Definition of Disinvestment
Disinvestment refers to the selling or liquidating of an asset, its division, or subsidiary by an organization or government. The process of disinvestment can lead to the deduction of capital expenditures. As we discuss that the disinvestment process may cause a deduction of (CapEx), but on the other side, the main aim of the said procedure to maximize the ROI. The process of disinvestment has been carried out for various reasons that are environmental, political, or strategic.
- CapEX- Capital Expenditures
- ROI- Rate of Return
Instance 1: A corporation having a business of manufacturing electric generators might sell its manufacturing facilities with the aim of collecting money, which can be utilized in expanding its industrial generator product line.
Instance 2: XYZ is a corporation engaging in the business of selling consumer products. Now, the corporation decided to sell the products off a profitable portion that no longer meets its long-range goals. This disinvestment will be used to expand the corporation’s monetary position by reducing its debt.
Note: It has been seen many of the time, the process of the disinvestment takes place to privatize assets. But the point to be noted is that not all the disinvestment is the privatization. Usually, the said process is done by the government to reduce the debt and for the long-term growth of the country.
- It helps in reducing the fiscal burden on the government.
- Improving public finances.
- Promotes expansion and diversification
- Inspiring private ownership.
- It also helps to promote development programs.
- Helps in healthy competition
Definition of Privatization
The transfer, selling of the business/ property/ownership from the government sector to the private sector is known as privatization. In simple word, when government give the ownership of its business to private sector is termed privatization. It is believed that the private sector managed and operate a business more effectively and efficiently. Whereas, on the other hand it also believes that the private sector organisations misuse their monopoly power and ignore the public benefits.
Privatization – Objectives
- It provides a strong base to the inflow of Foreign Direct Investment (FDI).
- Improves the economy strength and inflow of Foreign Direct Investment (FDI).
Methods Of Privatisation:
There are six (06) methods of the privatization the methods are given here-
- Sale of shares
- Public auction
- Public tender
- Negotiations by direct method
- Transfer of municipally controlled enterprises or control of State
- Lease with a right to purch