1. Prologue
  2. Disinvestment Timeline in India
  3. Two methods of disinvestment
  4. Retail investors’ participation? Hardly!
  5. Disinvestment: arguments in favor and against
  6. Modi-Reform1: Disinvesting NHPC, Coal India, ONGC
  7. Modi Reform2: Revive 5 and shut down 6
  8. Mock Questions


Combining Disinvestment theory and current affairs topics scattered around

  1. Akshay Dhadda and Ashok Charan’s entries under the erstwhile write2win competition.
  2. Sept.Week2: Disinterment in NHPC, Coal India and ONGC
  3. Sept. Week3: Two Methods of disinvestment- benefits and limitations.
  4. Sept. Week4: Government to shut down 5 PSUs and revive 6.

Disinvestment Timeline in India

  • Disinvestment: When Government sells its shares of a PSU, to private sector company / individual.
  • Privatization: when Government sells so many shares, that it no longer remains the majority shareholder of the given PSU.
  • Interim budget, Government announced 20% disinvestment in selected PSUs.
  • Their shares were sold to Mutual funds and financial institutions (UTI, EPFO, LIC etc.)
  • Government decides to sells shares to FIIs, PSU employees and banks.
1993 Rangarajan Committee suggests:

  1. 49% disinvestment in PSUs reserved for public sector
  2. 74% disinvestment in all other PSUs

Government did not implement.

1996 Disinvestment commission under GV Ramakrishna. It was a non-statutory, advisory body (similar to UPA’s NAC).
1998-2000 Vajpayee Government classifies PSUs into two parts

  1. Strategic: arms-ammunition, railway, nuke energy etc.=> here we won’t do disinvestment
  2. Non-strategic: those not in above category.=> here we will do disinvestment in a phased manner. Hindustan Zinc, BALCO, Maruti Disinvestment taken up.

To implement above policy, Department of disinvestment setup under Finance ministry. (first there was disinvestment ministry, then department….not going into all ball by ball commentary)

2004 UPA comes into power, Common Minimum program (CMP) updates disinvestment policy

  • Sick PSUs will be revived
  • No disinvestment in profit making PSUs
  • PSUs will get commercial autonomy
2005 Whatever Money Government earns from selling its PSU shares- it’ll goto National investment fund (NIF). Click me to read more about it.
2005-09 Disinvestment remains stagnant because Left allies of the UPA Government stonewall everything.
2009 onwards
  • UPA-2 without left parties. Government resumes disinvestment process.
  • All PSUs can be disinvested, but upper limit: 49%
  • Disinvestment Method: only public offer.
2013-14 Chindu wanted to earn 40,000 crores via disinvestment of Indian Oil, BHEL, NHPC, Neyveli lignite etc. but hardly managed to get ~16,000 crores. Main reasons for #EPICFAIL:

  1. Oil ministry, mining ministry, trade unions opposed the move, files were delayed.
  2. Lukewarm response from investors because sharemarket was down due to internal & external factors.
  • Modi cabinet approves disinvestment in NHPC, Coal India, ONGC
  • 6 EPICFAIL PSUs will be closed down.
  • 5 loss making but viable PSUs will be revived.

Two methods of disinvestment

IIP Via stock exchange
Via Institutional placement program. Directly selling the shares to another company / institution / mutual fund or other large player. Directly selling shares on stock exchange
Requires more clearances.
  • Faster, needs less clearances.
  • SEBI requires in each PSU, minimum 25% shares be held by public.
  • Hence Government using this method to quickly comply with SEBI norms.
Friendly to institutional investors (Mutual funds, pension /insurance funds etc.) Friendly to retail investors.

Retail investors’ participation? Hardly!

  • So, In theory, disinvestment via stock exchange = retail investors should be able to purchase those sarkaari shares.
  • But, after disinvestment, the market price and issue price of the company shares start converging.
  • Therefore, a retail investor cannot reap the benefit (by selling it to third party at higher price). He’ll have to wait for medium to long term before company share prices begin to rise again.
  • But retail investors don’t like to wait that long, hence disinvestment doesn’t generate interest of retail investors.

Solution: ETF exchange traded funds. Click me to learn more about it.

Disinvestment: arguments in favor and against

Against In Favour
  • Socialist / leftist ideology: private sector cannot achieve equal distribution of resources for all classes.
  • Private enterprises only focus on profit maximization. They won’t cater poor people.
  • Therefore Government needs to control all or some industrial sectors.
  • Such Government controlled units cannot compete in free market economy due to political interference and price control mechanisms.
  • Ultimately more public money is wasted in running these loss making entities.
  • Government’s dividend income will decline. (Because they’ll have less shares).
  • Consequently, Fiscal deficit will increase.
  • Whatever “dividend” Government earned so far- compared to that, Government has spent far more crores rupees to revive these PSUs.
  • There is no point in throwing good money after bad money.
  • A survey indicated 0.5% retail participation (i.e. Aam Admi investment) in equity market.
  • Meaning, only Large corporates and financial institutions will benefit from this drive.
  • It’ll not help in “financial inclusion”
  • Absurd logic, that just because corporates will benefit, we shouldn’t begin disinvestment.
  • Government already taken plenty of initiatives on financial inclusion front.
The funds received from disinvestment are used to finance fiscal deficit. This is unhealthy practise, like selling family gold to buy daily dose of desi liquor. Need amendments in FRBM act to ensure this doesn’t happen.
  • After disinvestment employees of PSUs will loss their jobs
  • If board of directors have many private sector experts- they may approve plans to reduce staff strength, to increase profitability.
  • Overstaffing = One of the main reasons why PSUs don’t make optimum profit. At some point we’ve to swallow the bitter pill.
  • Besides, such employees are given attractive VRS offers.
Disinvestment would lead to private monopolies Dragging the logic too far. Unlikely to happen in today’s world. CCI is always watching and punishing the firms that try to create monopoly or oligopoly.
Allegations  that PSEs are sold cheap to preferred parties e.g. BALCO
  • That used to happen in 90s era, when Government sold shares to specific private companies at an arbitrary price.
  • But, Unlikely to happen if shares directly sold via stock exchange. + CAG, Media very active these days.
  • To complete the disinvestment targets, Government asks one PSUs to buy shares of another PSU.
  • e.g. ordering LIC to buy ONGC’s shares…Iski topi uske sir pe…. In such cases, disinvestment doesn’t decrease Government control over those companies.
Need for a clear policy on disinvestment to stop this practice.

Speed of Disinvestment

Should India adopt rapid pace of disinvestment/privatization or move with a slow pace?  Taking example of disinvestment process of other countries:

Disinvestment Speed
Rapid speed
  • 1993: Czech Republic disinvested ~1000 state owned enterprises.
  • Russia did same.
  • Results were disappointing in both the cases.
  • Hence rapid approach=  not recommended for India
Slow speed
  • China- after more “Open Door Policy” in 1978.
  • But speed too slow- thousands of enterprises still under Government ownership.
Middle speed Most suitable for India

Modi PSU-reform1: Disinvesting NHPC, Coal India, ONGC

Data not important except for random GK in non-UPSC exams & interviews
Org underMinistry govt.shareholding Approved
NHPC Power 86% 11.36%
  • Has 20 hydroelectric power stations.
  • Unable to recover dues from electricity utility companies=> company making huge losses.
  • Hence it share price won’t fetch truckload of cash to Government.
Coal India Ltd coal ~90% 10%
  • Labour union strike may bring down share price. So Government maynot earn truckload of cash from selling these coal India shares.
ONGC petroleum ~69% 5%
  • Maharatna PSU
  • If Government clears the gas price policy, ONGC’s share prices will go up (And after that Government should sell it- to earn truckload of cash).

Note: in PSUs, Government owns the shares, in the name of President of India.

Modi PSU-reform2: Revive 5 and shut down 6

2014, Sep. week2: Union Government finished reviewing 11 PSUs: 5 worth savings and 6 worth closing.

Names not important except for random GK in bank exams
6 epicfails beyond saving 5 worth saving
  1. Hindustan Photo Films
  2. HMT Bearings
  3. HMT Watches
  4. HMT Chinar Watches
  5. Hindustan Cables.
  6. Tungabhadra Steel Products Ltd
  1. HMT Machine Tools
  2. Heavy Engineering Corporation
  3. NEPA
  4. Nagaland Paper & Pulp Co
  5. Triveni Structurals
These will be given 1000 crore rupees to give VRS to employees then shut down operations. Total employees ~3600

October week2: HMT watches in news, because they’ve tied up with flipkart.com to sell away the remaining stock of wrist watches.

Disinvestment & shutting down HMT watches

Mock Questions


  1. Non-UPSC exams: Trivial fact based questions- In September 2014, Government approved closing down Which of the following companies? How many crores does Government want to make from disinvestment?
  2. CSAT: assertion-reasoning, cause consequences type.  Which of the statements are correct about disinvestment process in India / NIF etc.

Mains: Answer following in 200 words each:

  1. Outline the main objectives and achievements of the policy of disinvestment in India? [Mains 2002]
  2. The Public sector undertakings have lost relevance in the post 1991 Indian economy. Do you agree? Justify your stand.
  3. Public sector undertakings in India, have often been criticized for their poor efficiency and low profitability. Examine the reasons and suggest remedies.