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Disinvestment Presentation Dhiraj

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Macroeconomics Project DISINVESTMENT: What Does it mean and how is it achieved? Implications of diverse measures adopted to secure disinvestment with reference to India?
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Page 1: Disinvestment Presentation Dhiraj

Macroeconomics Project

DISINVESTMENT: What Does it mean and how is it achieved?

Implications of diverse measures adopted to secure disinvestment with reference to

India?

Page 2: Disinvestment Presentation Dhiraj

DISINVESTMENT

what does it mean and how is it achieved?

Implications of diverse measures adopted to secure disinvestment with reference to India.

Page 3: Disinvestment Presentation Dhiraj

INDEX

Introduction Background Criteria of selection Disinvestment process Implications

Employment Performance Other issues

Page 4: Disinvestment Presentation Dhiraj

Objective of disinvestment is to put 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 aimed at:

Modernization and up gradation of Public Sector Enterprises;

Creation of new assets; Generation of employment;

Introduction

Page 5: Disinvestment Presentation Dhiraj

History of disinvestment

Disinvestment was initiated in the late 1970s in the UK, and in the early 1980s in Chile .

Macroeconomic JustificationPrivatisation was widely advocated as a quick and sure means of restoring budgetary balance, to revive growth on a sustainable basis.

Microeconomic justificationThe change in ownership is often advocated to increase domestic competition, hence promotes efficiency; and encourage public participation in domestic stock market all of which are expected to yield superior economic outcomes.

Page 6: Disinvestment Presentation Dhiraj

Employing about 19 million persons, public sector currently contributes about a quarter of India’s measured domestic output. These include, close to 250 public sector enterprises (PSEs) owned and managed by the central government, mostly in industry and services .

PSUs in India

Page 7: Disinvestment Presentation Dhiraj

Why disinvestment??

Page 8: Disinvestment Presentation Dhiraj

Sectoral composition

Page 9: Disinvestment Presentation Dhiraj

Disinvestment at centre

In 1991, a small fraction of the equity in selected central PSEs was sold to raise resources to bridge the fiscal deficit.

Disinvestment was initiated by selling undisclosed bundles of equity shares of selected central PSEs to public investment institutions (like the UTI), which were free to dispose off these shares in the booming secondary stock market.

Page 10: Disinvestment Presentation Dhiraj

Disinvestment at state level

Privatisation at the state level began somewhat earlier than at the Centre.

Sale of the state government’s equity holding in Allwyn Nissan Limited in Andhra Pradesh in 1989, UP State Cement Corporation to Dalmia Group, and Auto Tractors in 1991 – were precursors to the national level policy changes

Page 11: Disinvestment Presentation Dhiraj

Criteria of selection

Division of industries into Strategic

(No disinvestment) Core (tendency towards oligopoly) and

(Disinvestment limited to 49%) Non core group

(Disinvestment upto 74%)

Page 12: Disinvestment Presentation Dhiraj

Criteria of selection continued

The loss making PSUs were further sub classified as :

Those in which Government could disinvest as a going concern on

an as-is-where-is basis; Those which could be restructured

and turned around before disinvestment; and

Those which may need closure.

Page 13: Disinvestment Presentation Dhiraj

Process of disinvestment

The main feature of the disinvestment policy can be culled out from the 2000-2001 budget speech as follows :

To restructure and revive potentially viable PSEs

To close down PSEs which cannot be revived

To bring down Government equity in all non-strategic PSEs to 26% or lower, if necessary

To fully protect the interest of workers

Page 14: Disinvestment Presentation Dhiraj

Process of disinvestment

To put in place mechanisms to raise resources from the market against the security of PSEs' assets for providing an adequate safety-net to workers and employees

To establish a systematic policy approach to disinvestment and privatisation, by setting up a new Ministry of Disinvestment

To emphasise increasingly on strategic sales of identified PSEs

To use the entire receipt from disinvestment and privatisation for meeting expenditure in social sectors, restructuring of PSEs and retiring public debt

Page 15: Disinvestment Presentation Dhiraj

Disinvestment process & Role of MODI

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

2-3 months

3-6 months

1 week

Page 16: Disinvestment Presentation Dhiraj

Main Constituents

The Cabinet Committee on Disinvestment is the apex body in the disinvestment process

The Ministry of Disinvestment is the key constituent and manages the routine functioning of the disinvestment process.

MODI is helped by the relevant ministry and various other Government departments and ministries during the process.

Cabinet Committee for Disinvestment

(“CCD”)

Core Group of Secretaries

(“CGS”)

Inter Ministerial Group (“IMG”)

Working Group

Page 17: Disinvestment Presentation Dhiraj

Core Group of Secretaries on Disinvestment

Headed by the Cabinet Secretary and comprises of Secretaries from MoF, Industry, Dept. of Disinvestment, Planning Commission and any other Department as may be required

Supervise, Monitors progress and Makes recommendations to CCD

Inter-Ministerial Group

Chaired by the Secretary, MoDi and comprises of officers of, MoF, Dept. of PSE, Administrative Ministry and the CMD of the Public Sector Enterprise concerned

Responsible for day-to-day implementation of the disinvestment decision

Main constituents

Page 18: Disinvestment Presentation Dhiraj

Department of Disinvestment

The Department of Disinvestment (later, Ministry of Disinvestment)was set up vide Notification No. CD.551/99 dated the 10th of December 1999

All matters related to disinvestment of Central Government equity from Central Public Sector Undertakings

Decisions on the recommendations of the Disinvestment Commission on the modalities of disinvestment, including restructuring

Implementation of disinvestment decision, including appointment of advisors pricing of shares and other terms and conditions of disinvestment All matters relating to the Disinvestment Commission

Main constituents

Page 19: Disinvestment Presentation Dhiraj

  

Jessop and Company Limited, (subsidiary of BBUNL)8

Paradeep Phosphates Limited (PPL) 7

Videsh Sanchar Nigam Limited (VSNL)6

HTL Ltd. (HTL)5CMC Ltd. (CMC) 4

Bharat Aluminium Company Limited (BALCO)3

Modern Food Industries Limited (MFIL)2

Lagan Jute Machinery Company Limited (LJMC), (subsidiary of Bharat Bhari Udyog Nigam Ltd. hereinafter referred to BBUNL)

1

.Disinvested CPSEs

Page 20: Disinvestment Presentation Dhiraj

One hotel unit of ITDC has been given on 30 year lease cum-management control. ***

16

2 Hotel units of Hotel Corporation of India Ltd. **15

Punjab Hotels Ltd. (subsidiary of ITDC) – unfinished Chandigarh Project

14

17 Hotel units of India Tourism Development Corporation Ltd. (ITDC) *

13

Indo. Hokke Hotels Ltd. (subsidiary of HCI)12

Indian Petrochemicals Corporation Ltd.(IPCL) 11

Maruti Udyog Limited (MUL) 10

Hindustan Zinc Limited(HZL) 9

Disinvested CPSEs

Page 21: Disinvestment Presentation Dhiraj

Legality of the disinvestment process has been challenged on a variety of grounds that slowed the sale of public assets. However, there were two significant judicial rulings that broadly set the boundaries of the D-P process.

Privatisation is a policy decision, prerogative of the executive branch of the state; courts would not interfere in it.

Privatisation of the PSE created by an act of parliament would have to get the parliamentary approval.

While the first ruling gave impetus for strategic sale of many enterprises like Hindustan Zinc, Maruti, and VSNL etc. since 2000, the second ruling stalled the privatisation of the petroleum companies, as government was unsure of getting the laws amended in the parliament.

Legal issues in the D-P process:

Page 22: Disinvestment Presentation Dhiraj

Figure 1: Employment in Central PSEs

0

5

10

15

20

25

92 93 94 95 96 97 98 99 2000 2001 2002 2003

Year ending

In la

kh

Employment

Employment in central PSEs

Employment in the central PSEs has declined from about 2.2 million in 1991-92 to about 1.7 million a decade later

The fall in employment is clearly the result of voluntary retirement scheme (VRS) initiated using the National Renewal Fund, as part of the structural adjustment programme.

Popular reports suggest some retrenchments and compulsory retirement of workers. Reportedly some private firms have violated their contract in this regard

Page 23: Disinvestment Presentation Dhiraj

Performance of PSEs after disinvestment and privatization

Unlikely to affect economic performance since the state continues to be the dominant shareholder

Privatisation can be expected to influence economic outcome provided the firm operates in a competitive environment

It would be difficult to attribute changes performance sole or mainly to the change in ownership.

Page 24: Disinvestment Presentation Dhiraj

Increasing Involvement of banks in financing PSE investments

Limited control of banks in governance of PSE’s.

Concepts of sound corporate governance overlooked.

Managers averse in taking risks

Multiple owners dilutes the motivation of performance of managers.

Other related issues

Page 25: Disinvestment Presentation Dhiraj

The proceeds from disinvestment of CPSUs will be channelised into NIF, which is to be maintained outside the Consolidated Fund of India.

NIF will be professionally managed to provide sustainable returns to the Government, without depleting the corpus. Selected Public Sector Mutual Funds will be entrusted with the management of the corpus of NIF.

75% of the annual income of NIF will be used to finance selected social sector schemes, which promote education, health and employment.

The residual 25% of the annual income of the Fund will be used to meet the capital investment requirements of profitable and revivable CPSUs that yield adequate returns, in order to enlarge their capital base to finance expansion/diversification. 

National investment fund

Page 26: Disinvestment Presentation Dhiraj

The following Public Sector Mutual Funds have been appointed initially as FundManagers, to manage the funds of NIF

i) UTI Assets Management Company Limitedii) SBI Funds Management Company (Private) Limitediii) Jeevan Bima Sahayog, Asset Management Company Limited

The total amount of Rs. 994.82 crore received from the sale of Government equity in PGCIL has been handed over to the Fund Managers by the Finance Minister as per the allocation given below :

(i)UTI Asset Management Company Pvt. Ltd. Rs.368.91 crore (ii)SBI Funds Management Pvt. Ltd. Rs.368.91 crore (iii)LIC Mutual Fund Asset Management Rs.257.00 crore Company Ltd. -----------------------

TOTAL Rs.994.82 crore

Fund Managers of NIF

Page 27: Disinvestment Presentation Dhiraj

CONCLUSION

Overlooking the hard task of institutional design to suit the specificities of large, heterogeneous, democratic industrializing economy of India, the reforms initiated in the 1990s sought to improve PSEs’ financial performance by transferring ownership and control to private sector, and resort to stock market based discipline.

Page 28: Disinvestment Presentation Dhiraj

QUESTIONS ??


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