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What is Disinvestment
In business, disinvestment means to sell off certain assets such as a
manufacturing plant, a division or subsidiary, or product line. Some people
use the term divestiture, or to divest when discussing disinvestment.
For example, an electric generator manufacturer might sell off its consumer
generator product lines and manufacturing facilities in order to raise money
that can be used to expand its industrial generator product line.
Another example is a consumer products company selling off a
profitable division that no longer meets its long range goals. The proceeds
from this disinvestment are then used to improve the companys financial
position by reducing its debt.
Investment refers to conversion of money or cash into securities,
debentures, bonds or any other claims on money. At the same time,
disinvestment involves the conversion of money claims or securities into
money or cash.
Disinvestments, also known as divestments, are processes utilized by
companies when there is a need or desire to initiate a reduction in capital
investment. Essentially functioning as the polar opposite of an investment,
the process of divestment involves selling off current investments in order togenerate assets that can be used to better advantage in some other manner.
Businesses sometimes use disinvestment as a means of changing the
direction of the company in order to meet changing consumer needs and
remain competitive.
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One of the easiest ways to understand divestment is to think in terms of a
company that has successfully produced a product for many years. However,
changing technology is shrinking the demand for the companys product. A
new product is developed that is anticipated to recapture the interest of
consumers. However, this will leave the company with several physical
facilities and a great deal of equipment that is not required for the
production of the new product.
In order to generate revenue that will aid in the manufacturing of the
new product, the company will undergo a period of disinvestment. The plants
and other facilities that are no longer required for production are sold off,
along with the now obsolete equipment. By generating income from the sale
of these divested holdings, the company creates resources that constitute a
capital investment in the new product.
At times, a company may choose to sell off a subsidiary or business unit
as part of a disinvestment strategy. Doing so allows the company to begin
the migration from focusing on one market sector to a different sector that
holds more promise. In some cases, disinvestment involves selling the
business unit to another company. At other times, the business unit is spun
off into a separate company altogether.
Disinvestment can also occur when there is a decision to make changes
in the regulation of an industry. Perhaps the most well known example ofthis type of disinvestment application would be the deregulation of the
communications industry in the United States during the 1980s. As part of
the process, the Bell System was completely divested and emerged as eight
different entities: the new AT&T, and seven regional Bell companies that
were known collectively as the Baby Bells.
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Because disinvestment does involve the sale of resources, companies
often look very closely at the process before actually implementing any type
of divestiture action. It is important to make sure that the investments thatare released are not likely to be required in the future, and that the revenue
generated from the sale of the investments is highly likely to result in
increased profitability for the company in the long run.
Evolution of the Disinvestment
Policy
a) Initial Phase (1991-92 to 1998-99)
1)The Statement of Industrial Policy dated July 24, 1991 stated that in the
case of selected enterprises, part of Government holdings in the equity
share capital of these enterprises will be disinvested in order to provide
further market discipline to the performance of public enterprises. Thus,
disinvestment of the Governments equity in CPSUs (Central Public Sector
Units) started in 1991-92, when minority shareholding of the Central
Government in 30 individual CPSUs was sold to selected financial
institutions (LIC, GIC, UTI) in bundles, in order to ensure that along with the
attractive shares, the not so attractive shares also got sold. Subsequently,
shares of individual CPSUs were sold and the category of eligible buyers was
gradually expanded to include individuals, NRIs and registered FIIs. By 1997,
sale through the GDR route was also initiated and MTNL (1997-98), VSNL
(1998-99) and GAIL (1999-2000) all used the opportunity to access the GDR
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market. The number of listed CPSUs on domestic stock exchange stood at
42 as on 31.3.2006.
2)The policy on disinvestment has evolved through statements of Finance
Ministers in their budget speeches. In the interim budget 1991-92, it was
announced that the Government would disinvest up to 20 per cent of its
equity in selected public sector undertakings in favor of mutual funds and
financial or investment institutions in the public sector to broad-base the
shareholding, improve management, enhance availability of resources forthese CPSUs and yield resources for the exchequer.
3)The Rangarajan Committee recommended in April 1993 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. As per
statement of Industrial Policy dated 24th July 1991 the following industries
were proposed to be reserved for the public sector:- Arms and ammunition
and allied items of defense equipment, Defense aircraft and warships.
Atomic Energy
Coal and lignite
Mineral oils
Mining of iron ore, manganese ore, chrome ore, gypsum, sulphur, gold and
diamond
Mining of copper, lead, zinc, tin, molybdenum and wolfram
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Minerals specified in the Schedule to the Atomic Energy (Control of
Production and Use) Order, 1953
Railway transport.
4)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 will be utilized for allocation to education and
health sectors and for creating a fund to strengthen CPSUs.
5) Public Sector Disinvestment Commission:-The Public Sector Disinvestment
Commission was established on 23rd August 1996, for a period of three
years, as an independent, non-statutory, advisory body with Shri G.V.
Ramakrishna as full time Chairman, four other Members (part time) and a
full time Member Secretary. 72 CPSUs were referred to the Commission.
Subsequently, 8 cases were withdrawn. The Commission submitted 12
reports for 58 CPSUs, recommending strategic sale in 28 cases, trade sale in
8 cases, closure of 4 units, equity sales in 6 cases and no change
(disinvestment deferred) in 12 cases. The Commission did not take up
examination of the cases of six CPSUs, which were registered with the Board
for Industrial & Financial Reconstruction (BIFR). The tenure of the Chairman
of the Commission was extended till 30th November 1999.
6)In the budget speech of 199899, it was announced that, in the generality of
cases, the Governments shareholding in CPSUs would be brought down to26%. In the case of CPSUs involving strategic considerations, the
Government would continue to retain majority shareholding. The interest of
workers would be protected in all cases.
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7) In the budget speech of 1999-2000, it was announced that Government's
strategy towards the CPSUs would continue to encompass a judicious mix of
strengthening strategic units, privatizing non-strategic ones through gradualdisinvestment or strategic sale and devising viable rehabilitation strategies
for weak units.
8) On 16th March 1999, the Government classified the CPSUs into strategic and
non-strategic areas for the purpose of disinvestment. It was decided that
the strategic CPSUs would be those functioning in areas of:
Arms and ammunition and the allied items of defense equipment, defense
aircrafts and warships
Atomic energy (except in the areas related to the generation of nuclear
power and applications of radiation and radio-isotopes to agriculture,
medicine and non-strategic industries)
Railway transport.
All other CPSUs were to be considered as being non-strategic. For the non-
strategic CPSUs, it was decided that reduction of the Governments
shareholding to 26% would not be automatic and the manner and pace of
doing so would be decided on a case-by-case basis on the following
considerations:
a) Whether the industrial sector required the presence of the public sector as
a countervailing force to prevent concentration of power in private hands,
and
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b) Whether the industrial sector required a proper regulatory mechanism to
protect the consumer interests before Public Sector Enterprises were
privatized.
9) It was also decided to establish a new Department for Disinvestment to
systematize the policy approach to disinvestment and privatization and to
give a fresh impetus to this programmed. The Department came into being
on 10th December 1999.
10) In the budget speech of 2000-2001, it was announced that the main
elements of the Governments policy were to restructure and revive
potentially viable CPSUs; close down CPSUs which cannot be revived; bring
down Governments shareholding in all non-strategic CPSUs to 26% or
lower, if necessary; and fully protect the interests of workers. The receipts
from disinvestment and privatization will be used for meeting expenditure
on social sectors, restructuring of CPSUs and for retiring public debt.
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b) Second Phase (1999-00 to 2003-
04):
Reconstituted Public Sector Disinvestment Commission:-
11) The Public Sector Disinvestment Commission was re-constituted on 24th
July 2001 for a period of two years with Dr. R.H. Patil as Chairman (part
time) along with four other Members (part time) and a full time Member
Secretary. The then Ministry of Disinvestment had informed the
Commission on 23rd January 2002 that all non-strategic CPSUs, including
subsidiaries, but excluding IOC, ONGC and GAIL, stood referred to the
Commission for it to prioritize, examine and make recommendations in the
light of the Government policies articulated earlier on 16th March 1999 and
the budget speeches of Finance Ministers from time to time. The
Disinvestment Commissions in 25 reports submitted between February
1997 March 2004 disinvestment through strategic sale in 59 cases;
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disinvestment other than strategic sale in 32 cases and closure was
recommended in 4 cases. The term of the Commission was subsequently
extended till 31st
October 2004. The Commission ceased to exist from 1st
November, 2004.
12)In the budget speech of 2001 2002, it was announced that CPSUs must
be strengthened to compete and prosper in the new environment. A
receipt of Rs. 12,000 crore was budgeted from disinvestment. Out of this,
an amount of Rs. 7,000 crore was to be used for providing restructuringassistance to CPSUs, safety net to workers and reduction of debt burden
and a sum of Rs. 5,000 crore for providing additional budgetary support
for the Plan, primarily in the social and infrastructure sectors. This
additional allocation for the Plan would be contingent upon realization of
the anticipated receipts.
13)The Government decided in September 2002 that CPSUs and Central
Government owned cooperative societies (where Governments ownership
is 51% or more) should not be permitted to participate as bidders in the
disinvestment of other CPSUs unless specifically approved by the Core
Group of Secretaries on Disinvestment (CGD). In December 2002 on the
basis of a proposal of the Department of Fertilizers, it was decided that
Multi State Cooperative Societies under the Department of Fertilizers be
allowed to participate in the disinvestment of fertilizer CPSUs including
National Fertilizers Limited.
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14) In a suo motu statement made in both Houses of Parliament on 9th
December, 2002, by the then Minister of Disinvestment, the Government
reiterated the policy as The main objective of disinvestment is to putnational resources and assets to optimal use and in particular to unleash
the productive potential inherent in our public sector enterprises. The
policy of disinvestment specifically aims at:
Modernization and up gradation of Public Sector Enterprises
Creation of new assets
Generating of employment
Retiring of public debt
Government would continue to ensure that disinvestment does
not result in alienation of national assets, which, through the process
of disinvestment, remain where they are. It would also ensure that
disinvestment does not result in private monopolies. In order to
provide complete visibility to the Governments continued commitment
of utilization of disinvestment proceeds for social and infrastructure
sectors, the Government would set up a Disinvestment Proceeds Fund.
This Fund would be used for financing fresh employment opportunities
and investment, and for retirement of public debt. For the
disinvestment of natural asset companies, the Ministry of Finance and
the Ministry of Disinvestment would work out guidelines. The Ministry
of Finance would also prepare for consideration of the Cabinet
Committee on Disinvestment a paper on the feasibility and modalities
of setting up an Asset Management Company to hold manage and
dispose the residual holding of the Government in the companies in
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which the Governments equity has been disinvested to a strategic
partner.
15) The then Ministry of Disinvestment issued guidelines regarding
Management-Employee Bids in Strategic Sale on 25th April 2003 to
encourage and facilitate the participation of employee participation in
strategic sales.
16)In the budget speech for 2003-04, the Government announced that details
regarding the already announced Disinvestment Fund and Asset
Management Company, to hold residual shares post disinvestment, would
be finalized early in 2003-04.
Summary: -
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.
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7. Coal and lignite.
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 (Control of
Production and Use) Order 1953.
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.
Through Notification No. 477(E) dated 25.7.1991, the industries reserved for
PSUs were reduced to eight areas from the previous list of seventeen.
Industries reserved for PSUs since July 1991:
1. Arms and Ammunition and allied items of defence equipment, defence
aircraft and warship.
2. Atomic Energy.
3. Coal and Lignite.
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4. Mineral Oils.
5. Mining of iron ore, manganese ore, chrome ore, gypsum, sulphur, gold
and diamond.
6. Mining of copper, lead, zinc, tin, molybdenum and wolfram.
7. Minerals specified in the schedule to Atomic Energy (Control of
production and use) Order, 1953.
8. Railway Transport.
This list by December 2002 includes only three areas reserved for PSUs:
Atomic Energy
2) Minerals specified in schedule to atomic Energy (Control of Production
and Use) Order, 1953.
3) Railway Transport.
Because of the current revenue expenditure on items such as interest
payments, wages and salaries of Government employees and subsidies, the
Government is left with hardly any surplus for capital expenditure on social
and physical infrastructure. While the Government would like to spend on
basic education, primary health and family welfare, large amount of
resources are blocked in several non-strategic sectors such as hotels, tradingcompanies, consultancy companies, textile companies, chemical and
pharmaceuticals companies, consumer goods companies etc. Not only this -
the continued existence of the PSEs is forcing the Government to commit
further resources for the sustenance of many non-viable PSEs. The
Government continues to expose the taxpayers' money to risk, which it can
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readily avoid. To top it all, there is a huge amount of debt overhang, which
needs to be serviced and reduced before money is available to invest in
infrastructure. All this makes disinvestment of the Government stake in thePSEs absolutely imperative.
Criteria for Disinvestment
The decision regarding disinvestment or liquidation viewed in the light of
following criteria:
a) Whether the objectives of the company are achieved?
b) Whether there is decrease in number of beneficiaries?
c) Whether serving the national interest will be affected because ofdisinvestment?
d) Whether private sector can efficiently operate and manage the
undertaking?
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e) Whether the original rate of return targeted could not be possible to
achieve?
f) Whether socio-economic objectives lot its purpose?
Objectives of Disinvestment
The new economic policy initiated in July 1991 clearly indicated that PSUs
had shown a very negative rate of return on capital employed. Inefficient
PSUs had become and were continuing to be a drag on the Governments
resources turning to be more of liabilities to the Government than beingassets. Many undertakings traditionally established as pillars of growth had
become a burden on the economy. The national gross domestic product and
gross national savings were also getting adversely affected by low returns
from PSUs. About 10 to 15 % of the total gross domestic savings were
getting reduced on account of low savings from PSUs. In relation to the
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capital employed, the levels of profits were too low. Of the various factors
responsible for low profits in the PSUs, the following were identified as
particularly important:
Price policy of public sector undertakings
Underutilization of capacity
Problems related to planning and construction of projects
Problems of labour, personnel and management
Lack of autonomy
Hence, the need for the Government to get rid of these units and to
concentrate on core activities was identified. The Government also took a
view that it should move out of non-core businesses, especially the ones
where the private sector had now entered in a significant way. Finally,
disinvestment was also seen by the Government to raise funds for meeting
general/specific needs.
In this direction, the Government adopted the 'Disinvestment Policy'. This
was identified as an active tool to reduce the burden of financing the PSUs.
The following main objectives of disinvestment were outlined:
To reduce the financial burden on the Government.
To introduce, competition and market discipline.
To fund growth.
To encourage wider share of ownership.
To depoliticize non-essential services.
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Importance of Disinvestment
Presently, the Government has about Rs 2 lakh crore locked up in PSUs.
Disinvestment of the Government stake is, thus, far too significant. The
importance of disinvestment lies in utilization of funds for:
Financing the increasing fiscal deficit
Financing large-scale infrastructure development
For investing in the economy to encourage spending
For retiring Government debt- Almost 40-45% of the Centres revenue
receipts go towards repaying public debt/interest
For social programs like health and education
Disinvestment also assumes significance due to the prevalence of an
increasingly competitive environment, which makes it difficult for many PSUs
to operate profitably. This leads to a rapid erosion of value of the public
assets making it critical to disinvest early to realize a high value.
Reasons for disinvestment
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The public sector in India at present is at cross roads. The new economic
policy initiated in July 1991, clearly indicated that the public sector
undertakings have shown a very negative rate of return on capital employed.On account of this phenomenon many public sector undertakings have
become burden to the government. They are in fact turning out to be
liabilities to the government rather than being assets.
This is a sector which the government clearly wants to get rid off. In this
direction the government has adopted a new approach to reform and
improve the public sector undertakings performance i.e. 'Disinvestment
policy'. This has gained lot of importance especially in latter part of 90s. At
present the government seriously perceives the disinvestment policy as an
active tool to reduce the burden to financing the public sector undertakings.
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Benefits of Disinvestment
Some overall benefits of Disinvestment, irrespective of the approach used
are as follows:
For the Government:-
1. Raising valuable resources for the government, which could be used to
bridge the fiscal deficit for one, but also for various developmental
projects in key areas such as infrastructure? The Financial Times (20th
May 2009) quotes a report brought out by the French securities firm
CLSA to state: A reduction in shareholding to hypothetically 51% across
all the state-owned entities could bring in USD 62 billion (Rs. 2.9 lakh
crore approximately) at current market prices (thus valuing the
government holdings in listed state-owned companies at Rs 8.8 lakh
crore). Even a 10% stake sale in the ten large public state undertakings
that are likely disinvestment candidates can bring in USD 17 billion (Rs.
80000 crore approximately)". Another such estimate by Delhi-based
PRIME Database suggests that if the Government follows up on its
promise of bringing down its equity stake in listed CPSEs to 86%, it can
mobilise Rs. 7248 crore going by the current market valuations.
2. Apart from generating a one-time sale amount, a lot of these stake sales
would also result in annual revenues for the government, as has been
shown in the past.
3. The government can focus more on core activities such as infrastructure,
defence, education, healthcare, and law and order.
4. A leaner government with reduction in the number of ministries and
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bureaucrats.
For the Markets and Economy: -
1. Brings about greater efficiencies for the economy and markets as a
whole.
For the Taxpayers:-
1. Letting go of these assets is best in the long term interest of the tax
payers as the current yield on these investments in abysmally low. Even
if the funds from the sale are not utilised for bridging fiscal deficit, a
much better utilisation of these stuck funds would be into critical
sectors such as healthcare, education and infrastructure.
2. Unlocking of shareholder (in this case the citizens of India) value
For the Employees: -
1. Monetary gains through ESOPs and preferential issue of shares.
2. Pay rises, as has been seen in past divestments.
3. Greater opportunities and avenues for career growth- further
employment generation
For the PSUs: -
1. Greater autonomy leading to higher efficiencies
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Benefits specific to each approach used for Disinvestment
Complete Privatisation: -
In most parts of the world, it has been proven that Privatisation brings
the maximum returns to the tax payer, thus making it the best form of
Disinvestment. Since complete control is given off by the government, the
reforms are immediate, and the results start showing soon.
Majority Sale: -
A majority stake sale to a strategic buyer has its positives in getting a
superior valuation (though sometimes not as good as an outright sale) for
the government purely due to market dynamics. With some of the PSUs
being virtual monopolies, private players have a lot of interest in acquiring
stakes in them. It was because of this reason that this became the chosen
vehicle for Disinvestment in the early 2000's.
Minority Sale: -
Given the current political and social compulsions, complete privatisation
may not be a solution in the Indian context. Even a majority stake sale would
be met with opposition.
Offloading a part of the governments equity by way of a minority stake sale
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is the only workable option, as in this case, the control would still be with the
government. Minority stakes can be sold either to selected private players,
or to the public by way of a Public Offer or auctioned off to financialinstitutions. Offloading minority stakes to private players does not make
sense for the government since valuations would be driven down by the fact
that the government still retains control/ decision making of the company.
This has been proven in transactions in the past wherein the P-E ratios
typically accompanying such a sale were found to be low.
On the other hand, a minority stake sale via a Public Offer has several
benefits.
For the Government: -
1. Minority Stake sales via Public Offers provide benefits of long term
capital appreciation- Disinvestment done in a staggered manner can
help the government realize the real value of these PSUs, as has been
shown by recent PSU IPOs wherein the valuation that the market has
given to the PSUs is far higher than the original offer price. For
example, in the case of NTPC, the Government sold each share at Rs.
62 in its IPO in October 2004. In its FPO in February 2010, the
Government was able to realise Rs. 201 for the same share!
For the PSU: -
1.Listing leads to better and timely disclosures, bringing in greater
transparency and professionalism, thus protecting the interest of the
investors.
2. Greater efficiency by way of being accountable to thousands of
shareholders
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3. Listing provides an opportunity to raise capital to fund new projects
/undertake expansions/diversifications and for acquisitions. An initial
listing increases a company's ability to raise further capital throughvarious routes like preferential issue, rights issue, Qualified
Institutional Placements and ADRs/GDRs/FCCBs, and in the process
attract a wide and varied body of institutional and professional
investors.
4. Listing raises a company's public profile with customers, suppliers,
investors, financial institutions and the media. A listed company is
typically covered in analyst reports and may also be included in one or
more of indices of the stock exchanges.
For the Employees: -
1. Though there could be opposition from employees of some PSUs, this
can be countered and also turned into a favorable situation by offering
ESOPs/preferential issue of shares to them. This would provide tangible
monetary benefits to them, and also make them an interested party in
better performance of their companies.
For the Markets and Economy: -
1. These PSU IPOs present the best opportunity of widening the equity
investing retail base by providing greater and safer investment
opportunities. Curbs and measures, however, would need to be put in
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place to ensure that institutional investors do not run away with the
bulk of this sale and only retail participation is allowed in these issues.
Public offers have been one of the frequently used techniques in theUK to transfer state assets and businesses to private ownership. The
method has been fairly successful, having increased the shareholding
population from 4% to 25%. For example, British Telecom alone
created 2.1 million shareholders in the UK, when privatized.
2. Listed PSUs already form about 30% of the total market capitalization.
With more PSUs being listed, this would provide a greater depth and
width to our capital market
A minority stake sale via Auctioning to financial institutions also has certain
benefits:
1. Bidding by a group of large, informed investors would provide the
highest likelihood of the assets receiving the best valuation.
2. The process takes relatively little time as the modalities are less
demanding than those for a full-scale public offer process that can take
many months.
3. This will provide a direct conduit for interested foreign investors
4. Retail participation can come in through the mutual funds, Provident
Funds and the NPS.
Types of Disinvestment
a) Offer for sale to public at fixed price:-
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In this type of disinvestment, the government holds the sale of the
equity shares to the public at large at a pre determined price. Examples:-
MFIL, BALCO, CMC, HTL, IBP, HZL, PPL, and IPCL.
b) Strategic sale:-
In this type, significant management rights are transferred to the
investor i.e. majority of equity holdings is divested. Examples: -Offer of 1
million shares of VSNL, listing of ONGC IPO.
c)International offering:-
This is essentially targeted at the FII (foreign institutional investors).
Ex:-GDR of VSNL, MTNL, etc.
d) Asset sale and winding up:-
This is normally resorted to in companies that are either sick or facing
closure. This is done by the process of auction or tender. Ex:-Auction of sick
PSUs.
e) Strategies of Disinvestment:
Government adopted following disinvestment strategies for proper revenue
collection from disinvestment:
Selection of Companies to be offered-The list of companies offered
in the first phase of disinvestment had to be limited to those
companies whose investments in market appreciates without much
difficulty and price reasonably.
Pricing of the Equity-The Pricing formula adopted for the referral price
was average of NAV (Net Asset Value) and PECV (Profit earning
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capacity value) at 10%industry capitalization rate. This was as
existence at that time.
Rationale for Disinvestment Mechanism-A direct offer of shares to the
public was not feasible because even with most sophisticated valuation
skill a fair issue price on company basis was possible to determine
since the PSUs were unknown to the market. The risk of over-pricing or
under-pricing on a company specific basis was real but clearly
unaffordable.
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Methods of Disinvestment
The following are the three methods adopted by the Government of India for
disinvesting the Public sector undertakings. There are three Methods of
valuation approved by the Disinvestment Commission
1. Net Asset Method:
This will indicate the net assets of the enterprise as shown in the books of
accounts. It shows the historical value of the assets. It is the cost price less
depreciation provided so far on assets. It does not reflect the true position of
profitability of the firm as it overlooks the value of intangibles such as
goodwill, brands, distribution network and customer relationships which are
important to determine the intrinsic value of the enterprise. This model is
more suitable in case of liquidation than in case of disinvestment.
2. Profit Earning Capacity Value Method:
The profit earning capacity is generally based on the profits actually
earned or anticipated. It values a company on the basis of the underlying
assets. This method does not consider or project the future cash flow.
3. Discounted Cash Flow Method:
In this method the future incremental cash flows are forecasted and
discounted into present value by applying cost of capital rate. The method
indicates the intrinsic value of the firm and this method is considered assuperior than other methods as it projects future cash flows and the earning
potential of the firm, takes into account intangibles such as brand equity,
marketing & distribution network, the level of competition likely to be faced
in future, risk factors to which enterprises are exposed as well as value of its
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core assets. Out of these three methods the discounted cash flow method is
used widely though it is the most difficult.
Questionnaire
1) Do you know about Disinvestment?
2) Do you think Disinvestment has fundamental effect on the company?
3) Do you think the disinvestment that has happened till now has
achieved its objective?
4) Do you think that Engineering and power generation sector are two
major pillars for growth of Indian Economy?
5) Do you think there are unidentified government companies or sectors
that can have been identified at early stage to go for disinvestment?
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Case Studies
a) Engineering Industry:
Market Overview
The engineering sector is the largest segment of Indian industry The
engineering sector is the largest segment of the overall Indian industrial
sector. India has a strong engineering and capital goods base. The important
groups within the engineering industry include machinery & instruments,
primary and semi finished iron & steel, steel bars & rods, non-ferrous metals,
electronic goods and project exports. The engineering sector employs over 4
million skilled and semi-skilled workers (direct and indirect). The sector can
be categorised into heavy engineering and light engineering segments.
Heavy engineering segment forms the majority of the engineering sector in
India. In the year 2003-04, out of the total engineering production of US$ 22
billion, the heavy engineering market contributed over 80 per cent with the
light engineering segment accounting for the remaining. India has a well-
developed and diversified industrial machinery/ capital base capable of
manufacturing the entire range of industrial machinery. The industry has
also managed to successfully develop advanced manufacturing technology
over the years. Among the developing countries, India is a major exporter of
heavy and light engineering goods, producing a wide range of items. The
bulk of capital goods required for power projects, fertiliser, cement, steel and
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petrochemical plants and mining equipment are made in India. The country
also makes construction machinery, equipment for irrigation projects, diesel
engines, tractors, transport vehicles, cotton textile and sugar mill machinery.
The engineering industry has shown capacity to manufacture large-size
plants and equipment for various sectors like power, fertiliser and cement.
Lately, air pollution control equipment is also being made in the country. The
heavy electrical industry in India meets the entire domestic demand. Players
in the engineering sector in India can be categorised as follows:
Equipment manufacturers such as Bharat Earth Movers Limited
(BEML), Siemens, Cummins India, ABB, etc
Execution specialists such as Bharat Heavy Electricals
Ltd.(BHEL), Larsen &Toubro (L&T), Engineers India, etc and
Niche players such as Thermax in environmental solutions,
Voltas in electro-mechanical projects, ABB for automation technologies and
so on.
A large number of multinational companies like Cummins, Alfa Laval,
Sandwik
Asia, etc. have also entered the engineering industry in India.
Indias engineering industry is dominated by organized players
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The heavy and light engineering segments in this sector can be further
classified as shown in the table. As the sector demands a high level of
capability and investment, it is dominated by large organized players.
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This industry comprises multinational companies, joint ventures, large
domestic players, regional players in the organized sector and large number
of small players in the unorganized sector. Some unorganized players also
exist at lower levels where the technology required is very basic.
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BHEL
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Introduction:-
BHEL is the largest engineering and manufacturing enterprise in India in the
energy-related/infrastructure sector, today. BHEL was established more than
40 years ago, ushering in the indigenous Heavy Electrical Equipment
industry in India - a dream that has been more than realized with a well-
recognized track record of performance. The company has been earning
profits continuously since 1971- 72 and paying dividends since 1976-77.
BHEL manufactures over 180 products under 30 major product groups and
caters to core sectors of the Indian Economy viz., Power Generation &
Transmission, Industry, Transportation, Telecommunication, Renewable
Energy, etc. The wide network of BHEL's 14 manufacturing divisions, four
Power Sector regional centers, over 100 project sites, eight service centers
and 18 regional offices, enables the Company to promptly serve its
customers and provide them with suitable products, systems and services
efficiently and at competitive prices. The high level of quality & reliability of
its products is due to the emphasis on design, engineering and
manufacturing to international standards by acquiring and adapting some ofthe best technologies from leading companies in the world, together with
technologies developed in its own R&D centers.
BHEL has acquired certifications to Quality Management Systems (ISO
9001), Environmental Management Systems (ISO 14001) and Occupational
Health & Safety Management
Systems (OHSAS 18001) and is also well on its journey towards Total QualityManagement.
BHEL has:-
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Installed equipment for over 90,000 MW of power generation -- for Utilities,
Captive and Industrial users.
Supplied over 2,25,000 MVA transformer capacity and other equipment
operating in Transmission & Distribution network up to 400 kV (AC & DC).
Supplied over 25,000 Motors with Drive Control System to Power projects,
Petrochemicals, Refineries, Steel, Aluminum, Fertilizer, Cement plants, etc.
Supplied Traction electrics and AC/DC locos to power over 12,000 kms
Railway network.
Supplied over one million Valves to Power Plants and other Industries.
BHEL's operations are organized around three business sectors, namely
Power, Industry - including Transmission, Transportation,
Telecommunication & Renewable Energy - and Overseas Business. This
enables BHEL to have a strong customer orientation, to be sensitive to his
needs and respond quickly to the changes in the market.
BHEL, ranking among the major power plant equipment suppliers in the
world, is one of the largest exporters of engineering products & services
from India. Over the years, BHEL has established its references in around 60
countries of the world, ranging from the United States in the West to New
Zealand in the Far East. BHEL's export range covers individual products to
complete Power Stations, Turnkey Contracts for Power Plants, EPC Contracts,
HV/EHV Substations, O&M Services for familiar technologies, Specialized
after-market services like Residual Life Assessment (RLA) studies and
Retrofitting, Refurbishing & Overhauling, and supplies to manufacturers &
EPC contractors.
BHEL has assimilated and updated/adopted the state-of-theart- technologies
in the Power and Industrial equipment sectors acquired from world leaders.
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BHEL has successfully undertaken turnkey projects on its own and
possesses the requisite flexibility to interface and complement international
companies for large projects, and has also exhibited adaptability bymanufacturing and supplying intermediate products to the design of other
manufacturers and original equipment manufacturers (OEMs). The success in
the area of rehabilitation and life extension of power projects has
established. BHEL as a reliable alternative to the OEMs for such power
plants. BHEL's vision is to become a world-class engineering enterprise,
committed to enhancing stakeholder value. The company is striving to give
shape to its aspirations and fulfill the expectations of the country to become
a global player. The greatest strength of BHEL is its highly skilled and
committed 43,300 employees. Every employee is given an equal opportunity
to develop himself and grow in his career. Continuous training and
retraining, career planning, a positive work culture and participative style of
management all these have engendered development of a committed and
motivated workforce setting new benchmarks in terms of productivity,
quality and responsiveness.
Analysis of BHEL
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b) Engineering Industry:
Market overview
The process of electrification commenced in India almost with the developed
world, in the 1880s, with the establishment of a small hydroelectric power
station in Darjeeling. However, commercial production and distribution
started in 1889, in Calcutta (now Kolkata). In the year 1947, the country had
a power generating capacity of 1,362 MW. Generation and distribution ofelectrical power was carried out primarily by private utility companies such
as Calcutta Electric. Power was available only in a few urban centers; rural
areas and villages did not have electricity. After 1947, all new power
generation, transmission and distribution in the rural sector and the urban
centers (which was not served by private utilities) came Power Sector Report
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ABS, Bangalore 22 | P a g e Power Sector Report (Apr - 2009) under the
purview of State and Central government agencies. State Electricity Boards
(SEBs) were formed in all the states. Legal provisions to support and regulatethe sector were put in place through the Indian Electricity Act, 1910. Shortly
after independence, a second Act - The Electricity (Supply)
Act, 1948 was formulated, paving the way for establishing Electricity Boards
in the states of the Union. In 1960s and 70s, enormous impetus was given
for the expansion of distribution of electricity in rural areas. It was thought
by policy makers that as the private players were small and did not have
required resources for the massive expansion drive, the production of power
was reserved for the public sector in the Industrial Policy Resolution of 1956.
Since then, almost all new investment in power generation, transmission and
distribution has been made in the public sector. Most of the private players
were bought out by state electricity boards. From the installed capacity of
only 1,362mw in 1947, has increased to 97000 MW as on March 2000 which
has since crossed 100,000 MW mark India has become sixth largest
producer and consumer of electricity in the world equaling the capacities ofUK and France combined. The number of consumers connected to the Indian
power grid exceeds is 75 million. India's power system today with its
extensive regional grids maturing in to an integrated national grid, has
millions of kilometers of T & D lines criss-crossing diverse topography of the
country.
However, the achievements of India's power sector growth looks phony on
the face of huge gaps in supply and demand on one side and antediluvian
generation and distribution system on the verge of collapse having plagued
by inefficiencies, mismanagement, political interference and corruption for
decades, on the other. Indian power sector is at the cross road today. A
paradigm shift is in escapable- for better or may be for worse.
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NTPC
Introduction:
Indias largest power company, NTPC was set up in 1975 to accelerate power
development in India. NTPC is emerging as a diversified power major with
presence in the entire value chain of the power generation business. Apart
from power generation, which is the mainstay of the company, NTPC has
already ventured into consultancy, power trading, ash utilization and coal
mining. NTPC ranked 317th in the 2009, Forbes Global 2000 ranking of the
Worlds biggest companies.
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The total installed capacity of the company is 32,194 MW (including JVs) with
15 coal based and 7 gas based stations, located across the country. In
addition under JVs, 4 stations are coal based & another station uses
naptha/LNG as fuel. By 2017, the power generation portfolio is expected to
have a diversified fuel mix with coal based capacity of around 53,000 MW,
10,000 MW through gas, 9,000 MW through Hydro generation, about 2000
MW from nuclear sources and around 1000 MW from Renewable Energy
Sources (RES). NTPC has adopted a multi-pronged growth strategy which
includes capacity, addition through green field projects, expansion of
existing stations, joint ventures, subsidiaries and takeover of stations.
NTPC has been operating its plants at high efficiency levels. Although the
company has 18.10% of the total national capacity, it contributes 28.60% of
total power generation due to its focus on high efficiency.
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NTPC IPO:-
In October 2004, NTPC launched its Initial Public Offering (IPO) consisting of
5.25% as fresh issue and 5.25% as offer for sale by Government of India.
NTPC thus became a listed company in November 2004 with the government
holding 89.5% of the equity share capital. The rest is held by Institutional
Investors and the Public. The issue was a resounding success. NTPC is among
the largest five companies in India in terms of market capitalisation
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. At NTPC, People before Plant Load Factor is the mantra that guides all HR
related policies. NTPC has been awarded No.1, Best Workplace in India
among large organizations and the best PSU for the year 2009, by the Great
Places to Work Institute, India Chapter in collaboration with The Economic
Times.
The concept of Corporate Social Responsibility is deeply ingrained in NTPC's
culture. Through its expansive CSR initiatives, NTPC strives to develop
mutual trust with the communities that surround its power stations.
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Operations
In terms of operations, NTPC has always been considerably above the national av
availability factor for coal based power stations has increased from 89.32% in 1
91.76% in 2009-10, which compares favorably with international standards. Th
increased from 76.6% in 1998-99 to 90.81% during the year 2009-10.
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The table below shows that while the installed capacity has increased by 62.15%
twelve years the generation has increased by 99.84%.
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DESCRIPTION UNIT 1998-99 2009-10% OF
INCREASE
Installed
CapacityMW 17,786 28,840 62.15
Generation MUs 1,09,505 2,18,840 99.84
* Excluding JVs and Subsidiaries
The table below shows the detailed operational performance of coal based station
years.
OPERATIONAL PERFORMANCE OF COAL BASED
NTPC STATIONS
Generation(BU) PLF(%)
Availabilit
y
Factor(%)
2009-10 218.84 90.81 91.76
2008-09 206.94 91.14 92.47
2007-08 200.86 92.24 92.12
2006-07 188.67 89.43 90.09
2005-06 170.88 87.52 89.91
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2004-05 159.11 87.51 91.20
2003-04 149.16 84.40 88.79
2002-03 140.86 83.57 88.70
2001-02 133.20 81.11 89.09
2000-01 130.10 81.80 88.54
1999-00 118.70 80.39 90.06
1998-99 109.50 76.60 89.36
Market overview: Hydropower
In FY09, demand for electricity exceeded supply by 11%, compared with
9.90% in FY08. Indias peak demand deficit during FY09 was 12% or
13,124MW; it is anticipated to be 152,746MW by 2012 with total energy
requirements of 969 billion units.
Hydropower Potential in India
According to the Hydro Power Policy 2008, India has enormous potential for
hydroelectric generation; about 84,000MW at 60% load factor, which
translates into 148,700MW in terms of installed capacity, according to CEA.
Moreover, 6,782MW of installed capacity has been assessed from small,
mini, and micro hydroelectric schemes. The estimated hydropower potential
and probable installed capacities of major Indian River systems are given
below:
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As of May 31, 2009, the total installed capacity in the country was
149,392MW
and hydropower (including pumped storage schemes in the country)
accounts for
36,878MW.
Share of Hydropower in Total Power Generation in India, as of May
31, 2009
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This capacity does not include small hydropower capacity of 1,168MW from
hydropower plants with an installed generating capacity up to 25MW. These
small scale hydropower generators were classified as Renewable Energy
Sources (RES) (along with wind energy and biomass energy) in FY09. A
capacity addition of 78,700.4MW has been proposed in the eleventh five
year plan. Of this, capacity addition of 15,627MW is proposed from
hydropower - 3,392MW has already been commissioned and 12,235MW is
under construction, as of May 31, 2009.
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NHPC
Company
NHPC was incorporated under the Companies Act in 1975 as a private limited
company. It became a public limited company from, 1986, and its name
changed to NHPC Limited. NHPC is a hydroelectric power generating
company, which is dedicated to the planning, development and
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implementation of an integrated and efficient network of hydroelectric
projects in India. The company executes all aspects of the development of
hydroelectric projects - from conceptualizing to commissioning. It has
developed and constructed 13 hydroelectric power stations and its current
total installed capacity is 5,175MW. NHPCs current total generating capacity
is 5,134.2MW, which takes into account a downgrade of capacity ratings of
the Loktak and Tanakpur power stations by the CEA. NHPCs power stations
and hydroelectric projects are located predominantly in the North and North
East India, in Jammu & Kashmir, Himachal Pradesh, Uttarakhand, Arunachal
Pradesh, Assam, Manipur, Sikkim, and West Bengal. The company and its
subsidiary, NHDC, generated 16,582.72 MU and 2,368.45 MU of electricity in
FY09; they sold 14,587.88 MU and 2,345.01 MU, respectively. NHPCs
average selling price was INR2.03 per unit and the average capacity indices
for FY07, FY08 and FY09 were 94.11%, 96.13% and 93.61%, respectively.
Joint Ventures
NHPC selectively forms alliances with state governments to undertake
development of projects. Pursuant to a MoU with the government of Madhya
Pradesh, NHPC incorporated NHDC on August 1, 2000 to take advantage of
the hydroelectric potential of the Narmada river basin. In September 2007, it
signed a MoU with the government of Manipur to establish a JV to develop
the Loktak Downstream hydroelectric project. In June 2007, the company
entered into a MoA with the Arunachal Pradesh government to implement
the Dibang project on an own-and-operate basis. Further, on October 10,
2008, it signed a MoU with the JKSPDC, the government of Jammu & Kashmir
and PTC, to implement the Pakal Dul and other hydroelectric projects in the
Chenab river basin with an anticipated aggregate installed capacity of
~2,100MW. In recognition of NHPCs performance, it was designated a Mini-
Ratna Category-I public sector undertaking in April 2008. The company now
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has greater autonomy to undertake new projects without GoIs approval,
subject to an investment ceiling of INR5 billion. The President of India and its
nominees currently hold 100% of NHPCs issued and paid-up equity sharecapital. After the issue, the President of India will hold 86.36%of the post-
issue paid-up equity share capital.
NHPC Limited IPO
Public issue of 1.68 bn shares with a face value of INR10 at a price band of
INR30- INR 36, aggregating to INR50.32bn - INR60.39bn. The issue comprises
an offer for sale of 0.56bn shares and fresh issue of 1.1bn shares.
Background
NHPC is a hydroelectric power generating company, which is dedicated to
the planning, development, and implementation of an integrated and
efficient network of hydroelectric projects in India. NHPC is involved in all
aspects of hydroelectric projects - from conceptualizing to commissioning.
Objects Of The Issue
To part finance the construction and development costs of projects such as
Subansiri Lower, Uri II, Chamera - III, Parbati III, Nimoo Bazgo, Chutak,
and Teesta Low Dam IV. General corporate purposes
Valuation
We value NHPC on a P/BV basis relative to peers like JP Hydro in the hydel
space and NTPC and Tata Power, CESC and KSK Energy. While there are no
comparable peers, we believe hydel companies should be accorded
discounting lower than its thermal peers owing to the higher risks of
execution and long gestation periods. We believe NHPCs nearest
comparable peer is NTPC owing to a common lineage and large scale. Bulk of
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NHPCs projects are being commissioned in FY11 and FY13. We have
estimated the addition to gross block, funding and debt repayment as per
norms for FY12 when the first tranche of projects will be eligible for full RoE.We have also considered that the projects will be commissioned as
scheduled. The upper price band of INR36 discounts NHPCs FY12E book
value by 1.62x and the lower price band discounts FY12E book value by
1.38x. The upper P/BV is at a 31% discount to NTPC while the lower P/BV is
at a 41% discount to NTPC. We believe that the higher price band does not
adequately factor in the risks. Thus, we recommend SUBSCRIBE at the
lower price band of INR30.
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