Short answer: Disinvestment is when a government or organisation sells part or all of its ownership stake in a company, usually a public sector undertaking (PSU), meaning a company owned by the state. The buyers can be private investors or other public bodies. The seller receives cash for the shares, while the company keeps operating with a different set of shareholders.
Last reviewed: 11 November 2026
At a glance
| Term | What it means |
|---|---|
| Disinvestment | Selling part or all of a government’s stake in a company |
| Privatisation | Transferring full ownership and control to private hands, leaving the government with no stake |
| Offer for Sale | Government sells its existing shares through the stock exchure to retail and institutional investors |
| IPO route | A government-owned company offers shares to the public for the first time and gets listed |
| Strategic sale | Government sells a significant or controlling stake to an investor who takes over management |
Why do governments sell shares in their companies?
The government’s main stated reasons are to reduce its fiscal deficit, which is the gap between what it spends and what it earns in a year, or to reduce its debt burden. The money raised can also fund infrastructure and social programmes. A further aim is to improve the efficiency of PSUs.
Each of these uses turns a stake in a company into cash. The government gives up a share of ownership in exchange for money it can spend or use to repay borrowing.
How is disinvestment different from privatisation?
Disinvestment and privatisation are often confused, but they differ in how much is sold. Privatisation transfers full ownership and control of a public enterprise to private hands, so the government holds no stake afterwards.
Disinvestment sells only part of the government’s holding. After a disinvestment, the government can still be the majority owner, so it keeps a say in how the company is run.
What are the main routes for disinvestment?
There are three common routes, each with a different buyer and process.
In an Offer for Sale (OFS), the government sells its existing shares through the stock exchange, which is the market where listed shares are bought and sold. Retail investors, meaning individual buyers, and institutional investors, meaning large organisations that invest pooled money, can both take part.
In an IPO route, a government-owned company offers shares to the public for the first time and gets listed on a stock exchange. This reduces the government’s ownership, because some of the company’s shares now belong to new public shareholders.
In a strategic sale, the government sells a significant or controlling stake to a strategic investor, a buyer who takes over management of the company. This is the route where control can change hands.
How does a sale work in numbers?
The example below is hypothetical. All figures are invented for illustration and do not refer to any real company.
Suppose a company has 10 crore shares in total, and the government owns 9 crore of them, a 90% stake. The government sells 1 crore shares at Rs 500 each through an Offer for Sale. The government receives 1 crore × Rs 500 = Rs 500 crore.
After the sale, the government holds 8 crore shares, which is 80% of the company. It has raised Rs 500 crore and still holds a majority.
If the shares sold for Rs 400 instead, the same 1 crore shares would bring in only Rs 400 crore. The sale price, not just the number of shares sold, decides how much cash the government receives.
What are the catches and risks?
The cash from a sale is a one-time amount. It reduces debt or funds spending once, but it does not create a recurring income stream. If spending continues to exceed income, the gap can reappear in later years.
The government also gives up its share of the company’s future profits on the stake it sold. Profits paid out to shareholders as dividends now go partly to the new owners.
The sale price carries risk. If shares are sold at a lower price than the government hoped for, the proceeds fall short of the plan, as the example shows. In a strategic sale, the new owner takes over management, so the government loses its direct say over the company’s decisions.
Why did disinvestment gain importance in India?
Disinvestment became a major policy tool in India after the 1991 New Economic Policy. Many PSUs were loss-making, meaning they had negative returns on capital, which is the profit or loss earned on the money invested in the business. These companies became a burden on the government’s finances.
This prompted a Disinvestment Policy aimed at exiting non-core enterprises, meaning businesses that are not central to the government’s purpose. Selling their stakes was one way to reduce the burden and redirect the government’s resources.
Frequently asked questions
Is disinvestment the same as privatisation?
No. Privatisation transfers full ownership and control to private hands, leaving the government with no stake. Disinvestment sells only part of the government’s holding.
Does the government always lose control in a disinvestment?
Not always. Control changes most clearly in a strategic sale, where a significant or controlling stake goes to an investor who takes over management.
Where does the money from disinvestment go?
The government raises the proceeds mainly to reduce its fiscal deficit or debt burden. It also uses them to fund infrastructure and social programmes and to improve PSU efficiency.
Sources and last check
Facts in this article were checked against the sources below on 11 November 2026. Rules and figures can change; check the primary source before acting.
- groww.in (broker education)
- kotakneo.com (broker education)
- upstox.com (broker education)
This article is general information, not investment advice. MyFinanceBandhu is not a SEBI-registered investment adviser.