Disinvestment Policy

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Disinvestment policy of India Abhishek Dhulekar Achal Ramesh Adhvaith Hattiangadi Amit Singh Anand Raorane

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Disinvestment policy of IndiaAbhishek Dhulekar Achal Ramesh Adhvaith Hattiangadi Amit Singh Anand Raorane

What is Disinvestment ? The process of reducing the stake of Government in PSUs /PSEs through sale of equity Disinvestment may be aimed at dilution or tranfer of government ownership Thus Disinvestment can lead to partial or complete disinvestment It may be inferred that Disinvestment is a Process whereas Privatision is one of its aim

What is PSU ? The public sector is the part of economic and administrative life that deals with the delivery of goods and services by and for the government After independence and with the advent of planning, India opted for a public sector oriented planning It was believed that a dominant public sector would reduce the inequality of income and wealth, and advance the general prosperity of the nation

Problems faced by PSUs Under utilization of Capacity Problem related to planning and construction of projects Problems of labour, personnel and management Lack of autonomy Low Productivity. Low capacity utilization and low efficiency Low rate of return on capital. Large number of loss making firms

Why Disinvestment ? Poor Performance of the Public Sector Units Public sector undertakings have shown a very negative rate of return on capital employed Government must not enter into those areas where the private sector can perform better Government resources locked in commercial activities should be released for their deployment in social activities Huge amount of debt overhang, which needs to be serviced and reduced before money is available to invest in infrastructure

Objective of Disinvestment To reduce the financial burden on government To improve public finances To introduce, competition and market discipline To find growth To encourage wider share of ownership To de-politicise essential services

Disinvestment - Types Offer for sale to Public at fixed price The government holds the sale of the equity shares to the publicat large at a pre determined price Strategic sale Significant management rights are transferred to the investor International offeringThis is essentially targeted at the FII (issue of GDRs)

Asset Sale and Winding up Done by the process of auction or tender

History Evolved through Finance ministers in Budget speeches 1991-92: Upto 20% divestment in selected PSUs through mutual funds and institutional investors 1992-93: FIIs were included April 93: Rangarajan Committee recommended to divest upto 49% for explicitly public sector industries and over 74% in other industries 1996-97: Disinvestment committee was set up for 3 year period

History 16th March 1999: Government decided to reduce its shareholding in non-strategic CPSEs to 26%Strategic CPSEs covered 1. Defence equipment, arms and ammunition 2. Atomic energy, except its usage in agriculture and medicine 3. Railway transport Non-strategic covered all other areas

2000-01: Focus on restructure & revival of viable CPSEs; close down PSEs which cannot be revived

History 2003-04: Government announced setting up of Disinvestment Fund & Asset Management Company to hold, manage & dispose the residual holdings of Government; successful profit-making Cos would not be privatised January 2005: Government approved, in principle1. listing of currently unlisted profitable CPSEs each with a Net Worth in excess of Rs.200 crore 2. Sale of minority shareholding of the Government in listed, profitable CPSEs 3. Constitution of a National Investment Fund

Current Disinvestment Policy 4th June, 2009: Policy on disinvestment as per Presidents Address to Joint Session of Parliament Our fellow citizens have every right to own part of the shares of public sector companies while the Government retains majority shareholding and control. My Government will develop a roadmap for listing and people-ownership of public sector undertakings while ensuring that Government equity does not fall below 51 %

Current Disinvestment Policy 6th July, 2009: The above was reiterated by Finance Minister in his Budget Speech The Public Sector Undertakings are the wealth of the nation, and part of this wealth should rest in the hands of the people. While retaining at least 51 per cent Government equity in our enterprises, I propose to encourage peoples participation in our disinvestment programme. Here, I must state clearly that public sector enterprises such as banks and insurance companies will remain in the public sector and will be given all support, including capital infusion, to grow and remain competitive

Current Disinvestment Policy 5th November 2009: Action plan for disinvesting Government equity in profit making CPSUs1. Already listed profitable CPSUs, not meeting the mandatory public shareholding of 10%, to be made compliant 2. All CPSUs earning net profit for the 3 preceding years to be listed 3. Proceeds from disinvestment to be channelised into National Investment Fund

Department of Disinvestment Set up as a separate Department on 10th December 1999 Renamed as Ministry of Disinvestment on 6th September 2001 Under Ministry of Finance from 27th May 2004

Organisation

National Investment Fund Constituted on 27th January, 2005 Realisation from disinvestment is channelised into this fund The fund money is used for investment in social sectors The fund money is also used for capital investment in profitable PSEs

National Investment Fund Fund Managers of NIFUTI Asset Management SBI Funds Management LIC Asset Management

Disinvestment ProcedureSelection of PSU by DODI 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

Disinvestment and Employees Career stability Vs. Career Growth Time based Promotions Vs. Performance based promotions Increased wages, perks Vs. Increased workload, stress Clauses are included in the disinvestment contracts to safeguard employees intrest

Disinvestment and Politics Disinvestment has been always been a political issue rather than a financial issue Every party has different opinions on disinvestment The disinvestment strategy of Govt. of India changes with every government The abolishment of the ministry of disinvestment in 2004, after the formation of Congress coalition was mainly to appease Left parties Another Example of this is the scrapping of recommendations of the Rangarajan Committee and setting up of a new committee by the new United Front Government when it came to power

Balco - Disinvestment Government approved 51% stake in BALCO, a profit making PSU Sterlite Ltd acqired it for RS.551.5 crores Govt also received Rs.224 crores from capital restructuring of BALCO before disinvestment The deal witnessed from state government and opposition parties Allegation of undervaluing BALCO were made The workers went on 67 days strike to protest the disinvest ment

NTPC - Disinvestment Disinvestment through sale and issue of equity shares Aim was to enable people to have stake in the company Listed the company in October, 2004 Retained 89.5 % stake in the company In February, 2010 further sale of 5% of the stake Received around Rs.9000 crores

REC Disinvestment Disinvestment through issue and sale of equity shares Listed in February, 2008 Retained 81.82 % stake in the company In February, 2010 further sale of 5% of the stake Also issue of fresh equity of 15% by the company

Gains through IPO

There are a total of 214 of CPSEs Presently, the Government has about Rs 2 lakh crores locked up in PSUs Government is planning to generate Rs.25000 crores per year in coming years

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