Topics: Investment, Balance sheet, Finance Pages: 5 (1180 words) Published: November 3, 2010

1) What Does Disinvestment Mean?
Ans)  The action of an organization or government selling or liquidating an asset or subsidiary. Also known as "divestiture".  OR
A reduction in capital expenditure, or the decision of a company not to replenish depleted capital goods.

2) Why disinvestment in India?
In India for almost four decades the country was pursuing a path of development in which public sector was expected to be the engine of growth.  However, the public sector had overgrown itself and their shortcomings started manifesting in the shape of low capacity utilization and low efficiency due to over manning and poor work ethics, over capitalization due to substantial time and cost overruns, inability to innovate, take quick and timely decisions, large interference in decision making process etc. The Government started to deregulate the areas of its operation and subsequently, the disinvestment in Public Sector Enterprises (PSEs) was announced.  The process of deregulation was aimed at enlarging competition and allowing new firms to enter the markets.  The market was thus opened up to domestic entrepreneurs / industrialists and norms for entry of foreign capital were liberalized. Due to the current revenue expenditure on items such as interest payments, wages and salaries of Government employees and subsidies, the Government is left with hardly any surplus for capital expenditure on social and physical infrastructure. While the Government would like to spend on basic education, primary health and family welfare, large amount of resources are blocked in several non-strategic sectors such as hotels, trading companies, consultancy companies, textile companies, chemical and pharmaceuticals companies, consumer goods companies etc.  Additionally, the continued existence of the PSEs is forcing the Government to commit further resources for the sustenance of many non-viable PSEs.  The Government continues to expose the taxpayers' money to risk, which it can readily avoid.  To top it all, there is a huge amount of debt overhang, which needs to be serviced and reduced before money is available to invest in infrastructure.  All this makes Disinvestment of the Government stake in the PSEs absolutely imperative. 3) Advantages of disinvestments:- Raises funds for meeting expenditure in social sectors, restructuring of PSUs and retiring public debt.

Disadvantage of disinvestments:-The owner will dilute the ownership of the company. 

A Case of Bharat Heavy Electricals Ltd. (BHEL)

Does Disinvestment Improve Financial Performance?


Strategies are formulated in the light of objectives, and therefore play an important role in their accomplishment. An important aspect in the management of public sector enterprises is the relevance of the strategic financial planning technique in dealing with conflicting objectives. Objectives of public sector enterprises are conflicting because majority shareholder is the government. In the case of public ownership, the management of firms can be regarded as agents acting for the government to which they are responsible. As compared to private ownership, differences between managers and their immediate principals in public ownership arise from following facts:

(a) Principals do not typically seek to maximize profits.
(b) There are no marketable ordinary shares in the firm, and hence no market for corporate control. (c) There is no direct equivalent of the bankruptcy constraint on financial performance.

Thus the purpose of the present study is to analyze the impact of change in the ownership (reduction in government’s ownership) on various financial parameters of a public sector company.


In this approach performance of the enterprise before disinvestment is compared with its performance after disinvestment, attributing any observed change to the disinvestment. For the purpose of the present study Pre- disinvestment mean value of...
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