disinvestment
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DISINVESTMENT- the
concept and process
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Evolution of Public Sector in India Before independence, there was almost no "Public sector" in
Indian economy except Railways, The Post & Telegraph,The Port Trust, The Ordnance and the Aircraft factories and few Government controlled under takings.
After independence India adopted the road of planned economic development through Five year plans in which it opted for dominance of the Public Sector.
The passage of Industrial Policy Resolution of 1956 and adoption of socialist pattern of society as the national economic goal of the country built the foundation of the dominant public sector as we see it today.
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Objectives of PSU To help in the rapid economic growth and Industrialisation of the country and
create necessary infrastructure for economic development.
To earn return on investment and utilise generated resources for development.
To promote redistribution of income and wealth.
To create employment opportunities.
To promote balanced regional development.
To promote import substitutions, save and earn foreign exchanges for the economy.
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Genesis of Disinvestment in India.
It was observed in many countries that the performance of the public enterprises was far below the expectations. The weakness and defects of public enterprises started manifesting with grave danger to Government and economy in many countries, with no solution in sight.
During the 1980s, collapse of the socialist economy of the Soviet block, introduction of economic reform by Russia, East European countries and China knocked the bottom out of protagonists of Government intervention in every commercial activity for the benefit of the masses.
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Genesis………… By mid-eighties their short comings and weaknesses
started manifesting in the form of low capacity utilisation, low efficiency, lack of motivation, over-manning, huge time and cost overrun, inability to innovate and take quick decision, large scale political and bureaucratic interference in decision making, etc.
The emphasis shifted from PSUs to liberalisation of
economy and gradual disinvestment of PSUs. A paradigm shift of Government's economic policy orientation originated in 1991 from a foreign debt servicing crisis.
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While the case for economic reforms may take good note of the diagnosis that India has too much government interference in some fields, it ignores the fact that India also has insufficient and ineffective government activity in many other fields, including basic education, health care, social security, land reforms and the promotion of social change. This inertia, too, contributes to the persistence of widespread deprivation, economic stagnation and social inequality."
Amartya Sen
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Industries reserved for PSUs prior to July 1991
1. Arms and Ammunition and allied items of defence equipment. 2. Atomic energy. 3. Iron and steel. 4. Heavy castings and forgings of iron and steel. 5. Heavy plant and machinery required for iron and steel production, for mining, for machine tool manufacture and such other industries as may be specified by the Central Government. 6. Heavy electrical plant including large hydraulic and steam turbines. 7. Coal and lignite.
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8. Minerals oils. 9. Mining of iron ore, manganese ore, chrome ore, gypsum, sulphur, gold and diamond. 10. Mining and processing copper, lead, zinc, tin molybdenum and wolfram. 11. Minerals specified in the Schedule to the Atomic Energy 12. Aircraft. 13. Air transport. 14. Rail transport. 15. Ship building. 16. Telephones and telephone cables, telegraph and wireless apparatus (excluding radio receiving sets). 17. Generation and distribution of electricity
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Area reserved for PSU after Dec 2002
Atomic Energy
Railway Transport
Minerals specified in schedule to atomic Energy (Control of
Production and Use) Order, 1953
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Disinvestment – Process flow
Disinvestment Commission/other recommendation
Administrative Ministry’s comments
Consideration by core group of Secretaries
Approval of CCD
Advertisement for appointment of Advisors
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Receipt of Expression of Interests (EoI) from advisors
Presentation by Advisors
Selection of Advisors
Appointment of Advisor
Appointment of Legal Advisor/Fixed asset valuers/Other Advisors
Process finalization & due diligence by Advisors
Advertisement for inviting expressions of interest frombidders
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Receiving EoI from bidders
Shortlisting of bidders on the basis of prescribed/announcedqualifications criteria & signing of confidentiality undertaking
Finalizing & distribution of information package etc.
Data Room visits/Due diligence etc. by short listedbidders
Financial/capital/business restructuring etc.
Finalization of shareholders’/share purchase/otheragreements etc. in consultation with the bidders
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Receipt of final bids and resealing of bids in presence ofbidders & receipt of evaluation papers from advisors
Finalization of upset price by evaluation committee/IMG
Reopening of financial bids in presence of bidders andtheir comparison with upset price by IMG
IMG/CGD/CCD approvals (and other regulatoryapprovals, as needed)
Execution of legal documents and inflow of funds
Documents submitted to CAG’s office for assessment
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Cases of Privatisation in IndiaS.No. Name of the Privatised PSU
1 Lagan Jute Machinery Company Limited (LJMC)
2 Modern Food Industries Limited (MFIL)
3 Bharat Aluminium Company Limited (BALCO)4 CMC Ltd. (CMC)
5 HTL Ltd. (HTL)6 IBP Co. Ltd. (IBP)7 Videsh Sanchar Nigam Limited (VSNL)
8 Indian Tourism Development Corporation (ITDC)
9 Hotel Corporation of India Limited (HCI)10 Paradeep Phosphates Limited (PPL)
11 Jessop and Company Limited 12 Hindustan Zinc Limited(HZL)
13 Maruti Udyog Limited (MUL) 14 Indian Petrochemicals Corporation Ltd.(IPCL)
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Primary objectives for privatising the PSUs
Releasing large amount of public resources locked up in non-strategic PSUs, for redeployment in areas that are much higher on the social priority, such as, basic health, family welfare, primary education and social and essential infrastructure;
Stemming further outflow of scarce public resources for sustaining the unviable non-strategic PSUs;
Reducing the public debt that is threatening to assume unmanageable proportions;
Transferring the commercial risk, to which the taxpayers’ money locked up in the public sector is exposed, to the private sector wherever the private sector is willing and able to step in - the money that is deployed in the PSUs is really the public money and is exposed to an entirely avoidable and needless risk, in most cases;
Releasing other tangible and intangible resources, such as, large manpower currently locked up in managing the PSUs, and their time and energy, for redeployment in high priority social sectors that are short of such resources.
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Other Benefits from Disinvestments Become more efficient and survive or cease on their financial strength.
Wider distribution of wealth through shares of privatized company.
Result in more share in stock market hence more depth & liquidity in market.
Increase in more economic activity with private investment & thus giving thrust to economy.
More customer satisfaction & choice.
To compete against cheaper & quality product import.
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YearNo. of Companies in which equity sold
Target receipt for the year (Rs. in Crore)
Actual receipts (Rs. in Crore) Methodology
1991-92
47 (31 in one tranche and 16 in other) 2500 3038
Minority shares sold by auction method in bundles of “very good”, “good”, and “average” companies.
1992-93 35 ( in 3 tranches) 2500 1913Bundling of shares abandoned. Shares sold separately for each company by auction method.
1993-94 - 3500 0Equity of 7 companies sold by open auction but proceeds received in 94-95.
1994-95 13 4000 4843
Sale through auction method, in which NRIs and other persons legally permitted to buy, hold or sell equity, allowed to participate.
1995-96 5 7000 361
Equities of 4 companies auctioned and Government piggy backed in the IDBI fixed price offering for the fifth company.
Disinvestments in various PSU
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1996-97 1 5000 380 GDR (VSNL) in international market.1997-98 1 4800 902 GDR (MTNL) in international market.
1998-99 5 5000 5371
GDR (VSNL) / Domestic offerings with the participation of FIIs (CONCOR, GAIL). Cross purchase by 3 Oil sector companies i.e. GAIL, ONGC & Indian Oil Corporation
1999-00# 4 10000 1860GDR—GAIL, VSNL-domestic issue, BALCO restructuring, MFIL’s strategic sale and others
2000-01 4 10000 1871Strategic sale of BALCO, LJMC; Takeover - KRL (CRL), CPCL (MRL), BRPL
2001-02 # 9 12,000 5632
Strategic sale of CMC – 51%, HTL –74%, VSNL – 25%, IBP – 33.58%, PPL-- 74%, and sale by other modes: ITDC & HCI; surplus reserves: STC and MMTC
2002-03 6 12,000 3348
Strategic sale : HZL – 26%, MFIL-26%, IPCL – 25% HCI, ITDC, Maruti: control premium from renunciation of rights issue, ESOP:HZL,CMC.
2003-04 9 13,200 15547
Maruti- IPO(27.5%), Jessop & Co. Ltd. (Strategic sale-72%), HZL (Call Option of SP - 18.92%), Public Offers - IPCL (28.95%), CMC (26%), IBP (26%), DRDG (20%), GAIL (10%), ONGC (10%), ICI (9.2%)
2004-05 1 4,000 2684 NTPC(IPO) (5.25%)Total # 48* 91500 45066
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The main features of Government's present Policy Restructure and revive potentially viable PSUs.
Close down PSUs which cannot be revived.
Bring down Government equity in all Non-strategic PSEs to 26% or lower, if necessary.
Fully protect the interests of workers
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Issues regarding disinvestment – That need attention Which areas should not be divested.
Whether defence production & services should be disinvested and to what extent as it is desirable in view of national security.
To what extent the method of divestment can be made open and transparent.
Out of the various methods of divestment which path will lead to fulfillment of declared objectives.
Should the foreign private investors be allowed to acquire controlling interest in PSUs.
How the social security net be instituted to train and re-employ active and able employees retiring under VRS
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Current Disinvestment policy – The Salient Features
1. Citizens have every right to own part of the shares of Public Sector Undertakings;
2. Public Sector Undertakings are the wealth of the Nation and this wealth should rest in the hands of the people;
3. While pursuing disinvestment, Government has to retain majority shareholding, i.e. at least 51% and management control of the Public Sector Undertakings;
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Disinvestment Approach
1. Already listed profitable CPSEs (not meeting mandatory shareholding of 10%) are to be made compliant by ‘Offer for Sale’ by Government or by the CPSEs through issue of fresh shares or a combination of both;
2. Unlisted CPSEs with no accumulated losses and having earned net profit in three preceding consecutive years are to be listed;
3. FPOs would be considered taking into consideration the needs for capital investment of CPSE, on case by case basis, and the Government simultaneously or independently offer a portion of its equity shareholding;
4. In all cases of disinvestment, the Government would retain at least 51% equity and the management control;
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Disinvest Approach-----------------
5. All cases of disinvestment are to decided on a case by case basis;
6. The Department of Disinvestment is to identify CPSEs in consultation with respective administrative ministries and submit proposal to the Government in cases requiring offer for sale of Government equity.
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Problems associated with Disinvestment The number of bidders for equity has been small not only in the case of
financially weak PSUs, but also in that of better-performing PSUs.
Besides, the government has often compelled financial institutions, UTI and other mutual funds to purchase the equity which was being unloaded through disinvestment.
Low valuation or under pricing of equity.
In many cases, disinvestment has not really changed the ownership of PSUs, as the government has retained a majority stake in them.
There has been some apprehension that disinvestment of PSUs might result in the ‘crowding out’ of private corporate (through lowered subscription to their shares) from the primary capital market
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Inadequate information about PSUs has impeded free, competitive and efficient bidding of shares, and a free trading of those shares.
Disinvestment process is not completely open and transparent.
It is not clear if the rationale for divestment process is well-founded. The assumption of higher efficiency, better / ethical management practices and better monitoring by the private shareholders in the case of the private sector – all of which supposedly underlie the disinvestment rationale – is not always borne out by business trends and facts.
The creation of PSUs originally had economic, social welfare and political objectives, their current restructuring through disinvestment is being undertaken primarily out of need of government finances and economic efficiency.
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Lastly, to the extent that the sale of government equity in PSUs is to the Indian private sector, there is no decline in national wealth. But the sale of such equity to foreign companies has far more serious implications relating to national wealth, control and power, particularly if the equity is sold below the ‘correct’ price!
If the disinvestment policy is to be in wider public interests, it is necessary to examine systematically, issues such as - the ‘correct’ valuation of shares, the ‘crowding out’ possibility, the appropriate use of disinvestment proceeds and the institutional and other prerequisites
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Challenges in valuation of Indian PSUs Companies listed on stock exchange can be assessed fairly on the
basis of market price of shares. However, most of the PSUs are either not listed on stock exchange or command extremely limited trade float.
Valuation of PSU is different from establishing the price for which it can be sold. Government can only realize what the buyer is willing to pay for the PSU.
Valuation is a subjective figure arrived at by the bidders by leveraging there strengths with the potential of the company.
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The profitability of the PSUs as reflected through the profit and loss account does not adequately reflect the earning potential of PSUs because the PSUs have generally been run in unprofessional manner.
Public Sector undertakings own not only huge business assets but also highly valuable non-business assets like real estate, residential complex and utilities like power plant etc.
Valuing of companies in India becomes even more difficult, as there is no databank of transactions carried out in the past. In the US, the valuation report of any acquisition has to be filed with Securities and Exchange Commission (SEC).
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Points for Valuation It is important to understand that price is not value; in fact, the difference
between price and value is the raison d’etre of investment valuation, independent of market pricing.
The final value to be paid by acquirer will depend on the controlling premium he is willing to pay. Most foreign companies are not comfortable with less than 51 percent holding. But the government isn’t offering 51 percent in most strategic sales.
The government should have clear future policy when going in for big ticket disinvestments like Air India. For instance, main assets of Air India are the bilateral rights. Will these bilateral rights vest with Air India – if yes, Air India’s valuation will be higher. However, no country in the world has committed all its bilaterals to any airline. These uncertainties with regard to future of the sector will prevent bidders to quote higher prices for Air India.
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The value is a function of the individual’s perception of the risk, the nature of financial resources available to the purchaser, opportunity, and other similar factors.
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Points of General Attention
There is no reason why the government should continue to hold a part of the equity in PSEs that are operating in non-core sectors. This strategy leads to sub-optimal realization of revenue and significant loss to the government.
In the cases of disinvestment involving transfer of control of management affairs to the private investor, higher weightage has to be given to the value of assets both tangible and intangible. While disinvesting minority shares, more weightage will have to be given to market price.
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