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Knowledge Center » Finance & Investment » DIVESTMENT

Divestment, also known as divestiture, in economics and finance, is the cutback of some kind of asset for ethical, financial or political objectives or sale of an existing business by a firm. A divestment is the opposite of an investment.
The reasons which are generally cited for Disinvestment are:
•    A firm may want to divest/sell businesses that are not part of its core operations so that it can focus on what it does best.
•    To secure funds: Divestitures bring about funds for the firm because it sells part of its businesses in exchange for cash.
•    Sometimes a firm’s “break-up” value is regarded to be better than the value of the firm as a whole. Therefore, firms are encouraged to sell off what would be worth more when liquidated than when retained.
•    To generate stability in operations.

Case Study: PSU’s turning into liability resulting in their Divestment
Often government-owned corporations function in sectors where there is a natural monopoly, or where it has strategic interest. A government-owned corporation is termed as Public Sector Undertaking (PSU) in India.That PSUs had shown an extremely negative rate of return on capital employed as was stated in the economic policy initiated in July 1991. Inefficient Public Sector Undertakings had become a burden on the Government’s resources, turning out to be liabilities rather than the assets they were supposed to be.The Government eventually decided to get rid of these units, move out of non-core businesses, particularly the ones where the private sector had entered in a significant way and fixate on core activities. Finally, disinvestment was also regarded by the Government as a method to raise funds for meeting general and specific needs.In this direction, the Government adopted the ‘Disinvestment Policy’. The following main objectives of disinvestment were outlined:                                
•    To reduce the financial burden on the Government.
•    To improve public finances.
•    To introduce, competition and market discipline.
•    To fund growth.
•    To encourage wider share of ownership.
•    To retire Government debt- Almost 40-45% of the Centre’s revenue receipts go towards repaying public debt/interest.

Disinvestment target Fiscal 2013-14.

The government has framed the disinvestment target for fiscal year 2013-14 as Rs.40000 crore. The government needs all the revenue it can manage if it is to stay within the budgeted fiscal deficit of 4.8% of gross domestic product, a line finance minister P Chidambaram has repeatedly said will not be crossed.