Embassy REIT CEO expresses optimism about the Indian market and plans for organic and inorganic growth

The Ministry of External Affairs of India reiterated on Tuesday that the state of Arunachal Pradesh constitutes an 'inalienable and integral part of India.'

This statement was made in the context of a dispute with China regarding the renaming of settlements in the border state.

The government uses various mechanisms to reduce its stake in state-owned companies, ranging from the sale of a stake in the Life Insurance Corporation of India (LIC) to the transfer of Air India. One recent example is the Offer for Sale (OFS) in LIC, which was the largest stake sale in this insurance company since its IPO in 2022.

Initially, 2.5 percent of LIC's equity capital was offered for sale, with the possibility of increasing the offer volume by another 4 percent if investor demand was high. This deal not only helps LIC approach the SEBI requirement for a minimum public float but is also expected to bring in over 310 billion rupees, bringing the government closer to its target of disinvestment of 800 billion rupees by the 2027 fiscal year.

OFS is one of the methods the government employs to reduce its share in public enterprises; other significant methods include disinvestment, strategic sale, and privatization. Although these concepts are closely related, they differ in the method of sale, the transfer of management control, and the remaining government stake.

Disinvestment: Reducing Government Stake

Disinvestment means the government selling part of its stake in a state-owned enterprise. In many cases, the government retains control over the majority of votes and management, but disinvestment can also pave the way for deeper changes in ownership structure through strategic sales or privatization.

Governments typically conduct disinvestment to increase budgetary resources, expand public ownership, improve market discipline, and unlock value from state-owned enterprises. For instance, the LIC IPO in 2022 was one of the largest disinvestment projects in India, where about 3.5 percent of the insurance company's equity capital was sold to the public, while the government retained the overwhelming majority and control over management.

Similarly, the government periodically sold minority stakes in state-owned companies such as Indian Oil Corporation (IOCL), Bharat Heavy Electricals Ltd (BHEL), and Coal India through market transactions.

Offer for Sale (OFS): A Path to Disinvestment

OFS itself is not a type of disinvestment, but rather a mechanism for carrying it out. Through OFS, promoters, including the government, sell existing shares of a listed company directly on the stock exchange via a simplified trading process for institutional and retail investors.

The OFS route is widely used because it is faster, cheaper, and more transparent than many other fundraising methods. It also allows the government to comply with SEBI's minimum public float norms while efficiently raising resources. The latest stake sale in LIC was conducted through OFS, allowing the government to sell shares directly on the stock exchange.

The government has also utilized OFS in Coal India and National Aluminium Company (NALCO) to reduce its stake more quickly and economically than other public offering methods.

Strategic Sale: Transferring Ownership and Management

A strategic sale involves transferring a significant stake in a state-owned enterprise to a strategic investor along with control over management. Unlike disinvestment, where shares are sold to a wide range of investors, a strategic sale transfers operational control to a single buyer or consortium expected to bring capital, technology, and managerial expertise.

The distinguishing feature of a strategic sale is the transfer of managerial control, not the exact percentage of shares sold. In 2001, the government sold a 51 percent stake in Bharat Aluminium Company (BALCO) to Sterlite Industries (now part of Vedanta), handing over management to a private buyer. This deal is considered one of the first major strategic sales in India.

Another example is Hindustan Zinc Ltd (HZL), where Sterlite Industries acquired a controlling stake incrementally starting in 2002. Although the government still holds a minority stake, management is in the hands of the private owner.

Privatization: Government Exit from Control

Privatization represents the broadest form of government exit. It occurs when ownership and control of a state-owned enterprise transfer to the private sector, leaving the government with either zero stake or only a minority stake without management control.

Although many privatizations are carried out through strategic sales, not every strategic sale leads to full privatization. The sale of Air India to the Tata group in 2022 is the most prominent example of privatization in India in recent years. The government transferred full control of ownership and management after decades of operating the national airline.

An earlier example is Modern Food Industries, which was sold to Hindustan Lever Ltd (now Hindustan Unilever) in 2000. This was the first major privatization of a central state-owned enterprise in India.