Disinvestment in IndiaDisinvestment in IndiaMethods , Procedures and Methods , Procedures and

ProblemsProblems

Meaning of Investment

Conversion of money or cash into either : - Securities Bonds Debentures Or any other form of money

Transfer of Government Ownership when the dilution

is beyond 51 %

Imperative for the Government

to sell a part of its holdings

Less than 51%

Government’s Strategy

Meet the growing budget deficit

The Government knew that they could make more money by selling off their assets cheaply

Faster realization value

Industries reserved for PSU’s since December 2002

Atomic Energy

Minerals specified in schedule to atomic Energy (Control of Production and Use) Order, 1953

Railway Transport

Government Policies on Disinvestment

Government Policies

Bring down Government equity to 26% or lower

Restructuring of potential & viable P.S.U

Close down P.S.U that can’t be revived

Protect the interest of the workers

Methods of Disinvestment

Strategic Sale

Capital Market Offer for sale –Fixed Price / Book Building Secondary market / Private Placement

Reduction in Equity Buy back of Shares Conversion of equity into other instruments

Other Methods

Trade Sale 

Asset Sale and Winding up

Management/Employees Buyout (M/EBO)

Cross Sale

Sale through De-merger/Spinning off

DISINVESTMENT PROCESS

2-3 months

3-6 months

1 week

Selection of PSU by MODI

Approval by CCD

Formation of IMG & Selection of Global Advisors

Submission of Expression of Interest

Submission of Initial Technical Proposal

Due Diligence / Commercial negotiations

Finalise Shareholders Agreement (SHA)& Share Purchase Agreement (SPA)

Financial bids

Selection of strategic partner & signing of SHA & SPA

Three Methods of valuation

Discounted cash flow

Net asset value' approach

Profit Earning Capacity

Problems in Disinvestment process

Soft Budget constraint

Policy adopted by the government.

Multiple Control authorities

Reasons for Slow Progress

No clear framework or policy

Disinvestment used to meet fiscal deficit

No transparency

Failure to attract foreign buyers

Disinvestment Case Laws

BALCO’s Disinvestment

"Sterlite's offer for Balco is more than fair."- Business World, March 12, 2001.

The deal was like loot of Chattisgarh in a day-light robbery.“

- Chattisgarh CM, Ajit Jogi.

Fact File

Top line

898 Cr.

PAT 56 Cr.

HC 7500

Sale of 51% stake in Balco (Management Control)

Mines

Case for Disinvestment

Company running on Outdated technology. Cash reserve 500 Cr. not adequate for Modernization

Share of Operating profit in total Profit

Impact of Aluminum prices

Company recovered from state of sickness and hence right time for sale.

Bidders for Strategic Stake

Hindalco (Birla Group)

Alcoa (US based)

Sterlite Ind. (Anil Agarwal)

Valuation Conundrum

Valued on 4 Parameters (JP Morgan)

Discounted cash flow Comparative valuation Balance sheet Asset valuation

Control premium added to arrive at reserve price

Reserve Price fixed at 514 Cr. using 25% mark up to the valuations arrived by DCF Model

Hue and cry by Opposition over valuation methodology

Question – Earnings Vs Asset Value

Analysis Paralysis

The Verdict

Sterlite Industries emerges as the highest bidder with an offer of 551 Cr.

Post Sell Out Drama

Lack of Transparency

Political Pressure & threats

Allegations of Under hand deals

Company wide Agitation, strike continued for 67 days

Post Sell out Drama

Threat of damage to company’s assets

Supreme Court’s role

Union – Management Meetings

Agreement Signed

SUGGESTIONS AND REMARKS

Clear policy & framework for disinvestment process

De-link disinvestment with budgetary control exercise

Disinvestment process be audited by at least 2 reputed

auditing firms

Creation of separate disinvestment fund

Yearly action plan should be taken