Budget 2022 | What is divestment and divestment target?

The government had set a divestment target of Rs 1.75 lakh crore this year

As the Modi government gears up to table its second pandemic Budget on February 1, all eyes will be set on Finance Minister Nirmala Sitharaman and what her ministry has in store to aid in the recovery of the Covid-battered economy.

Reading the Budget fine-print and breaking it down can come with the understanding of some important terms and concepts that find their place in the document.

Here's looking at one such concept - disinvestment and disinvestment target.

Disinvestment or divestment is defined as the government's action of selling or liquidating its stake in a public sector unit asset or subsidiary.

This is done when PSUs start turning into liabilities and start showing a negative rate of return, in turn pressuring government resources. In such cases, disinvestment helps bring down the financial burden being imposed by inefficient PSUs on the public finances, raise money and put the proceeds to better use.

Disinvestment is an annual exercise with the government setting a disinvestment target for select PSUs for the upcoming financial year. The idea was introduced in the 1991 interim Budget by the then Finance Minister Manmohan Singh as the country was moving towards a more liberal, global and private sphere.

The Department of Disinvestment was set up as a separate entity in 1999 and turned into a ministry in 2001 during the AB Vajpayee regime which propelled disinvestment. In 2004, it was included as a department in the Ministry of Finance. The department was renamed Department of Investment and Public Asset Management (DIPAM) in 2016.

The government had set a divestment target of Rs 1.75 lakh crore for this year, and is already in the process of handing over loss-making Air India to the Tata Group after selling its assets to the conglomerate, and is planning an initial public offer (IPO) of state-run insurer LIC.

How does divestment work?

The government puts up a set of shares of the Central Public Sector Enterprises (CPSEs) for sale, open for buyers to trade in. This is done “to promote people’s ownership through public participation and improving efficiencies of CPSEs through accountability to its shareholders and to bring in operational efficiencies in CPSEs through strategic investment, ensuring their greater contribution to economy”.

The current disinvestment policy covers public ownership of CPSEs, disinvestment through minority stake sale — the government retaining majority shareholding, i.e. at least 51 per cent of the shareholding and management control — and strategic disinvestment — sale of a substantial portion of the government shareholding of a CPSE of up to 50 per cent, or a higher percentage along with transfer of management control which essentially means handing it over to the private players in the fray.

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