Differences between disinvestment, public offering of shares, strategic sale, and privatization

The Union Government completed the Offer for Sale (OFS) of shares in Life Insurance Corporation of India (LIC) last week. This move brings the government closer to its target of ₹80,000 crore for the 2027 fiscal year in privatization, while also helping the insurance company meet the Minimum Public Shareholding (MPS) norms set by the Securities and Exchange Board of India (Sebi).

Under this OFS, a base stake of 2.5 percent was sold, with an oversubscription option to increase it to 4 percent, totaling an offer size of 6.5 percent. This deal demonstrates the evolution of India's privatization strategy over the last three decades. Since the economic liberalization in 1991, the government's approach has shifted from strategic privatization and transfer of managerial control to gradual dilution through the stock market, allowing capital attraction without relinquishing control.

What was the government's policy before 1991?

Before 1991, India's economic policy ensured a dominant role for the public sector, as the government owned and managed enterprises in several key industries. This approach was largely determined by the Industrial Policy Resolution of 1956, which stipulated that the public sector would occupy 'leading positions' in the economy. Seventeen industries were reserved for the public sector, and state ownership was viewed as a tool for industrialization, infrastructure creation, and broader economic development.

During this period, there was no formal privatization program, and reducing the state's share in public enterprises was not a stated policy goal. The situation changed with the 1991 economic reforms, when the number of industries reserved for the public sector was reduced, and the government offered to sell part of its equity in selected public enterprises to financial institutions, mutual funds, employees, and other investors. The first privatization deals began in 1991–92 through the sale of minority stakes.

India's privatization program went through several phases after 1991. In the first phase, between 1991 and 2000, the government primarily sold small minority stakes in public sector companies, raising about ₹20,000 crore. This included the sale of stakes in Maruti Udyog (now Maruti Suzuki) and the opening up of Videsh Sanchar Nigam Limited (VSNL, now Tata Communications) to private investment.

The most significant shift in policy occurred under the government led by Atal Bihari Vajpayee in the early 2000s, when the government undertook strategic privatization by transferring managerial control to private players. Controlling stakes in Hindustan Zinc and Bharat Aluminium Company (BALCO) were sold to the Sterlite group, as well as VSNL to the Tata group. Additionally, companies like Indian Petrochemicals were partially privatized as part of restructuring in the steel and energy sectors.

Starting from the 2010s, the government increasingly relied on stock market listings and stake sales. The IPO of Coal India in 2010 raised about ₹15,000 crore, while the CPSE ETF launched in 2014 and the Bharat 22 ETF in 2017 became important channels for monetizing public assets.

According to data from the Department of Investment and Public Asset Management (DIPAM), annual receipts grew from ₹24,349 crore in FY 2015 to a record ₹100,037 crore in FY 2018, after which they fell to ₹84,972 crore in FY 2019 and ₹50,300 crore in FY 2020. Collections dropped to ₹32,886 crore in FY 2021 amid the pandemic and further to ₹13,534 crore in FY 2022, when the sale of Air India was completed. Receipts recovered to ₹35,294 crore in FY 2023 but decreased to ₹16,507 crore in FY 2024 and ₹10,163 crore in FY 2025. In FY 2026, the government mobilized ₹16,886 crore, and in FY 2027, receipts reached ₹20,391 crore, mainly through Offer for Sale (OFS) transactions rather than strategic privatization.

The government also continues to sell stakes in companies such as NHPC, Coal India, and Indian Railway Finance Corporation through OFS, while retaining majority ownership. Among major pending deals are the proposed privatization of Bharat Petroleum (BPCL) and the planned sale of a stake in IDBI Bank.

The government approved the privatization of BPCL in 2019, and the sale of Shipping Corporation of India was approved with a plan to transfer managerial control. IDBI Bank was also earmarked for strategic sale. However, these deals have been delayed due to valuation issues, regulatory clearances, due diligence requirements, and difficulties in finding suitable buyers.

What is behind this shift?

Leha Chakraborti, Professor at the National Institute of Public Finance and Policy (NIPFP), noted that 'India's privatization strategy has shifted from pure fiscal expediency to selective structural redistribution, but the transformation remains incomplete.' She told Business Standard that after 1991, the sale of minority stakes primarily served to raise non-debt capital to finance the budget deficit, which was necessary to stabilize finances after the balance of payments crisis. The period 1999–2004 marked the only genuine attempt at strategic privatization, which transferred both capital and control in several firms, ensuring measurable efficiency gains. However, this experiment was interrupted by political resistance.

She added that after 2004, the government reverted to diluting minority stakes, despite the 2021 public sector enterprise policy aiming to reduce their commercial presence. Although privatization has become more structured, she said it is still largely driven by revenue generation goals rather than actual transfer of control.

Ritik Bhandari, Head of Group at the Centre for Law, Policy and Governance, NFPRC Foundation, told Business Standard that India's privatization has evolved from fiscally driven minority stake sales in the 1990s to strategic privatization under the Vajpayee government, and then to a more structured system after 2014, aided by the enhanced status of DIPAM and the 2021 public sector enterprise policy. He noted that the LIC IPO and subsequent OFS tranches reflect a cautious approach. 'Instead of ceding control of a systemically important insurer, the government consistently opted for stake dilution instead of outright sale, monetizing value through the market while retaining majority ownership,' he said.

He also emphasized that this combination of privatization and calibrated stake dilution defined the post-2014 strategy, even if privatization revenues often failed to meet budgetary targets.

Why has strategic privatization slowed down?

Strategic privatization involves selling a substantial stake along with the transfer of managerial control, unlike minority stake sales conducted through IPOs, OFSs, share buybacks, and exchange-traded funds. Such operations are more complex because they involve asset valuation, debt settlement, employee issues, regulatory approvals, and finding suitable buyers. Furthermore, they face greater political opposition.

Chakraborti stated that 'the preference for OFS over strategic sales is a rational response to three constraining factors—political costs, market microstructure, and administrative capacity.' She added that union resistance, valuation disputes, inter-ministerial coordination, and buyer identification have repeatedly delayed strategic sales, while OFS has become a simpler way to raise revenue without surrendering control.

The delay in the privatization of BPCL, Shipping Corporation of India, and IDBI Bank illustrates these difficulties. Consequently, the government increasingly relies on OFS in companies such as Coal India, Central Bank of India, NHPC, NLC India, GIC, and Indian Railway Finance Corporation to mobilize resources.

What does this mean for long-term goals?

Chakraborti believes that selling minority stakes helps the government raise funds and improve market liquidity, but it does not deliver the efficiency gains that strategic privatization provides. She noted that OFS improves free float, enhances pricing, and generates non-debt capital receipts to finance the budget deficit. However, it does not solve the fundamental agency problems associated with soft budget constraints and residual bureaucratic control.

In her view, efficiency gains were observed mainly when both ownership and managerial control were transferred. She added that large state stakes continue to tie up public capital in commercial business, limiting the goal of the 2021 policy to reduce the state's role in the economy. She concluded that 'stake sales are a useful financial tool. However, they are not a substitute for privatization.'