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What is disinvestment?

[] The process of selling off a portion of an organisation or government’s ownership in order to generate more revenue is disinvestment.

The process of selling off a portion of an organisation or government’s ownership in order to generate more revenue is disinvestment. The sale may represent the disposal of an asset or share in a division of a company or government agency.

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An important reason for disinvestment is to make it easier to redistribute finances and resources in order to put them to more productive use. A further benefit of disinvestment is a reduction in debt, which also assists in the process of a corporate reorganisation.

Disinvestment: Goals

A state government’s choice to give up control of a company to the private sector is a common example of disinvestment in action. Disinvestment may be caused by a number of factors, including high loan costs, inappropriate capacity, liquidity problems, or even political considerations.

It is the primary goal of disinvestment to maximise an organisation’s return on investment. Stock sales, sale of assets, spin-offs, and demergers are all examples of disinvestment. Disinvestment could also be the result of ineffective production techniques, obsolete technology, and other similar factors.

Because of an enterprise’s lack of profitability, a corporation can choose to demerge or spin-off certain endeavours. It is possible that a single unit is losing money while the rest of the company is flourishing and that the unit’s business plan does not fully connect with the company’s overall strategy. The unit may then be sold to a different investor who is more suitable for the company’s needs. This generates money that might be used to expand the firm in line with the existing business strategy.

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In certain situations, government laws may mandate disinvestment from a specific enterprise. A nation could adjust its approach to trade or reduce the number of critical parts or ingredients that it allows into the country. The modification of the policy might render the company’s operations unprofitable, which would then necessitate the sale of a portion of ownership in the company. In other circumstances, the change in policy may render the operation of the company unlawful, which would make it necessary for the firm to be shut down.

Types of disinvestment

Disinvestment may be broadly broken down into the following categories:

Establishing market segmentation

When other divisions of a corporation continue to generate more profitability despite needing the same level of resources and expense, the firm may decide to stop investing in one of its divisions that is underperforming. The goal of this kind of disinvestment plan is to refocus the attention of the corporation on the departments and divisions that are successful and to expand those operations.

Getting rid of unused assets

When a firm’s long-term plan is compromised by the purchase of an asset that does not match that strategy, the company finds itself in a position where it has little choice but to follow this approach. Companies that have recently undergone mergers sometimes find themselves saddled with assets they have no plans to use. In order to concentrate on its core competencies, a firm may decide to stop investing in newly acquired assets.

Considering social and legal factors

Disinvestment may be necessary for fair competition if a corporation crosses a specific market holding barrier. If a firm’s market holdings exceed a specific threshold limit, the company may be required to disinvest its holdings in order to maintain an atmosphere of fair competition. An additional example may be an endowment fund that has decided to stop investing in energy businesses due to environmental concerns.

From the perspective of the government, disinvestment strategies may be broken down into the following categories:

Minority disinvestment

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By keeping its position as the company’s primary shareholder, the government intends to keep its management influence over the business. Because public sector businesses are meant to serve the public, the government must have the ability to have some level of influence on the policies of these businesses in order to advance the interests of the populace as a whole. In most cases, the government will either hold an auction to sell the minority ownership to possible institutional investors or issue an offer for sale (OFS) and invite the general public to participate.

Majority disinvestment

The government divests itself of the bulk of its holdings in a corporation that was formerly controlled by the government. As a result of the sale, the government only owns a small portion of the corporation. In this case, the choice is based on government strategy and policy. In most cases, the majority of disinvestments are made in favour of other public sector firms.

Strategic disinvestment

A PSU is often sold off by the government to a private organisation that is not affiliated with the government. Governments are hoping to shift responsibility for an underperforming organisation to more economical private sector entities and decrease the financial strain on their balance sheets by selling off their stake.

Complete disinvestment/privatisation 

The privatisation of a PSU happens when the government sells its whole investment in the firm to a private buyer, at which point the private buyer assumes full ownership and management of the business.

Companies all across the world are pulling out of investments for a variety of reasons, including financial, political, regulatory, and strategic concerns. Assets or endeavours that are no longer lucrative or do not fit in with the overall plan of the company are put up for sale. In a similar vein, a business should be in compliance with the legal regulations and norms of the nation in which its operations are based or where its headquarters are located. It is possible that the strategy may necessitate a fresh look at its worldwide assets or strategic alliances.

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Category: Must Knows

Debora Berti

Università degli Studi di Firenze, IT

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