-25, and to more focus on dividends and asset monetisation.

• Efficiency vs equity

• Privatised CPSEs improved their net worth, net profit and productivity after strategic sale (Economic Survey 2019-20 [9]). CPSE indices rose sharply after 2021: NSE CPSE index 182.36% and BSE CPSE index 146.92% by November 2024 [3].
• Critics point to undervalued assets, worker and social concerns, and sale money used to plug revenue gaps instead of building assets.

• Fixes to suggest: transparent valuation, using receipts for capital spending, and a golden share where a public interest must be protected.

• Balanced approach (GS-III / GS-II)

• Keep and strengthen profitable, strategic CPSEs through Ratna autonomy and professional boards.
• Exit non-strategic, loss-making ones through strategic sale.
• Disinvestment should improve how companies are run, not just raise money.

Related concepts

• Central public sector enterprise
• Maharatna, Navratna and Miniratna status
• Maharatna status
• Navratna status
• Miniratna status
• Minority stake sale
• Strategic sale
• Strategic sector (public enterprise policy)
• Golden share

Read more

• Public enterprises after 1991: CPSEs, the Ratna system, disinvestment and privatisation