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Project on Disinvestment 2010

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 of thistype 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 market.

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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 24

th

July2001 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; disinvestment other than

strategic sale in 32 cases and closure was recommended in 4 cases. The

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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 restructuring assistance 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.

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 put

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national 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 which the Governments

equity has been disinvested to a strategic partner.

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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 instrategic 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.

7. Coal and lignite.

8. Minerals oils.

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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.

4. Mineral Oils.

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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, trading companies,

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 readily avoid. To top it all,

there is a huge amount of debt overhang, which needs to be serviced and

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reduced before money is available to invest in infrastructure. All this makes

disinvestment of the Government stake in the PSEs 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 of

disinvestment?

d) Whether private sector can efficiently operate and manage the

undertaking?

e) Whether the original rate of return targeted could not be possible to

achieve?

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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 being assets. 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 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

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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 is

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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 financial institutions.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

place to ensure that institutional investors do not run away with the bulk

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of this sale and only retail participation is allowed in these issues. Public

offers have been one of the frequently used techniques in the UK to

transfer state assets and businesses to private ownership. The methodhas 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 capacity

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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 petrochemical plants

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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 of the best technologies fromleading 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.

BHEL has successfully undertaken turnkey projects on its own and possesses

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the requisite flexibility to interface and complement international companies

for large projects, and has also exhibited adaptability by manufacturing and

supplying intermediate products to the design of other manufacturers andoriginal 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 ofBHEL 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 of electrical

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 ABS,

Bangalore 22 | P a g e Power Sector Report (Apr - 2009) under the purview of

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State and Central government agencies. State Electricity Boards (SEBs) were

formed in all the states. Legal provisions to support and regulate the sector

were put in place through the Indian Electricity Act, 1910. Shortly afterindependence, 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 of UK and

France combined. The number of consumers connected to the Indian powergrid 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 developmen

India. NTPC is emerging as a diversified power major with presence in the entire value chain

the power generation business. Apart from power generation, which is the mainstay of t

company, NTPC has already ventured into consultancy, power trading, ash utilization and cmining. NTPC ranked 317th in the 2009, Forbes Global 2000 ranking of the Worlds bigg

companies.

The total installed capacity of the company is 32,194 MW (including JVs) with 15 coal bas

and 7 gas based stations, located across the country. In addition under JVs, 4 stations are c

based & another station uses naptha/LNG as fuel. By 2017, the power generation portfolio

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expected to have a diversified fuel mix with coal based capacity of around 53,000 MW, 10,0

MW through gas, 9,000 MW through Hydro generation, about 2000 MW from nuclear sourc

and around 1000 MW from Renewable Energy Sources (RES). NTPC has adopted a mu

pronged growth strategy which includes capacity, addition through green field projec

expansion of existing stations, joint ventures, subsidiaries and takeover of stations.

NTPC has been operating its plants at high efficiency levels. Although the company

18.10% of the total national capacity, it contributes 28.60% of total power generation due

its focus on high efficiency.

NTPC IPO:-

In October 2004, NTPC launched its Initial Public Offering (IPO) consisting of 5.25% as fre

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issue and 5.25% as offer for sale by Government of India. NTPC thus became a listed compa

in November 2004 with the government holding 89.5% of the equity share capital. The res

held by Institutional Investors and the Public. The issue was a resounding success. NTPC

among the largest five companies in India in terms of market capitalisation

. 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 be

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 average. T

availability factor for coal based power stations has increased from 89.32% in 1998-99

91.76% in 2009-10, which compares favorably with international standards. The PLF

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% in the l

twelve years the generation has increased by 99.84%.

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DESCRIPTION UNIT 1998-99 2009-10 % OF INCREASE

Installed Capacity MW 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 stations over

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

2004-05 159.11 87.51 91.20

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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. Indi

peak demand deficit during FY09 was 12% or 13,124MW; it is anticipated to be 152,746MW

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 hydroelect

generation; about 84,000MW at 60% load factor, which translates into 148,700MW in terms

installed capacity, according to CEA. Moreover, 6,782MW of installed capacity has be

assessed from small, mini, and micro hydroelectric schemes. The estimated hydropow

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

This capacity does not include small hydropower capacity of 1,168MW from hydropower pla

with an installed generating capacity up to 25MW. These small scale hydropower generat

were classified as Renewable Energy Sources (RES) (along with wind energy and bioma

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energy) in FY09. A capacity addition of 78,700.4MW has been proposed in the eleventh f

year plan. Of this, capacity addition of 15,627MW is proposed from hydropower - 3,392MW

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

became a public limited company from, 1986, and its name changed to NHPC Limited. NH

is a hydroelectric power generating company, which is dedicated to the planning, developme

and implementation of an integrated and efficient network of hydroelectric projects in Ind

The company executes all aspects of the development of hydroelectric projects - fr

conceptualizing to commissioning. It has developed and constructed 13 hydroelectric pow

stations and its current total installed capacity is 5,175MW. NHPCs current total generat

capacity is 5,134.2MW, which takes into account a downgrade of capacity ratings of the Lokt

and Tanakpur power stations by the CEA. NHPCs power stations and hydroelectric projects

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located predominantly in the North and North East India, in Jammu & Kashmir, Himac

Pradesh, Uttarakhand, Arunachal Pradesh, Assam, Manipur, Sikkim, and West Bengal. T

company and its subsidiary, NHDC, generated 16,582.72 MU and 2,368.45 MU of electricity

FY09; they sold 14,587.88 MU and 2,345.01 MU, respectively. NHPCs average selling price w

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 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 share capital. After

the issue, the President of India will hold 86.36%of the post-issue paid-up

equity share capital.

NHPC Limited IPO

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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 hydelspace 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 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

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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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