Modes of Disinvestment of CPSEs

Disinvestment Policy comprises two components :
  1. Strategic Disinvestment and
  2. Minority Stake Sale
Strategic Disinvestment implies entire or substantial sale of Government shareholding of a CPSE along with transfer of management control.
Minority Stake Sale: Minority stake sale in certain CPSEs are carried out without transfer of management control through various SEBI-approved methods like Initial Public Offer (IPO), Offer for Sale (OFS) and Buyback of shares etc. These methods play important role in strengthening the capital market through:
  1. Increasing the float of well performing CPSE's
  2. Providing opportunity to retail investors to participate in an extended range of stocks and
  3. Increasing liquidity and depth of the capital market

Initial Public/ Further Public Offer (IPO/FPO)
  1. Initial Public Offer (IPO): When an unlisted company makes either a fresh issue of shares or convertible securities or offers its existing shares or convertible securities for sale or both for the first time to the public, it is called an IPO. This paves way for listing and trading of the issuer's shares or convertible securities on the Stock Exchanges.
  2. Further Public Offer (FPO): When an already listed company makes either a fresh issue of shares or convertible securities to the public or an offer for sale to the public, it is called FPO.
  3. Offer For Sale (OFS) is a simpler method of sale of shares through the exchange platform for listed companies. The mechanism was first introduced by SEBI in 2012, to make it easier for promoters of publicly-traded companies to cut their holdings and comply with the minimum public shareholding (MPS) norms. The method was largely adopted by listed companies, both state-run and private, to adhere to the SEBI norms of minimum public shareholding. Government has often used this route to divest its shareholding in CPSEs to achieve MPS and further dilution beyond MPS. However, Government is competent to extend time for achieving MPS for Public Sector under Rule 19 A of SCRR, 1957. Salient features of OFS are as under:
    1. Simple to execute
    2. Market-driven
    3. Govt. continues to retain management control
    4. Cost-effective
    5. Time efficient (completed in 2 trading days)
    6. Transparent allocation based on price-parity basis.
  4. Buyback of Shares: Buyback is the repurchase by a company of its shares from the existing shareholders that reduces the number of its shares in the open market. Companies buy back their shares for a number of reasons:
    1. To increase the value of shares held by promoters.
    2. To eliminate any threats by minority shareholders who may be looking for a controlling stake.
    3. For CPSEs, buyback is a tool for Govt. of India to disinvest the equity held by GoI in CPSEs and to make proper utilization of idle cash left with CPSEs.
    DIPAM has recently issued Revised Guidelines on Capital Restructuring of CPSEs on 18.11.2024 and as per Revised Guidelines on Capital Restructuring of CPSEs, the criteria for identifying potential buyback cases are as under: CPSE, whose market price of the share is less than the book value consistently for the last six months, and having net-worth of at least Rs. 3000 crore and cash & bank balance of over Rs. 1500 crore may consider the option to buy-back their shares. It is clarified that Cash and bank balances of some CPSEs may be high due to receipt of advance and milestone payments. Therefore, cash and bank balances for the purpose of buyback, shall mean own cash i.e. cash holdings minus the advances received from clients for project work. For assessing the net worth of a CPSE, general Reserves and Surplus plus paid-up share capital of the CPSE are required to be used. CPSEs should look into and analyse/ deliberate in the first Board meeting after the closure of the financial year, the following parameters for the purpose of buyback:
    1. Cash and Bank balance;
    2. Capital Expenditure and business expansion as committed with reference to the CAPEX incurred in the last 3 years;
    3. Net-worth [Free reserves and paid-up capital, including other reserves (if any)];
    4. Long term borrowing and further capacity to borrow on the basis of its Net worth;
    5. Any other financial commitments in the near future;
    6. Business/other receivables and contingent liabilities, if any;
    7. Market price/book value of share.
    Further, if buyback is not considered desirable for a CPSE with excess cash, but no committed expenditure, company may consider paying higher or special dividend to the shareholders.
  5. Exchange Traded Funds: An ETF is a basket of stocks that reflects the composition of an Index, like Nifty-50 or BSE Sensex. Govt. introduced ETF as a method of disinvestment of CPSEs in 2014 by launching CPSE-ETF comprising of 10 CPSEs (with 67% weight in favour of energy sectors). Later another ETF, i.e. Bharat-22 was launched in 2017 comprising of 16 CPSEs, 3 PSBs and 3 private sector companies (where SUUTI had stake).