Disinvestment is just the opposite of investment, i.e. it means pulling out the money invested in the company by selling the stake, either partially or fully. It is driven by the effective use of the resources, to earn the highest returns out of the money invested.
On the contrary, Privatization is a transition of government-owned company, operation, unit or division to the privately-owned enterprise. It happens when more than 51% of the shareholding of the government is transferred to private hands.
The development of a nation is highly dependent on the growth of the industrial sector and its growth. Privatization of various sectors is in vogue since the last few decades, as it is believed that there is a tough competition in the private sector, which brings in better offerings at reasonable prices and less corruption.
Content: Privatization Vs Disinvestment
|Basis for Comparison||Privatization||Disinvestment|
|Meaning||Privatization is the process of transfer of ownership of a public sector undertaking to the private sector.||Disinvestment is a process in which an organization or government sells or liquidates the assets which it owns.|
|Involves||Change in ownership||Dilution of ownership|
|Shareholding of Government||More than 50%||Less than 50%|
|Change in management||Results in a change in management||May or may not result in a change in management|
|Objective||To provide financial support and to enhance the efficiency of the concern.||To make effective use of the public resource, and to increase operational and dynamic efficiency.|
Definition of Privatization
In simple words, Privatization implies the complete or partial sale of government’s equity in a state-owned undertaking, to the private sector.
Privatization can take place in two ways, i.e. either by selling government-owned shares in an undertaking or lifting the restrictions that block private individuals and firms to take part in a particular industry. It also includes contracting out services provided by the public sector with private contractors.
When there is a transfer of ownership, control and management, from the public sector to the private sector, specifically due to the sale of assets, it is called Privatization. When the transfer becomes effective, the government ceases to be the owner of such an undertaking. This change has a great impact on government revenue, which can be positive or negative.
Forms of Privatization
There are eight ways in which privatization can take place, namely:
- Contracting out
- Liberalization or Deregulation
- Management Privatization
- Load shedding
- Sale of assets to the private sector
- Private payment
How to Privatize?
The benefits of privatization can be visible only when it is implemented with proper planning and cooperation. There are three points which should be considered while effectuating it.
- Creation of Conducive Environment: Development of an appropriate environment by carrying out other reforms, which were designed to promote competition and growth.
- Streamlining of the process: Develop a powerful, inclined, centralized and transparent process, by establishing a small yet significant goal to privatize, while maintaining its fairness.
- Prepare the enterprise/industry for privatization: Preparing the enterprise for privatization involves a series of steps, beginning with proper planning. Thereafter, making required changes to assure that it is implemented to improve efficiency while overcoming with the negative outcomes, caused by it.
Definition of Disinvestment
Disinvestment refers to a strategy of selling off or liquidating some assets like plant, division, subsidiary, unit, etc, owned by the government or the organization. The strategy is adopted to reduce the losses incurred from non-performing assets, pulling out investment in a specific industry or sector, or to raise funds.
The strategy is commonly used by the government, by selling the shares of a Public Sector Enterprise (PSE) in which the government (centre or state) owns a majority stake, so as to raise funds. The proceeds received from selling the stake can be used in productive areas.
The shareholding of government in a public sector undertaking represents the investments at the disposal of the government and so when these shares are sold for cash, it means the investment is converted into cash called as disinvestment. The degree of disinvestment depends on the disinvestment policy of the government.
Key Differences Between Privatization and Disinvestment
The points of difference between privatization and disinvestment are discussed below:
- When more than 51% of the stake is sold by the government of a public sector undertaking, to the private individuals or firm, the process is termed as privatization. On the other hand, Disinvestment alludes to the disposal of assets by the government or any other organization, leading to a change in ownership and control, influenced by financial, political or strategical reasons.
- Privatization involves a change in ownership, whereas Disinvestment involves dilution of ownership.
- In privatization, the government sell more than 50% of its shareholding, while in case of disinvestment shareholding less than 50% is sold by the government.
- Disinvestment refers to the dilution of government shareholding in a public sector entity. However, if the dilution is less than 50%, the management of the enterprise is kept by the government. However, when the dilution of shares exceeds 50%, there is a change in management along with the ownership, which is practically called Privatization.
- Privatization covers disinvestment, but disinvestment does not necessarily mean privatization, only when the dilution of shares is greater than 51%, then it is called as privatization.
- Disinvestment aims at lessening the fiscal burden on the government, because of the inefficiency of the Public Sector Undertaking. Moreover, it also aims at providing financial aid. On the flip side, privatization is encouraged to make the best possible use of the country’s resources as well as to increase the operational and dynamic efficiency of the concern.
Privatization and disinvestment are undertaken with the aim of improving the efficiency of the enterprise. However, these are highly criticized, due to political reasons and become a matter of debate these days.
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