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Disinvestment Definition, What is Disinvestment, and How Disinvestment works?

Under this approach, sponsored by State Senator Jacqueline Collins, public pensions are prohibited from investing in any corporation or private equity firm that conducts business in Sudan, unless authorized to do so by the U.S. Ever since India opened up its economy to the world, the government has been distancing itself from industrial production. Years of monopoly across several industries led to Public Sector Undertakings (PSU) running inefficiently. Thus, the government began the process of disinvesting from loss-making and inefficiently-run PSUs in the 1990s.

But when it doesn’t, then the ownership is transferred to the private sector, which results in privatisation. It is also known as majority disinvestment or complete privatisation wherein 100 per cent control goes to the private sector. In some cases, however, a company may be forced to sell assets as the result of legal or regulatory action. Companies can also look to a divestment strategy to satisfy other strategic business, financial, social, or political goals.

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Since that year, it has divested operations by selling its pulp-and-paper manufacturing businesses to focus on real estate and timber. Privatization can take place in two ways, i.e. either by selling government-owned shares in an undertaking or lifting the restrictions that block private individuals and firms to take part in a particular industry. It also includes contracting out services provided by the public sector with private contractors. Finally, companies may engage in divestment for political and social reasons, such as selling assets contributing to global warming.

The movement spans 37 countries and has resulted in the divestiture of $6.2 trillion worth of assets, according to a September 2018 report from Arabella Advisors. One thousand institutional investors, including insurance companies, sovereign wealth funds, and pension funds, have committed to divest assets related to fossil fuels. The report attributes the surge in fossil fuel-related divestments to moral pressure that gave way to financial and fiduciary imperatives as the movement grew and stocks for major oil companies fell. Regardless of why a company chooses to adopt a divestment strategy, asset sales will generate revenue that can be used elsewhere in the organization.

• It is driven by the effective use of the resources, to earn the highest returns out of the money invested.
• Disinvestment targets are set under each Union Budget, and every year the targets change.
• Divesting a non-essential business unit can free up both time and capital for a parent company’s management to focus on its primary operations and expertise.
• These examples are programmatically compiled from various online sources to illustrate current usage of the word ‘disinvest.’ Any opinions expressed in the examples do not represent those of Merriam-Webster or its editors.
• This change has a great impact on government revenue, which can be positive or negative.

However, these are highly criticized, due to political reasons and become a matter of debate these days. Disinvestment is just the opposite of investment, i.e. it means pulling out the money invested in the company by selling the stake, either partially or fully. It is driven by the effective use of the resources, to earn the highest returns out of the money invested.

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Complete privatisation is a form of majority disinvestment wherein 100 per cent control of the company is passed on to a buyer. The equity allocation provides long-term growth and the debt exposure reduces the volatility of the returns, thus offering the benefits of asset allocation in a single product. The most common reason for divestment is to eliminate non-performing, non-core businesses. Companies, especially large corporations or conglomerates, may own different business units that operate in very different industries, and which can be quite difficult to manage or distracting from their core competencies. One major current instance is the impact of the pandemic, remote work, and the rise of technology use and their impact on offices, commercial real estate. On the contrary, Privatization is a transition of government-owned company, operation, unit or division to the privately-owned enterprise.

The term has also been applied to actions targeting Iran, Sudan, Northern Ireland, Myanmar, Israel, and China. There is a separate department under the Ministry of Finance which handles all disinvestment-related works for the government. On 10 December 1999, the Department of Disinvestment was set up as a separate department and later renamed as Department of Investment and Public Asset Management.

What is disinvestment?

Disinvestment may also be due to inefficient manufacturing methods, outdated technologies, and so on. In many instances, disinvestment occurs as a policy decision of the government when a state government decides to transfer the ownership and management of undertakings to private hands. The reasons for disinvestment could be a high cost of debt, ineffective management, liquidity issues, or any political reasons. Disinvestment refers to an act of an organisation or the government of a state to raise funds by selling ownership stake. The sale can also be a liquidation of asset or stake in a subsidiary of an organisation or government undertaking.

While most divestment transactions are premeditated, company-initiated efforts, at times this process could be forced upon them as a result of regulatory action. When there is a transfer of ownership, control and management, from the public sector to the private sector, specifically due to the sale of assets, it is called Privatization. When the transfer becomes effective, the government ceases to be the owner of such an undertaking.

disinvest Business English

After disinvestment, AT&T retained its long-distance services, while the operating companies, referred to as the Baby Bells, provided regional services. Whether disinvestment results in the divestiture or the reduction of funding, the primary objective is to maximize the return on investment (ROI) related to capital goods, labor, and infrastructure. Privatization and disinvestment are undertaken with the aim of improving the efficiency of the enterprise.

The policy shift may make the business unviable, resulting in a sale of stake or ownership. In other instances, the policy shift may make the business illegal and hence necessitate a liquidation of the business. The passage of this law was widely seen as a reprisal for an incident in which Cuban military aircraft shot down two private planes flown by Cuban exiles living in Florida, who were searching for Cubans attempting to escape to Miami. The Washington-based company was a manufacturer of paper and paper products until 2004.

Since the late 1990s, disinvestment has become an almost regular feature of the Union budgets under successive governments, which set a target each year to raise funds from stake sales in public sector enterprises. Disinvestment has led to mixed results for the governments in terms of meeting the revenue targets. Governments select disinvestment candidates based on various factors, such as its existing stake in the company, private sector interest in ownership of that enterprise, general market conditions, expected value realisation etc. Items that are divested may include a subsidiary, business department, real estate holding, equipment, and other property, or financial assets. Proceeds from these sales are typically used to pay down debt, make capital expenditures, fund working capital, or pay a special dividend to a company’s shareholders.

Meaning of disinvested in English

Disinvestment is the action of an organization or government selling or liquidating an asset or subsidiary. Absent the sale of an asset, disinvestment also refers to capital expenditure (CapEx) reductions, which can facilitate the re-allocation of resources to more productive areas within an organization or government-funded project. Disinvestment refers to a strategy of adp can become a powerhouse through acquisitions selling off or liquidating some assets like plant, division, subsidiary, unit, etc, owned by the government or the organization. The strategy is adopted to reduce the losses incurred from non-performing assets, pulling out investment in a specific industry or sector, or to raise funds. Companies globally disinvest for financial, political, legal, or strategic reasons.

Divestment executions are often forms of denouncement and delegitimization of an industry, such as in the fossil-fuel divestment movement. Negative public perception can lead to reform and changes in policy, both privately for the company and in the public sphere. Several states and localities did pass legislation ordering the sale of such securities, most notably the city of San Francisco. An array of celebrities, including singer Paul Simon, actively supported the cause. Disinvestment refers to the use of a concerted economic boycott to pressure a government, industry, or company towards a change in policy, or in the case of governments, even regime change. The term was first used in the 1980s, most commonly in the United States, to refer to the use of a concerted economic boycott designed to pressure the government of South Africa into abolishing its policy of apartheid.

Definition of Privatization

Therefore, the company’s net worth becomes devalued and the owners of the company may lose substantial paper assets. In addition, institutional divestment may encourage other investors to sell their stocks for fear of lower prices, which in turn lowers prices even further. Finally, lower stock prices limits a corporation’s ability to sell a portion of their stocks in order to raise funds to expand the business. For example, a company may determine that its industrial tool division is growing faster and generating higher profit margins than its consumer tool division. If the difference in the profitability of the two divisions is large enough, the company may consider disinvesting (e.g. selling) the consumer division. After the disinvestment, the company could allocate both the sales proceeds and recurring capital expenditures to the industrial division to maximize its ROI.

In simple words, Privatization implies the complete or partial sale of government’s equity in a state-owned undertaking, to the private sector. The process raises funds which could be useful for the expansion as per the existing business plan. Many conservatives opposed the disinvestment campaign, accusing its advocates of hypocrisy for not also proposing that the same sanctions be leveled on either the Soviet Union or the People’s Republic of China.