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DISINVESTMENT-

the concept and process

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Evolution of Public Sector in India

Before independence, there was almost no "Public sector" inIndian economy except Railways, The Post & Telegraph,ThePort Trust, The Ordnance and the Aircraft factories and fewGovernment controlled under takings.

After independence India adopted the road of planned economicdevelopment through Five year plans in which it opted fordominance of the Public Sector.

The passage of Industrial Policy Resolution of 1956 andadoption of socialist pattern of society as the national economicgoal of the country built the foundation of the dominant publicsector as we see it today.

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Objectives of PSU To help in the rapid economic growth and Industrialisation of the country and

create necessary infrastructure for economic development.

To earn return on investment and utilise generated resources for development.

To promote redistribution of income and wealth.

To create employment opportunities.

To promote balanced regional development.

To promote import substitutions, save and earn foreign exchanges for theeconomy.

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Genesis of Disinvestment in India.

It was observed in many countries that the performance of

the public enterprises was far below the expectations. The

weakness and defects of public enterprises started

manifesting with grave danger to Government and economy

in many countries, with no solution in sight.

During the 1980s, collapse of the socialist economy of the

Soviet block, introduction of economic reform by Russia,

East European countries and China knocked the bottom outof protagonists of Government intervention in every

commercial activity for the benefit of the masses.

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Genesis

By mid-eighties their short comings and weaknessesstarted manifesting in the form of low capacity utilisation,low efficiency, lack of motivation, over-manning, huge

time and cost overrun, inability to innovate and take quickdecision, large scale political and bureaucraticinterference in decision making, etc.

The emphasis shifted from PSUs to liberalisation ofeconomy and gradual disinvestment of PSUs. A paradigmshift of Government's economic policy orientationoriginated in 1991 from a foreign debt servicing crisis.

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While the case for economic reforms may take good

note of the diagnosis that India has too much

government interference in some fields, it ignores the

fact that India also has insufficient and ineffective

government activity in many other fields, including

basic education, health care, social security, landreforms and the promotion of social change. This

inertia, too, contributes to the persistence of

widespread deprivation, economic stagnation and

social inequality."Amartya Sen

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n ustr es reserve or s pr or to u y

1991

1. Arms and Ammunition and allied items of defence equipment.

2. Atomic energy.

3. Iron and steel.

4. Heavy castings and forgings of iron and steel.5. Heavy plant and machinery required for iron and steel

production, for mining, for machine tool manufacture

and such other industries as may be specified by the

Central Government.6. Heavy electrical plant including large hydraulic and

steam turbines.

7. Coal and lignite.

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8. Minerals oils.

9. Mining of iron ore, manganese ore, chrome ore, gypsum,

sulphur, gold and diamond.10. Mining and processing copper, lead, zinc, tin

molybdenum and wolfram.

11. Minerals specified in the Schedule to the Atomic Energy

12. Aircraft.13. Air transport.

14. Rail transport.

15. Ship building.

16. Telephones and telephone cables, telegraph and wirelessapparatus (excluding radio receiving sets).

17. Generation and distribution of electricity

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DisinvestmentProcess flow

Disinvestment Commission/other recommendation

Administrative Ministrys comments

Consideration by core group of Secretaries

Approval of CCD

Advertisement for appointment of Advisors

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Receipt of Expression of Interests (EoI) from advisors

Presentation by Advisors

Selection of Advisors

Appointment of Advisor

Appointment of Legal Advisor/Fixed asset valuers/Other Advisors

Process finalization & due diligence by Advisors

Advertisement for inviting expressions of interest from

bidders

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Receiving EoI from bidders

Shortlisting of bidders on the basis of prescribed/announced

qualifications criteria & signing of confidentiality undertaking

Finalizing & distribution of information package etc.

Data Room visits/Due diligence etc. by short listed

bidders

Financial/capital/business restructuring etc.

Finalization of shareholders/share purchase/otheragreements etc. in consultation with the bidders

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Receipt of final bids and resealing of bids in presence ofbidders & receipt of evaluation papers from advisors

Finalization of upset price by evaluation committee/IMG

Reopening of financial bids in presence of bidders and

their comparison with upset price by IMG

IMG/CGD/CCD approvals (and other regulatoryapprovals, as needed)

Execution of legal documents and inflow of funds

Documents submitted to CAGs office for assessment

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Cases of Privatisation in India

S.No. Name of the Privatised PSU

1Lagan Jute Machinery Company Limited (LJMC)

2 Modern Food Industries Limited (MFIL)

3 Bharat Aluminium Company Limited (BALCO)

4 CMC Ltd. (CMC)

5 HTL Ltd. (HTL)6 IBP Co. Ltd. (IBP)

7 Videsh Sanchar Nigam Limited (VSNL)

8 Indian Tourism Development Corporation (ITDC)

9 Hotel Corporation of India Limited (HCI)

10 Paradeep Phosphates Limited (PPL)

11 Jessop and Company Limited

12 Hindustan Zinc Limited(HZL)

13 Maruti Udyog Limited (MUL)

14 Indian Petrochemicals Corporation Ltd.(IPCL)10/3/2013


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Primary objectives for privatising the PSUs

Releasing large amount of public resources locked up in non-strategic PSUs, forredeployment in areas that are much higher on the social priority, such as, basichealth, family welfare, primary education and social and essential infrastructure;

Stemming further outflow of scarce public resources for sustaining the unviablenon-strategic PSUs;

Reducing the public debt that is threatening to assume unmanageableproportions;

Transferring the commercial risk, to which the taxpayers money locked up inthe public sector is exposed, to the private sector wherever the private sector iswilling and able to step in - the money that is deployed in the PSUs is really the

public money and is exposed to an entirely avoidable and needless risk, in mostcases;

Releasing other tangible and intangible resources, such as, large manpowercurrently locked up in managing the PSUs, and their time and energy, for

redeployment in high priority social sectors that are short of such resources.10/3/2013


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Other Benefits from Disinvestments

Become more efficient and survive or cease on their financial strength.

Wider distribution of wealth through shares of privatized company.

Result in more share in stock market hence more depth & liquidity in market.

Increase in more economic activity with private investment & thus giving

thrust to economy.

More customer satisfaction & choice.

To compete against cheaper & quality product import.

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Year

No. of Companies in

which equity sold

Target receipt for the

year (Rs. in Crore)

Actual receipts

(Rs. in Crore) Methodology

1991-92

47 (31 in one

tranche and 16 in

other) 2500 3038

Minority shares sold by auction method in bundles

of very good, good, and average companies.

1992-93 35 ( in 3 tranches) 2500 1913

Bundling of shares abandoned. Shares sold

separately for each company by auction method.

1993-94 - 3500 0

Equity of 7 companies sold by open auction but

proceeds received in 94-95.

1994-95 13 4000 4843

Sale through auction method, in which NRIs and

other persons legally permitted to buy, hold or sellequity, allowed to participate.

1995-96 5 7000 361

Equities of 4 companies auctioned and

Government piggy backed in the IDBI fixed price

offering for the fifth company.

Disinvestments in various PSU

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1996-97 1 5000 380 GDR (VSNL) in international market.

1997-98 1 4800 902 GDR (MTNL) in international market.

1998-99 5 5000 5371

GDR (VSNL) / Domestic offerings with the

participation of FIIs (CONCOR, GAIL). Cross

purchase by 3 Oil sector companies i.e. GAIL,ONGC & Indian Oil Corporation

1999-00# 4 10000 1860

GDRGAIL, VSNL-domestic issue, BALCO

restructuring, MFILs strategic sale and others

2000-01 4 10000 1871

Strategic sale of BALCO, LJMC; Takeover - KRL

(CRL), CPCL (MRL), BRPL

2001-02

# 9 12,000 5632

Strategic sale of CMC 51%, HTL 74%, VSNL

25%, IBP 33.58%, PPL-- 74%, and sale by other

modes: ITDC & HCI; surplus reserves: STC and

MMTC

2002-03 6 12,000 3348

Strategic sale : HZL 26%, MFIL-26%, IPCL

25% HCI, ITDC, Maruti: control premium from

renunciation of rights issue, ESOP:HZL,CMC.

2003-04 9 13,200 15547

Maruti- IPO(27.5%), Jessop & Co. Ltd. (Strategicsale-72%), HZL (Call Option of SP - 18.92%),

Public Offers - IPCL (28.95%), CMC (26%), IBP

(26%), DRDG (20%), GAIL (10%), ONGC (10%),

ICI (9.2%)

2004-05 1 4,000 2684 NTPC(IPO) (5.25%)

Total # 48* 91500 4506610/3/2013


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The main features of Government's present Policy

Restructure and revive potentially viable PSUs.

Close down PSUs which cannot be revived.

Bring down Government equity in all Non-strategic PSEs

to 26% or lower, if necessary.

Fully protect the interests of workers

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Issues regarding disinvestment That need attention Which areas should not be divested.

Whether defence production & services should be disinvested and to what extentas it is desirable in view of national security.

To what extent the method of divestment can be made open and transparent.

Out of the various methods of divestment which path will lead to fulfillment ofdeclared objectives.

Should the foreign private investors be allowed to acquire controlling interest in

PSUs.

How the social security net be instituted to train and re-employ active and ableemployees retiring under VRS

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Current Disinvestment policy The Salient

Features

1. Citizens have every right to own part of the shares of Public

Sector Undertakings;

2. Public Sector Undertakings are the wealth of the Nation and

this wealth should rest in the hands of the people;

3. While pursuing disinvestment, Government has to retainmajority shareholding, i.e. at least 51% and management

control of the Public Sector Undertakings;

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Disinvestment Approach

1. Already listed profitable CPSEs (not meeting mandatory shareholding

of 10%) are to be made compliant by Offer forSale by Government

or by the CPSEs through issue of fresh shares or a combination of both;

2. Unlisted CPSEs with no accumulated losses and having earned netprofit in three preceding consecutive years are to be listed;

3. FPOs would be considered taking into consideration the needs for

capital investment of CPSE, on case by case basis, and the Government

simultaneously or independently offer a portion of its equityshareholding;

4. In all cases of disinvestment, the Government would retain at least 51%

equity and the management control;

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Disinvest Approach-----------------

5. All cases of disinvestment are to decided on a case by case

basis;

6. The Department of Disinvestment is to identify CPSEs inconsultation with respective administrative ministries and

submit proposal to the Government in cases requiring offer

for sale of Government equity.

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Problems associated with Disinvestment

The number of bidders for equity has been small not only in the case of financiallyweak PSUs, but also in that of better-performing PSUs.

Besides, the government has often compelled financial institutions, UTI and other

mutual funds to purchase the equity which was being unloaded throughdisinvestment.

Low valuation or under pricing of equity.

In many cases, disinvestment has not really changed the ownership of PSUs, as thegovernment has retained a majority stake in them.

There has been some apprehension that disinvestment of PSUs might result in the

crowdingout of private corporate (through lowered subscription to their shares)

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Inadequate information about PSUs has impeded free, competitive and

efficient bidding of shares, and a free trading of those shares.

Disinvestment process is not completely open and transparent.

It is not clear if the rationale for divestment process is well-founded. The

assumption of higher efficiency, better / ethical management practices and

better monitoring by the private shareholders in the case of the private sector

all of which supposedly underlie the disinvestment rationale is not always

borne out by business trends and facts.

The creation of PSUs originally had economic, social welfare and political

objectives, their current restructuring through disinvestment is beingundertaken primarily out of need of government finances and economic

efficiency.

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Lastly, to the extent that the sale of government equity in PSUs is tothe Indian private sector, there is no decline in national wealth. But

the sale of such equity to foreign companies has far more serious

implications relating to national wealth, control and power,

particularly if the equity is sold below the correct price!

If the disinvestment policy is to be in wider public interests, it is

necessary to examine systematically, issues such as - the correct

valuation of shares, the crowding out possibility, the appropriate

use of disinvestment proceeds and the institutional and otherprerequisites

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Challenges in valuation of Indian PSUs Companies listed on stock exchange can be assessed fairly on the

basis of market price of shares. However, most of the PSUs are eithernot listed on stock exchange or command extremely limited tradefloat.

Valuation of PSU is different from establishing the price for which itcan be sold. Government can only realize what thebuyer is willing topay for the PSU.

Valuation is a subjective figure arrived at by the bidders by

leveraging there strengths with the potential of the company.

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The profitability of the PSUs as reflected through the profit and loss

account does not adequately reflect the earning potential of PSUsbecause the PSUs have generally been run in unprofessionalmanner.

Public Sector undertakings own not only huge business assets butalso highly valuable non-business assets like real estate, residentialcomplex and utilities like power plant etc.

Valuing of companies in India becomes even more difficult, as thereis no databank of transactions carried out in the past. In the US, thevaluation report of any acquisition has to be filed with Securitiesand Exchange Commission (SEC).

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The value is a function of the

individuals perception of the risk, the

nature of financial resources availableto the purchaser, opportunity, and

other similar factors.

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Points of General Attention

There is no reason why the government should continue to hold apart of the equity in PSEs that are operating in non-core sectors.This strategy leads to sub-optimal realization of revenue andsignificant loss to the government.

In the cases of disinvestment involving transfer of control ofmanagement affairs to the private investor, higher weightage hasto be given to the value of assets both tangible and intangible.While disinvesting minority shares, more weightage will have to

be given to market price.

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