Strategic Disinvestment of PSUs

By BYJU'S Exam Prep

Updated on: September 13th, 2023

Definition: Strategic disinvestment is the transfer of ownership and control of the public sector entity to other entity, mostly private sector entity. It involves the sale of a substantial portion of government shareholding of CPSE, up to 50% or more, along with transfer of management control.

The objective of strategic disinvestment includes the Government exiting from non-strategic business, unlocking optimum economic potential by promoting efficiency & professional management in such companies.


The money earned through disinvestment is deposited in NIIF (National Investment and Infrastructure Fund). That goes into Consolidated funds of India. It is managed by LIC, UTI and SBI.

PROCESS OF STRATEGIC DISINVESTMENT:                                                                                                                 

  • Since the 2016 budget, there is a revival of the strategic sale. NITI Aayog and Department of Investment and Public Asset Management (DIPAM) plays a critical role in strategic disinvestment by the government.
  • Department of Disinvestment was formed in 1999 and which later renamed as Department of Investment and Public Asset Management (DIPAM) in 2016. It is under the Ministry of Finance as a nodal department for strategic sale in order to streamline and speed up the process and reduce the role of administrative ministries.
  • NITI Aayog entrusted with the task of selecting PSEs for disinvestment and strategic sale.
  • In 2019 (March) finance minister led a panel called ‘Alternative Mechanism’ decides on the issue of strategic disinvestment.
  • Alternative Mechanism decides the number of shares to be sold, mode of sale and final pricing of transactions.
  • Design guidelines on pricing, selection of buyer and sets up terms and conditions related to sale and timing of the sale is also decided by Alternative Mechanism.
  • Various modes of disinvestment include Initial Public Offering (IPO), Offer For Sale (OFS), buyback shares, strategic disinvestment and Exchange Traded Funds (ETF).
  • Finance Minister Nirmala Seetharaman in her budget of 2019, has increased the disinvestment target from 90000 crores to 1.05 lakh crores for the current financial year.


  • Entities can be made economically viable as investors can infuse capital, upgrade technology through professional management. For example takeover of Hindustan Zinc by Vedanta in 2002 increased its profits hundred-folds.
  • Efficient management of public investment in CPSEs for accelerating economic development and augmenting Government’s resources for higher expenditure.
  • Proceeds of the stake sale are additional income of government. The government can use this as an investment in health, education, infrastructure.
  • It will help in fulfilling the Fiscal deficit target.
  • In the case where revenue from the indirect tax is low or revenue loss due to the tax cut, disinvestment proceeds can be used to carry the usual business of government.


  • The government can be a facilitator of a business-friendly environment.
  • Brings operational efficiency in CPSEs and adopt a professional approach for the financial management of CPSEs.
  • Competitive dynamics for private players is maintained if the government is out of business.
  • It would ensure accountability of PSUs and can incentivise them to improve structure.
  • Improvement in public finance as Inefficient PSUs only leads to wastage of taxpayer’s money.
  • A huge debt of PSUs can also be transferred to the private sector.


  • Protest and opposition by PSU stakeholders trade unions and employees.
  • It may result in crony capitalism.
  • Disinvestment proceeds are mostly used to cover fiscal deficit instead of growth purpose.
  • There is a possibility of creation of a private-sector monopoly.
  • Job loss of workers in many PSUs.
  • There are concerns related to national security in case of defence privatization.
  • PSUs that are involved in welfare work can not be left in the hands of the private sector whose prime motive is profit-making.
  • Sale of debt-laden and loss ridden PSU can not attract a buyer.
  • The government may lose cushion in the fiscal deficit.

Strategic Disinvestment of PSUs approved recently are:

  • Sale of entire 74.2% stake in Tehri Hydro Development Corp of India and entire 100% stake in North Eastern Electric Power Corporation (NEEPCO) to NTPC.
  • Sale of 53.3% stake in Bharat Petroleum Corp Ltd. (BPCL) to a strategic buyer.
  • Sale of 63.8% stake in Shipping Corporation of India (SCI).
  • 8% stake and management control to a strategic buyer in Container Corporation of India (Concor).
  • CCEA has approved ‘in principle’ for strategic disinvestment of Air India and Pawan Hans Ltd. And 26 other CPSEs.


  • PSU Monetisation should be the priority of the government.
  • Strategic interests of the government in priority sectors must be defined first.
  • Transparency in the strategic sale process and time-bound auction of valuable assets with a minimum reserve price.
  • A third-party evaluation of every PSUs assets precondition of minimum numbers of bidders.
  • Use of strategic disinvestment proceeds in infrastructure assets for example investment in National Investment and Infrastructure Fund (NIIF).
  • For ensuring efficient market conditions, the regulatory framework must be strengthened. There is a need for breaking the oligopolistic environment for new players.
  • Opening up key sectors of the economy for FDI.


Mere changing ownership from public to private can not ensure higher productivity and efficiency. As the Indian market economy is growing confidently and multidirectional growth is taking place there will be a transition from disinvestment of assets to invest in assets.

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