A sale of government's shareholding in a Public Sector Unit (PSU) to private parties is called disinvestment. In recent years, this issue has come to the fore due to the large fiscal deficit that the government has been facing. This article examines the reaction of the market to disinvestment policy using event study methodology. It is found that the investors were initially unhappy with the disinvestment plan which led to decrease in share prices of the PSUs in which the program was initiated, followed by increase in their share prices later.

The term disinvestment was first used in the 1980s in the US. Disinvestment involves the sale of equity and bond capital invested by the government in Public Sector Units (PSUs). It also implies the sale of government's loan capital in PSUs through securitization. However, it is the government and not the PSUs which receives money from disinvestment. It is imperative for the government to sell a part of its holdings in a disinvestment process. The main objective of disinvestment is to put national resources and assets to optimal use and, in particular, to unleash the productive potential inherent in the public sector enterprises of the country.

In India, disinvestment of the Government's equity in Central Public Sector Undertakings (CPSUs) started in 1991-92. In April 1933, the Rangarajan Committee recommended that the percentage of equity to be disinvested should be generally under 49% in industries reserved for the public sector and over 74% in other industries. In the budget speech of 1996-97, the proposal to establish a Disinvestment Commission was announced. It was also stated that the revenues generated from such disinvestment would be utilized for allocation to education and health sectors and for creating a fund to strengthen CPSUs. By 1997 sale through the Global Depository Receipts (GDR) route was also initiated and Mahanagar Telephone Nigam Limited (MTNL) (1997-98), Videsh Sanchar Nigam Limited (VSNL) (1998-99) and Gas Authority of India Limited (GAIL) (1999-2000) all used the opportunity to access the GDR market. The Public Sector Disinvestment Commission was established on August 23, 1996 for a period of three years. The Commission had GV Ramakrishna as the full time Chairman, four other members (part time) and a full time member secretary. The primary reasons for disinvestment by the government include: meeting the growing budget deficit and faster realization of the value locked in the PSUs.

Treasury Management Magazine, Public Sector Units, PSUs, Disinvestment Process, Public Sector Enterprises, Global Depository Receipts, Gas Authority of India Limited, GAIL, Distribution Networks, Foreign Governments, Multinational Companies, Cumulative Average Abnormal Returns, CAARs, National Stock Exchanges, NSE, Efficient Market Hypothesis, EMH, Multinational Companies, MNCs.