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Disinvestment and Disinvestment in Ntpc

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    PREPARED BY :

    NITESHJANGID

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    Disinvestment is a process in which the publicundertaking reduces its portion in equity bydisposing its shareholding. Disinvestment as

    per SEBI (substantial acquisition of shares)guideline, means the sale by the centralgovernment/state government, of its shares orvoting rights and/or control, in PSUs. The

    disinvestment reduces governmentparticipation in the company.

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    Cont.

    In India, the new economic policy have given rise tosignificant focus for privatization of public sectorenterprises.

    Hence, disinvestment is one of the method of privatization,

    which started in the year 1992.

    It implies selling of govt. equity shares of public sector

    units in the market.

    It is a concrete step towards privatization andliberalization of our economy.

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    The decision regarding disinvestment or liquidationviewed 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.

    f) Whether socio-economic objectives lots its purpose

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    In Private Sector, the decision making process is quick anddecisions are linked with the competitive market changes.

    The disinvestment process would bring in better corporategovernance, exposure to competitive, corporate

    responsibility, improvement in work environment etc. The market participation in capital of PSUs through stock

    exchanges would enable the market to discover the latentworth of PSUs.

    The Loss making PSUs can be successfully revived byasking the strategic partner to infuse fresh capital andexercising excellent management control over sick PSUs

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    Selling of profit-making and dividend paying PSUwould result in loss of regular source of income to thegovernment.

    There would be chances of asset stripping by thestrategic partner. Most of the PSUs have valuableassets in the shape of plant and machinery, land andbuildings etc.

    The Governments Policy or disinvestment includes

    the disposal of both profit making, as well potentiallyviable PSUs.

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    Privatization and Disinvestment Privatization implies a change in ownership, resulting in a change in

    management.

    The privatization of public sector enterprises will occur only when govt.sells more than 51% of its ownership to private entrepreneurs.

    Disinvestment on the other hand, has a much wider connotation as itcould either involve dilution of govt. stake to a level that result in a

    transfer of management or could also be limited to such a level as wouldpermit govt. to retain control over the organization.

    Disinvestment beyond 50% involves transfer of management, where asdisinvestment below 50% would result in the govt. continuing to have a

    major say in the undertaking. 7

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    Background of Disinvestment

    The Indian economy had virtually embraced bankruptcyduring the period of 1980-92.

    In 1991, there was 236 operating public sector undertakings,of which only 123 were profit making.

    The top 20 profit making PSUs were responsible for 80percent of profits.

    The return on public sector investment for the year 1990-91

    was just over 2 percent. 8

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    The basic charges against the public sector for itsPoor performance are as follows:

    (a) Low rate of return on Investment

    (b) Declining contribution to national savings(c) Poor capacity utilization

    (d) Overstaffing, bureaucratization leading toexcessive delays and wastage of scares resources.

    (e) On account of these phenomenon, many publicsector enterprises have become more a burdenthan an asset to the government.

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    Process of Disinvestment

    The govt. in July 1991 initiated the disinvestment process inIndia, while launching the New Economic Policy (NEP).

    The govt. had appointed the Krishnamurthy committee in1991 and Rangarajan committee in 1992 to look after thedisinvestment process.

    Both the committees have recommended disinvestments tofulfill objectives of modernization of the PSEs through:

    (a) Strengthening R & D(b) Initiating diversification/expansion programme

    (c) Retaining and reemployment of employees

    (d) Funding genuine needs of expansion

    (e) Mitigating fiscal deficit of the government. 10

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    These committees also distinguished between the short term and long term

    goals of the disinvestment and advised the govt. not to sacrifice the long termgoals for the sake of fulfilling the short term objectives.

    The govt. has announced in its NEP that mitigating the fiscal deficits is the onlyobjective of disinvestment.

    The crucial shift in govt. policy for disinvestment of PSUs was mainlyattributed to poor performance of these enterprises and burden of financingtheir requirements through budget allocation.

    Further in 1996, the govt. constituted a five member public sectordisinvestment commission under the chairmanship of G.K.Ramakrshna fordrawing a long term disinvestment programme for the PSUs.

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    The committee submitted its report covering 58 enterprises, out of 70

    enterprises referred to it by the govt. recommendations ranged fromstrategic sales in various proportions to disinvestments ant variouslevel.

    This committee was ultimately abolished in 1999.

    The govt. set up a new Department of Disinvestment in 1991 to

    establish a systematic policy approach to disinvestment and to givefresh impetus to the programme of disinvestment, which willincreasingly emphasize strategic sales of identified PSUs.

    In 2001, the govt. reconstituted the disinvestment commission withR.H.Patil as its chairman.

    The govt. has decided to refer all non-strategic PSUs and theirsubsidiaries, excluding IOC, ONGC, and GAIL to the commission forits independent advice.

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    Objectives of Disinvestment: The following are the main objectives of the disinvestment policy of the

    government:

    (a) To reduce financial burden on the government

    (b) To encourage wider share of ownership

    (c) To introduce competition and market discipline

    (d) To help public enterprise upgrade their technology to becomecompetitive

    (e) To rationalize and retain their workforce

    (f) To improve efficiency and productivity in public enterprise throughnew industrial policies.

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    Modalities of Disinvestment:In order to achieve the various objectives and goals of

    disinvestment many methods have been formulated andimplemented. These includes:

    (1) Public Offer: offering shares of public sector enterprises ata fixed price through a general prospectus, the offer ismade to the general public through the medium ofrecognized market intermediaries.

    (2)Cross Holding: In the case of cross holding, the govt. wouldsimply sell part of its share of one PSU to one or morePSUs.

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    (3) Golden Share: in this model, the govt. retains a 26 percentshare in the PSU. This 26 percent share will continue to givethe govt. the status of majority share holder.

    (4) Warehousing: Under this model, the govt. owned financial

    institutions were expected to buy the govt.s share in selectPSUs and holding them until third buyer emerged.

    (5) Strategic Sale: Under this model, govt. sells a major portion(51% and above) of its stake to the strategic buyer and alsogives over the management control.

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    Progress of Disinvestment:

    Disinvestment has also been undertaken in states.

    Out for the 222 state level public enterprises identified fordisinvestment, the process has been initiated in 124 enterprises.

    Out of which 30 enterprises have been privatized and 68 have beenclosed down.

    The reason for such low proportion of disinvestment proceedsagainst the target are:

    (a) The unfavorable market conditions.

    (b) Stringent bureaucratic procedure.(c) The Govt. is not transparent about its approach towards privatization

    of PSEs.

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    1. The government has to form a policy framework forthe entire disinvestment process.

    2. The government should de-link the disinvestment

    process from the budgetary exercise.

    3. Government should stop setting up of the targets inevery year annual budget and should have a long-term plan.

    4. Timing of disinvestment is crucial and thegovernment should follow a specific method orprocess in order to reap more chunks.

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    On november 27, 2012, the government initiated the process ofdisinvestment in NTPC by inviting bids from merchant bankers for 9.5per cent stake sale in the power major, which may fetch the exchequerover Rs.12,000 crore.

    The Department of Disinvestment proposed stake sale of NTPC. Thegovernment would clear sale of about 78.33 crore shares resulting in 9.50per cent stake dilution in the NTPC Ltd, official sources said.

    NTPC became public with its initial public offering hitting the market in

    2004. Thereafter in 2009, the government further diluted its stake throughFollow-on Public Offer (FPO).

    With the proposed disinvestment, the government was expected to mopup about Rs 13,100 crore.

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    The divestments would be by Offer for Sale (OFS) of sharesthrough the stock exchanges.

    The Government of India previously hold 84.50 per cent stake in

    NTPC. After disinvestment, the government stake would comedown to 75 per cent.

    The paid up equity capital of the company, as on March 31, 2012,is Rs. 8,245.46 crore.

    NTPC recorded a turnover of Rs 61,002.20 crore in 2011-12 ascompared to Rs 54,704.55 crore in the previous fiscal.

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    The blockbuster NTPC stake sale on February 07, 2013 fetchedgovernment Rs. 11,500 crore.

    The share sale of country's largest power producer NTPC wasover-subscribed 1.7 times as an offer price lower than the scrip'strading rate on stock exchanges received tremendous interest fromforeign investors.

    The total demand received for the offer was 132.84 crore shares,

    which is 1.7 times over the 78.32 crore shares or 9.5 per cent stakeon the block.

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    "The government is satisfied with the response to theNTPC offer. We expect more than Rs. 11,500 crore fromthe issue," Disinvestment Secretary Ravi Mathur said.

    The government holds 84.50 per cent stake in NTPC.After stake sale, its holding will come down to 75 percent. Citigroup, Morgan Stanley, Goldman Sachs,Deutsche Equities, Kotak Securities and SBI Cap

    Securities are acting as the merchant bankers for thestake sale.

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