Goseeko blog

What is privatization?

by Team Goseeko

Privatization refers to transfer of ownership, management and control of the public sector company to the private sector. In India, the concept of privatization was introduced under LPG policy in the year 1993. In other words, it allows the private companies to enter into the banking sector, insurance sector, Production Company etc. For example, Privatization of Bharat Aluminium Company in 2006, privatization of Delhi and Mumbai airports in 2006 etc.

Objectives of privatization

Above all, the main objectives are-

  • To increase the inflow of foreign direct investment to India.
  • It improves the financial strength of the company.
  • To improve the efficiency of Public Sector Undertaking by giving them power to make decision.
  • Finally, promotes government dynamism by reducing government interference.

The methods of privatization of companies are-

Methods of Privatization

1. Transfer of ownership

Firstly, under this method, the public sector transfers the ownership, management and control of the to the private sector.

2. Disinvestment

Secondly, it is the process of withdrawing government investment from the PSUs and sell it to the public.

3. Public auction

Further, this method facilitates sale of share of public company or long term assets to raise highest amount for government owned property.

4. Sales of shares

Additionally, this method facilitates sale of shares of PSUs through stock exchanges.

5. Direct negotiations

Moreover, under this method, the government directly deal with specific private bodies for the privation of PSUs.

  1. Lease with a right to purchase:

Finally, private company is assumes possession and usage of a state run company. The private company the option to exercise the option to convert the lease of a property to ownership.

Conceptualization of privatization in India

Above all, concepts related to privatization in India are-

  1. Delegation:

Firstly, the government keeps the ownership and the responsibility of an enterprise. The company  will handle the daily activities and deliver the product or service.

2. Divestment:

Secondly, the government will sell a majority stake of the enterprise to one or more private companies. It may keep minority ownership.

3. Displacement:

However, the first step here will be deregulation, this will allow private players to enter the market. Here the private sector will compete with public companies and ultimately outperform them, causing the public enterprise to be displaced.

4. Disinvestment:

Further, directly selling a portion or whole of a public enterprise to private parties.

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