Disinvestment

From CEOpedia | Management online

Disinvestment is the process of selling assets, such as shares, stocks or bonds, owned by the government in a public sector unit or a state-owned enterprise in order to raise funds for the government. It is also known as privatization, as it involves shifting public sector units from the government to the private sector. The primary purpose of disinvestment is to raise funds for the government, which can be used for other public expenditure programs. The proceeds of the sale of assets can also be used to reduce the government’s fiscal deficit. Disinvestment is seen as a way to improve the efficiency of public sector units and help the government to raise resources for other developmental programs.

Disinvestment is usually done through the sale of shares, either through an initial public offering or through a sale of private equity. The government can also sell its stake in a public sector unit to a strategic investor or to the public through an open auction. The government may also choose to disinvest its holdings in a public sector unit through merger and acquisitions.

Disinvestment is a controversial issue, as it is seen by some as a form of privatization. Critics argue that disinvestment could lead to the decline of public sector units and the loss of jobs for public sector employees. Supporters of disinvestment argue that it can help the government to raise funds for public expenditure programs and to reduce the government’s fiscal deficit.

In conclusion, disinvestment is the process of selling assets owned by the government in order to raise funds for the government. It is seen as a way to improve the efficiency of public sector units and help the government to raise funds for other developmental programs. However, it is a controversial issue, as it is seen by some as a form of privatization.

Example of Disinvestment

Disinvestment typically involves the sale of shares, either through an initial public offering or through a sale of private equity. Other examples of disinvestment include:

  • Mergers and Acquisitions: This involves the government selling its stake in a public sector unit to a strategic investor or to the public through an open auction.
  • Asset Sale: This involves the government selling its assets in a public sector unit to raise funds.
  • Divestment: This involves the government selling its holdings in a public sector unit to a private investor or to the public.

Formula of Disinvestment

The formula for disinvestment is as follows:

Disinvestment = Sale of Assets - (Cost of Assets - Proceeds of Sale)

In this formula, the sale of assets refers to the amount of money the government receives from the sale of assets such as shares, stocks or bonds. The cost of assets is the original value of the assets that are being sold. Finally, the proceeds of sale refers to the amount of money the government receives after deducting the cost of assets. The disinvestment is the difference between the sale of assets and the cost of assets minus the proceeds of sale.

When to use Disinvestment

Disinvestment is usually used as a tool by the government to raise funds for public expenditure programs and to reduce the government’s fiscal deficit. It can also be used to improve the efficiency of public sector units by allowing them to access private capital. The government may also choose to disinvest its holdings in a public sector unit through merger and acquisitions.

Disinvestment can also be used to reduce the number of government-owned enterprises, thereby reducing the burden of the government. This can help the government to better allocate resources and focus on more pressing issues. Furthermore, it can help to reduce the government’s fiscal deficit and improve the efficiency of public sector units.

Types of Disinvestment

Disinvestment can take many forms, depending on the purpose and the asset that is being sold. The following are some of the common types of disinvestment:

  • Initial Public Offering (IPO): This is the process of selling a portion of the government’s stake in a public sector unit to the public through the stock market.
  • Sale of Private Equity: This is the process of selling the government’s stake in a public sector unit to a private investor.
  • Merger and Acquisition (M&A): This is the process of combining two or more public sector units into one business entity.
  • Open Auction: This is the process of selling the government’s stake in a public sector unit to the highest bidder.

Steps of Disinvestment

  • Step 1: Preparation: The first step in the disinvestment process is the preparation of the disinvestment plan. This involves the evaluation of the assets and liabilities of the public sector unit, the evaluation of the potential buyers, the pricing of the assets and the determination of the sale structure.
  • Step 2: Announcement: Once the disinvestment plan has been prepared, it must be announced to the public. This is done through the media or through official announcements from the government.
  • Step 3: Bidding Process: After the announcement, potential buyers can submit bids for the assets. The bids are evaluated based on a number of criteria, such as the price offered, the terms of the sale and the potential for future growth.
  • Step 4: Selection of Buyer: Once the bids have been evaluated, the government will select the winning bidder. The buyer will then be required to make the payment for the assets.
  • Step 5: Closing of Deal: After the payment has been made, the deal is closed and the assets are transferred to the buyer.

Advantages of Disinvestment

  • Disinvestment helps the government to raise funds for public expenditure programs and to reduce the government’s fiscal deficit. This can help the government to invest in infrastructure, health care, education, and other essential public services.
  • Disinvestment can help to improve the efficiency of public sector units by increasing competition and reducing bureaucracy.
  • Disinvestment can lead to job creation in the private sector, as more investments from the private sector can create new jobs in the economy.

Limitations of Disinvestment

Disinvestment has certain limitations that must be considered before undertaking the process:

  • Financial: Disinvestment involves the sale of assets, which can result in a loss of revenue for the government. As the government is unable to sell its assets for the same price as what it originally paid for them, it may result in a financial loss for the government.
  • Political: Disinvestment is a politically sensitive issue, as it involves the sale of assets owned by the government. The government may face public backlash if it is seen as selling public assets to private entities.
  • Regulatory: The sale of assets may also be subject to government regulations. This can make the process of disinvestment slow and complicated.

Other approaches related to Disinvestment

  • Asset Monetization: Asset monetization is the process of converting the existing physical assets of the government into financial assets. This process involves the sale of existing physical assets such as land, buildings and infrastructure to the private sector in exchange for cash or other financial instruments. Asset monetization is done to raise funds for public expenditure programs and to reduce the government’s fiscal deficit.
  • Dividend Policy: The dividend policy of a company is the policy adopted by the company to distribute its earnings to its shareholders. A company’s dividend policy can be used to manage disinvestment. Companies can declare higher dividends to encourage investors to purchase its shares, thereby increasing the demand for the company’s shares. This can help the company to raise funds through disinvestment.
  • Tax Incentives: The government can also provide tax incentives to encourage investors to purchase the shares of public sector units. This can help to increase the demand for the company’s shares and help the company to raise funds through disinvestment.

In conclusion, there are various approaches related to disinvestment, such as asset monetization, dividend policy and tax incentives which can help the government to raise funds for public expenditure programs and to reduce the government’s fiscal deficit.


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References

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