Disinvestment PPT

Disinvestment In India

Meaning of Investment

Equities

Bonds

Debentures

Any Other Form

Conversion of Money or Cash

into either

What is government’s investment?

• Government owns stake in PSUs

• Public’s Property

• Under President’s name

Meaning of Disinvestment• Disinvestment involves the conversion of money claims ,securities

into money or cash by the government

• The withdrawal of capital from a company or corporation

• Disinvestment involves sale of only part of equity holdings held by the government to private investors

• Disinvestment process leads to dilution of ownership

• Privatization refers to the transfer of ownership from government to private investors

• Disinvestment is called “partial privatization”

Approaches to disinvestmentsThere are two approaches to disinvestments viz –

The government sells its equity holdings in PSU’s to public or private parties or MFI’s or other Financial Institutions.

when PSUs are generally directed by the government to issue their equity share to public, private parties, financial institution and mutual fund with a view to reduce its control.

Objectives of Disinvestment

• To generate revenue for the government

• To provide for social welfare

• To reduce budget deficit

• To introduce the big reform - FRM

Contd…

To cool down stock & realty markets.

To help determine correct valuation of company.

To change the management of a sick unit.

Companies benefit – to raise loans easily & at low rates

Contd…

To make companies abide by SEBI rules & regulations

To overcome the problem of corruption & inefficiencies.

To encourage wider share of ownership

To provide employees ESOPs.

Cons of disinvestments Loss of public interests.• Unknown companies• Lack of recommendation• Slow down in stock market

Fear of foreign control.

Issues with workers.

Less number of bidders.

Problem in case of monopoly company

Methods Of Disinvestment• Strategic Sale

– Companies where Government is willing to give significant management control

– Pricing: Optimisation / maximisation – Target investor set: Investors with strategic fit

• Capital Market– Offer for sale to public at a fixed price – Offer for sale to public through book building – Secondary market operation– International offering – Private placement– Auction

Methods Of Disinvestment

• Reduction in Equity– Conversion of equity into another instrument

• Asset Sale & Winding up

VALUATION OF COMPANY ADOPTED BY GOVERMENT

1. NET ASSET METHOD:

• This will indicate the net assets of the enterprise as shown in the books of accounts. It does not reflect the true position of profitability of the firm as it overlooks the value of intangibles such as goodwill, brands, distribution network etc. This model is more suitable in sale of asset and winding up method of disinvestment

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 to the present time 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.

Ministry Of Disinvestment• Set up in 1999

• Assisted by Advisors

• Business Allocated to Ministry of Disinvestment:

– All matters related to disinvestment

– Decisions on the recommendations of the Disinvestment Commission

– Implementation of disinvestment decisions

Disinvestment Process

Core Group of Secretaries

Disinvestment Commission

Ministry of Finance

Cabinet Committee of Disinvestment

(CCD)

Core Group of Secretaries on

Disinvestment (CGD)

Inter-Ministerial Group (IMG)

Sends Recommendations

Inputs from adm. Ministry and Department of Disinvestment

Constitutedfor Implementation

Does Monitoring

1

5

43

2

6

7

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 the recommendations

– To approve the three-year rolling plan and the annual programme of disinvestment




Ministry of Finance


(CCD)


Disinvestment (CGD)





Does Monitoring

1

5

43

2

6

7

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




Ministry of Finance


(CCD)


Disinvestment (CGD)





Does Monitoring

1

5

43

2

6

7


• Chaired by Secretary, Ministry of Disinvestment

• Inter-ministerial consultation

Phase wise Details of Disinvestment Year Target of Disinvestment Actual Receipts

1991-1992 2500 3037.74

1992-1993 2500 1912.51

1993-1994 3500 -

1994-1995 4000 4843.10

1995-1996 7000 168.48

1996-1997 5000 379.67

1997-1998 4800 910.00

1998-1999 5000 5371.11

1999-2000 10000 1860.14

Year Target of Disinvestment Actual Receipts

2000-2001 10000 1871.26 2001-2002 12000 5657.69

2002-2003 12000 3347.98

2003-2004 4500 15547.41

2004-2005 4000 2764.87

2005-2006 NO TARGET FIXED 1569.68

2006-2007 NO TARGET FIXED -

2007-2008 NO TARGET FIXED 4181.39

2008-2009 NO TARGET FIXED -

2009-2010 25000 4259.90

2010-2011 40000 On going

NATIONAL INVESTMENT FUND On 27th January 2005, the Government had decided to constitute a “National Investment Fund” (NIF) into which the realisation from sale of minority shareholding of the Government in profitable CPSEs would be channelized. The Fund would be maintained outside the Consolidated Fund of India. The income from the Fund would be used for the following broad investment objectives: -

75 per cent of the annual income of the Fund will be used to Invest in social sector projects which promote education, health care and employment;

25 per cent of the annual income of the Fund will be in the form of Capital investment in selected profitable and revivable Public Sector Enterprises that yield adequate returns in order to enlarge their capital base to finance expansion/ diversification.

SALIENT FEATURES OF NIFThe corpus of the National Investment Fund

will be of a permanent nature. The Fund will be professionally managed to

provide sustainable returns to the Government, without depleting the corpus. Selected Public Sector Mutual Funds will be entrusted with the management of the corpus of the Fund.

It was decided that NIF would not be a part of THE UNION BUDGET from 2009-2012

However there are signs that NIF might be used partially to reduce the Fiscal Deficit

Fund Managers at NIFThe following Public Sector Mutual Funds have been appointed initially as Fund

Managers, to manage the funds of NIF

i) UTI Assets Management Company Limited

ii) SBI Funds Management Company (Private) Limited

iii) Jeevan Bima Sahayog, Asset Management Company Limited

The total amount of Rs. 994.82 crore received from the sale of Government equity in PGCIL has been handed over to the Fund Managers by the Finance Minister as per the allocation given below :

(i)UTI Asset Management Company Pvt. Ltd. Rs.368.91 crore

(ii)SBI Funds Management Pvt. Ltd. Rs.368.91 crore

(iii)LIC Mutual Fund Asset Management Rs.257.00 crore

Company Ltd. -----------------------

TOTAL Rs.994.82 crore

The corpus of NIF as on 31 March, 2009 stood at Rs.1,875 crore

Current Policies

• Revitalize the disinvestment program and plan to generate at least Rs. 25,000 crore per year

• Complete the process of selling of 5-10% equity

• The Government has announced a disinvestment target of Rs. 40,000 crore for the fiscal 2010-11

• The Government had also announced its intentions of raising the minimum public shareholding in listed companies to 25% revised by 10%

Current Proposal under Pipeline IOC & ONGC :- • Two of the countries largest oil and gas players Indian Oil Corporation

(IOC) and Oil and Natural Gas Corporation (ONGC)• Stakes to be disinvested : 10% from IOC & 5 % from ONGC• Together 24,000 crore approx

SAIL :-• The Union cabinet on Thursday cleared a move to disinvest 10% of the

government’s equity stake in Steel Authority of India Ltd (SAIL) to raise an estimated Rs8,000 crore.

Issues in Disinvestment

• Reviving privatization policy • Economic resurgence • Capital raising activity on rise • Expanding equity base • Employees Issues

Reviving privatization policy • Last opportunity for the UPA

Government• Needs to be leveraged by bold policy

initiatives• Poor physical and social infrastructure

such as power, irrigation, rural connectivity, education, and health

• Sustainability of high economic growth will be circumscribed by how effectively the government deals with these challenges

Economic Resurgence

• The Centre has the major responsibility of improving the budgetary health on a tight leash its internal indebtedness

• The opportunities afforded by the excellent valuations, based on the performance of many profit-making PSUs, must be leveraged

• Why should profit-making PSUs shy away or be denied the opportunity of raising new equity and in the process also divest a part of the existing equity capital is an arguable question

Expanding equity base

• Reactivated disinvestment programme will provide a powerful thrust to spread the equity culture and strengthen the capital market

Employees 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 of the economy over the last decade

Case Study 1:- BALCO

Bharat Aluminium Company Limited

Company profile• Set up in 1965 at Korba ,Chhattisgarh

• Manufacture aluminium rods and semi-fabricated products

• Fabrication unit in Bidhanbagh

• 270 MW power plant

• Refining capacity of BALCO is 2, 00,000 tonnes

THE DISINVESTMENT DECISION

• Government of India had 100% stake before 1997

• Disinvestment Commission recommended immediate divestment of 40%

• 26% within 2 years and the remaining stake at an appropriate time thereafter.

• Later, in 1998 the Disinvestment Commission revised its recommendation

…….conti

• Government to consider 51% divestment

• Transfer of Management

• BALCO's equity being reduced by 50%

• Government received Rs. 244 crore from the capital restructuring

• Strategic sale process for BALCO started in late 1997 and finally came to end in 2nd March 2001

• 51% stake was sold to Sterlite Industries @ Rs. 551 crore.

• Government thus recovered Rs 827 crore from this privatization.

POST SALE SCENARIO

Number of doubts have been raised

• Transparency

• Valuation

• Protection of employees’ interests

Case Study 2:

COAL INDIA

• Indian state controlled co. - KOLKATA

• WORLD’S LARGEST COAL MINER - Rs 51,925 Cr (FY2009-10)

• In April 2011, CIL was conferred the MAHARATNA status

• CIL – 85% OF COAL PRODUCTION IN INDIA

• TURNOVER – Rs.386.31 billion & TAX PAID - Rs35.75 billion

COAL INDIA IPO

• The Cabinet Committee on Economic Affairs (CCEA) cleared the divestment of equity in Coal India Ltd

• COAL INDIA’s 10 % STAKE - DISINVESTED

• IPO – SUBSCRIBED 15.28 times

• COLLECTED - Rs 2,40,000 crore

• LISTED 40% HIGHER THAN IPO PRICE

SHOULD INDIA GO FOR COMPLETE PRIVATISATION?

• Oil & gas sector

• Education

• Defense

• Banking sector

• Steel, Mobile & IT

SHOULD INDIA GO FOR COMPLETE PRIVATISATION?

NO

Disinvestment PPT

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