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Indian Economy

Notes disinvestments ensued in the issue of shares through the IPO route to general public and financial
institutions, and thus, majority stake and control remained with the government.
The disinvestment programme was initiated in 1991-92. The total realisation to the government
from several rounds of disinvestments till 1998-99 was ` 16,809 crore.

12.2.1 Objectives of Disinvestment

You must understand that the following are the main goals of the disinvestment policy:
1. To reduce the financial burden on government

2. To improve public finances
3. To introduce competition and market discipline
4. To improve growth
5. To encourage wider share of ownership
6. To de-politicise essential services.

Arun Shourie, former Disinvestment Minister, on December 9, 2002, stated the following
objectives of disinvestment:
You must note that the primary objective of disinvestment is to put national resources and assets
to optimal use and in particular, to unleash the productive potential inherent in public sector
enterprises. The policy of disinvestment specifically intends at:
1. Modernisation and upgradation of public sector enterprises;
2. Creation of new assets;
3. Generating of employment; and
4. Retiring of public debt.

The government would continue to make sure that disinvestment does not lead to alienation of
national assets, which, with the process of disinvestment, remain where they are. It will also
make sure that disinvestment does not result in private monopolies. In order to offer complete
visibility to the government’s sustained commitment of utilisation of disinvestment proceeds
for social and infrastructure sectors, the government would establish a Disinvestment Proceeds
Fund. This Fund will be utilised for financing fresh employment opportunities and investment,
and for retirement of public debt.

12.2.2 Methods of Disinvestment in India

It is important to note that there are three methods adopted by the government for the valuation
of shares for disinvestment. They are:
1. Net Asset Method: This will signify the net asset of the enterprise as shown in the books of
accounts. It shows the historical value of the assets. It does not reflect position of
profitability.
2. Profit Earning Capacity Value Method: The profit earning capacity is usually based on the
profits actually earned or anticipated.

3. Discounted Cash Flow Method: In this method, the future incremental cash flows are
forecasted and discounted into present value by applying cost of capital rate. The method
signifies the intrinsic value of the firm.

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