In finance, the term disinvestment means to the withdrawal of invested money by selling the assets or major production tool. Disinvestment reduces the unexpected loss of a company, a business initiative or even government. When an investor observes that their investments do not fetch their desired profit and it will jog them toward loss in future then they intends to make disinvestment. Sometimes, an investor attempts to make disinvestment for the sake of funding elsewhere expecting more profit. Disinvestment is often done from economic, political or social aspect.
Disinvestment activity of the government has become a crucial topic of India. The Government can sell its enterprises or disinvest a part of its equity capital held by it to the private sector companies or in the open market.
There are many reasons behind the disinvestment made by the government of India:
- The government wants to develop resources to reduce budget shortage.
- The government requires resources to make investment in infrastructure, social sectors such as education, public health and poverty alleviation attempt.
- The government leads to disinvest to avoid financial loss: as it increases the efficiency in utilization of capital.
- Another important use of disinvestment of public enterprises is the resources raised from them can be used to pay off past debts of the government and thereby reducing the interest burden of the government
Disinvestment of public asset to private sector is profitable because this will enable these enterprises to attract private foreign investment to develop joint ventures. The government disinvested around two lakh crore of PSU considering following significance:
- To solve fiscal problem
- To develop economic growth
- To develop social strategy
- Reducing government rate
- To develop private sector enterprise
- To encourage investment
Moreover, disinvestment policy taken by Indian government develops private sector enterprise and also ensures a handsome profit for the government.