Disinvestment Neelam.ppt

5/19/2018 Disinvestment Neelam.ppt

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Privatization and Disinvestment

BY:Dr Neelam Tandon

JIMS


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The transfer of ownership and/or management of an

enterprise from the public sector to the private sector. It also

means the withdrawal of the State from an industry or sector,

partially or fully. Another dimension of privatization is

opening up of an industry that has been reserved for the

public sector to the private sector.

According to the World Bank, privatisationis the transfer of

ownership of State owned Enterprises (SOEs) to the privatesector by sale (full or partial) of going concerns or by sale of

assets following their liquidation.


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Divestiture:

Privatisation of ownership through the sale of equity i.e.Selling stock to the public. This has largely beenundertaken in industrial countries.

Contracting: Government contracts out services plannedand specified to other organizations that produce anddeliver them. Common in public works and defence etc.

but there is scope of corruption in this as long termcontracts tend to encourage monopolistic behavior by the

private supplier.

Withdrawing from the provision of certain goods andservices leaving them wholly or partly to the private sector.


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Strategic sale by auction method: There is a transfer of a block of

shares by government to the strategic partner. Companies that havewitnessed strategic sale in India in the recent past include Modern

Foods, BALCO, VSNL, ITDC hotels etc. In India this method has

been preferred to that of sale of equity shares to the public.

Privatisation of management using leases and management

contracts.

Liquidation involves the closure of an enterprise and sale of its

assets. Informal liquidation is when the firm retains its legal statuseven though its operations have been suspended.


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It refers to the action of an organization or the government in sellingor liquidating an asset or subsidiary. In simple words, disinvestmentis the withdrawal of capital from a country or corporation.

Some of the salient features of disinvestment are:

Disinvestment involves sale of only part of equity holdings held bythe government to private investors.

Disinvestment process leads only to dilution of ownership and nottransfer of full ownership. While, privatization refers to the transferof ownership from government to private investors.

Disinvestment is called as PartialPrivatization.


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Offer for sale to public at fixed price: in this type of disinvestment,

the government holds the sale of the equity shares to the public at largeat a pre determined price. examples:-MFIL, BALCO, CMC, HTL, IBP,

HZL, PPL, and IPCL.

Strategic sale: in this type, significant management rights are

transferred to the investor i.e. majority of equity holdings are divested.examples: -offer of 1 million shares of VSNL, listing of ONGC IPO.

International offering: this is essentially targeted at the FII (Foreign

Institutional Investors). ex:-GDR of VSNL, MTNL etc.

Asset sale and winding up: this is normally resorted to in companies

that are either sick or facing closure. this is done by the process of

auction or tender. ex:-auction of sick PSUs.


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Commitment from the Political leadership is mandatory.

There should be a multiplicity of suppliers in the industry and governmentmonopoly should not be replaced by private monopoly.

There should be freedom of entry to provide goods and services.

Public services to be provided by the private sector must be specific orhave a measurable outcome. Lack of specificity makes it difficult to controland quantify.

It is extremely important to educate the consumers.

Privately provided services should be less susceptible to fraud if they are tobe effective


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Increased efficiency

Specialization

Corruption

Accountability

Security

Goal


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Short term view

Downsizing

Political interference

Reliability


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1. NET ASSET METHOD:

This will indicate the net assets of the enterprise as

shown in the books of accounts. It does not reflect thetrue position of profitability of the firm as it overlooksthe value of intangibles such as goodwill, brands,distribution network etc. This model is more suitable incase of liquidation than in case of disinvestment.


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2. PROFIT EARNING CAPACITY VALUE METHOD:

The profit earning capacity is generally based on the profits

actually 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 into present 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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Objectives for the formation of PSUs

To help in the rapid economic growth and industrialization of the

country and create the necessary infrastructure for economic

development

To earn return on investment and thus generate resources for

development

To promote redistribution of income and wealth

To create employment opportunities;


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To promote balanced regional development

To assist the development of small-scale and ancillary

industries

To promote import substitutions, save and earn foreign

exchange for the economy

Problems of PSUs

1. Price policy of the Public Sector undertakings.

2. Underutilization of capacity.

3. Problem related to planning and construction of projects4. Problems of labour, personnel and management

5. Lack of autonomy


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Low productivity of investment.

Year 1950-51 1960-61 1970-71 1980-81 1989-90

Investment

(Current Prices,% GDP)10.2 15.7 16.6 22.7 24.1

Investment

(Constant 1980-81 prices, % GDP)14.7 18.1 18.7 22.7 21.8

Domestic Savings

(Current Prices, %GDP)10.4 12.7 15.7 21.2 21.7


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Year 1960- 61to 1964-65

1965-66 to

1969-70

1970-71 to

1974-75

1975-76 to

1979-80

1980-81 to

1984-85

1985-86 to

1989-90

Revenue 12.7 13.4 14.6 17.8 18.1 20.0

Current

Expenditure

11.8 12.9 14.2 16.3 18.6 23.0

Current RevenueBalance

0.9 0.5 0.4 1.5 (0.5) (2.9)

CapitalExpenditure

6.6 6.0 5.1 6.9 7.5 7.1

TotalExpenditure

18.4 18.9 19.3 23.2 26.1 30.0

Fiscal Deficit 5.7 5.5 4.7 5.4 8.0 10.0

Primary Fiscal

Deficit

5.3 5.2 4.2 4.7 6.8 7.5

Fiscal situation in 1980


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Other important factors

RBI adopted sharp contractionary measures and had takenhuge amounts from International Monetary Fund in July,1990 and January, 1991 amounting to $2.4 billion.

Foreign Exchange Reserves were reduces $ 1 Billion whichcould support only two weeks imports.

Inflation was staring at 14%

On July6, 1991 47 tons of gold were transferred from RBIto Bank of England, London. Already 20 tons of gold weresold in International market through State Bank of India


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The first phase being 1991-92 to 1995-96 where partial

disinvestment was taken in piecemeal manner.

Second Phase 1996-97 to 1997-98, an effort to institutionalizethe disinvestment process was undertaken on a firm footing byconstituting the Disinvestment Commission.

The third Phase 1998-99 to 2007-08 where Department ofDisinvestment (Now a Ministry) and National investment fundwas formed to look after the disinvestment process and the funds

generated from it.

Fourth phase, the Current one where government is planning tosell its stake in NTPCL, SJVNL, RECL and NMDCL


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It started when Chandrasekhar government, while presenting

the interim budget for the year 1991-92 declared disinvestmentup to 20%.

The Industrial Policy Statement of 24th July 1991 stated that

the government would divest part of its holdings in selectedPSEs,but did not place any cap on the extent of disinvestment.

During this Phase the sole was to generate revenue without

following any objective seriously.

16 industries were reserved for public sector prior to 1991

which reduced to 8 after July 1991.


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The Highlights of the committee report

were as follows: 49% of equity could be divested for industries explicitly reserved

for the public sector

In exceptional cases the public ownership level could be keptat26%.

In all other cases it recommended 100 per cent divestment of

Government stake.

Holding 51% or more equity by the Government wasrecommended only for six Schedule industries.


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The government constituted Public Sector Disinvestment

Commission with the objective of preparing an over-all longterm disinvestment programme for public sector undertakings .

A comprehensive overall long-term disinvestment programme

(extent of disinvestment, mode of disinvestment etc.) within 5-10 years for the PSUs.

Industries were divided into core and non-core industries.

The commission recommended disinvestment up to 49% in core

industries and 74% in non-core industries.


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YEAR Target amount

(in crore)Amount realised

(in crore)

Enterprises

disinvested

Methodology

1991-92 2500 3038.00 30 (30) Minority shares sold byauction methodin bundles of very good,good, and

average companies.1992-93 2500 1912.51 16 (2) Bundling of shares

abandoned. Sharessold separately for eachcompany byauction method

1993-94 3500 Equity of 7 companies soldby openauction but proceedsreceived in 1994-95.


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YEAR Target amount

(in crore)Amount realised

(in crore)

Enterprises

disinvested

Methodology

1994-95 4,000 4843.08 16 (7) Sale through auction

method, in which NRIs andother persons legallypermitted to buy, hold orsell equity.

1995-96 7,000 362.00 4(-) Equities of 4 companies

auctioned andgovt piggy-backed in the IDBI fixedprice offering for the fifthcompany.

1996-97 5,000 380.00 1 (-) GDR (VSNL) ininternational market.

1997-98 4,800 902.00 1 (-) GDR (MTNL) ininternational market.


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Year Targetamount(in crore)

Amount

realised

(in crore)

Enterprisesdisinvested*

Methodology

1998 99 5,000 5371.11 5 (-) GDR (VSNL)/ Domestic offeringswith the participation of FIIs(CONCOR, GAIL). Cross purchase by3 oil sector companies i.e., GAIL,ONGC & IOC.

1999 00 10,000 1573.78 5 (1) GDR (GAIL) in international market,VSNL domestic issue, cross-holdingin IOC and ONGC, and strategic saleof MFIL.

2000 01 10,000 1868.73 3 (1) BALCO, KRL (CRL) & MRL through

Strategic sale/acquisition

2001 02 12,000 3130.94 6 (3) Strategic sale of CMC, HTL, IBP,VSNL and PPL. Sale of eight hotelsand long term lease of one hotel ofITDC.


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Amount

realised

(in crore)


Methodology

2002 03 12,000 3265.14 5 (1) Strategic sale of HZL, IPCL,Maruti Udyog Ltd. Sale of 10properties of ITDC and residualequity of MFIL

2003 - 04 14,500 15,547 10 Strategic sale of JCL, call option ofHZL, offer for sale of MUL, IBP,

IPCL, CMC, DCI, GAIL, and ONGC;sale of share of ICI Ltd

2004 - 05 4,000 2,764.87 3 Offer sale of NTPC and spill overofONGC; sale of shares to IPCL

employees2005 - 06 No target

fixed1,569.68 1 Sale of MUL shares to Indian

Public Sector financial institutionsand banks and employees

2006-07 No target

fixed

- - -


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Amount

realised

(in

crore)


Methodology

2007-08 No targetfixed

2,366.94 1 Sale of MUL shares topublic sector financial

institutions, public sectorbanks, and Indian MutualFunds

2008-09 No target

fixed

- - -

2009-10 No targetfixed

4,259.90 - 2012.85-NHPC2247.05- OIL


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This phase marked a paradigm shift in the disinvestment process.

First, in 1998 99 budget the BJP government decided to bringdown the government shareholding in the PSEs to 26 %to facilitateownership changes which were recommended by DisinvestmentCommission.

In 1999 2000 government stated that its policy would be tostrengthen strategic PSEs privatise non-strategic PSEs throughdisinvestment.

For the first time the term privatisation were used instead of

disinvestment.

The government later formed the Department of Disinvestment on10 December 1999.


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In 1998-99, the government decided to disinvest through offer of

shares in GAIL, VSNL, CONCOR, IOC and ONGC.

In 1999 2000, the government disinvested from Modern Foods

India Ltd and did a strategic sale to their strategic partner HLL for

Rs 105, 45 crore for a 74 % equity stake.

This was the first time government had sold more than 50 %

holding.

In 2002-03, target of the government for disinvestment in the year was Rs12,000 crore.


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The major highlight was the two-stage sell off in Maruti

Udyog Ltd with a Rs. 400 crore right issue at a price of Rs

3280 per share of Rs 100 each in which the government

renounced whole of its rights share (6,06,585) to Suzuki, for a

control premium of Rs 1000 crore. Relative share holding of

Suzuki and government after completion of the rights issue

was 54.20 % and 45.54 % respectively.

The second stage government offloaded its holding in twotranches first where government sold 27.5 % of its equity

through IPO in June 2003. The issue was oversubscribed by

over 10 times.


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Later keeping in view the overwhelming response from sale

of Maruti, government sold its remaining shares in the

privatised companies of VSNL, CMC, 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 taken in December

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

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


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On 27th January 2005, the Government had decided toconstitute a NationalInvestment Fund(NIF) into which therealisation from sale of minority shareholding of theGovernment in profitable CPSEs would be channelized. TheFund would be maintained outside the Consolidated Fund ofIndia. The income from the Fund would be used for the

following broad investment objectives: -

Investment in social sector projects which promote education,health care and employment;

Capital investment in selected profitable and revivable PublicSector Enterprises that yield adequate returns in order toenlarge their capital base to finance expansion/diversification.


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The corpus of the National Investment Fund will be of apermanent nature.

The Fund will be professionally managed to providesustainable returns to the Government, without depleting thecorpus. Selected Public Sector Mutual Funds will be

entrusted with the management of the corpus of the Fund.

75 per cent of the annual income of the Fund will be used tofinance selected social sector schemes, which promoteeducation, health and employment. The residual 25 per cent

of the annual income of the Fund will be used to meet thecapital investment requirements of profitable and revivableCPSEs that yield adequate returns, in order to enlarge theircapital base to finance expansion/diversification.


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With the Left no longer in the power equation, thegovernment has decided to focus on selling governmentshares either through public offers or institutional placements(especially for listed blue-chips).

The issue of disinvestment has grown in importance becausethe government faces a fiscal deficit of 6 per cent of GrossDomestic Product, owing to farm loan waivers, pay increases,a country-wide rural job guarantee scheme and a fiscalstimulus package.

The government has prepared a list of over 40 companies inwhich it is planning to divest part of its shareholding throughthe stock market. This includes 15 listed entities in which thegovernment holds more than 90 per cent.


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The government has also prepared a list of around 25 unlisted

companies with a net worth of Rs 200 crore which have earned a net

profit in each of the last three years for selective disinvestment.

Some of these are Bharat Sanchar Nigam Ltd, Rashtriya Ispat

Nigam, Coal India, Hudco, Export Credit Guarantee Corporation,

Indian Railway Finance Corporation and North East Electric Power

Corporation Ltd.

The government concluded public offers of equity in NHPC and Oil

India. The market capitalisation of these companies, post-listing, has

increased to Rs 37,702 crore and Rs 27,220 crore, respectively, a

rise of 106 per cent and 177 per cent. There was a mix of directdisinvestment as well as fresh equity in the case of these companies.


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The government plans to offer six loss-making public sector units on

long-term lease to private players for periods up to 99 years.

The companies that may be offered on lease are HMT , HindustanFertiliser, Scooters India , Hindustan Cables, Triveni Structurals and

NEPA.

The Rs8,286 crore issue of NTPC Ltd. received a lukewarmresponse from both retail and institutional investors.

With recent issues from state-run companies receiving lukewarm

response from the markets, the government has downscaled its

disinvestment programme this year, restricting it to a maximum of

eight companies.


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A significant part of the disinvestment target would be met through

stake sales in companies such as Coal India Ltd (CIL) and Steel

Authority of India Ltd (SAIL), he added.

Other big issues could come from Bharat Sanchar Nigam Ltd

(BSNL) and MMTC, while Hindustan Copper, Manganese Ore India

Ltd (MOIL), SJVNL and Engineers India Ltd (EIL) would be

smaller issues.


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6 out of Top 10 companies in India are Public SectorCompanies.

Of the 50 companies which make up the NIFTY, 10

companies are PSUs.

In many businesses PSUs are virtual monopolies.

Top 18 PSU companies (called Navratnas) total

income is equal to 15% of IndiasGDP.


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It is only due to the strong fundamentals of the PSUs thatthey are among the most profitable companies in India. The

strong fundamentals of these companies provided a

substantially high growth of 19.37% in the past 10 years.

Something private companies envy upon.

Balance Sheet virtually debt free.

Ability to show greater resilience in an economic downturn

less vulnerable to a slowdown in earnings growth.

Huge cash on books puts them in an advantageous position

when it comes to funding their expansion plans


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Disinvestment Neelam.ppt