Previous Year Question
Why is the Government of India disinvesting its equity in the Central Public Sector Enterprises—CPSEs?
The Government intends to use the revenue earned from disinvestment mainly to pay back external debt.
The Government no longer intends to retain the management control of the CPSEs.
Which of the statements given above is/are correct?
1 only
2 only
Both 1 and 2
Neither 1 nor 2
Correct Answer: D
Detailed Solution
Disinvestment means the sale of a part or the whole of the Government’s equity in a Public Sector Enterprise.
Disinvestment does not invariably amount to Privatisation:
The Government may sell a minority stake while retaining at least 51% ownership and Management Control.
Strategic Disinvestment may involve the transfer of a substantial shareholding together with Management Control.
Complete Privatisation transfers Government ownership and control to the private sector.
Statement 1 is incorrect
Disinvestment proceeds are recorded in the Government Budget as Non-debt Capital Receipts because:
They do not create a new repayment liability; but
They reduce a Government financial asset, namely its equity in a CPSE.
The objectives of disinvestment have included:
Releasing public resources for priority social and infrastructure sectors;
Promoting wider public ownership of CPSEs;
Improving Corporate Governance and transparency;
Introducing Market Discipline;
Strengthening Government finances; and
Concentrating Government resources on strategic sectors.
There was no general requirement that disinvestment receipts must be used mainly for repaying external debt. Budgetary resources may be fungible, but the categorical claim that external-debt repayment was their principal purpose is incorrect.
Statement 2 is incorrect
The Government does not intend to relinquish Management Control in every case of disinvestment.
The policy applicable around 2011 emphasised that, in listed profitable CPSEs, the Government could promote public ownership while:
Retaining at least 51% equity; and
Retaining Management Control.
If the Government sells 10% or 20% of the shares but continues to hold more than 51%, part of the ownership moves to public investors while the enterprise remains a CPSE under Government control.
Therefore, the statement that the Government no longer intends to retain Management Control is incorrect.
CPSE and Government Company
Under the Companies Act, a company is a Government Company when at least 51% of its paid-up share capital is held by:
The Central Government;
One or more State Governments; or
The Central and State Governments jointly.
An enterprise controlled by the Central Government is generally classified as a CPSE.
Disinvestment versus Strategic Disinvestment
Basis | Ordinary disinvestment | Strategic disinvestment |
Stake sold | Usually a minority stake | Substantial or controlling stake |
Management Control | May remain with Government | May be transferred |
Primary character | Resource mobilisation and public listing | Strategic transfer of ownership and control |
Privatisation | Not necessary | May result in privatisation |
Hence, neither statement is correct.