Government Disinvestment Plan for PSUs

7/31/2019 Government Disinvestment Plan for PSUs

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GOVERNMENT

DISINVESTMENT PLAN FORPSUS Chirag JainAmarinder Singh

BFIA 3A

Amarinder Singh

Chirag Jain

BFIA 3A


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Introduction

Disinvestment is selling the

equity invested by the

government in Public Sector

Enterprises(PSU). PSUs areenterprises which are either

owned completely by the

government or whose sharesare maximum owned by the

government(51% or above).


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Types of Disinvestment

Strategic Sale to Private Entity

Transactions involving sale of shares held by thegovernment in CPSEs, including subsidiaries of CPSEs,along with transfer of management control, to a strategic

private partner identified through a process ofcompetitive bidding and subsequent sales to the partnerthrough call/put options.

Public Offer Transactions

Involving sale of shares held by the government in CPSEsthrough a Public Offer

CPSE to CPSE Sale

Transactions involving sale of shares held by theGovernment in one CPSE to another CPSE


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Types of Disinvestment

Auction to Financial Investors

Transactions involving sale of shares held by thegovernment in CPSEs through an auction to definedfinancial investors/investor groups like public sector

financial institutions Auction to Private Entities

Transactions involving sale of shares held by theGovernment in CPSEs through an auction to private

entities Sale To Employees

Transactions involving sale of shares held by the

government to employees of the respective CPSEs


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Why Disinvestment?

The premise accepted by most of the high-ups in the top echelon of the

Central Government is that the PSUs which were once created for "Public

Interest" should gradually be disinvested in the "Public Interest" only.

The logic and rationale behind such disinvestment policy are therefore,

according to them, now stand well defined and transparent. It is for thatreason, they feel, public exchequer in lieu of funding the PSUs should

better be utilised for basic education, primary health, family welfare etc.

of the country for which Government has at present hardly any surplus to

allocate.

This is more so when a vast amount of money is already being blocked inPSUs in non- strategic sectors in the form of hotels, consumer goods

companies, pharma companies, consultancy companies so on and so forth.

These PSUs are not only blocking huge public money, but also causing a

big drain on the public exchequer in the form of Plan and Non-Plan

support from the Government for their sustenance.


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Objectives of Disinvestment

ReduceFinancialBurden on

Government

ImprovePublic

Finances

IntroduceCompetitionwith MarketDiscipline

EncourageWide Share

in

Ownership

DepoliticizeEssentialServices


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Benefits of Disinvestment

For t he Gove rnm en t

Raising valuable resources for the government which couldbe used to bridge the fiscal deficit and also for variousdevelopmental projects.

The government can focus more on core activities such asinfrastructure, defense, education, healthcare, and law andorder.

For t h e PSUs

Greater autonomy leading to higher efficiencies

For t he Mark e ts and Econom y

Brings greater efficiencies for the economy and markets asa whole


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Benefits of Disinvestment

For t he Taxp ayers

Letting go of these assets is best in the longterm interest of the tax payers

Unlocking of shareholder (in this case the citizens

of India) value

For t he Em p loyees

Greater opportunities and avenues for career

growthMonetary gains through ESOPs and preferential

issue of shares

Pay rises, as has been seen in past divestments


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The 10% Challenge?

Corporate Restructuring at its best

PSUs to have a 10 per cent non-promoter holding

IPPs (Institutional Placement Programme) can be

brought in to raise this float holding and are a

convenient way to sell shares.

As many as 11 listed PSUs currently have promoter

(read Central Government) holdings of 90 per centplus and can easily adopt this route to comply' with

minimum public shareholding norms.


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"With a view to establishing a systematic policy approach to disinvestment and

privatisation and to give a fresh impetus to the Government's disinvestment programme",

the Ministry of Disinvestment (MOD) was formed on 10th December, 1999.

As per the Government of India (Allocation of Business) Rules, 1961, the Department of

Disinvestment is responsible for divesting Government of India shareholding in Central

Public Sector Enterprises (CPSEs) with Government retaining at least 51% equity andmanagement control.

Additionally, it deals with all matters relating to sale of Central Government equity

through offer for sale or private placement in the erstwhile Central Public Sector

Undertakings.

Public issues are governed by SEBI regulations. The entire process of disinvestment

follows the procedures laid down by Regulatory authorities including SEBI.

For every transaction professionals (Merchant Bankers, Legal Advisors and other

intermediaries) are appointed for the Issue on a transparent basis and allowed to

function within the concerned regulations. The Department is thus not involved in the

delivery of any public services or has any direct interface with the citizen or public at

large.


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Disinvestment Procedure

Proposals for disinvestments in any PSU, based on the recommendations of the

Disinvestment Commission or in accordance with the declared Disinvestment

Policy of the Government, are placed for consideration of the Cabinet

Committee on Disinvestment (CCD).

After CCD clears the disinvestment proposal, selection of the Advisor is done

through a competitive bidding process.

After receipt of the Expression of Interest (EOI), in pursuance of Advertisement

in newspapers / website, advisors are selected based on objective screening in

the light of announced criteria / requirements.

Bidders are invited through advertisement in newspapers / website to submit

their Expression of Interest. On receiving EOI from bidders, the advisors, after

due diligence of the PSU, prepare the information memorandum in consultation

with the concerned PSU. This is given to the short listed prospective bidders

who have entered into a confidentiality agreement. The list of bidders is

prepared after scrutiny of EOIs and those are shortlisted, who meet the

prescribed qualification criteria.


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The draft share purchase agreement and the shareholder agreement are also prepared

by the Advisor with the help of the legal Advisors, and the final draft is prepared after

detailed consultation with the bidders, in consultation with the Inter-Ministerial Group

(IMG).

The prospective bidders undertake due diligence of the PSU and hold discussions with

the Advisor/ the Government/ the representatives of the PSU for any clarifications. Concurrently, the task of valuation of the PSU is undertaken in accordance with the

standard national and international practices.

Based on the feedback received from the prospective bidders, the Share Purchase

Agreement (SPA) and Shareholders Agreement (SHA) are finalised by IMG. After getting

them vetted by the Ministry of Law, they are approved by the Government (CCD).

Thereafter, they are sent to the prospective bidders for inviting their final bindingfinancial bids.

The material for finalising upset price is taken from the advisors after receipt of financial

bids. The bids are not opened at this stage and are sealed after receipt, in presence of

bidders. Upset price determination exercise is thereafter completed by inter-ministerial

Evaluation Committee and the IMG. The sealed bids are then opened by IMG (in

presence of bidders).The Upset Price. Is then compared by the IMG.


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After examination, analysis and evaluation, the recommendations of the Inter Ministerial

Group (IMG) are placed before the Core Group of Secretaries on Disinvestment (CGD),

whose recommendations are placed before the Cabinet Committee on Disinvestment

(CCD) for a final decision regarding selection of the strategic partner, signing of the

Share Purchase Agreement and Shareholders Agreement, and other related issues.

In case the disinvested PSU's shares are listed on the Stock Exchange, an open offerwould be required to be made by the bidder before closing the transaction, as per SEBI

guidelines: Takeover Code.

In the disinvestment process mentioned above, Ministry of Disinvestment is assisted at

each stage by an IMG, headed by Secretary (Disinvestment) and comprising officers

from the Ministry of Finance, Department Of Public Enterprises, the Administrative

Ministry / Department controlling the PSU, Department of Company Affairs, Departmentof Legal Affairs, CMD / Director (Finance) of the company being disinvested, and the

Advisors and the Legal Advisors.

After the transaction is completed, all papers and documents relating to it are turned

over to the CAG of India; the CAG prepares an evaluation for sending to Parliament

and releasing to the public.


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Approach for Disinvestment

On 5th November 2009, Government approved the following action plan for

disinvestment in profit making government companies:

Already listed profitable CPSEs (not meeting mandatory shareholding of 10%)

are to be made compliant by Offer for Sale by Government or by the CPSEs

through issue of fresh shares or a combination of both

Unlisted CPSEs with no accumulated losses and having earned net profit in three

preceding consecutive years are to be listed

Follow-on public offers would be considered taking into consideration the needs

for capital investment of CPSE, on a case by case basis, and Government could

simultaneously or independently offer a portion of its equity shareholding

In all cases of disinvestment, the Government would retain at least 51% equityand the management control

All cases of disinvestment are to be decided on a case by case basis

The Department of Disinvestment is to identify CPSEs in consultation with respective

administrative Ministries and submit proposal to Government in cases requiring

Offer for Sale of Government equity


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RECEIPTS FROM STRATEGICSALE DURING 1999-2000

TO 2003-04
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Recent Disinvestments (April 2009

Onwards)

Sl.No. Company1. NBCC2. ONGC3. MOIL LTD.4. COAL INDIA LTD.5. POWER GRID CORP.OF INDIA LTD.6. ENGINEERS INDIA LTD.7. SJVN LTD.8. NMDC LTD.9.

RURAL ELECTRIFICATION CORP.LTD.

10. NTPC LTD.11. OIL INDIA LTD.12. NHPC LTD.13. SHIPPING CORP.OF INDIA LTD.,THE14.

POWER FINANCE CORP.LTD.


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Forthcoming Disinvestments

Sl.No. Company1. TYRE CORPORATION OF INDIA LTD2. HINDUSTAN COPPER LTD.3. STEEL AUTHORITY OF INDIA LTD.4. RASTRIYA ISPAT NIGAM LTD.5. BHARAT HEAVY ELECTRICALS LIMITED


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` 33,500-cr shares on the block: Govt plans to

sell stake in 15 PSUs this fiscal

The government is planning disinvestment in 15

public sector enterprises in the current fiscal,

including sale of shares worth ` 7,000 crore in the

state-owned mining company NMDC. "Shares worth $6 billion (about ` 33,500 crore) are

on the block," a senior official of the finance

ministry said, adding that the government has lined

up disinvestment in companies such as Hindustan

Copper, BHEL, Engineers India and NHPC.


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Disinvestment Companies

Sovereign wealth funds

from the region, such as

KIA, Mumtalakat, Saudi

Arabian Bank andstate pension funds,

have evinced interest to

invest in India through

the framework, anofficial said.


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Initiatives

The ministry is hopeful of receiving the first investment through this route within

a month.

The roadshows, held in Riyadh, Dubai, Muscat and Bahrain, included one-on-

one meetings with investors and officials from RBI, Sebi, departments of

disinvestment, revenue and economic affairs, and ministry of external affairs.

Industrial groups from the region, such as Zubair group, Al Khonji, Bahwan

group and Qurum business group, showed interest in realty, banking and

manufacturing firms.

The disinvestment department is exploring options, such as creation of an

exchange-traded fund with PSUs, which will provide the government a stablemechanism to raise large sums of money from the market with minimal

disruption to the share prices of these companies.

Choppy markets forced the government to defer much of its disinvestment

programme in last fiscal, when just ` 13,894 crore could be collected against

a target of ` 40,000 crore.


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How to and how not to Disinvest


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Government planning ETF for PSU

stake sale

The finance ministry is mulling setting up of an exchange traded fund (ETF) for

selling shares of state-owned companies as part of steps to meet the

disinvestment target of 30,000 crore in the current fiscal.

The disinvestment department is considering setting up of an exchange traded

fund in the format of Hong Kong Tracker Fund and has floated a concept note for

implementing it, a top official in the finance ministry told PTI.

Thedisinvestment department is planning to create a pool of shares of the PSUs it

wants to divest and create a fund (ETF), which would be listed on stock exchanges.

The ETF, which is an investment fund traded on stock exchanges much like stocks,

would have an underlying benchmark which could be an index on the stock

exchange. The government has already identified a host of companies fordisinvestment in the current fiscal.

These include Hindustan Copper, Oil India, SAIL, BHEL, HAL and RINL.

The government is seriously pursuing this concept, after the offer for sale (OFS)

and institutional placement programme (IPP) model, to meet the ` 30,000 crore

target.


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Funds procured how to use

The government is likely to revert to the policy of using 25 per cent ofthe disinvestment proceeds for reviving sick PSUs and recapitalisingthe profitable ones from the next fiscal.

The earlier stated policy of the government was to utilise 75 per centof the disinvestment proceeds for social sector programmes and the

rest for recapitalisation and revival of sick and profitable units.


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