Benefits of Disinvestment

Some overall benefits of Disinvestment, irrespective of the approach used are as follows:

For the Government

For the Markets and Economy

    1.   Brings about greater efficiencies for the economy and markets as a whole 

For the Taxpayers

For the Employees

    1.   Monetary gains through ESOPs and preferential issue of shares
    2.   Pay rises, as has been seen in past divestments
    3.   Greater opportunities and avenues for career growth- further employment generation

For the PSUs

    1.   Greater autonomy leading to higher efficiencies

Benefits specific to each approach used for Disinvestment

Complete Privatisation

In most parts of the world, it has been proven that Privatisation brings the maximum returns to the tax payer, thus making it the best form of Disinvestment. Since complete control is given off by the government, the reforms are immediate, and the results start showing soon.

Majority Sale

A majority stake sale to a strategic buyer has its positives in getting a superior valuation (though sometimes not as good as an outright sale) for the government purely due to market dynamics. With some of the PSUs being virtual monopolies, private players have a lot of interest in acquiring stakes in them. It was because of this reason that this became the chosen vehicle for Disinvestment in the early 2000's. 

Minority Sale

Given the current political and social compulsions, complete privatisation may not be a solution in the Indian context. Even a majority stake sale would be met with opposition. 
Offloading a part of the government’s equity by way of a minority stake sale is the only workable option, as in this case, the control would still be with the government. Minority stakes can be sold either to selected private players, or to the public by way of a Public Offer or auctioned off to financial institutions. Offloading minority stakes to private players does not make sense for the government since valuations would be driven down by the fact that the government still retains control/ decision making of the company. This has been proven in transactions in the past wherein the P-E ratios typically accompanying such a sale were found to be low. 

On the other hand, a minority stake sale via a Public Offer has several benefits. 

For the Government

1. Minority Stake sales via Public Offers provide benefits of long term capital appreciation- Disinvestment done in a staggered manner can help the government realize the real ‘value’ of these PSUs, as has been shown by recent PSU IPOs wherein the valuation that the market has given to the PSUs is far higher than the original offer price. For example, in the case of NTPC, the Government sold each share at Rs. 62 in its IPO in October 2004. In its FPO in February 2010, the Government was able to realise Rs. 201 for the same share!

For the PSU 

1.  Listing leads to better and timely disclosures, bringing in greater transparency and professionalism, thus protecting the interest of the investors
2. Greater efficiency by way of being accountable to thousands of shareholders
3. Listing provides an opportunity to raise capital to fund new projects/undertake expansions/diversifications and for acquisitions. An initial listing increases a company's ability to raise further capital through various routes like preferential issue, rights issue, Qualified Institutional Placements and ADRs/GDRs/FCCBs, and in the process attract a wide and varied body of institutional and professional investors.
4. Listing raises a company's public profile with customers, suppliers, investors, financial institutions and the media. A listed company is typically covered in analyst reports and may also be included in one or more of indices of the stock exchanges.

For the Employees

1. Though there could be opposition from employees of some PSUs, this can be countered and also turned into a favourable situation by offering ESOPs/preferential issue of shares to them. This would provide tangible monetary benefits to them, and also make them an interested party in better performance of their companies.

For the Markets and Economy

1. These PSU IPOs present the best opportunity of widening the equity investing retail base by providing greater and safer investment opportunities. Curbs and measures, however, would need to be put in place to ensure that institutional investors do not run away with the bulk of this sale and only retail participation is allowed in these issues. Public offers have been one of the frequently used techniques in the UK to transfer state assets and businesses to private ownership. The method has been fairly successful, having increased the shareholding population from 4% to 25%. For example, British Telecom alone created 2.1 million shareholders in the UK, when privatized.
2. Listed PSUs already form about 30% of the total market capitalisation. With more PSUs being listed, this would provide a greater depth and width to our capital market

A minority stake sale via Auctioning to financial institutions also has certain benefits: 

     1.  Bidding by a group of large, informed investors would provide the highest likelihood of the assets receiving the 
          best valuation 
     2.  The process takes relatively little time as the modalities are less demanding than those for a full-scale public offer
          process that can take many months. 
     3.  This will provide a direct conduit for interested foreign investors
     4.  Retail participation can come in through the mutual funds, Provident Funds and the NPS.