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Disinvestment DIV B

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    Disinvestment

    In India

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    Equities

    Bonds

    Debentures

    Any OtherForm

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    ` Government owns stake in PSUs

    ` Publics Property

    ` Under Presidents name

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    ` Disinvestment involves the conversion of money claims,securities into money or cash by the government

    ` The withdrawal of capital from a company orcorporation

    ` Disinvestment involves sale of only part of equityholdings held by the government to private investors

    ` Disinvestment process leads to dilution of ownership

    ` Privatization refers to the transfer of ownership fromgovernment to private investors

    ` Disinvestment is called partial privatization

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    There are twoapproaches todisinvestments viz

    The government sells its

    equity holdings in PSUsto public or privateparties or MFIs or otherFinancial Institutions.

    when PSUs are generally

    directed by thegovernment to issuetheir equity share topublic, private parties,financial institution andmutual fund with a view

    to reduce its control.

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    There is a decision to make changes in theregulation of an industry.For Example, Deregulation of the communicationsindustry in the United States during the 1980s.

    To reduce deficits.

    For Example, In NTPC, the government stake iscurrently 89.5 per cent, In PFC, it is 89.78 per cent,86.36 per cent in Powergrid and 81.82 per cent in

    REC. Reducing its stake to 51 per cent in thesecompanies could earn the government a revenue ofRs 99,044 crore.

    To overcome the problem of political involvement inPSUs.

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    ` To generate revenue for the government

    ` To provide for social welfare

    ` To reduce budget deficit

    ` To introduce the big reform - FRM

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    To cool down stock & realty markets.

    To help determine correct valuation of company.

    To change the management of a sick unit.

    Companies benefit to raise loans easily & at low

    rates

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    To make companies abide by SEBI rules &

    regulations

    To overcome the problem of corruption &

    inefficiencies.

    To encourage wider share of ownership

    To provide employees ESOPs.

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    ` Strategic Sale Companies where Government is willing to give

    significant management control

    Pricing: Optimisation / maximisation

    Target investor set: Investors with strategic fit

    ` Capital Market Offer for sale to public at a fixed price

    Offer for sale to public through book building

    Secondary market operation International offering

    Private placement

    Auction

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    ` Reduction in Equity Conversion of equity into another instrument

    ` Asset Sale & Winding up

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    1. NET ASSET METHOD:

    ` This ill i icate the et assets

    f the e ter rise as shown in thebooks of accounts. It oes notreflect the true osition of

    rofitability of the fir as itoverlooks the value ofintangibles such as goodwill,

    brands, distribution network etc.This odel is ore suitable insale of asset and winding upmethod ofdisinvestment

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    2. PROFIT EARNING CAPACITY VALUE METHOD:

    ` The profit earning capacity is generally based on the profitsactually earned or anticipated. It values a company on the basis

    of the underlying assets. This method does not consider or

    project future cash flows.

    3. DISCOUNTED CASH FLOW METHOD :

    ` In this method the future incremental cash flows are

    forecasted and discounted to the present time value by applying

    cost of capital rate. The method indicates the intrinsic value of

    the firm and this method is considered as superior than other

    methods.

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    ` Set up in 1999

    ` Assisted by Advisors

    `

    Business Allocated to Ministryof Disinvestment:

    All matters related to disinvestment

    Decisions on the recommendations

    of the Disinvestment Commission

    Implementation of disinvestmentdecisions

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    Core Group ofSecretaries

    DisinvestmentCommission

    Ministry ofFinance

    Cabinet Committee

    of Disinvestment(CCD)

    Core Group of

    Secretaries onDisinvestment (CGD)

    Inter-MinisterialGroup (IMG)

    Sends

    Recommendations

    Inputs from adm.

    Ministry and

    Department of

    Disinvestment

    Constituted

    for

    Implementation

    Does Monitoring

    1

    5

    43

    2

    6

    7

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    ` Chaired by the Prime Minister

    ` Functions:

    To consider the advice of the Core Group of Secretaries

    To decide the price band

    To decide the final pricing

    Intervention in case of disagreement between therecommendations

    To approve the three-year rolling plan and the annualprogramme of disinvestment

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    ` Headed by the Cabinet Secretary

    ` Functions:

    Supervises the implementation of the decisions of

    all strategic sales

    Monitors the progress of implementation of the

    CCD decisions

    Makes recommendations to the CCD on

    disinvestment policy matters

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    ` Chaired by Secretary, Ministry of Disinvestment

    ` Inter-ministerial consultation

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    Year Target ofDisinvestment Actual Receipts

    1991-1992 2500 3037.74

    1992-1993 2500 1912.51

    1993-1994 3500 -

    1994-1995 4000 4843.10

    1995-1996 7000 168.48

    1996-1997 5000 379.67

    1997-1998 4800 910.00

    1998-1999 5000 5371.11

    1999-2000 10000 1860.14

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    Year Target ofDisinvestment Actual Receipts

    2000-2001 10000 1871.26

    2001-2002 12000 5657.692002-2003 12000 3347.98

    2003-2004 4500 15547.41

    2004-2005 4000 2764.872005-2006 NO TARGET FIXED 1569.68

    2006-2007 NO TARGET FIXED -

    2007-2008 NO TARGET FIXED 4181.39

    2008-2009 NO TARGET FIXED -

    2009-2010 25000 4259.90

    2010-2011 40000 On going

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    On 27th January 2005, the Government had decided to constitute aNational Investment Fund (NIF) into which the realisation fromsale of minority shareholding of the Government in profitableCP Es would be channelized. The Fund would be maintainedoutside the Consolidated Fund of India. The income from the Fundwouldbe used for the followingbroad investment objectives: -

    75 percent of the annual income of the Fund will be used to Investin social sector projects which promote education, health care andemployment;

    25 percent of the annual income of the Fund will be in the form ofCapital investment in selected profitable and revivable Public SectorEnterprises that yield adequate returns in order to enlarge theircapital base to finance expansion/ diversification.

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    The corpus of the National Investment Fund will be of

    a permanent nature.

    The Fund will be professionally managed to provide

    sustainable returns to the Government, withoutdepleting the corpus. Selected Public Sector Mutual

    Funds will be entrusted with the management of the

    corpus of the Fund.

    It was decided that NIF would not be a part of THENION B DGET from 2009-2012

    However there are signs that NIF might be used

    partially to reduce the Fiscal Deficit

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    The following PublicSector Mutual Funds have been appointed initially as Fund

    Managers, tomanage the funds of NIF

    i) TI Assets Management Company imited

    ii) SBI Funds Management Company (Private) imited

    iii) Jeevan Bima Sahayog, Asset Management Company imited

    The corpus of NIF as on 31 March, 2009 stood at Rs.1,875crore

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    ` Already listed profitable CPSUs, not meeting the

    mandatory public shareholding of 10%, are to be

    made compliant

    ` All CPSUs having positive net worth, no

    accumulated losses and having earned net profit

    for the three preceding consecutive years are to be

    listed

    ` The proceeds from disinvestment would be

    channelized into National Investment Fund

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    ` Revitalize the disinvestment program and plan to

    generate at least Rs. 25,000 crore per year

    ` Complete the process of selling of5-10% equity

    ` The Government has announced a disinvestment tar get

    of Rs. 40,000 crore for the fiscal 2010-11

    ` The Government had also announced its intentions of

    raising the minimum public shareholding in listed

    companies to 25% revised to 10%

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    IOC & ONGC :-

    ` Two of the countries largest oil and gas players Indian Oil

    Corporation (IOC) and Oil and Natural Gas Corporation (ONGC)

    ` Stakes to be disinvested : 10% from IOC & 5% fromONGC

    ` Together24,000crore approx

    SAIL :-

    ` The Union cabinet on Thursday cleared a move to disinvest 10% of

    the governments equity stake in Steel Authority of India Ltd (SAIL) to

    raise an estimated Rs8,000 crore.

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    ` Reviving privatization policy

    ` Economic resurgence

    ` Capital raising activity on rise` Expanding equity base

    ` Employees Issues

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    `

    Last opportunity for the UPAGovernment

    ` Needs to be leveraged by bold policy

    initiatives

    ` Poor physical and social infrastructuresuch as power, irrigation, rural

    connectivity, education, and health

    ` Sustainability of high economic

    growth will be circumscribed by howeffectively the government deals with

    these challenges

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    ` The Centre has the majorresponsibility ofimproving the budgetaryhealth on a tight leash its

    internal indebtedness

    ` The opportunitiesafforded by the excellentvaluations, based on theperformance of manyprofit-ma ing PSUs, mustbe leveraged

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    ` Why should profit-ma ing PSUs shy away or be

    denied the opportunity of raising new equity and

    in the process also divest a part of the existing

    equity capital is an arguable question

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    ` Reactivated disinvestment programme will

    provide a powerful thrust to spread the equity

    culture and strengthen the capital mar et

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    ` Of the 1.6 million jobs addedin the organized sector 1million, or two thirds, wereadded in the private sectorduring the period 1991 to2000

    ` This indicates that theprivate sector has become themajor source for incremental

    employment in the organizedsector of the economy overthe last decade

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    ` Set up in 1965 at Korba ,Chhattisgarh

    ` Manufacture aluminium rods and semi-fabricated

    products

    ` Fabrication unit in Bidhanbagh

    ` 270 MW power plant

    ` Refining capacity of BALCO is 2, 00,000 tonnes

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    ` Government of India had 100% sta e before 1997

    ` Disinvestment Commission recommended immediate

    divestment of 40%

    ` 26% within 2 years and the remaining sta e at an

    appropriate time thereafter.

    ` Later, in 1998 the Disinvestment Commission revised its

    recommendation

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    ` Government to consider 51% divestment

    ` Transfer of Management

    ` BALCO's equity being reduced by 50%

    ` Government received Rs. 244 crore from the capital

    restructuring

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    ` Strategic sale process for BA CO started in late 1997 and

    finally came to end in2nd March2001

    ` 51% stake was sold toSterlite Industries @ Rs. 551.50crore.

    ` Government thus recovered Rs 827.50crore from this

    privatization.

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    ` Number of doubts have been raised

    ` Transparency

    ` Valuation

    ` Protection of employees interests

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    ` A combination of inappropriate procedure, undue haste

    and unwarranted secrecy had created a veritable mess.

    ` Claims on the lac of transparency are being continued till

    date.

    ` Thus Corruption and lac of accountability still remain

    the two worms eating away the Indian economy.

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    ` Later eeping in view the overwhelming response from sale of

    Maruti, government sold its remaining shares in the privatised

    companies of VSNL, IPCL, BALCO and IBP to public through

    IPOs.

    ` Strategic sale of IPCL was also finalised in May 2002. The

    decision to disinvest IPCL was although ta en in December

    1998, it too three and half years to finalise the deal. Reliance

    Petro industries Ltd (Reliance group) was finally inducted as astrategic partner with a 26 % sale in IPCL.

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    The government has to form apolicy frameworkfor the entire disinvestmentprocess

    The government shouldde-linkthe disinvestmentprocess from the budgetaryexercise

    Government should stop settingupof the targets in every year annual budget andshouldhave a long-termplan

    A separate fund should be created fordisinvestment and it should be kept under thecontrol ofpresident and the fund should be utilized for building infrastructure anddeveloping the social sector

    Timingofdisinvestment is crucial and the government should follow a specific

    methodorprocess inorder to reapmore chunks

    The entire exercise ofdisinvestment should be audited by not less than two reputedauditing firms inorder tohave a fair and transparentpicture of the entireprocess

    Finally, the government shouldhave an 'Yearly Action Plan' which should spell outthe activities carriedout in thatparticular year and at the endof the year an 'ActionTaken Report' has to be submitted.

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