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m Disinvestment:-The withdrawal of capital from a country or corporation

m Disinvestment involves sale of only part of equity holdings held by the


government to private investors.

m Disinvestment process leads only to dilution of ownership and not


transfer of full ownership.

m Privatization refers to the transfer of ownership from government to


private investors.

m Disinvestment is called ³partial privatization



à
àà


6 To reduce the financial burden on government.

6 To improve public finances.

6 To introduce, competition and market discipline.

6 To find growth.

6 To encourage wider share of ownership.

6 To depoliticize essential services.



 àà



m To meet fiscal deficit

m Expansion or diversification of the firm

m To repayment of government debts

m Implementation of government plan

m PSU's give negative rate of return on capital


àà


6 To solve critical Balance of Payment situation

6 High Fiscal Deficit

6 Rise in prices due to Inflation of around 14%

6 Underperformance of PSU¶S

6 Expenditure on subsidies rose from Rs.19.1 billion in 1980-


81 to Rs. 107.2 billion in 1990-91
 àà


Ê    
  
åInterest payments
å ages Govt. should be spending on
åSalaries of govt. employees ; basic education, primary
and health & family welfare
åSubsidiaries


Ê  

Huge amounts blocked in


non strategic
sectors(Hotels, trading
companies,
No surplus for capital Consultancies, Textile
expenditure on social and companies, Chemical
physical infrastructure pharmaceutical
companies
Disinvestment Process
1
Core group of Disinvestment 2 Ministry
secretaries commission of finance

3
4
Sends recommendations Inputs from adm.
Ministry and
Department of
disinvestment

5 6
Cabinet Committee of Core Group of IMG constituted
Disinvestment(CCD) Secys. for implementation
(CGD)
(Does monitoring)
7
Committees involved in the Disinvestment Process

m Y
 

m  
  

m   

  
   
 



 

   
 


   
   

 
   
 
  

  

   
 
   
 
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m Headed by the Cabinet Secretary

m 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.
 #
!"
m Chaired by the Prime Minister

m Functions:
o To consider the advice of the Core Group of
Secretaries
o To decide the price band

o To decide the final pricing

o Intervention in case of disagreement between the


recommendations
o To approve the three-year rolling plan and the annual
programme of disinvestment
à$  % !à "

m Chaired by Secretary, Ministry of Disinvestment

m Inter-ministerial consultation
 %à&
m Established on 23rd November 2005

m The proceeds from disinvestment of CPSUs will be channelized into


NIF

m 75%Annual income NIF will be used to finance selected social sector


schemes, which promote education, health and employment.

m Residual 25% of the annual income will be used to meet the capital
investment requirement
Methods Of Disinvestment
  % '
m   Y ! "  ! # $   #

Methodology: Offer for sale


ż Issue of Equity Shares to the public at large
ż Number of securities to be pre-determined and
disclosed
ż Price discovery through bidding by interested
investors
ż Issue amount is thus automatically obtained (No.
of securities multiplied by price)
ż Issue underwritten by the Syndicate Members
(may or may not be)
ż Offer made through an Offer Document
  % '
m Y   $
  


Suitability:
ż Companies which have a sizeable floating stock
with good intrinsic value and good future prospects
ż Companies not in need of significant technical,
managerial, marketing inputs etc.

Methodology: sale through market operations


ż A secondary market sale of Equity Shares.
ż Through brokers
ż To interested buyers - institutional and retail
ż At trading market prices
  % '
m 

  # %Ê  &Ê'

Methodology: offer for sale in the international markets


ż An offer to international investors through issue of Depository
Receipts, which represent underlying shares (ADRs in the
USA market and GDRs in markets other than the USA)
ż Recasting of accounts as per US GAAP for issue of ADRs and
consolidation of accounts for issue of GDRs
ż Preparation of red herring (Offer Document) and road shows
ż Price discovery through bidding and allocations made at cut-
off price (Dutch Auction) or at bid price (French Auction)
ż The issue is usually fully underwritten
ż Offer through an offering document
  % '
å " 
"  
(

O Methodology: placement of equity
å To a set of institutional investors
å At a negotiated price arrived at through valuation
or price discovery through book building
å ith issues of management rights and exit option
resolved
å Through an information memorandum circulated
among institutional investors and due-diligence
å In case of listed companies as placement of less
than 15% equity to investors does not trigger
Take-over code (as per SEBI guidelines)
  % '
m 

Methodology: Auction through the Dutch / French Auction
ż To a set of institutional investors
ż At a price discovered through the bidding process
ż For a pre-determined number of Equity Shares
ż Allocations made
ż At a cut-off price to all investors above the cut-off price in
case of Dutch Auction
ż At the bid price in case of French Auction
ż Marketing through Analysts' meet and one-on-one
discussions
ż In case of listed companies, placement of less than 15%
equity to each investor to avoid trigger of Take-over code
(or as per SEBI guidelines)
 ( %
m Methodology: Structuring the transaction in terms of:

Extent of stake to be divested


Extent of management rights
Decisions on pre qualification criteria, bid evaluation
criteria and bidding process
Preparation and circulation of information memorandum to
pre-qualified buyers
Due diligence and preparation of transaction documents
Valuation of Assets/shares
Receiving of bids
Evaluation of bids
Signing of Sale Agreement
&à
)
m     (
 
 


 

Methodology
ż Conversion of equity into an attractive and suitable
capital market instrument, plain vanilla bonds,
deep discount bonds, fully / partially convertible
bonds, bonds with warrants attached, preference
shares with / without warrants
ż Preparation and circulation of an information
memorandum (IM) among institutional investors
ż Placement of the instrument
&à
)
m $ Y 
Methodology: Offer by company to buy-back its shares
from others
ż Through tender route
ż Buy-back at fixed price
ż In case of over subscription, acceptance on
proportionate basis
ż Through book building
ż Buy-back through Dutch Auction route- price discovery
through bidding by interested investors- and allocations
made at cut-off-price
ż Valuation to factor in future loss of dividend to the
sellers.
* *&
m arehousing

m Trade Sale

m Asset / inding up

m MANAGEMENT/EMPLOYEE BUY OUTS


(M/EBOS)
YEAR ISE DISINVESTMENT

(1991-2009)
DISINVESTMENT IN 1991 O 1992 :
IN BUDGET SPEECH 1991-1992 :

m GOVT. DECIDED TO DIVEST UP TO 20% OF ITS EQUITY.

m ELIGIBLE INVESTORS O MUTUAL FUNDS , INVESTMENT


INSTITUTIONS IN PUBLIC SECTORS, ORKERS IN THESE FIRMS.

m OBJECTIVES O RAISING RESOURCES, ENCOURAGING IDER


PUBLIC PARTICIPATION & PROMOTING GREATER ACCOUNTIBILITY.
m OUT OF 244 PUBLIC ENTERPRISES ( AS ON 1 APRIL 1990) 47 PSEs
ERE SELECTED FOR DISINVESTMENT.

m T O TRANCHES :

1) DECEMBER 1991 ( 31 PSEs DISINVESTED)


2) FEBRUARY 1992 (16 PSEs DISINVESTED)

TARGET RECEIPT- RS. 2500 CRORE.

ACTUAL RECEIPT O RS. 3038 CRORE.


àà

à +,,+$+,,-
m BHARAT EARTH MOVERS LTD (BEML) «««««««««.20%

m BHARAT ELECTRONICS LTD.(BEL) «««««««««««..20%

m BHARAT HEAVY ELECTRICALS LTD.(BHEL)«««««««..20%

m BHARAT PETROLEUM CORPORATION LTD.(BPCL)«««.20%

m HINDUSTAN PETROLEUM CORPORATION LTD.(HPCL)«20%

m INDIAN PETROCHEMICAL CORPN. LTD.(IPCL)«««««..20%

m MAHANAGAR TELEPHONE NAGAR LTD.(MTNL)««««.20%

m SHIPPING CORPORATION OF INDIA LTD.(SCI)««««««20%


àà

à +,,-$+,,.

m TARGET RECEIPT - Rs. 3500 CRORE


m ACTUAL RECEIPT O Rs. 1913 CRORE

m MINIMUN RESERVE PRICE OF SHARES OF PSEs AS FIXED BY THE


3 MERCHANT BANKS -

a) INDUSTRIAL CREDIT & INVESTMENT CO. OF INDIA

b) INDUSTRIAL DEVELPOMENT BANK OF INDIA

c) STATE BANK OF CAPITAL MARKET


àà

à +,,-$+,,.
m OCTOBER 1992 :

HINDUSTAN ZINC LTD«««««2.58%


NATIONAL ALUMINIUM CORP. LTD««««.5%
RCF LTD««««««1.57%

m DECEMBER 1992 :

STEEL AUTHORITY OF INDIA LTD (SAIL)««....5%


BCPL«««««««««««««..5%

m MARCH 1993 :

HINDUSTAN COPPER LTD««««««««1.12%


NATIONAL MINERAL DEVELOP CORP. LTD««««.1.59%
àà

à +,,/$+,,0
m TARGET RECEIPT- Rs .4000 CRORE
m ACTUAL RECEIPT O Rs. 4843 CRORE

m THREE TRANCHES:

1) FIRST TRANCHE - MARCH 1994


2) SECOND TRANCHE - OCTOBER 1994
3) THIRD TRANCHE - JANUARY 1995

m IMPORTANT CHANGES:

1) BIDDING AMOUNT LO ERED


2) FIIs REGISTERED ITH SEBI ERE ALSO PERMITTED TO
PARTICIPATE IN AUCTIONS OF PSEs SHARES.
àà

à +,,/$+,,0

m BHARAT HEAVY ELECTRICALS LTD««..11.74%

m CONTAINER CORP. OF INDIA««««««20%

m OIL AND NATURAL GAS CO. LTD(ONGC)«2%

m ENGINEERS INDIA LTD««««««««««..5.99%

m GAS AUTHORITY OF INDIA LTD««««««3.37%


àà

!+,,1$,2+,,2$,3"
m HIGHLIGHTS OF POLICY FORMULATED BY UNITED FRONT GOVT. IN
1996:

1) TO CAREFULLY EXAMINE PUBLIC SECTOR NON - CORE STRATEGIC


AREAS.

2) TO SET UP DISINVESTMENT COMMISSION.

3) TO IMPLEMENT DECISIONS TO DISINVEST IN TRANSPARENT


MANNER.

m PSEs CLASSIFIED INTO : STRATEGIC AND NON- STRATEGIC


àà

à +,,1$+,,2

m IN BUDGET SPEECH:

1) TARGET RECEIPT O Rs. 5000 CRORE


2) ACTUAL RECEIPTS O Rs. 380 CRORE

3) CONSIDERED COMPANIES FROM COMMUNICATION AND


PETROLEUM SECTOR.
(VIDESH SANCHAR NIGAM LTD.( VSNL) AND INDIAN OIL CORP. (IOL)
THROUGH GDR ISSUE.
4) ONLY VSNL AS DISINVESTED.
àà

à +,,2$+,,3
m IN BUDGET SPEECH:

1) TARGET RECEIPT O Rs. 4800 CRORE

2) ACTUAL RECEIPT O Rs. 902 CRORE

3) COMPANIES TO BE DISINVESTED : MTNL, GAIL, CONCOR, IOC


THROUGH GDR ISSUE .

4) ONLY MTNL DISINVESTED IN NOVEMBER 1997.


-  4 
àà

,3$,, 
m IN BUDGET SPEECH:

m BJP GOVT. DECIDED TO BRING DO N GOVT. SHAREHOLDING IN PSE


TO 26%.

m GOVT. OULD RETAIN MAJORITY HOLDINGS IN STRATEGIC


PSEs.(ARMS AND AMMUNITION,DEFENCE EQUIPMENTS, ATOMIC
ENERGY AND RAIL AY TRANSPORT)

m MINISTRY OF DISINVESTMENT AS FORMED ON 10 DEC. 1999

m TERM PRIVATISATION AS USED FOR THE FIRST TIME.


àà

à +,,3$+,,,
m TARGET RECEIPT O Rs. 5000 CRORE

m ACTUAL RECEIPT O Rs. 5371 CRORE

m PSEs DISINVESTED :

1) CONCOR
2) GAIL
3) IOC
4) VSNL
5) ONGC
àà

à +,,,$-555
m TARGET RECEIPT O RS. 10,000 CRORE

m ACTUAL RECEIPT O Rs. 1818 CRORE

m PSEs DISINVESTED :

1) MODERN FOODS INDIA LTD.(MFIL) - 74% OF DIVESTITURE IN


FAVOUR OF HINDUSTAN LEVER LT. (HLL)
2) GAIL
3) IOC
4) ONGC
5) VSNL
àà

à -555$-55+
m BUDGET SPEECH:

m TARGET RECEIPT O Rs. 10,000 CRORE

m ACTUAL RECEIPT O Rs. 1868 CRORE

m POLICY ADOPTED:

1) EMPHASIS ON STRATEGIC SALES


2) TO RESTRUCTURE AND REVIVE VIABLE PSEs
3) TO CLOSE DO N PSEs HICH CANOT BE REVIVED
4) TO BRING DO N GOVT. EQUITY TO 26% OR LO ER IF REQUIRED.
5) TO PROTECT INTERESTS OF ORKERS
4
àà

à -555$ -55+
m BALCO ( STRATEGIC SALE OF 51% SHARES)

m BPRL AND CHENNAI REFINERIES( TAKEOVER BY IOC)

m KOCHI REFINERY ( TAKEOVER BY BPCL)


àà

à -55+$-55-
m TARGET RECEIPT O Rs. 12,000 CRORE

m ACTUAL RECEIPT O Rs. 5,632 CRORE

m PSEs DISINVESTED :

1) COMPUTER MAINTENANCE CORP.(CMC) (STRATEGIC SALE OF 51%)

2) HTL ( STRATEGIC SALE OF 74%)

3) PRADEEP PHOSPHATE LTD.(PPL) (STRATEGIC SALE OF 74%)


àà

à -55-$-55.
m TARGET RECEIPT O Rs. 12,OOO CRORE

m ACTUAL RECEIPT O Rs. 3348 CRORE

m PSEs DISINVESTED :

1) MODERN FOODS INDUSTRY LTD.(MFIL)«.26%

2) ITDC««.100%

3) HOTEL CORP. OF INDIA(TEN HOTELS)««..100%


àà

à -55.$-55/
m TARGET RECEIPT O Rs. 13,200 CRORE

m ACTUAL RECEIPT O Rs. 15,547 CRORE

m PSEs DISINVESTED:

1) MARUTI( IPO) O 28%

2) IPCL- 29%

3) GAIL O 10%

4) ONGC O 10%
àà

à -55/$-550
m TARGET RECEIPT O Rs. 4000 CRORE

m ACTUAL RECEIPT O Rs. 2,765 CRORE

m PSEs DISINVESTED :

1) NTPC ( IPO) O 5.25%


2) IPCL ( TO EMPLOYEES) O 5%
3) ONGC - 0.01%
àà

à -550$ -551
ù TARGET RECEIPT O NONE

ù ACTUAL RECEIPT O Rs. 1567 CRORE.

ù PSE DISINVESTED:

1) MARUTI UDYOG LTD. (MUL)

DISINVESTMENT IN 2006- 2007


àà

à -551$ -552

THERE AS NO DISINVESTMENT IN 2006-07


àà

à -552$-553
m TARGET RECEIPT O NOT FIXED

m ACTUAL RECEIPT O Rs. 2367 CRORE

m PSE DISINVESTED:

MUL ( SHARES TO PUBLIC SECTOR FINANCIAL INSTITUTIONS , PSU


BANKS, MUTUAL FUNDS)

DISINVESTMENT IN 2008- 2009

THERE AS NO DISINVESTMENT IN 2008-09


446à 46

à à -55,$+5

 ÷!") 


Disinvestment of 5% equity of the company out of Government


shareholding through Public Offering .

 Y )) 
%Y
*   
÷ #) 
'

Disinvestment of 10% equity of the company out of Government


shareholding through Public Offering.

 Ê  
 
  
) 
%Ê':-

Disinvestment of 5% equity of the company out of Government


shareholding in conjunction with the issue of fresh equity of
15% by the company.


àà


m SHIPPING CORP.OF INDIA LTD

m MOIL LTD

m PO ER GRID CORP.OF INDIA LTD

m COAL INDIA LTD

m ENGINEERS INDIA LTD

m SJVN LTD

m NMDC LTD

m RURAL ELECTRIFICATION CORP.LTD

m NTPC LTD

m OIL INDIA LTD

m NHPC LTD
  à àà

$ 

44 6

à


m OIL & NATURAL GAS CORP.LTD

m STEEL AUTHORITY OF INDIA LTD

m HINDUSTAN COPPER LTD


&(6&
m Government approved on 14.05.2002 on disinvestment in Maruti
Udyog Limited (MUL) through a two-stage process:

m (i) A rights issue by MUL in the first phase of Rs.400 crores with
Government renouncing its rights share to Suzuki. Suzuki would gain
majority control and pay Rs 1000 crore to Government as control
premium.

m (ii) Sale of its existing shares through a public issue in the second
phase ; the issue to be underwritten by Suzuki.
7*&#&* 
m Disinvest has helped the company in getting cheaper funds
for the advancement of existing plants and creating new
ones

m Disinvestment has helped in creating a better product mix for


the company

m After Disinvestment Suzuki has gained a majority stake in


the company (54%) , this has brought in active participation
by Suzuki in terms of better decision making and reduction in
product development cycle.

m Product development has speeded up


 %* %
m Unique in nature

m SUZUKI already has 50% shares in MUL and control


and management rights which were more than equal
as per earlier agreements.

m Annual Cash inflows to Government

m Value enhancement by SUZUKI

m p p 

Fact File

Mines

Top line
898 Cr.

PAT 56 Cr.

Sale of 51% stake in Balco


(Management Control)
Case for Disinvestment
  (& &*%(8 *
0558 &)  &9 

 *  ( %4

 à %

  & ' &


*(* %8
Bidders for Strategic Stake

 & %! % "

 % !# &"

 %à&8!%( 7 %"
Valuation Conundrum

%&/4  ! 4 ( "

& *%7
   % 
% *
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% &&&  



Analysis Paralysis

 4:& 0+/8(
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&# &%

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(  %
The Verdict

%à&
( *
*(*#&&
7* 
00+8
Post Sell Out Drama
 6 '  

 4% %4>* 

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  7&( ?'


&12& 
Post Sell out Drama
 * &  (
 @ 

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 =  (
(

 ((&
 %%(>(
 (
Government¶s Strategy
Infusing New
Capital > Meet the growing budget
deficit

> The Government knew that they


could make more money by
selling off their assets cheaply
Introduce
New
New
Technology
Management > Faster realization value
7
> No clear framework or policy

> Disinvestment used to meet fiscal deficit

> No transparency

> Failure to attract foreign buyers


((

> Clear policy & framework for disinvestment process

> De-link disinvestment with budgetary control exercise

> Disinvestment process be audited by at least 2 reputed auditing firms


& &
m ith a dead IPO market and almost no way for the Indian corporate
to raise funds from the public, market men believe that a
divestment trigger would give the necessary push to revive the
Indian markets.
m PSU divestment brings value addition not only to the public but also
to the government.
m Public money is flowing back to the public with lots of value-
addition. It's not through privatisation but through selling only
modest 5-15% stakes.
m The UPA government, headed by Manmohan Singh, raised Rs
8,500 crore in the last four years through disinvestment.
m It divested Rs 2,760 crore in FY05, Rs 1,569 crore in FY06 and Rs
4,181 crore in FY08.
m There are around 156 profit-making PSUs among the total of 217.
Out of this, 16 are Navaratnas (highly profitable) and 54 mini-
ratnas.
%
There is no clear-cut framework or policy for disinvestment in India.

The study of disinvestment for a period of 1991-92 to 2001-02 has revealed


that a very meager amount of disinvestment proceeds has been realized as
against the target.
The entire proceeds of disinvestment are been used to mitigate the gap
fiscal deficit instead of using them for development of social sector &
building infrastructure.
The government has not been concentrating on the timing of disinvestment
as a result most of the private sector investors are shying away form the
process because of the unattractive offers made by the government.

There is no transparency in the entire process of disinvestment in India.

The government has done a little or more so failed to attract foreign suitors
for the disinvestment process in India
((
The government has to form a policy framework for the entire disinvestment process.
The government should de-link the disinvestment process from the budgetary
exercise.
Government should stop setting up of the targets in every year annual budget and
should have a long-term plan.
A separate fund should be created for disinvestment and it should be kept under the
control of president and the fund should be utilized for building infrastructure and
developing the social sector.
Timing of disinvestment is crucial and the government should follow a specific
method or process in order to reap more chunks.
The entire exercise of disinvestment should be audited by not less than two reputed
auditing firms in order to have a fair and transparent picture of the entire process.
Finally, the government should have an 'Yearly Action Plan' which should spell out
the activities carried out in that particular year and at the end of the year an 'Action
Taken Report' has to be submitted.