DISINVESTMENT STRATEGY WITH CASE STUDY

A) Introduction-

The process of disinvestment of Public Sector Undertakings (PSU) had

been started by the Government in 1991-92. Different methodologies for

disinvestment were adopted from time to time such as the auction

method1

or

partial disinvestment in favour of mutual funds and financial institutions

in the

public sector, strategic sale2 for privatization between 1999-2000 and

2002-2003

and market sale3

, either through initial public offer4

or offer for sale5

for

divestment of minority shareholding during 2003-05.

It was in August 1996 that Government established a Disinvestment

Commission (DC) initially for a duration of three years to advise it on all

aspects

relating to public sector disinvestment. The main terms of reference were

• to draw a comprehensive overall long-term disinvestment programme

within 5-10 years for the PSUs referred to it by the Core Group

comprising Secretaries of selected Ministries;

• to determine the extent of disinvestment in each PSU;

• to prioritise the PSUs referred to it by the Core Group in terms of the

overall disinvestment programme;

• to recommend the preferred mode(s) of disinvestment for each of the

identified PSUs;

• to supervise the overall sale process and take decisions on instrument,

pricing, timing etc., as appropriate;

• to select the financial advisors for specified PSUs to facilitate the

disinvestment process; and

• to monitor the progress of disinvestment process and take necessary

measures and to advise Government on possible capital restructuring

of the enterprises by marginal investments, if required, so as to ensure

enhanced realization through disinvestment.

Divestment is a form of retrenchment strategy used by businesses when they

downsize the scope of their business activities. Divestment usually involves

eliminating a portion of a business. Firms may elect to sell, close, or spin-off a

strategic business unit, major operating division, or product line. This move

often is the final decision to eliminate unrelated, unprofitable, or unmanageable

operations.

Divestment is commonly the consequence of a growth strategy. Much of the

corporate downsizing of the 1990s has been the result of acquisitions and

takeovers that were the rage in the 1970s and early 80s. Firms often acquired

other businesses with operations in areas with which the acquiring firm had

little experience. After trying for a number of years to integrate the new

activities into the existing organization, many firms have elected to divest

themselves of portions of the business in order to concentrate on those activities

in which they had a competitive advantage.

B) Definition-