How has the govt's disinvestment strategy changed since liberalisation?

From strategic privatisation to market-based stake sales, here's how the government's disinvestment strategy has changed since economic liberalisation in 1991

The Union government concluded its Offer for Sale (OFS) of Life Insurance Corporation of India (LIC) last week, moving closer to its FY27 disinvestment target of ₹80,000 crore while helping the insurer meet the Securities and Exchange Board of India's (Sebi's) minimum public shareholding (MPS) norms.

 

Under the OFS, the government sold a base 2.5 per cent stake with a greenshoe option of up to 4 per cent, taking the total offer size to 6.5 per cent.

 

The transaction shows how India's disinvestment strategy has evolved over the past three decades. Since economic liberalisation in 1991, the government's approach has shifted from strategic privatisation and transfer of management control to gradual stake dilution through the stock market, allowing it to raise funds without transferring management control.

 

 

What was the government's approach before 1991?

 

Before 1991, India's economic policy gave the public sector a dominant role, with the government owning and operating enterprises across several key industries. The approach was shaped largely by the Industrial Policy Resolution of 1956, which envisaged the public sector occupying the "commanding heights" of the economy. As many as 17 industries were reserved for the public sector, and government ownership was viewed as an instrument for industrialisation, infrastructure creation and broader economic development.

 

There was no formal disinvestment programme during this period, and reducing government ownership in public enterprises was not a stated policy objective. This changed with the economic reforms of 1991, when the number of industries reserved for the public sector was reduced and the government proposed selling part of its equity in selected public-sector enterprises to financial institutions, mutual funds, workers and other investors. The first disinvestment transactions subsequently began in 1991-92 through minority stake sales.

 

How the government's disinvestment strategy has evolved

 

India's disinvestment programme has gone through several phases since 1991. During the first phase between 1991 and 2000, the government mainly sold small minority stakes in public sector companies, raising around ₹20,000 crore. This included stake sales in Maruti Udyog (now Maruti Suzuki) and opening up Videsh Sanchar Nigam Limited (VSNL, now Tata Communications) to private investment.

 

The biggest policy shift came under the Atal Bihari Vajpayee-led government in the early 2000s, when the government undertook strategic privatisation by transferring management control to private players. It sold controlling stakes in Hindustan Zinc, Bharat Aluminium Company (BALCO) to the Sterlite group, and VSNL to the Tata group. It also partially divested companies such as Indian Petrochemicals while restructuring units in the steel and power sectors.

 

From the 2010s onwards, the government increasingly relied on stock market listings and stake sales. Coal India's 2010 IPO raised around ₹15,000 crore, while the CPSE ETF launched in 2014 and Bharat 22 ETF in 2017 became important channels for monetising government holdings.

 

According to data from the Department of Investment and Public Asset Management (DIPAM), annual receipts rose from ₹24,349 crore in FY15 to a record ₹1,00,037 crore in FY18, before moderating to ₹84,972 crore in FY19 and ₹50,300 crore in FY20. Collections fell to ₹32,886 crore in FY21 amid the pandemic and further to ₹13,534 crore in FY22, when the Air India sale was completed.

 

Receipts recovered to ₹35,294 crore in FY23, but eased to ₹16,507 crore in FY24 and ₹10,163 crore in FY25. In FY26, the government mobilised ₹16,886 crore, while FY27 receipts have reached ₹20,391 crore so far, largely through offer-for-sale (OFS) transactions rather than strategic privatisation.

 

The government has also continued to sell stakes in companies such as NHPC, Coal India and Indian Railway Finance Corporation through OFSs while retaining majority ownership.

 

Major pending transactions include the proposed privatisation of Bharat Petroleum (BPCL) and the government's planned stake sale in IDBI Bank.

 

The government approved BPCL's privatisation in 2019, while the sale of Shipping Corporation of India was cleared with a plan to transfer management control. IDBI Bank was also identified for strategic sale. However, these transactions have been delayed due to valuation issues, regulatory clearances, due diligence requirements and challenges in finding suitable buyers.

 

What's behind the shift?

 

Lekha Chakraborty, professor at the National Institute of Public Finance and Policy (NIPFP), said, "India’s disinvestment strategy has shifted from pure fiscal expediency to selective structural reallocation, yet the transformation remains incomplete."

 

"Post-1991, minority stake sales served primarily as non-debt capital receipts to finance fiscal deficits. This was to stabilise the fisc after the balance of payments crisis. The 1999-2004 phase marked the only genuine attempt at strategic privatisation, transferring both equity and control in a handful of firms and generating measurable efficiency gains. Political resistance truncated that experiment," she told Business Standard.

 

She said the government returned to minority stake dilution after 2004 despite the 2021 PSE policy's push to reduce its commercial presence. While disinvestment has become more structured, she said it remains driven largely by revenue targets rather than actual transfer of control.

 

Ritik Bhandari, team lead at the Centre for Law, Policy and Governance, NFPRC Foundation, told Business Standard that India's disinvestment has evolved from fiscal-driven minority stake sales in the 1990s to strategic privatisation under the Vajpayee government and a more structured framework after 2014, backed by DIPAM's elevation and the 2021 PSE policy.

 

He said the LIC IPO and subsequent OFS tranches reflect a cautious approach. "Rather than ceding control of a systemically important insurer, the government has consistently chosen stake dilution over outright divestment, monetising value through the market while retaining majority ownership," he said.

 

He added that this mix of privatisation and calibrated stake dilution has defined the post-2014 strategy despite disinvestment receipts often missing Budget targets.

 

Why strategic privatisation has slowed

 

Strategic disinvestment involves selling a substantial stake along with management control, unlike minority stake sales carried out through IPOs, OFSs, buybacks and exchange-traded funds. Such transactions are more complex because they involve asset valuation, debt resolution, employee concerns, regulatory approvals and finding suitable buyers. They also face greater political opposition.

 

Chakraborty said, "The preference for OFS over strategic sales indeed is the rational response to three binding constraints -- political costs, market microstructure, and administrative capacity." She added that trade union resistance, valuation disputes, inter-ministerial coordination and buyer identification have repeatedly delayed strategic sales, while OFSs have emerged as a simpler way to raise revenue without giving up control.

 

The delayed privatisation of BPCL, Shipping Corporation of India and IDBI Bank illustrates these challenges. As a result, the government has increasingly relied on OFSs in companies such as Coal India, Central Bank of India, NHPC, NLC India, GIC and Indian Railway Finance Corporation to mobilise resources.

 

What it means for long-term goals

 

Chakraborty said minority stake sales help the government raise funds and improve market liquidity, but they do not deliver the efficiency gains that come with strategic privatisation.

 

"OFS improves free float, enhances price discovery and generates non-debt capital receipts to finance fiscal deficit. It does not resolve the fundamental agency problems of soft budget constraints and residual bureaucratic control," she said.

 

According to her, efficiency gains have been seen mainly in cases where both ownership and management control were transferred. She added that large government stakes continue to tie up public capital in commercial businesses, limiting the 2021 policy's goal of reducing the state's role in the economy.

 

"Stake sales are a useful financing device. However they are not a substitute for privatisation," she said.