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Tuesday, July 07, 2020

The five paths of disinvestment in India

by Sudipto Banerjee, Renuka Sane and Srishti Sharma.

Privatisation of Central Public Sector Enterprises (CPSEs) in India has typically been done in one of the following ways: in the early years government equity was sold through an auction to financial investors, while since 2004, the popular method has been public offer. Strategic sales, where control of the public sector is transferred to private entities have been very few, concentrated in the 1999-2004 period. As a result, sale of government shareholding in India is referred to as disinvestment and not privatisation.

In recent years the methods used for disinvestment include: a) Public offer, b) Buybacks, c) Sale to employees, d) Exchange traded funds (ETFs), and e) CPSE to CPSE sale. Buybacks and ETFs are new ways of divesting minority stake. As we study the trajectory of disinvestment in India, it is important to understand the relative magnitudes involved in each transaction. There are two metrics that are important - first, the amount of resources raised and second, the change in government equity through these methods. The latter is especially important as disinvestment has great potential to improve economic efficiency by reducing government control. By focusing only on resources raised as an outcome, we end up ignoring the more important economic rationale for undertaking disinvestment.

In this article, we describe the methods adopted for disinvestment of CPSEs since FY2015. We use the BSEPSU disinvestment database and individual annual reports of firms to arrive at the magnitudes of disinvestment. We use two measures:

  • Disinvestment proceeds and shares sold. The proceeds are the amount realised through the sale process. Shares sold is the ratio of the number of government shares sold by the total equity of the firm.
  • Change in government equity. This is the difference between the share of government in total equity of the firm before and after the disinvestment transaction.

Disinvestment methods

Table 1 provides an overview of disinvestment by the government in the last 6 years. It shows the number of transactions, the number of CPSEs, the disinvestment proceeds, % of total shares sold and the change in government equity post the transaction.

Table 1: Disinvestment from FY15 to FY20
Methods of disinvestment Number of
Number of CPSEs
Disinvestment proceeds (INR million)
Average % of
shares sold
Average change in % of govt equity post
1 PUBLIC OFFER 37 32 984,054 10 10
2 BUYBACK 36 23 403,549 8.34 0.64
3 SALE TO EMPLOYEES 21 15 9,379 0.138 0.138
4 EXCHANGE TRADED FUND* 10 18 989,490 1.09# 1.09#
5 CPSE TO CPSE SALE 8 8 667,119 77.15 77.15
Source: BSEPSU database and authors' calculation based on annual reports

* There were a total of 10 tranches of ETFs in this period. Each tranche contains a basket of firms. If the disinvestment in each firm that was part of an ETF tranche is considered separately then we would have 126 ETF transactions instead of 10. The average change in government equity for ETFs is therefore calculated across these 126 transactions, and not the 10 tranches

The government of India disinvested its stake in 50 CPSEs and raised a total of INR 3,053 billion using five methods: public offer, buy back, CPSE to CPSE sale, exchange traded funds and sale to employees. On an average, the government sold 7.28% of total shares and the average reduction in government equity has been around 5.84%. The sum total of the number of CPSEs in column 2 does not match with the total number of 50 unique CPSEs because some CPSEs adopted multiple methods across years. Public offer was the most used method with 32 firms and 37 transactions. The second most popular method was buyback with 36 transactions. The maximum revenue was raised through ETFs followed by public offer. The maximum share of sales and change in government equity was through CPSE to CPSE transfers. There is some missing data on % shares sold for buyback and ETF transactions as annual reports for FY20 is not published yet (indicated by #).

Figure 1 below shows the yearly distribution of amount raised and % reduction in equity across various methods from FY15 to FY20. The significant increase in proceeds in FY18 and FY19 is driven by ETFs and CPSE to CPSE sales. Besides CPSE to CPSE sales, the average % reduction in government equity remained low and constant across all years. We next study the five methods in detail and understand the extent of disinvestment in each method.

Public offer

Public offer has been the most common method of disinvestment. Since FY 2015, there have been 37 public offer transactions including 21 offer for sale (OFS) transactions. The public offer route is considered as a transparent way of offloading government shares and aims to encourage public participation. In several public offer transactions, the Life Insurance Corporation (LIC), whose shares are fully owned by the central government, has bought majority of the shares. Some of these transactions include:

  1. In 2014, LIC bought 5.94% stake in Bharat Heavy Electricals Ltd (BHEL) for INR 26,850 million, increasing its stake in BHEL to 14.99%.
  2. In 2015, LIC bought shares worth INR 70,000 million INR in the public offer of Coal India Ltd. This was equivalent to one-third of the public offer.
  3. In the same year, it bought nearly 86% of the shares on offer of the Indian Oil Corporation paying over INR 80,000 million.
  4. In 2016, LIC bought 59% of shares offered in NTPC stake sale worth $730 million. Thus, LIC spent approximately INR 29,000 million.
  5. In 2017, LIC bought shares worth around INR 80,000 million in the disinvestment of General Insurance Corporation of India and again bought shares worth INR 65,000 million in the IPO of New India Assurance Company.
  6. In March 2018, LIC subscribed 70% of shares in the IPO of Hindustan Aeronautics Ltd, paying INR 29000 million.
  7. Between November 22, 2019 and February 27, 2020, LIC acquired 59.49 lakh shares worth INR 1,770 million, or 2.38 % stake, in RITES though an offer-for-sale (OFS).

LIC spent roughly INR 381,620 million on the transactions listed above. This constitutes 38.7% of the disinvestment proceeds raised through the public offer method in the period of our study.


Buyback is a process where a company purchases its shares from its existing shareholders. This helps a company to restructure capital and increase the underlying value of shares. The company is required to extinguish the bought back shares. The government has used buyback in the past as a method of disinvestment. However in 2016, buyback was made compulsory for CPSEs who met the prescribed threshold of net worth and cash reserves.

A company is under an obligation to provide a buyback offer to all existing shareholders. In such a case, reduction in the total equity is higher than the reduction in government shares which may lead to an increase in % of government equity post buyback. However, if a CPSE is wholly owned by the government, total number of shares will be reduced (extinguished) by the same number of shares bought back. Hence, there will be no change in % of equity held by the government post buyback.

Table 2 presents the impact of buyback transactions on government shareholding. Since 2015, 23 CPSEs have bought back shares from the government raising INR 403,549 million. It is important to note that % shares sold for three buyback transactions in FY20 is unavailable since annual report for the year is not published yet (indicated by *). Out of total 36 buyback transactions, 9 transactions led to an increase in government equity. In 11 transactions, where CPSE was wholly owned by the government, there was no change in government holding. The remaining 16 transactions recorded an average reduction of 1.19% in government equity. In column (2) the count of individual number of CPSEs do not match with the total number of CPSEs because same 8 CPSEs recorded increase in equity in one year while decrease in another (indicated by **).

Table 2: Summary of buyback transactions
Transaction type Number of transactions No. of CPSEs Total disinvestment proceeds(INR million) Average % of shares sold Average change in % of govt equity post buyback
Reduction in government holding 16 12 244,947 7.63 (1.19)
Increase in government holding 9 9 83590.7 2.31 0.16
No change in government holding 11 7 75,011 15.55* 0
Total 36 23** 40,3549 8.34 (0.64)
Source : Authors' calculation based on annual reports

Sale to employees

As part of its disinvestment strategy, the government has often reserved a certain quantity of its shares for offer to the CPSE employees. Usually these shares are offered at a discount. Such transactions are expected to incentivise the employees and create dispersed shareholding. In the last six years, there have been 21 such transactions across 15 firms from which the government raised a total of INR 9,379 million. On an average, the % of shares sold to the employees is around 0.14%. Almost half of the proceeds from this method comes from two transactions in FY17 by Indian Oil Corporation Ltd. and NTPC Ltd. In May 2016, government sold 0.29% of the total shares of Indian Oil Corporation Ltd. to its employees raising INR 2,624 million. Pursuant to the 5% OFS stake in February 2016, NTPC offered to sell 2.06 crores equity shares of government to the employees at a discount rate of 5%. 85% of the shares were subscribed by around 10,800 eligible employees and government raised approximately INR 2,037 million.

Exchange traded funds (ETFs)

ETF is a pool of stocks that reflects the composition of an index, like S&P BSE SENSEX. This method has been frequently used for disinvestment in the recent past, where the government sells shareholding in select CPSEs to a fund house which owns the ETF. The ETF fund manager first formulates the scheme and offers to the public for subscription by way of a new fund offer (NFO). The subscription proceeds are used to purchase the shares of constituent companies in similar composition and weights based on the underlying index. Shares are usually sold at a discount to the scheme and the fund manager in turn creates and allots units of the scheme, to the investors. Once the NFO closes, the units are listed on the exchanges.

The government has launched two ETFs, namely, CPSE ETF and Bharat-22 ETF. CPSE ETF was launched in 2014. It contains stock of 11 listed CPSEs and follows the NIFTY CPSE index. In 2017, Bharat-22 ETF was created. This comprises of 16 CPSEs, 3 public sector banks and 3 private company stocks held by Specified Undertaking of the Unit Trust of India (SUUTI). The underlying index is the S&P Bharat 22 index. From FY15 to FY20, there were six tranches of CPSE ETF and four tranches of Bharat-22 ETF transactions which raised INR 989,490 million.

Table 3 lists each ETF tranche from FY15 to FY20 and provides details on allotment date, number of constituent CPSEs, amount raised by government and average reduction in % of government equity post each tranche. It is important to note that the average % reduction in government equity for three ETF transactions in FY20 is unavailable since annual report for the year is not published yet (indicated by *NA).

Table 3: Summary of ETF tranches from FY15 to FY20
ETF Name ETF tranche No. of constituent CPSEs Allotment date of ETF units Average % reduction in government equity Amount realised (in INR million)
CPSE ETF FURTHER FUND OFFER 1 10 28/01/2017 0.98 59999.9
CPSE ETF FURTHER FUND OFFER 2 10 25/03/2017 0.39 24999.9
CPSE ETF FURTHER FUND OFFER 3 11 07/12/2018 2.88 170000
CPSE ETF FURTHER FUND OFFER 4 11 29/03/2019 1.22 93500.7
CPSE ETF FURTHER FUND OFFER 5 10 26/07/2019 NA* 100003.9
CPSE ETF FURTHER FUND OFFER 6 10 07/02/2020 NA* 165000
BHARAT 22-ETF NEW FUND OFFER 16 24/11/2017 0.93 145000
BHARAT 22-ETF FURTHER FUND OFFER 1 16 29/06/2018 0.58 83252.6
BHARAT 22-ETF TAP OFFER 16 22/02/2019 0.92 104045.9
BHARAT 22-ETF FURTHER FUND OFFER 2 16 10/10/2019 NA* 43688
Source : Author's calculation based on annual reports

While aggregate proceeds from ETF may have been high, the average reduction in government equity has been low.

CPSE to CPSE sale

Under this method, government transfers its shares in one CPSE to another CPSE. There have been eight such transactions in the last six years which raised a total of approximately INR 667,119 million. The details of each of the transaction is given in table 4. Except REC Limited, the entire government shareholding was transferred to another CPSE. In case of REC Limited, government still holds 0.25% shares. Post these sales, the firms became subsidiaries of the buyer CPSE firms, but continue to remain government companies as defined under section 2(45) of the Companies Act, 2013.

Table 4: CPSE to CPSE sales from FY15 to FY20
CPSE Date of transaction Buyer's Name % of shares sold Amount realised (in INR million)
H S C C (INDIA) LTD. 06/11/2018 NBCC (INDIA) LTD. 100 2,850
R E C LTD. 28/03/2019 POWER FINANCE CORP.LTD. 52.63 145,000
T H D C INDIA LTD. 27/03/2020 NTPC LTD. 74.49 750,00
Source : BSEPSU disinvestment database

The CPSE to CPSE sale transactions constituted around 22% of total disinvestment proceeds in the last six years. While technically, the government may have divested 77% shareholding in these CPSEs (as shown in Table 1), it did not bring any change in government ownership of these firms.


There has been a huge increase in disinvestment proceeds in the recent years. However, reduction in government equity in the CPSEs has not witnessed much growth. About 5.19% of disinvestment proceeds came from buyback transactions that led to an increase (or no change) in government equity and 21.8% came from CPSE to CPSE sale transactions that led to no change in government ownership. While 32.2% of proceeds came from public offer, almost 39% of these were actually purchased by LIC. Thus, purchases by LIC accounted for 12.49% of the total proceeds which also imply no change in government ownership. Finally, around 32.4% came from ETFs which, on an average reduced government equity by 1.09%. These considerations become central issues for any research on disinvestment and its impact.

The authors are researchers at NIPFP. We thank Karthik Suresh and Sarang Moharir for useful comments.


  1. I have a few observations

    1) LIC may have government shareholding but LIC received public money which was used to purchase PSU shares as investment. Hence I think it is technically not correct to say that government shareholding did not decrease.

    2) CPSE to CPSE sale is like restructuring, also share buyback is restructuring, hence both should be kept out of the discussion on DISINVESTMENT.

    3) ETF by very nature are instruments of collective investment used to pool investor money. I fail to understand how this can be called as disinvestment when the Mutual funds are supposed to purchase stocks as per there defined investment policy from open market (has sone special law been created for these ETF ¡) i seriously doubt whether ETF should be considered under the head disinvestment.

  2. (1) Regardless of how LIC obtained the money, the ownership of LIC remained unchanged (100% government). Hence, the ownership of the PSU shares also remained unchanged. Think of it this way - if Mukesh Ambani uses the insurance premiums of Reliance Insurance to fund his purchase of a house, does that mean the insurance premium payers own the house or Mukesh Ambani?

    (2) CPSE sale to CPSE is reported by the government itself as part of the disinvestment targets.

    (3) When the ETF is created, shares are transferred to that fund and those shares thus move from Government as owner to Fund subscribers (ie people who bought the ETF) as owners while the government gets the money that the ETF collects. Its indeed disinvestment.


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