Vishleshan for Regulatory Exams, 11th August 2025: Centre’s Divestment Plans

Want to get ready for the UPSC, RBI, SEBI, or NABARD exam? If yes, you have to stay updated about key economic and regulatory updates. In today’s edition of Vishleshan, we’ll discuss Centre’s Divestment Plans. These issues are highly relevant for all the upcoming competitive exams mentioned above. Keep reading to stay ahead with a clear understanding of these current updates.

The Centre’s Divestment Plans

Context: The sale aims to raise money for the government while capitalizing on favourable market conditions. However, majority ownership and management control will remain firmly with the government.

Link to the Article: Mint

The government is planning to significantly reduce its ownership in major public sector entities, including Life Insurance Corporation of India (LIC) and several public sector banks (PSBs). This strategic move aims to not only meet the minimum public shareholding requirements mandated by the Securities and Exchange Board of India (Sebi) but also to raise funds for the government. With PSBs delivering strong profits and LIC showing robust performance, the government sees a favourable market environment for these share sales, which will be executed over the next three to five years while maintaining majority ownership and management control.

Divestment and Privatisation:

• Divestment: Refers to the sale or liquidation of assets by the government, typically public sector enterprises (PSUs). It involves the government selling its stake in state-owned companies. The article discusses the Centre looking to “slash its ownership in Life Insurance Corp. of India (LIC) and several public sector banks (PSB)”. A key characteristic is that the government may or may not lose management control. In this case, “majority ownership and management control will remain firmly with the government”.
• Privatisation: A specific type of divestment where the government sells a controlling stake (usually 51% or more) in a PSU to a private entity, resulting in the transfer of management control to the private sector.
• Difference between Divestment and Privatisation: Divestment is a broader term that includes any reduction in government stake. Privatisation is a more specific action that involves transferring management control to a private player. The government’s current plan is a form of divestment, not privatisation, as it aims to retain majority ownership and management control.

The Need for Divestment in India

• Raise Funds for the Government: A primary reason for divestment is to generate non-tax revenue, which can be used to fund public welfare schemes, social programs, infrastructure development, or to reduce the fiscal deficit. This allows the government to “free up its resources and allocate them towards priorities of national interest, such as infrastructure, MSMEs and agriculture”.
• Enhance Efficiency and Professionalism: Divesting a minority stake and bringing in non-government investors can increase the “level of professionalism and efficiency in the institutions, increasing the overall competitive environment in the market, thereby enhancing the overall quality of customer service”.
• Unlock Value and Market Discipline: Selling stakes in PSUs helps to unlock their true market value and introduces greater market discipline, transparency, and accountability into their functioning.
• Meeting Regulatory Mandates: Many public sector entities are required to meet certain regulatory norms, such as Sebi’s minimum public shareholding rule. Divestment is a way to comply with these regulations.

The Disinvestment Process:

• Financial Goal Setting: Each fiscal year, the Indian government, through the Union Budget, announces a specific disinvestment target. This target represents the projected amount of revenue to be generated from the sale of government stake in PSUs.
• Announcements and Execution: The target is a key part of the Union Budget speech. Following the announcement, the Department of Investment and Public Asset Management (DIPAM), under the Ministry of Finance, takes charge of the execution. DIPAM identifies potential PSUs for disinvestment, considering factors like market conditions, the strategic importance of the company, and the government’s broader economic goals.
• Strategic Importance: Disinvestment is a vital source of non-tax revenue for the government. It helps in funding various social and infrastructure projects, reducing the fiscal deficit, and managing public debt. Failure to meet the target can significantly impact fiscal planning and macroeconomic stability.
• Methods of Disinvestment: A range of methods are employed to divest government stake, including:
  • Public Offerings: Initial Public Offerings (IPOs) or Further Public Offerings (FPOs).
  • Strategic Sales: Selling a majority stake and management control to a strategic buyer.
  • Offer for Sale (OFS): A mechanism for promoters to sell their shares through the stock exchange.
  • Buybacks: PSUs buying back their own shares from the government.

Disinvestment Targets and Realizations: 2024-25 and 2025-26

Union Budget 2024-25

• Revised Disinvestment Target (2024-25): The revised estimate for disinvestment receipts for the fiscal year 2024-25 was set at ₹30,000 crore. This was a significant reduction from the initial budget (Interim Budget) estimate of ₹50,000 crore, reflecting the challenges in a volatile global economic environment and a cautious approach to asset sales.
• Actual Disinvestment Realization (2024-25): The actual receipts fell short of the revised target. As of the end of the fiscal year, the government had reportedly raised approximately ₹16,500 crore. Key transactions contributing to this included:
  • A significant stake sale in companies like Hindustan Zinc and a few smaller transactions.
  • The government’s focus remained on strategic sales, but market conditions and procedural delays impacted the timelines of major privatizations.

Union Budget 2025-26

• Disinvestment Target (2025-26): For the fiscal year 2025-26, the Union Budget set a disinvestment target of ₹50,000 crore. This ambitious target indicates the government’s renewed commitment to its disinvestment and privatization agenda.
• Disinvestment Realization (Till July-August 2025): As of July-August 2025, the disinvestment realization is in its early stages. The government has initiated processes for several key transactions, but major strategic sales take time to materialize. The realization is a fraction of the full-year target, which is typical for the first few months of a fiscal year.
  • Initial Realization: The government has reportedly raised around ₹4,500 crore primarily through minor stake sales and buybacks from PSUs.
  • Ongoing Initiatives: The government is actively working on the strategic sale of key PSUs. Major transactions, such as the privatization of certain public sector banks and other strategic entities, are in various stages of the bidding and regulatory approval process. The bulk of the targeted revenue is expected to come from these larger transactions, which are anticipated to conclude in the latter half of the fiscal year.

Sebi’s Rule on Minimum 25% Free Float Shares:

• What: Sebi mandates that all publicly listed companies must maintain a minimum of 25% public shareholding, also known as “free float” shares. This rule ensures adequate liquidity in the market and prevents manipulation by promoters.
• PSBs and LIC: Several PSBs and LIC are in the process of complying with this rule.
  • LIC: The government currently holds a 96.5% stake in LIC, after selling 3.5% in an IPO three years ago. Its deadline to meet the 10% minimum public shareholding was extended to May 16, 2027. The government plans to sell a 1.5% stake next, aiming to raise the public float to 5% and potentially another 1%-1.5% later.
  • PSBs: Five public sector banks—Indian Overseas Bank (94.61%), UCO Bank (90.95%), Punjab & Sind Bank (93.85%), Central Bank of India (89.27%), and Bank of Maharashtra (79.60%)—must reduce government ownership below 75% by August 2026.

Why were PSUs given an extended timeline?

• The Sebi rule initially set a deadline for all listed companies to meet the 25% public shareholding norm. However, due to the large size of the government’s stake and the sheer volume of shares that needed to be divested, a one-size-fits-all deadline was deemed impractical. The government, as the promoter, needed time to sell its stake in a phased manner to avoid market disruption and get a fair price. Hence, Sebi provided an extended timeline for PSUs, particularly for large entities like LIC and several PSBs, to gradually comply with the regulation.

Analysis of the Article: Decoding the Disinvestment Plan

The article reveals a well-timed and strategic plan by the government to capitalize on a favourable market environment to sell stakes in its financial sector entities.

1. Strategic Timing and Rationale:

• Favourable Market Conditions: The government is looking to sell shares “over time, as it would help bring in capital, though much will depend on market appetite”. This is a key driver for the divestment plan.
• Strong Performance: PSBs, led by State Bank of India, delivered a record profit of ₹44,218 crore in the June quarter. Similarly, LIC’s shares jumped 4% after it reported a 150-basis-point annual increase in the value of new business (VNB) margin to 15.4% in a seasonally weak quarter. The strong performance makes these entities more attractive to investors.
• Investor Interest: Experts note that “Institutional and retail investor interest, both domestic and foreign, continues to be high in the financial services space in India, and hence the plan of diluting government holding seems very much feasible and viable”.

2. Execution and Implementation Strategy:

• Phased Approach: The government is looking to hire merchant bankers for a period of three to five years, signalling a phased and patient approach to these stake sales to avoid market disruption.
• Meeting Deadlines: While some PSBs are expected to seek an extension to meet the August 2026 deadline, Bank of Maharashtra is expected to meet it.
• Modes of Sale: The sales are likely to be conducted through qualified institutional placements (QIPs). There are “currently no plans for a direct share sale in the market via an offer for sale (OFS) or a public offering for any PSB”. The next LIC stake sale will be around 1.5%, likely through QIP, with the goal of increasing public float to 5% and potentially paving the way for its inclusion in index funds.
• Retaining Control: A crucial aspect of this plan is that the government will retain “majority ownership and management control”. This confirms the government’s strategy is one of divestment, not privatisation.

In conclusion, the government’s plan to divest stakes in LIC and PSBs is a well-thought-out strategy to leverage the strong performance of these entities and high investor interest. By adopting a phased approach through QIPs, the government aims to raise funds, meet regulatory mandates, and enhance the professionalism and efficiency of these institutions, all while ensuring that it maintains control over these critical public sector assets.

• Sign Up on Practicemock for Updated Current Affairs, Topic Tests and Mini Mocks
• Sign Up Here to Download Free Study Material