afm assignment psus

7/30/2019 AFM Assignment PSUs

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AFM Project on

PUBLIC SECTOR UNITS

By

Sneha Desai 11-713

Harshit Bafna 11-E05

Hemant Solanki 11-E45

Ryan Barboza 11 E54


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Introduction

In India, public sector undertaking (PSU) is a term used for a government-owned

corporation (company in the public sector). The term is used to refer to companies in whichthe government (either the Union Government or state or territorial governments, or both) owned amajority (51 percent or more) of the company equity

A Public Sector Undertaking is a corporation in the public sector in India, where management controlof the company rests with the Government, it can be Central Government or the State Governments

Objectives

The main objectives of setting up the Public Sector enterprises as stated in Industrial PolicyResolution of 1956 were:

1. Social objectives

a. To promote rapid economic development through creation and expansion of infrastructure

b. To promote redistribution of income and wealth

c. To create employment opportunities

d. To promote balanced regional growth

e. To encourage the development of small-scale and ancillary industries, and

f. To promote exports on the one side and import substitution, on the other.

2. Political objectives

a. To generate financial resources for development

b. In public interest

c. For national defense

Classification of PSUs

Classification of PSUs on the basis of their management

1. Central Public Sector Enterprise (run by central Government)a. Strategic business: national defense, Railways, atomic energy plants etc.b. Non strategic business : other than strategic

2. Public Sector Banks (run by central/ state Government)3. State level Public Enterprise (run by state Government)


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Classification of PSUs on the basis of their status

1. Maharatna

a. Characteristicsi. Govt. Conferred MAHARATNA Status on 16 th Nov 2010 to 4 PSUs

ii. Allows the PSUs to raise its Investment Ceiling from 1000 to 5000 cr.

iii. Gives the PSU Autonomy to decide on investments up to 15% of theirnet worth in a project

iv. Examples: Indian Oil Corporation, NTPC Ltd., Oil & Natural GasCorporation, Steel Authority of India Ltd.

b. Criteria for Maharatna statusAccording to the criteria laid down by the Cabinet, the Maharatna status isgranted to listed Navaratna central public sector companies with an averageannual turnover of more than Rs 25,000 crore, net profit after tax of Rs 5,000crore and net worth of Rs 15,000 crore during the past three year

2. Navratnaa. Characteristics

Navratna status gives a company enhanced financial and operational autonomyand empowers it to invest up to `1000 cr. or 15% of their net worth on a singleproject without seeking government approval. In a year, these companies can

spend up to 30% of their net worth not exceeding ` 1000 cr. They will also havethe freedom to enter joint ventures, form alliances and float subsidiariesabroad.Examples: Bharat Electronics Limited, Bharat Heavy Electricals Limited, BharatPetroleum Corporation Limited, Coal India Limited, GAIL (India) Limited

b. Criteria for Navratna Having a Miniratna Category I status Having at least 3 Excellent or Very good Memorandum of

Understanding (MoU) for last 3 years On the basis of 6 identified parameters and their contributions, scores

are given and a minimum of 60% is required for Navratna status Net profit to Net worth (25%) Manpower cost to cost of production services (15%) Gross Margin as capital employed (15%) Gross profit to turnover (15%) Earnings per share (10%) Inter-sectoral comparison based on net profit to net worth (20%)


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3. Miniratnaa. Characteristics

These are PSEs that have made profits continuously for the last three years orearned a net profit of Rs. 30 crore or more in one of the three years. Theseminiratnas granted certain autonomy like incurring capital expenditure withoutgovernment approval up to Rs. 500 crore or equal to their net worth, whicheveris lower.

b. Criteria for Miniratna Statusi. Miniratnas have the authority to enter into joint ventures, set

subsidiary companies, overseas office with certain conditions. Theyhave been divided into 2 categories on the basis of there capitalexpenditure allowance.

ii. The Category I kind of PSEs are the ones that have made profitscontinuously for the last three years or earned a net profit of Rs.30.cr ormore in one of the three years. They do not have to take anygovernment approval for the capital investments up to Rs.500.cr orequal to their net worth, whichever is lower. As on April 2011 there are48 such PSEs.

iii. The Category II kind of PSEs has made profits for the last three yearscontinuously and should have a positive net worth. Unlike Category IPSEs, these PSEs can invest up to Rs.250.cr or up to 50% of their networth whichever is lower. There are 15 such PSEs as on April 2011.

Special Features of PSUs

1. Budget: the PSUs prepare a budget based on zero budgeting concept, keeping in kindattainable targets. This budget acts as a benchmark . The variance report shows theattained targets compared to the set ones. In case the budget turns out to be less thanrequired, a revised budget has to be prepared.

2. financial advisor: responsibilities includea. determining financial requirements, sources through which they can be metb. appraisal of capital budgeting projects to determine economic viability and

financial soundnessc. review of financial results of all operations of enterprised. study for reducing cost, enhancing profitability

3. accounts & audit: statutory audit as well as efficiency cum proprietary audit have to becarried out by the comptroller & auditor general of India

4. financial reporting: apart from internal financial reporting, PSUs have to submit amonthly report to admin ministry containing

a. cost of productionb. inventory holding period,c. income statementd. plan expenditure etc.


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5. Financial Decisions

a. Capital expenditure: Is governed by manual issued by planning commission. Asper the manual,

i. Project evaluation techniques like ROI, payback period, NPV, IRR, CPM,SWOT are to be used

ii. Single discounting rate not for all projects (higher discount rate forhigher risk)

iii. Project appraisal for technical feasibility, economic viability, commercialprofitability, financial soundness.

iv. Expenditure allowed with prior gvt permission: e.g. companies like BHEL,MTNL, NTPC, ONGC etc. The entire funding is made by these companies

themselves without any help from the govt in most cases

Gross block profit (Rs. cr) Amount allowed (Rs.cr)

< 100 10

100-200 20

200-500 40

>500 100

b. financingi. Financing for the PSUs is provided by the central govt, state govt,

financial institutions, banks, private parties etc. i.e. 90% of the funding

for PSUs is provided by themii. Internal sources: central & state govt equity subscription

iii. External sources: public issue, loans, inter-corporate depositsiv. Debt : equity = 1:1, but debt is highv. Financial restructuring: writing off govt loan/interest, infusion of fresh

capitalvi. Extended repayment period


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Advantages of PSUs

Filling the Gaps in Capital Goods Employment Balanced Regional Development Contribution to Public Exchequer Export Promotion and Foreign Exchange Earnings Import Substitution Research and Development

Disadvantages of PSUs

Poor Project Planning Over-capitalization Excessive Overheads Overstaffing Under-utilisation of Capacity Lack of a Proper Price Policy Inefficient Management

Privatisation

Privatization is a process by which the government transfers the productive activity from the publicsector to the private sector

Characteristics

Improvement in efficiency and performance

Fixing responsibility is easier

Response time incase of Private sector is less

Privatization leads to better services to customers

Remedial measures are taken early in private sector

Disinvestment

Disinvestment refers to the action of the government in selling or liquidating an asset orsubsidiary. In simple words, disinvestment is the withdrawal of capital from a country orcorporation.


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Objectives of disinvestment

1. Releasing large amount of public resources

2.

Reducing the public debt3. Transfer of Commercial Risk4. Releasing other tangible and intangible resources5. Expose the privatised companies to market discipline6. Wider distribution of wealth7. Effect on the Capital Market

Disinvestment policy

1. The salient features of the policy area. Citizens have every right to own part of the shares of Public Sector Undertakingsb. Public Sector Undertakings are the wealth of the Nation and this wealth should rest

in the hands of the peoplec. While pursuing disinvestment, Government has to retain majority shareholding, i.e.

at least 51% and management control of the Public Sector Undertakings2. Present policy

a. Restructure and revive potentially viable PSEs.b. Close down PSEs which cannot be revived.c. Bring down Government equity in all Non-strategic PSEs to 26% or lower, if

necessary.

d. Fully protect the interests of workers.

Problems in disinvestment

1. Which areas should not be divested.2. Whether defence, production & services should be disinvested and to what extent it is

desirable in view of national security.3. To what extent the method of divestment can be made open and transparent.4. Out of the various methods of divestment which path will lead to fulfillment of declared5. Should the foreign private investors be allowed to acquire controlling interest in PSEs.6. How the social security net be instituted to train and re-employ active and able employees

retiring under VRS.

Methods of disinvestment

1. BIDDING:a. bids for portion of stake from govt FIs & mutual funds.b. Reserve price below which bids are not accepted.c. Bundles of sharesd. Individual companies

2. SALE IN MARKET: public issue3. GDR/ADR: not as profitable4. CROSS HOLDINGS: e.g. cash rich oil companies subscribe to each others shares, IOC & ONGC


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5. STRATEGIC SALE: sale of equity blocks to a single buyer, & transfer of management to him.E.g. Maruti, VSNL

Different approaches in disinvestment

1. Minority Disinvestment: Here, the company divests a part of its interest in the company, tomake money, to resolve deficit, etc. Eg: the govt issued an IPO of a part of its controllinginterest in Coal India inorder to raise money to cover the budget deficit

2. Majority Disinvestment : here, the govt parts with the controlling interest or it completelydivests its interest from the company. Eg: the govt completely sold the Modern Foodscompany to Hindustan Lever, BALCO to Sterlite, CMC to TCS etc.

3. Complete Privatisation: The govt transferred the entire management to private sector, forbetter productivity and performance. Egs: 18 hotel properties of ITDC and 3 hotel propertiesof HCI were privatized in a view to increase their performance and get better productivity.

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