Why in news?
What is disinvestment?
What is Conventional Disinvestment
What is Strategic Sale?
- In the third week of May, the Cabinet Committee on Economic Affairs (CCEA) headed by the PM gave its approval to the Department of Disinvestment for the sale of government stake in 20 PSUs.
- The CCEA’s approval was given anticipating a realisation of nearly Rs.50,000 crore, if disinvestment was to be carried out, at the then ruling prices.
- For this, the government might undertake strategic sales of identified units as well as selling some shares in unlisted companies (fresh disinvestment)
What is disinvestment?
- The term disinvestment refers to the process through which the government offloads a portion of its shareholding in a PSU.
- Capital receipts so garnered will help in central government finances.
- Importantly, however, under disinvestment, government will remain the majority shareholder even if its post-divestment shareholding is smaller than before.
What is Conventional Disinvestment
- Usually, the government retains 51% of its shareholding in a PSU after disinvestment, so that it remains an owner of these 'family jewels'. This is the 'Conventional Disinvestment'.
- It must be remembered that Companies Act, 1956 only defines a ‘Government Company’, which in common parlance, is a company in which Government holds more that 51%.
- PSU is not defined in the Act.
- Once the Governments shareholding goes below 51%, it ceases to be a Government company and hence, it requires changes in the Articles of Association of the company especially in relation to the Presidential directives etc.
What is Strategic Sale?
- In the strategic sale of a company, the transaction has two elements:
- Transfer of a block of shares to a Strategic Partner and
- Transfer of management control to the Strategic Partner
- In the case of PSUs, in order that the company no longer has the character of a Government company, the transfer of shares involves bringing down Governments shareholding below 51%.
- The Strategic Partner, after the transaction, may hold less percentage of shares than the Government but the control of management would be with him.
- For example, if in a PSU the shareholding of Government is 51% and the balance is dispersed in public holdings, then Government may go in for a 25% strategic sale and pass on management control, though the Government would post-transfer have a larger share holding (26%) than the Strategic Partner (25%).
- NOTE: the number 26% has a special significance in Company Law as to get a special resolution passed, one requires at least ¾ majority in a general meeting. Therefore, the 26% block acts as a check.
- In fact, the Agreements can be structured such that these rights are exercisable even when Government holding goes below 26%.
- The other critical number one encounters in Company Law are 10% shareholding:
- below which one loses voting rights unless specially provided.
[Sources: Dept of Disinvestment, The Hindu]
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