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Disinvestment in IndiaMethods , Procedures and
Problems
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Disinvestment - defined
Meaning of Investment
Conversion of money or
cash into either : - Securities
Bonds
Debentures
Or any other form of money
Converting
Money Claims
Securities
Into Money orCash
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Transfer of Government
Ownership when the dilution
is beyond 51 %
Imperative for the Government
to sell a part of its holdings
Disinvestment in a p.s.u
PSUTransfer OfOwnership
Government
GovernmentHoldings
Less than
51%
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Objectives in any disinvestment
ReduceFinancial
Burden onGovernment
Improve PublicFinances
IntroduceCompetitionwith Market
Discipline
EncourageWide Share in
Ownership
DepoliticizeEssentialServices
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Governments Strategy
Meet the growing
budget deficit
The Government knew
that they could make
more money by sellingoff their assets cheaply
Faster realization
value
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Industries reserved for PSUs since December 2002
Atomic Energy
Minerals specified inschedule to atomic Energy(Control of Production andUse) Order, 1953
Railway Transport
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Government Policies on Disinvestment
Government Policies
Bring down Government equity to 26% or lower
Restructuring of potential & viable P.S.U
Close down P.S.U that cant be revived
Protect the interest of the workers
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Methods of Disinvestment
Strategic Sale
Capital MarketOffer for saleFixed Price / Book BuildingSecondary market / Private Placement
Reduction in Equity Buy back of Shares
Conversion of equity into other instruments
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Other Methods
Trade Sale
Asset Sale and Winding up
Management/Employees Buyout (M/EBO)
Cross Sale
Sale through De-merger/Spinning off
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DISINVESTMENT PROCESS
2-3 months
3-6 months
1 week
Selection of PSU by MODI
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
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Three Methods of valuation
Discounted cash flow
Net asset value' approach
Profit Earning Capacity
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Problems in Disinvestment process
Soft Budget constraint
Policy adopted by thegovernment.
Multiple Controlauthorities
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Reasons for Slow Progress
No clear framework or policy
Disinvestment used to meet fiscal deficit
No transparency
Failure to attract foreign buyers
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Disinvestment Case Laws
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BALCOs Disinvestment
"Sterlite's offer for Balco is more than fair."- Business Wo rld, March 12,
2001.
The deal was like loot of Chattisgarhin a day-light robbery.
- Chattisgarh CM, Ajit Jogi.
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Fact File
Top line898 Cr.
PAT 56 Cr.
HC 7500
Sale of 51% stake in Balco
(Management Control)
Mines
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Case for DisinvestmentCompany running on Outdated technology. Cashreserve 500 Cr. not adequate for Modernization
Share of Operating profit in total Profit
Impact of Aluminum prices
Company recovered from state of sickness and henceright time for sale.
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Bidders for Strategic Stake
Hindalco (Birla Group)
Alcoa (US based)
Sterlite Ind. (Anil Agarwal)
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Valuation ConundrumValued on 4 Parameters (JP Morgan)Discounted cash flow
Comparative valuation
Balance sheet
Asset valuation
Control premium added to arrive at reserve price
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Analysis Paralysis
Reserve Price fixed at 514 Cr.
using 25% mark up to the valuations
arrived by DCF Model
Hue and cry by Opposition over
valuation methodology
Question Earnings Vs Asset
Value
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The Verdict
Sterlite Industriesemerges as thehighest bidderwith an offer of
551 Cr.
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Post Sell Out DramaLack of Transparency
Political Pressure & threats
Allegations of Under hand deals
Company wide Agitation, strike
continued for 67 days
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Post Sell out Drama
Threat of damage to
companys assets
Supreme Courts role
Union Management
Meetings
Agreement Signed
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SUGGESTIONS AND REMARKS
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suggestions
Clear policy & framework for disinvestment process
De-link disinvestment with budgetary control
exercise
Disinvestment process be audited by at least 2
reputed auditing firms
Creation of separate disinvestment fund
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