PSU and Disinvestment

8/3/2019 PSU and Disinvestment

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What is PSU?

In India, public sector undertaking (PSU) is a term

used for a government-owned corporation.

The majority (51% or more) of companies equity is

held by union government or state government.

Divisions of activity in 1956

a)Public sector-Heavy and basic industries which

require high capital and low return.b)Private sectors-Consumer based goods industries

having high and early returns


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Investment of Government in PSU

As on 1 st April No. of units Total

Investment(Crs)

1951 5 29

1956 21 811961 47 948

1980 179 18150

1985 215 42673

1990 244 99329

1992 237 135445

1995 239 164690

2007 247 421089

2008 242 455409


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Performance of Public sectorYears Nos of

PSUTurnover PBIT Net

ProfitDividend

paidContribution to

country

revenue

1991-92 237 133906 13675 2356 687 19951

1995-96 239 226919 27587 9574 2205 30878

2000-01 234 458237 48767 15653 8260 61037

2001-02 231 447529 63190 25978 8068 62866

2002-03 227 535165 73374 32399 13768 818672003-04 230 587052 99053 53084 15288 89035

2004-05 227 700862 109518 65429 20714 110599

2005-06 226 837295 117614 69536 22886 125456

2006-07 217 964410 142949 81550 26805 147728

(Rs.Crs)


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Industries reserved for PSUs since

July 1991

1. Arms and Ammunition and allied items of defence

equipment, defence aircraft and warship

2. Atomic Energy

3. Coal and Lignite

4. Mineral oil

5. Mining of iron ore, gold and diamond

6. Mining of copper, zinc, led, tin and molybdenum.

7. Minerals specified in the schedule to Atomic Energy

(Control of production and use) Order, 1953

8.R

ailway Transport


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Top 10 PSU in India

IOC-20 largest company in the world, most profitablePSU, ranked in Fortune 500 lists

NTPC-India largest power company. contributes to 28.5%

of th

e power to th

e country.

BPCL-3 largest company in India, listed in Fortune 500lists

HPCL-operates the largest lube refinery in India

ONGC-5 largest company ,contributes 77% of Indiascrude oil, 81% of natural gas production


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Top 10 PSU in India

SAIL-6 largest company in India and leading steel producer

BHEL-manufactures over 180 products and caters to core

sector of indian economy

BSNL-Largest telecom industry

HAL-Largest public sector in aeronautical engineering

Bharat Dynamics Limited has made it to the top ten list due

to the sheer grit and diligence that it showcases in its balance

sheet and the profitability that it shows year after years


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Problems of Public sector

Poor Project Planning: Investment decisions in many public enterprises are not based upon proper evaluation of demand

and supply, cost benefit analysis and technical feasibility.

Many projects in the public sector have not been finished according to the time schedule.

Over-capitalization: Due to inefficient financial planning, lack of effective financial control and easy availability of money from

the government, several public enterprises suffer from over-capitalization

The Administrative Reforms Commission found that Hindustan Aeronautics, Heavy Engineering Corporation

and Indian Drugs and Pharmaceuticals Ltd were over-capitalized.

Such over-capitalization resulted in high capital-output ratio and wastage of scare capital resources.

Excessive Overheads: Public enterprises incur heavy expenditure on social overheads like townships, schools, hospitals, etc. In

many cases such establishment expenditure amounted to 10 percent of the total project cost.

Hindustan Steel alone incurred an outlay ofRs. 78.2 crore on townships. Such amenities may be desirable

but the expenditure on them should not be unreasonably high.


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Overstaffing: Manpower planning is not effective due to which several public enterprises like Bhilai Steel have

excess manpower.

Under- utilization of Capacity: One serious problem of the public sector has been low utilization of installed capacity. In the absence

of definite targets of production, effective production planning and control and proper assessment of

future needs many undertakings have failed to make full use of their fixed assets. There is

considerable idle capacity. In some cases productivity is low on account of poor materials

management or ineffective inventory control.

Lack of a Proper Price Policy: There is no clear-cut price policy for public enterprises and the Government has not laid down

guidelines for the rate of return to be earned by different undertakings

Inefficient Management : The management of public enterprises in our country leaves much to be desired.

. Civil servants who are deputed to manage the enterprises often lack proper training

Motivations and morale of both executives and workers are low due to the lack of appropriate

incentives.


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Meaning and Reasons for Privatization

Privatization is a process by which the governmenttransfers the productive activity from the public

sector to the private sector

Improvement in efficiency and performance

Fixing responsibility is easier

Response time incase of Private sector is less

Privatization leads to better services to customers

Remedial measures are taken early in private sector


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Role of Private Sector

1. It lessens the government burden, private company such as water supply,electricity, airport.etc..the money can be spent on development such as publicfacilities..

2. Much efficient and better, private companies tends to collect revenue higher

than the government..that is why the provide the best services.. you will havecleaner water, better telephone lines and reception..etc

3. Privatization provides job opportunity to many people..private companies havebetter pays than government servant, they get better salary and reduces thecountry jobless rate.

4. Increase revenue of the country, as private company pay taxes to the centralgovernment, it helps the government to have more funds for development..suchas foreign invest and etc..


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ROLE OF PRIVATE PUBLIC AND JOINT SECTOR IN

EMPLOYMENT AND GROSS OUTPUT

SECTOR FACTORYNOS

EMPLOYM

ENT(000S)

FIXED CAP

IN CRORES

GROSS

OUTPUT

PUBLIC 13,227 3,107 4,20,767 11,12,91

8

PRIVATE 1,21,113 5,610 1,70,547 7,43,293

JOINT 2,046 269 13,494 42,087

OTHERS 3,775 125 2,132 9,338

TOTAL 1,40,161 9,112 6,06,940 3,11,864


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Problems of Private Sector Profit generation is the main motive

Monopoly and Concentration

Declining share of net value added in total output

Infrastructure Bottlenecks

Industrial Disputes

Industrial Sickness

Threat from Foreign Competition


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Disinvestment in India

What is Disinvestment? The action of an organization or government selling or liquidating an

asset or subsidiary as a strategic move for the company.

Th

e term was first used in th

e 1980s, most commonly in th

e UnitedStates


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Objectives of Disinvestment PSUs had shown a very negative rate of return on capital employed.

Inefficient PSUs had become and were continuing to be a drag on the Governments resources turning to

be more of liabilities to the Government than being assets.

Out of the 239 operating PSUs in 1995-96, 134 were running on profits and as many as 101 were loss

making units, 86 of them were sick.

Many undertakings traditionally established as pillars of growthhad become a burden on the economy.

National gross domestic product and gross national savings also getting adversely affected by low returns

from PSUs.

Of the various factors responsible for low profits in the PSUs, the following were identified as particularly

important:-

Price policy of public sector undertaking

Underutilisation of capacity

Problems related to planning and construction of projects

Problems of labour, personnel and management

Lack of autonomy


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Finally, disinvestment was also seen by the Government to raise funds for

meeting general/specific needs.

In this direction, the Government adopted the 'Disinvestment Policy'. This

was identified as an active tool to reduce the burden of financing the

PSUs.

Few main objectives are:

To reduce the financial burden on the Government

To improve public finances

To introduce, competition and market discipline

To fund growth

To encourage wider share of ownership


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Different Approaches to

Disinvestments

There are primarily three different approaches to disinvestments (from the

sellers i.e. Governments perspective)

Minority Disinvestment

Majority Disinvestment

Complete Privatisation


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Majority Disinvestment

A majority disinvestment is one in which the government, post

disinvestment, retains a minority stake in the company i.e. it sells off a

majority stake

Eg: Modern Foods to Hindustan Lever, BALCO to Sterlite, CMC to

TCS etc.


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Complete Privatisation

Complete privatization is a form of majority disinvestment wherein 100%

control of the companies passed on to a buyer.

Examples of this include 18 hotel properties of ITDC and 3 hotel

properties of HCI.


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Cabinet Committee on

Disinvestment (CCD)

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 annual

programme of disinvestment every year.


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Core Group of Secretaries on

Disinvestment (CGD)

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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Ministry Of Disinvestment

Set up in 1999

Assisted by Advisors

Business Allocated to Ministry of Disinvestment

1. All matters relating to disinvestment of Central Government equity from Central PublicSector Undertakings

2. All matters relating to sale of Central Government equity through offer forsale or private placement in the erstwhile Central Public Sector Undertakings

3. Decisions on the recommendations of the Disinvestment Commission on the modalitiesof disinvestment, including restructuring.

4. Implementation of disinvestment decisions, including appointment of advisers, pricingof shares, and other terms and conditions of disinvestment

5. Disinvestment Commission;6. Central Public Sector Undertakings for purposes of

disinvestment of Government equity only.

7. Financial Policy in regard to the utilization of the proceeds of disinvestment channelizedinto the National Investment Fund


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Major Issues In DisinvestmentProfitability:

The return on investments in PSEs, at least for the last

two decades, has been quite poor.

The PSE Survey shows PSEs, as a whole, never earned

post tax profits that exceeded 5% of total sales or 6% of

capital employed, which is at least 3% points below the

interest paid by the Government on its borrowings

Recurring Budgetary support to PSEs:

Despite huge investment in the public sector, the

Government is required to provide more funds every

year that go into maintaining of the unviable / weak PSEs


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Cost Control:

As per NCAER Study Report

the cost structure in PSEs is

increasing as compared to

private sector, which is ableto contain costs on all

parameters.

Power & fuel

/Net salesPSEs

Pvt. sector

I9.5

5

Wages/Net

SalesPSEs

Pvt.sector

23.3

6.5

Interest/Net

sales

PSEs

Pvt. sector

11.7

4.7


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Industrial Sickness in PSUs:

To save the PSUs from sickness, the government

has been sanctioning restructuring packages from

time to time.

As on 31.3.00 Profit & Loss A/C of 21 PSUs showed

accumulated loss of 13959.57 crores.

Employee issues:

Of the 1.6 million jobs added in the organized

sector 1 million, or two thirds, were added in the

private sector during the period 1991 to 2000. This indicates that the private sector has become

the major source for incremental employment in the organized sector ofthe economy over the last decade


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HUL Modern Foods

CASE STUDY


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Introduction MFIL was incorporated as Modern Bakeries (India) limited in 1965.

It had 2042 employees as on 31.1.2000

It went through minor restructuring during 1991-94 when its UjjainPlant was closed, the Silchar project was abandoned and the

production ofRasika drink was curtailed.

The company was referred to Disinvestment Commission in 1996. InFebruary 1997, the Commission recommended 100% sale of thecompany, treating it in the non-core sector.

As per the Disinvestment Commission the major problems at MFILwere under- utilization of the production facilities, large work force,low productivity and limited flexibility in decision-making


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The Disinvestment Process

September 1997 The Government approved 50%disinvestment to a Strategic Partner through competitiveglobal bidding

October 1998 ANZ Investment bank was appointed as theGlobal Advisor for assisting in disinvestment

January 1999 The Government decided to raise thedisinvestment level to 74%

April 1999 An advertisement inviting the EOI fromprospective strategic partners was issued


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The Disinvestment Process

In a response to the advertisement 10 parties submittedExpressions of Interest

Out of these, 4 conducted the due diligence of the company, which

included visits to Data Room, interaction with the management ofthe MFIL, and site visits.

October 1999 Post due diligence, 2 parties remained in the field,and on the last day for submission of the financial bid (15.10.99),

the only bid received was that from Hindustan Lever Limited (HLL).

January 2000 - The Government approved the selection of HLL asthe strategic partner in and the deal was closed on 31.1.2000.


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Year Seller Type of sale Buyer Percentage of

Equity Sold

Percentage

of Residual

Equity of

Govt.

Amount

Realised

(Rs.

crore)

1999-00 Modern Food Industries

(India) Ltd.

Strategic sale Hindustan

Lever Ltd.

74 26 105.45

2002-03 Modern Food Industries

(India) Ltd.

Sale of residual

shares to SP

(Put Option by

GoI)

Hindustan

Lever Ltd.

25.995 - 44.07

TOTAL 149.52


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PRIOR TO SALE AFTER SALE

1.

Authorised share capital

Paid up capital

Losses 1998-99

Losses 1999-00**(Inclusive of an amount of Rs.

35.19 cr. towards provisions made

for previous years.) Number ofemployees

Rs. 15.00 cr.

Rs. 13.01 cr.

Rs. 6.87 cr

Rs.48.23 cr **

2042

1. 74% of the shares sold for

Rs. 105.45 cr. and further

Rs. 20 cr. Invested by HLL

in the company.

2

.

Net Worth (and total expected

realisation) as per DPE Survey1998-99

Value of assets as per 31.3.99accounts:

GrossNet

Market value of land & building asper Government valuer

Rs. 28.51 cr.

Rs. 38.76 cr.

Rs. 18.99 cr.

Rs. 109.00 cr.

2. Thus, the Government

gained by selling Rs. 1000shares for Rs. 11,490,

i.e.more than 11 times the

face value & 3.68 timesthe Book Value.

3.

Valuation of 100% equity by

different methods - as done byglobal advisors

Rs. 30 cr. toRs.70 cr.

3. HLL's share value went up

from Rs. 2138 on 30th

Dec. (prior to sale) to Rs.

3247 on 25th Feb. (postsale).


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PRIOR TO SALE POST SALE

. 4. The employees of acompany incurring losses

became HLL employees

- an efficient company.

The Shareholders

Agreement envisages:"

the parties envision thatall employees of the

company on the date

hereof will continue in the

employment of the

company."

5 Company referred to

BIFR, which was

inevitable. Now HLL will

pick up the bill forrestructuring.


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Post Disinvestment Scenario

The decline in the sales of Modern Bread, which continued till the

beginning of 2000, has been arrested. Weekly sales in December

2000 were around 44 lakhs SL, which is a 100% increase over the

figure of April 2000.

As on 31.12.2000, HLL has extended secured corporate loans to

MFIL to the extent ofRs. 16.5 crores for meeting the requirement

of funds for working capital and capital expenditure.

HLL has provided a corporate guarantee to MFIL's banker, viz.,Punjab National Bank, which has helped the Company in getting the

interest rate reduced considerably to the extent of 3-4% of its

earlier borrowing cost.


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Steps have been taken to improve the quality of bread, its packaging andmarketing with trade-promotion activities, and to train the manpower inquality control systems.

November,2002 wages have increased by an average of Rs.1800 peremployee.

Rs. 30 crore has been spent VRS. Rs. 7 crore infused for safety & hygienepurposes at various manufacturing locations

The Government was also entitled to Put its share of remaining equity of

26 % at Fair Market Value for 2 years from 31st January 01 to 30th January03. The Government has exercised this option and thereby received Rs.44.07 crore on 28th November 02.



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Despite HULs best efforts MFIL continued to make losses, HUL has

invested 157 crore in MFILs equity

In 2005, its losses were Rs 15 crore and accumulated losses were Rs 79crore.

At th

e operating profit level, before interest and depreciation, it did makea profit though ofRs 22 crore compared to a loss of Rs 7 crore in theprevious year.

Bread sales grew by about 7%. The company suffered as it lost somelucrative government contracts and changed its operational structure.

Hence overall sales declined by 35% to Rs 95 crore.

However, HUL did enjoy tax benefits as MFIL was a sick industrial unit

The company put MFIL on the block in 2006 but failed to clinch a deal


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However, HUL still was unsuccessful in turning around the

business and due to high employment costs and low margins

As per the company,

The culture of MFIL was a complete misfit with its own

The company has committed a mistake while conducting the due diligence

process

Reasons for the Failure


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PSU and Disinvestment

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