What is disinvestment?
Disinvestment is the action of a government or an organisation selling or liquidating an asset or a subsidiary. It is also referred to as divestment or divestiture. In India, disinvestment is a policy wherein the government liquidates its assets in public sector enterprises partially or fully.What are the main approaches to disinvestment?
The three main approaches to disinvestment are minority disinvestment, majority disinvestment and complete privatisation.
A minority disinvestment is one such that, at the end of it, the government retains a majority in the company, typically greater than 51 per cent, thus ensuring management control. In the case of majority divestment, the government, retains a minority stake in the company.
Complete privatisation is a disinvestment where 100 percent control of the company is passed on to a buyer.
What is the value of Central Government shareholding in Central Public Sector Enterprises (CPSEs)?
A CAG report put out in the year 2020 highlighted that the total paid up capital of 434 covered CPSEs stood at ₹5,45,338 crore as of March 2019. Of this central government holding is about ₹400,909 crore.
The long-term loans taken by these 434 CPSEs stood at ₹16,46,888 crore. The market capitalisation of the then 54 listed traded government companies was ₹14,29,111 crore (equity investment being ₹85,041 crore) as on March 31, 2019. The consolidated Return on Capital Employed (ROCE) of 434 government companies in 2018-19 was 10.06 per cent, lower than 10.47 per cent in previous year. The Return on Equity (ROE) of these 434 companies stood at 11.81 per cent for 2018-19.
How has the Central Government’s performance been on disinvestment?
It has been sub- optimal. The Modi-led government has achieved its disinvestment target (budget estimate) only in two (2017-18 and 2018-19) of the seven years.
In 2019-20, the government had set a disinvestment target of ₹1 lakh crore and the actual receipt was only ₹ 50,000 crore. Similarly, the government garnered just over ₹ 30,000 crore in the financial year 2020-21 against a budget estimate of ₹2 lakh crore. For the current fiscal, it has budgeted ₹1.75-lakh crore and so far, disinvestment receipts is about ₹9,291 crore. The government is betting big on the upcoming LIC IPO to help meet its disinvestment target.
What are the challenges it typically faces in the disinvestment process?
There are several challenges that the government has to surmount in making a success of the disinvestment programme. From identification of the right candidates to choosing the right route (whether it should be strategic divestment or through the stock exchanges) and quantum of stake sale, the government has to do a fine balancing act. It also has to face the opposition from workers Unions and opposition parties. Another critical decision is on the pricing of the share sale so as to ensure that there is no future criticism of having sold the family silver cheap in public markets. Timing of the share sale is also a big challenge.
How important are disinvest proceeds in funding the Budget?
They are useful in part-funding the deficit. The decision to disinvest is mainly to reduce the fiscal burden and bridge the revenue shortfall of the government. Disinvestment proceeds are mostly used to finance fiscal deficit, finance large-scale infrastructure development, for investing in the economy, for retiring government debt, and for social programmes like health and education. Successful divestment of a loss-making unit also means that the government does not have to fund its losses going forward.
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FAQs
Divestment is the method of selling subsidiary properties, investments, or divisions to increase the parent company's value. Often known as the divestiture, it is the reverse of an acquisition which is generally achieved when the asset or division of the company does not meet expectations.
What is the difference between divest and disinvest? ›
Disinvestment vs divestment
Disinvestment, meaning the sale of shares, can happen in small lots at any time to raise funds without losing control of the asset. Divestment or divestiture, on the other hand, usually refers to the sale of controlling shares.
What are the approaches to divesting? ›
The three main approaches to disinvestment are minority disinvestment, majority disinvestment and complete privatisation. A minority disinvestment is one such that, at the end of it, the government retains a majority in the company, typically greater than 51 per cent, thus ensuring management control.
What is the target of disinvestment in India? ›
In the Union Budget 2023-24, a disinvestment target of Rs 51,000 crore, has been set, which is nearly 21% less from the budget estimate for the current year.
What is an example of divestment? ›
A business may choose to divest smaller businesses within the larger ones to allow for better focus on the primary goal. For example, a company that helps other businesses make websites to sell their products may also contain smaller businesses that offer graphic design and content creation services.
What is the divestment rule? ›
In business law, divestment is when a business sells off its subsidiaries, investments, or other assets for a financial, ethical, or political objective. To do so, the business must partially or fully remove the asset from its financial records (books). Businesses can divest through sale, closure, or bankruptcy.
What is the benefit of divesting? ›
By divesting some of its assets, a company may be able to cut its costs, repay its outstanding debt, reinvest, focus on its core business(es), and streamline its operations. This, in turn, can enhance shareholder value.
Why is divesting important? ›
Through divestiture, a company can eliminate redundancies, improve operational efficiency, and reduce costs. Reasons why companies divest part of their business include bankruptcy, restructuring, to raise cash, or reduce debt.
What is divesting responsibility? ›
If you divest yourself of something that you own or are responsible for, you get rid of it or stop being responsible for it.
What is an example of a disinvestment strategy? ›
Disinvesting is an exit strategy that means taking out an existing investment. Disinvestment policies are commonly followed by governments to allocate resources more efficiently. For example, the Indian government announced that they will carry out disinvestment in BPCL, a government oil and gas subsidiary.
The correct answer is 'Give'. Key Points. The most appropriate antonym of the given word 'Divest' is 'Give'.
What does it mean to divest money? ›
Divestment, also known as divestiture, is the act of reducing financial exposure to an asset to better achieve financial or social goals. Companies can divest property, businesses or other assets by selling them or reducing their ownership stake in them.
Is divestment the opposite of investment? ›
In finance and economics, divestment or divestiture is the reduction of some kind of asset for financial, ethical, or political objectives or sale of an existing business by a firm. A divestment is the opposite of an investment.
What are the problems with divestment? ›
There's one major problem with divestment: Selling an asset requires someone to buy it. In other words, for you to divest, someone else needs to invest. As a result, divestment could end up breathing new life into fossil fuel assets – exactly the opposite of what's intended.
How do you create a divestment strategy? ›
Divestment Strategy Example
- Identifying the firm's core processes.
- Reviewing the performance of the division based on the identified core processes.
- Analyzing the relevance of the division to discern its value.
- Looking for prospective buyers in the market.
Divestment was used during the 1990s to protest the military-ruled government of Myanmar (Burma), when such multinational corporations as PepsiCo, Texaco, Hewlett-Packard, and Federated Department Stores (later Macy's, Inc.).
What are the three criteria for divestment? ›
Criteria of Divestment
According to Aaker and Moorman, the criteria for divestment include market attractiveness, strategic fit, and business position.
What is forced divestment? ›
Thereupon, warnings may – or may not – be followed by forced divestment: the actions leading to the loss of rights over the business. For example, the firm's assets could be expropriated after an expropriation threat.
What happens to employees when a company is divested? ›
Employees will generally be transferred through an offer/accept process, unless sufficient assets are transferred to meet local requirements for an automatic transfer of employees.
What is the difference between investment and divestment? ›
“Investment refers to the conversion of money or cash into securities, debentures, bonds or any other claims on money. As follows, disinvestment involves the conversion of money claims or securities into money or cash.”
The first concept is that of selling a company whose products or practices you don't agree with – Divestment. The second is Engagement – the idea that more progress can be made by speaking with corporate leaders to encourage positive change.
Why do people divest? ›
Divestment is the sale of an existing business or an asset class that doesn't perform or meet the expectations of the company or a country. It helps organizations to generate cash, thereby reducing debt and making the company more attractive with a low debt-to-equity ratio.
What are examples of divested companies? ›
Examples of divestment
Divestment was used during the 1990s to protest the military-ruled government of Myanmar (Burma), when such multinational corporations as PepsiCo, Texaco, Hewlett-Packard, and Federated Department Stores (later Macy's, Inc.).
What does completely divest mean? ›
to strip or deprive (someone or something), especially of property or rights; dispossess. to rid of or free from: He divested himself of all responsibility for the decision.
Why does divestment happen? ›
Through divestiture, a company can eliminate redundancies, improve operational efficiency, and reduce costs. Reasons why companies divest part of their business include bankruptcy, restructuring, to raise cash, or reduce debt.
What is the difference between divestment and investment? ›
“Investment refers to the conversion of money or cash into securities, debentures, bonds or any other claims on money. As follows, disinvestment involves the conversion of money claims or securities into money or cash.”
How do you implement a divestment strategy? ›
Divestment Strategy Example
- Identifying the firm's core processes.
- Reviewing the performance of the division based on the identified core processes.
- Analyzing the relevance of the division to discern its value.
- Looking for prospective buyers in the market.
Steps in the Divestiture Process
- Monitoring the Portfolio. For a company that pursues an active divestiture strategy, management regularly performs a review of each business unit and its relevance to the company's long-term business strategy.
- Identifying a Buyer. ...
- Performing the Divestiture. ...
- Managing the Transition.
The company is divesting 8 of its 20 stores. We may have to divest assets to raise capital/money.
What does it mean to divest part of a company? ›
Divestment meaning
This term refers to the process of selling a company's investments, divisions, or assets. These can be sold off for numerous reasons, all relating to underperformance. For example, an asset may no longer meet your business's ethical viewpoints or align with your financial goals.
As a result of the disinvestment, the acquiring company can reduce the total cost of the purchase and determine the optimal use of the proceeds, which may include reducing debt, keeping the cash on the balance sheet, or making capital investments.
What are the four 4 types of divestitures? ›
What kinds of divestitures are there? There are three basic types of divestitures: sell-offs, spin-offs and split-ups. Some of these may involve a continuing involvement – a strategy referred to as a satellite launch.
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