Public sector enterprises and disinvestment

The first principle

The state owns a firm for one of two reasons: because the market will not provide something the country needs, or because owning it once served that purpose and the firm is still there. Ownership by itself does not make a firm serve the public; what matters is whether it faces competition, hard budgets and managers who answer for results. Disinvestment is the decision that, in a particular firm, those disciplines are better supplied by markets and private owners, while the state keeps what is strategic.

The core

Why India built a public sector

• The commanding heights. The Industrial Policy Resolution of 1956 reserved 17 industries for the state because private capital was too small and too cautious to build steel plants, heavy machinery, power and oil refining, and because planners wanted to prevent concentration of wealth and to spread industry to backward regions. Bhilai, Rourkela and Durgapur steel plants were the result.
• The forms of public enterprise. Departmental undertakings such as the Railways and the Posts are run directly by a ministry, statutory corporations such as the Food Corporation of India are created by their own Act, and government companies such as NTPC are registered under company law. A government company is one in which governments hold at least 51 per cent of the paid up share capital (Companies Act, 2013, section 2(45)).
• Central public sector enterprises (CPSEs) are companies in which the Central government, or other CPSEs, hold more than half the equity. The Department of Public Enterprises, now in the Ministry of Finance, sets their policy on pay, governance and performance.

The Ratna categories

• Why grade them. Profitable CPSEs were slowed by needing approval for every large investment, so from 1997 the best were given freedom to invest, form joint ventures and go abroad on their own.
• Miniratna Category I and II are CPSEs that have made a profit in each of the last three years and have positive net worth; Category I must also have earned a pre tax profit of at least Rs 30 crore in one of those years.
• Navratna (1997) status goes to a Miniratna I company in Schedule A that has earned an "excellent" or "very good" rating under its memorandum of understanding (MoU), the annual performance agreement with its ministry, in three of the last five years and scores at least 60 out of 100 on six financial ratios.
• Maharatna (2010) status goes to a listed Navratna with average annual turnover above Rs 25,000 crore, net worth above Rs 15,000 crore and net profit above Rs 5,000 crore over three years, and a significant global presence. Its board may invest up to Rs 5,000 crore, or 15 per cent of its net worth, in one project without approval. There are 14 Maharatnas, the latest being Hindustan Aeronautics Limited in October 2024; the others are Bharat Heavy Electricals (BHEL), Bharat Petroleum (BPCL), Coal India, GAIL, Hindustan Petroleum (HPCL), Indian Oil (IOCL), NTPC, Oil India, the Oil and Natural Gas Corporation (ONGC), Power Finance Corporation, Power Grid Corporation, REC and the Steel Authority of India (SAIL).

Disinvestment and its methods

• Disinvestment is the sale of government equity in a public enterprise. A minority sale leaves control with the state, through an initial or further public offer, an offer for sale on the stock exchange, exchange traded funds of CPSE shares such as Bharat 22, or share buybacks. A strategic sale transfers management control, usually with 50 per cent or more of the shares, to a buyer.
• Institutions. The Rangarajan Committee (1993) recommended selling up to 49 per cent of the equity in industries reserved for the public sector and 74 per cent or more in others, the Disinvestment Commission (1996) advised on individual firms, and a Department of Disinvestment (1999) carried out the first strategic sales, such as Modern Food Industries and Bharat Aluminium Company (BALCO). It became the Department of Investment and Public Asset Management (DIPAM) in 2016, which now manages all government equity.
• The New Public Sector Enterprise Policy (2021), announced in the Union Budget 2021-22, divides the economy into four groups of strategic sectors, namely atomic energy, space and defence; transport and telecommunications; power, petroleum, coal and other minerals; and banking, insurance and financial services. In these the state keeps a bare minimum of enterprises and the rest are privatised, merged or closed, and in all other sectors CPSEs are to be privatised or closed.

Dimensions

• Fiscal. Sale proceeds are a non debt capital receipt that reduces borrowing, but selling an asset to fund running expenses only swaps one asset for one year's spending, so the sound use is to retire debt or fund capital spending.
• Efficiency. Private owners face the threat of loss and takeover, while a CPSE can rely on its ministry for support, which economists call a soft budget constraint; but many CPSEs, such as the oil and power companies, are efficient and profitable.
• Strategic and social. Public ownership is still used in defence, nuclear energy and some infrastructure, and CPSEs have carried social tasks such as rural electrification and price stability, which private owners will not do without payment.
• Governance. Ministries often treat CPSEs as departments, appointing boards and controlling prices, which weakens accountability; listing on the stock exchange subjects them to market scrutiny and the rules of the Securities and Exchange Board of India (SEBI).

In practice

• Performance. CPSEs as a group make a large net profit, according to the Public Enterprises Survey, but the profits are concentrated in a few oil, power, coal and finance companies while a long tail makes losses.
• Air India (2022). The government sold 100 per cent of Air India and Air India Express and half of the ground handling company AISATS to Talace, a Tata group company. The bid of Rs 18,000 crore was made up of Rs 2,700 crore in cash and Rs 15,300 crore of debt taken over, against a reserve price of Rs 12,906 crore. The share purchase agreement was signed in October 2021 and the airline was handed over on 27 January 2022, while the rest of its debt and non core assets went to a government company, Air India Assets Holding Limited (AIAHL).
• Other cases. HPCL was sold to ONGC in 2018, which counted as a strategic sale although control stayed in the public sector. The Life Insurance Corporation (LIC) was listed in May 2022 by selling 3.5 per cent of its shares for about Rs 21,000 crore. The sale of BPCL was called off in 2022 after bidders withdrew, and the strategic sale of IDBI Bank, in which the government and LIC together offered about 61 per cent of the shares, begun in 2022, had not been completed by early 2026.
• Targets. Receipts have usually fallen short of budget targets. The Union Budget 2026-27 put miscellaneous capital receipts, the head that now carries disinvestment proceeds, at Rs 80,000 crore.
• Asset monetisation. The National Monetisation Pipeline (NMP), prepared by NITI Aayog in August 2021, leased revenue rights in operating assets, such as roads, transmission lines and pipelines, to private operators for a fixed period while the state kept ownership. The government reports that it achieved about 90 per cent of its Rs 6 lakh crore target from 2021-22 to 2024-25. NMP 2.0, launched in February 2026, estimates a monetisation potential of Rs 16.72 lakh crore for 2025-26 to 2029-30. The models, such as toll operate transfer and infrastructure investment trusts, are explained in the note on infrastructure investment models.

Issues and way forward

• Missed targets and poor timing. Sales depend on market conditions and on buyers' confidence, and large sales such as BPCL and IDBI Bank have stalled or dragged on; a rolling pipeline, sales spread over several years and clear policy on pricing and post sale regulation help.
• Using the money well. Proceeds have often filled the budget gap of a year rather than reducing debt. The original design of the National Investment Fund (2005), which kept proceeds for capital and social spending, is the better principle.
• Valuation and transparency. Sales below perceived value invite charges of favouritism, so independent valuers, open bidding, a reserve price and audit by the Comptroller and Auditor General protect the process; in the Air India sale the reserve price was fixed before the financial bids were opened.
• Governance of what remains. CPSEs that stay public need professional boards, freedom on pricing and investment and fewer directions from ministries; a holding company that owns the shares at arm's length, of the kind Singapore runs through Temasek, would separate ownership from policy making.
• Monetisation risks. Leasing an asset for decades at a low price, or to a few bidders, transfers value to private operators, so monetisation needs competitive bids and a strong regulator for tariffs.

Common confusions

• Disinvestment and privatisation. Disinvestment is any sale of government shares, and most of it in India has been minority sales that leave control with the state; privatisation is a strategic sale that passes control to a private owner.
• Disinvestment and asset monetisation. Disinvestment sells ownership of a company, while monetisation leases the revenue rights of an asset for a period, after which the asset returns to the state.
• Government company and CPSE. A government company may be owned by the Centre, a State or both, while a CPSE is majority owned by the Centre or other CPSEs.
• Navratna and Maharatna. Both are earned by financial performance, but a Maharatna must be listed, much larger and present abroad, and it has five times the investment freedom of a Navratna.
• Strategic sector and reserved sector. A strategic sector under the 2021 policy may have private firms alongside a minimum public presence, while a sector reserved for the state excludes private firms altogether.

For the exam

• Keyword bank: commanding heights, central public sector enterprise, Maharatna, Navratna, Miniratna, memorandum of understanding, soft budget constraint, minority stake sale, strategic sale, offer for sale, enterprise value, DIPAM, New Public Sector Enterprise Policy, asset monetisation, National Monetisation Pipeline 2.0.
• Previous year questions: Practise the previous year questions on this topic →
• Use in an answer:
  • Introduction with data: The second National Monetisation Pipeline, launched in February 2026, lists Rs 16.72 lakh crore of public assets for monetisation over five years, after the first pipeline achieved about 90 per cent of its Rs 6 lakh crore target.
  • Introduction with a source: The New Public Sector Enterprise Policy of 2021 limited the state to a bare minimum presence in four groups of strategic sectors, reversing the commanding heights doctrine of the Industrial Policy Resolution of 1956.
  • Conclusion: Disinvestment should be judged by whether firms become more efficient and proceeds build new assets, not by whether a year's target is met.
  • Conclusion: The state can own less and govern better, keeping a lean, professionally run public sector in strategic areas and leaving the rest to competitive markets.