A PROJECT REPORT

ON

disinvestment strategy

UNDER THE SUBJECT OF

Strategy management

SUBMITTED BY-

HITESH M VEKHANDE.

M.Com,Sem-1,

Batch 2013-2014.

UNDER THE GUIDANCE OF

PRIN: N.K. PHADAKE.

A report submitted in partial fulfilment of requirements of

Arts And Commerce Collage Wada UMROTHE ROAD, PARLI NAKA, WADA, THANE 421303.

DECLARATION

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I hereby declare that the project title Disinvestment Strategy submitted as a part of the study of Master Of Commerce is my original work. has been done under the guidance of Princ: N.K.Phadake. The project has not formed the basis for the award of any other degree, diploma, associate ship, fellowship or any other similar titles.

Date: (Hitesh .M. Vekhande)

Place: Wada (m.com sem-1)

(Roll no:5036)

Certificate

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This is to certify that the study presented by Mr. Hitesh .M. Vekhande. To the Arts And Commerce Collage Wada in part completion of M.Com Sem-1 under the title Disinvestment Strategy has been done under the guidance of Princ: N.K.Phadake.

The project is in nature of original work that has been submitted for any Diploma of Arts And Commerce Collage Wada.

Signature of the Guide/Signature of the Director.

(Princ: N.K.Phadake)

Acknowledgement

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I express my sincere thanks to my all M.COM faculty, for guiding me right

form the inception till the successful completion of the project. I sincerely

acknowledge them for extending their valuable guidance, support for literature

Prin. N.K.Phadake, critical reviews of project and the report and above all the

moral support she had provided to me with all stages of this project. This project

has helped us to learn the intricacies of restructuring and we are grateful to them

for making this learning possible.

Last but not the least we would like to thank each and every one who has

Helped us in our learning process.

TABLE OF CONTENT

Sr.No.

Particulars PageNo.

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1 Introduction 06

2 Definitions Of Disinvestments 08

3 Objectives Of Disinvestment 09

4 Importance Of Disinvestment 10

5 Benefits Of Disinvestment 11

6 Disinvestments-A Historical Perspective 14

7 Policy On Public Sector And Disinvestment 16

8 Current Government Policy 18

9 Disinvestment Strategy 20

10 The Disinvestment Process 31

11 The Step By Step Disinvestment Procedure 32

12 SEBI'S Role In Disinvestment 33

13 RBI'S  Role  In  Disinvestment 33

14 A Case Of Bharat Heavy Electricals Ltd. (BHEL) 34

15 Conclusion 35

16 Suggestion 35

17 Bibliography 36

INTRODUCTION

Disinvestment is usually a final stage of our strategic reviews or monitoring. As such it usually occurs after a longer process has reached its conclusion. This guide describes the formal

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stages for disinvestment but does not detail the discussions and other stages you would go through before reaching this point.

The process for disinvestment comprises a number of stages:

identifying the possible need to disinvest substantiating the case for disinvestment formally notifying the organisation that we are considering disinvestment reviewing the case in the light of any response from the organisation or any action they

plan to take making the decision to disinvest formally notifying the organisation of the decision to disinvest and the date that funding

will end agreeing a programme for the disinvestment and how the long-term implications for the

organisation are to be managed

These stages provide a clear process to ensure that the decision to disinvest is correct and that we can defend such a decision against any challenge. All stages need to be clearly documented and the documents held on the files for the regularly funded organisation.

At any point it may become apparent that the evidence does not support a case for disinvestment and as such we would not take the process any further. However any real concerns that led to the initial consideration of disinvestment must be fed back to the organisation and recorded on our files. If these concerns worsen or arenot dealt with over a longer period it may lead us to consider the organisation for disinvestment in the future.

Although much of the following guidance makes a distinction between effective management and portfolio review as reasons for disinvestment, they are not mutually exclusive. We would also consider disinvestment where an organisation had breached the conditions of funding. Because of the delicate and confidential nature of the issues that surround disinvestment it is important to handle all communication sensitively and agree a formal strategy within the department and region that is appropriate to the circumstances.

At any point through the disinvestment process we may wish to discuss alternative funding routes for the organisation, including Grants for the arts. We must be clear in these discussions that Grants for the arts should not be seen as a like for like replacement for regular funding. The organisation can apply for Grants for the arts at any time for project based activity

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and organisational development and this funding can fill some of the gaps left by disinvestment. However we must emphasise that all applications will follow the same assessment process and a successful outcome cannot be guaranteed. If a grant is given it will be time limited and the organisation would have to apply again for any future activity.

Where we use alternative resources such as managed funds, not as project funding, but to fund to regularly fund an organisation, we are not disinvesting from the organisation. The source of the funding is not relevant to substance of the relationship. As such we must continue to treat them as a regularly funded organisation and they will be subject to same funding agreement, the same conditions and an annual review and assessment

DEFINITIONS OF DISINVESTMENTS:

Capital investment shrinkage caused by a firm's failure tomaintain or replace capital assets being used up or by thefirm's sale of capital goods such as equipment.

Disinvestment is a process of transferring property from public ownership.

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(By.Wordnet Dictionary)

Disinvestment refers to the use of a concerted economic boycott, with specific emphasis on liquidating stock, to pressure a government towards policy or regime change.

The term also refers to the reduction of investment in firms, industries or countries for reasons of political or social policy

Objectives of Disinvestment

The new economic policy initiated in July 1991 clearly indicated that PSUs had shown a very negative rate of return on capital employed. Inefficient PSUs had become and were continuing to be a drag on the Government’s resources turning to be more of liabilities to the Government than being assets. Many undertakings traditionally established as pillars of growth had become a burden on the economy. The national gross domestic product and gross national savings were also getting adversely affected by low returns from PSUs. About 10 to 15 % of the total gross domestic savings were getting reduced on account of low savings from PSUs. In relation to the capital employed, the levels of profits were too low. Of the various factors responsible for low profits in the PSUs, the following were identified as particularly important: 

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Price policy of public sector undertakings Under–utilisation of capacity Problems related to planning and construction of projects Problems of labour, personnel and management Lack of autonomy 

Hence, the need for the Government to get rid of these units and to concentrate on core activities was identified. The Government also took a view that it should move out of non-core businesses, especially the ones where the private sector had now entered in a significant way. Finally, disinvestment was also seen by the Government to raise funds for meeting general/specific needs.In this direction, the Government adopted the 'Disinvestment Policy'. This was identified as an active tool to reduce the burden of financing the PSUs. The following main objectives of disinvestment were outlined: 

To reduce the financial burden on the Government To improve public finances To introduce, competition and market discipline To fund growth To encourage wider share of ownership To depoliticise non-essential services

Importance of Disinvestment

Presently, the Government has about Rs. 2 lakh crore locked up in PSUs. Disinvestment of the Government stake is, thus, far too significant. The importance of disinvestment lies in utilisation of funds for:

Financing the increasing fiscal deficit

Financing large-scale infrastructure development

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For investing in the economy to encourage spending

For retiring Government debt- Almost 40-45% of the Centre’s revenue receipts go towards repaying publicdebt/interest 

For social programs like health and education

Disinvestment also assumes significance due to the prevalence of an increasingly competitive environment, which makes it difficult for many PSUs to operate profitably. This leads to a rapid erosion of value of the public assets making it critical to disinvest early to realize a high value.

Benefits of Disinvestment

Some overall benefits of Disinvestment, irrespective of the approach used are as follows:For the Government

1. Raising valuable resources for the government, which could be used to bridge the fiscal deficit for one, but also for various developmental projects in key areas such as infrastructure. The Financial Times (20th May 2009) quotes a report brought out by the French securities firm CLSA to state: "A reduction in shareholding to hypothetically 51% across all the state-owned entities could bring in USD 62 bn (Rs. 2.9 lakh crore approximately) at current market prices (thus valuing the government holdings in listed state-owned companies at Rs. 8.8 lakh crore). Even a 10% stake sale in the ten large public state undertakings that are likely disinvestment candidates can bring in USD 17 bn (Rs. 80000 crore approximately)". Another such estimate by Delhi-based PRIME Database

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suggests that if the Government follows up on its promise of bringing down its equity stake in listed CPSEs to 48%, it can mobilise Rs. 1089 crore going by the current market valuations.

2. Apart from generating a one-time sale amount, a lot of these stake sales would also result in annual revenues for the government, as has been shown in the past. 

3. The government can focus more on core activities such as infrastructure, defense, education, healthcare, and law and order.

4. A leaner government with reduction in the number of ministries and bureaucrats.

For the Markets and Economy

1. Brings about greater efficiencies for the economy and markets as a whole 

For the Taxpayers

1. Letting go of these assets is best in the long term interest of the tax payers as the current yield on these investments in abysmally low. Even if the funds from the sale are not utilised for bridging fiscal deficit, a much better utilisation of these 'stuck' funds would be into critical sectors such as healthcare, education and infrastructure

2. Unlocking of shareholder (in this case the citizens of India) value

For the Employees

1. Monetary gains through ESOPs and preferential issue of shares2. Pay rises, as has been seen in past divestments3. Greater opportunities and avenues for career growth- further employment generation

For the PSUs

1. Greater autonomy leading to higher efficiencies

Benefits specific to each approach used for Disinvestment

Complete PrivatisationIn most parts of the world, it has been proven that Privatisation brings the maximum returns to the tax payer, thus making it the best form of Disinvestment. Since complete control is given off by the government, the reforms are immediate, and the results start showing soon.

Majority SaleA majority stake sale to a strategic buyer has its positives in getting a superior valuation (though sometimes not as good as an outright sale) for the government purely due to market dynamics. With some of the PSUs being virtual monopolies, private players have a lot of interest in acquiring stakes in them. It was because of this reason that this became the chosen vehicle for Disinvestment in the early 2000's. 

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Minority SaleGiven the current political and social compulsions, complete privatisation may not be a solution in the Indian context. Even a majority stake sale would be met with opposition. Offloading a part of the government's equity by way of a minority stake sale is the only workable option, as in this case, the control would still be with the government. Minority stakes can be sold either to selected private players, or to the public by way of a Public Offer or auctioned off to financial institutions. Offloading minority stakes to private players does not make sense for the government since valuations would be driven down by the fact that the government still retains control/ decision making of the company. This has been proven in transactions in the past wherein the P-E ratios typically accompanying such a sale were found to be low. On the other hand, a minority stake sale via a Public Offer has several benefits. 

For the Government

1. Minority Stake sales via Public Offers provide benefits of long term capital appreciation- Disinvestment done in a staggered manner can help the government realize the real 'value' of these PSUs, as has been shown by recent PSU IPOs wherein the valuation that the market has given to the PSUs is far higher than the original offer price. For example, in the case of NTPC, the Government sold each share at Rs. 62 in its IPO in October 2004. In its FPO in February 2010, the Government was able to realise Rs. 201 for the same share!

For the PSU 

1. Listing leads to better and timely disclosures, bringing in greater transparency and professionalism, thus protecting the interest of the investors

2. Greater efficiency by way of being accountable to thousands of shareholders3. Listing provides an opportunity to raise capital to fund new projects/undertake

expansions/diversifications and for acquisitions. An initial listing increases a company's ability to raise further capital through various routes like preferential issue, rights issue, Qualified Institutional Placements and ADRs/GDRs/FCCBs, and in the process attract a wide and varied body of institutional and professional investors.

4. Listing raises a company's public profile with customers, suppliers, investors, financial institutions and the media. A listed company is typically covered in analyst reports and may also be included in one or more of indices of the stock exchanges.

For the Employees

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1. Though there could be opposition from employees of some PSUs, this can be countered and also turned into a favourable situation by offering ESOPs/preferential issue of shares to them. This would provide tangible monetary benefits to them, and also make them an interested party in better performance of their companies.

For the Markets and Economy

1. These PSU IPOs present the best opportunity of widening the equity investing retail base by providing greater and safer investment opportunities. Curbs and measures, however, would need to be put in place to ensure that institutional investors do not run away with the bulk of this sale and only retail participation is allowed in these issues. Public offers have been one of the frequently used techniques in the UK to transfer state assets and businesses to private ownership. The method has been fairly successful, having increased the shareholding population from 4% to 25%. For example, British Telecom alone created 2.1 million shareholders in the UK, when privatized.

2. Listed PSUs already form about 30% of the total market capitalisation. With more PSUs being listed, this would provide a greater depth and width to our capital market

A minority stake sale via Auctioning to financial institutions also has certain benefits: 

1. Bidding by a group of large, informed investors would provide the highest likelihood of the assets receiving the best valuation 

2. The process takes relatively little time as the modalities are less demanding than those for a full-scale public offer process that can take many months. 

3. This will provide a direct conduit for interested foreign investors

Retail participation can come in through the mutual funds, Provident Funds and the NPS.

Disinvestments-A Historical Perspective

For the first four decades after Independence, the country was pursuing a path of development in which the public sector was expected to be the engine of growth. However, the public sector overgrew itself and its shortcomings started manifesting in low capacity utilisation and low efficiency due to over manning, low work ethics, over capitalisation due to substantial time and cost over runs, inability to innovate, take quick and timely decisions, large interference in decision making process etc. Hence, a decision was taken in 1991 to follow the path of Disinvestment. 

Period from 1991-92 - 2000-01

The change process in India began in the year 1991-92, with 31 selected PSUs disinvested for Rs.3,038 crore. In August 1996, the Disinvestment Commission, chaired by G V Ramakrishna was set up to advice, supervise, monitor and publicize gradual disinvestment of

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Indian PSUs. It submitted 13 reports covering recommendations on privatisation of 57 PSUs.Dr R.H.Patil subsequently took up the chairmanship of this Commission in July 2001.However, the Disinvestment Commission ceased to exist in May 2004. The Department of Disinvestment was set up as a separate department in December, 1999 and was later renamed as Ministry of Disinvestment from September, 2001. From May, 2004, the Department of Disinvestment became one of the Departments under the Ministry of Finance.Against an aggregate target of Rs. 54,300 crore to be raised from PSU disinvestment from 1991-92 to 2000-01, the Government managed to raise just Rs. 20,078.62 crore (less than half). Interestingly, the government was able to meet its annual target in only 3 (out of 10) years. In 1993-94, the proceeds from PSU disinvestment were nil over a target amount of Rs. 3,500 crore. The reasons for such low proceeds from disinvestment against the actual target set were: 

1. Unfavorable market conditions 2. Offers made by the government were not attractive for private sector investors 3. Lot of opposition on the valuation process 4. No clear-cut policy on disinvestment 5. Strong opposition from employee and trade unions 6. Lack of transparency in the process 7. Lack of political will

This was the period when disinvestment happened primarily by way of sale of minority stakes of the PSUs through domestic or international issue of shares in small tranches. The value realized through the sale of shares, even in blue chip companies like IOC, BPCL, HPCL, GAIL & VSNL, however, was low since the control still lay with the government. Most of these offers of minority stakes during this period were picked up by the domestic financial institutions. Unit Trust of India was one such major institution. 

Period from 2001-02 - 2003-04This was the period when maximum number of disinvestments took place. These took the shape of either strategic sales (involving an effective transfer of control and management to a private entity) or an offer for sale to the public, with the government still retaining control of the management. Some of the companies which witnessed a strategic sale included:

BHARAT ALUMINIUM CO.LTD. CMC LTD. HINDUSTAN ZINC LTD. HOTEL CORP.OF INDIA LTD. (3 PROPERTIES: CENTAUR HOTEL,JUHU BEACH,

CENTAUR HOTEL AIRPORT,MUMBAI & INDO HOKKE HOTELS LTD.,RAJGIR) HTL LTD. IBP CO.LTD. INDIA TOURISM DEVELOPMENT CORP.LTD.(18 HOTEL PROPERTIES) INDIAN PETROCHEMICALS CORP.LTD. JESSOP & CO.LTD. LAGAN JUTE MACHINERY CO.LTD.,THE

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MARUTI SUZUKI INDIA LTD. MODERN FOOD INDUSTRIES (INDIA) LTD. PARADEEP PHOSPHATES LTD. TATA COMMUNICATIONS LTD.

The valuations realized by this route were found to be substantially higher than those from minority stake sales. During this period, against an aggregate target of Rs. 38,500 crore to be raised from PSU disinvestment, the Government managed to raise Rs. 21,163.68 crore. 

Period from 2004-05 - 2008-09The issue of PSU disinvestment remained a contentious issue through this period. As a result, the disinvestment agenda stagnated during this period. In the 5 years from 2003-04 to 2008-09, the total receipts from disinvestments were only Rs. 8515.93 crore. 

2009-10 onwardsA stable government and improved stock market conditions initially led to a renewed thrust on disinvestments. The Government started the process by selling minority stakes in listed and unlisted (profit-making) PSUs. This period saw disinvestments in companies such as NHPC Ltd., Oil India Ltd., NTPC Ltd., REC, NMDC, SJVN, EIL, CIL, MOIL, etc. through public offers. However, from 2011 onwards, disinvestment activity has slowed down considerably. As against a target of Rs.40,000 crore for 2011-12, the Government was able to raise only Rs.14,000 crore.

Policy on Public Sector and Disinvestment

The Industrial Policy Resolution of 1956 gave the public sector a strategic role in the economy. Massive investments were made over the next four decades to build the public sector. Many of these enterprises successfully expanded production, opened up new areas of technology and built up a reserve of technical competence in a number of areas.

Nevertheless, after the initial concentration of public sector investment in key infrastructure areas, public enterprises began to spread into all areas of the economy including non-infrastructure and non-core businesses. 

The Government announced on 24th July 1991 the ‘Statement on Industrial Policy’ which inter-alia included Statement on Public Sector Policy. The statement contained the following decisions: 

“Portfolio of public sector investments will be reviewed with a view to focus the public sector on strategic, high-tech and essential infrastructure. Whereas some reservation for the public sector is

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being retained, there would be no bar for area of exclusivity to be opened up to the private sector selectively.

Similarly, the public sector will also be allowed entry in areas not reserved for it.

Public enterprises which are chronically sick and which are unlikely to be turned around will, for the formulation of revival/rehabilitation schemes, be referred to the Board for Industrial and Financial Reconstruction (BIFR), or other similar high level institutions created for the purpose. Social security mechanism will be created to protect the interests of workers likely to be affected by such rehabilitation packages.

In order to raise resources and encourage wider public participation, a part of the government’s shareholding in the public sector would be offered to mutual funds, financial institutions, general public and workers.

Boards of public sector companies would be made more professional and given greater powers.There will be a greater thrust on performance improvement through the Memorandum of Understanding (MOU) System through which managements would be granted greater autonomy and will be held accountable. Technical expertise on the part of the Government would be upgraded to make the MOU negotiations and implementation more effective.

To facilitate a fuller discussion on performance, the MOU signed between Government and the public enterprises would be placed in Parliament. While focusing on major management issues, this would also help place matters on day-to-day operations of public enterprises in their correct perspective”.

In accordance with the decision announced in the aforesaid statement on industrial policy on public sector and also as per budget speech of July 1991, in order to encourage wider participation and promote greater accountability, the Government equity in selected CPSEs was offered to mutual funds, financial institutions, workers and the general public.

In the subsequent years, there have been constant policy changes. While on one hand, disinvestment as a policy has been much debated, there have also been changes and disagreements in terms of the different approaches that can be taken for disinvestment to happen.

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Current Government Policy

The President of India’s address on 4th June 2009 unveiled the agenda of the Congress- led Government at the Centre. In keeping with the election manifesto of the Congress Party, the President’s address mentioned: “Our people 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%.” 

In line with the Presidents’ address, the Economic Survey (2008-09) stated the following as the Governments plan of action: "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 in previously identified profit making non-navratnas. List all unlisted public sector enterprises and sell a minimum of 10% of equity to the public. Auction all loss making PSUs that cannot be revived. For those in which net worth is zero, allow negative bidding in the form of debt write-off."  

The subsequent Union Budgets have also taken disinvestment on the agenda of the Government.  

The Government has also announced its intentions of raising the minimum public shareholding

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in listed companies to 25%. This figure was subsequently revised to 10%. This, besides bringing more quality paper in the market, shall also lead to disinvestment as the Government shall have to dilute its present holding to ensure the minimum public shareholding in the listed PSUs. At current prices, this could mean a divestment amount of over Rs. 101084 crore, in case 25% public shareholding were to be achieved and Rs.10339 crore, in case 10% public shareholding were to be achieved. Different Approaches to DisinvestmentsThere are primarily three different approaches to disinvestments (from the sellers’ i.e. Government’s perspective)

Minority Disinvestment

A minority disinvestment is one such that, at the end of it, the government retains a majority stake in the company, typically greater than 51%, thus ensuring management control. Historically, minority stakes have been either auctioned off to institutions (financial) or offloaded to the public by way of an Offer for Sale. The present government has made a policy statement that all disinvestments would only be minority disinvestments via Public Offers.Examples of minority sales via auctioning to institutions go back into the early and mid 90s. Some of them were Andrew Yule & Co. Ltd., CMC Ltd. etc. Examples of minority sales via Offer for Sale include recent issues of Power Grid Corp. of India Ltd., Rural Electrification Corp. Ltd., NTPC Ltd., NHPC Ltd. etc.

Majority Disinvestment 

A majority disinvestment is one in which the government, post disinvestment, retains a minority stake in the company i.e. it sells off a majority stake. Historically, majority disinvestments have been typically made to strategic partners. These partners could be other CPSEs themselves, a few examples being BRPL to IOC, MRL to IOC, and KRL to BPCL. Alternatively, these can be private entities, like the sale of Modern Foods to Hindustan Lever, BALCO to Sterlite, CMC to TCS etc.Again, like in the case of minority disinvestment, the stake can also be offloaded by way of an Offer for Sale, separately or in conjunction with a sale to a strategic partner.

Complete Privatisation

Complete privatisation is a form of majority disinvestment wherein 100% control of the company is passed on to a buyer. Examples of this include 18 hotel properties of ITDC and 3 hotel properties of HCI.Disinvestment and Privatisation are often loosely used interchangeably. There is, however, a vital difference between the two. Disinvestment may or may not result in Privatisation. When the Government retains 26% of the shares carrying voting powers while selling the remaining to a strategic buyer, it would have disinvested, but would not have ‘privatised’, because with 26%, it can still stall vital decisions for which generally a special resolution (three-fourths majority) is required.

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Disinvestment strategy

1.Identifying The Possible Need For DisinvestmentThe possible need for disinvestment would normally be identified either by the lead

officer through on-going monitoring and the annual review of an organisation or through considering the organisation as part of an overall portfolio review. Where the officer identifies that disinvestment is to be considered for an organisation they should discuss this with their director or head of department and inform the regional executive director.

The consideration of disinvestment and the reasons for this must be recorded on the file for the regularly funded organisation. This can be via a file note, a copy of minutes of a meeting or a copy of the memo to or from the executive director.

A)Effective Management-

Through on-going monitoring and the annual reviews certain weaknesses in organisations may come to light that undermine the effectiveness of the funding we provide. These weaknesses may pertain to any aspect of the organisation but where significant will lead to the organisation being considered for disinvestment. Weaknesses would be considered significant where:

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they have a material effect on the delivery of an artistic programme1, or the administration costs of the organisation are disproportionately high, or the financial management of the organisation is such that we are not sure what the funds

are being spent on or is at risk of going into unplanned deficit

Our first recourse is rarely to threaten disinvestment but to work with the organisation to find a way of addressing these problems. There are some circumstances where the concerns we have are so serious that we will have to move immediately to the formal process for disinvestment prior to having an opportunity to discuss this with the organisation.

In most cases we should have discussed our concerns with the organisation prior to having reached this stage. Where we are considering disinvestment it is usually through lack of progress or worsening of the situation in relation to weaknesses that have already been identified.

When we reach this stage we should consider if it is an effective use of the Arts Council’s funding to offer the organisation an opportunity to address the organisational weaknesses before we make the decision to disinvest. This will depend on the strategic importance of the organisation and the nature of the weaknesses and whether they can be addressed within a reasonable time.

b) Review of portfolio-

As well as helping us form a view on individual organisations the annual reviews give us a consistent body of knowledge that helps inform how well individual organisations contribute to the overall portfolio and to meeting our strategic aims.

Any review of the portfolio and the resulting removal of organisations will be driven by the Arts Council’s arts development strategies, regional strategies and/or financial strategies. Removing organisations from the portfolio would normally be in response to the need to make it more effective in meeting the aims of the Arts Council and fit within the resources available. The Arts Council’s policies and priorities will change from time to time and the portfolio would be expected to change to meet these priorities. Changes to the portfolio can arise from:

the portfolio as a whole not meeting the current priorities for the Arts Council individual organisations not contributing effectively to meeting the current priorities for

the Arts Council as a part of the portfolio the existing portfolio not meeting the current or future needs of the region or sector restriction or reduction in the overall funding available

1.

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The portfolio review will identify which organisations contribute most effectively to meeting our strategic objectives within the resources available through regular funding. As funding is limited we need to consider how funding is distributed and may be required to reduce the number of organisations receiving regular funding in order to maintain the value of grants for those who remain in the portfolio. Those organisations that are not key to meeting our strategies, do not form an effective part of our portfolio or for whom regular funding is not the most effective way of funding should be considered for disinvestment. The effective management of individual organisations would be a factor in considering how effective their contribution is.

The planning process framework gives more details of how regularly funded organisations are assessed against each other and how organisations would be identified for possible disinvestment.Where changing circumstances require it the Arts Council will have to be able to make changes to the overall portfolio over short periods of time. This may be in response to the changing political or financial environment or to urgent needs that have been identified.

2. Substantiating the case for disinvestment

Where we are considering disinvestment we need to be sure that the reasons for disinvestment are sound and are backed up by credible evidence. It is important to concentrate on the material issues, as it is easier to substantiate one or two significant issues than a number of smaller issues. Where a possible case for disinvestment has been identified, the lead officer should gather evidence supporting the perceived need for disinvestment.

Evidence can include:

information we generate: notes of the current and previous annual reviews; current and previous risk assessments; current and previous annual surveys; correspondence; minutes of meetings with the organisation; notes of telephone conversations

information generated by the organisation itself: management accounts; financial statements; board papers; audience figures; tour schedules; programme information; business plans

information generated by a third party: auditor’s reports; independent assessments; show reports; reviews

any other relevant information

Except where the organisation has breached a condition of funding the organisation should be reviewed in a regional context and/or in relation to other similar organisations we fund. A useful tool can be to compile comparable and relevant information on these organisations.

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As part of building a case for disinvestment the lead officer should consult with relevant colleagues within their region and nationally and, where appropriate, external partners regarding the implications of disinvesting from the organisation. This is especially important if the organisation has a presence in other regions or has a national role.

a) Effective Management-

Before we reach the stage of considering disinvestment we would normally have discussed the organisational weaknesses previously. The starting point for any case would be the notes of meetings and correspondence that relate to these discussions. As such it is important to maintain the regularly funded organisations file and keep detailed notes of meetings and any correspondence relating to concerns we have raised.

Where disinvestment is being considered because of concerns about the effective management of the organisation, the lead officer should carry out a risk assessment going into detail on the areas that we have identified as concerns. The lead officer should write up the answers of the risk assessment questions and reference the answers to the evidence supporting the findings. This evidence must be retained and held on the organisations file.

The comparators that might be useful when considering the effective management of an organisation can range from financial position and performance to organisation structure and board experience. A range of comparative information should be used and should include information specific to the areas that might support our view of ineffective management and general information from which the size, funding and structure of organisation can be gauged. This comparison would normally cover more than one year and at least four other organisations.

Once happy with the case the regional executive director must ratify the case before the organisations are contacted.

b) Review of portfolio-

The annual review allows us to collect consistent information on organisations across the portfolio and how they contribute to our strategic aims. Using the annual review as a starting point, the planning framework sets a matrix against which organisations can be assessed against our aims, national art form strategies and regional strategies.

All assessments must be in line with standard guidance and criteria issued across the Arts Council and the assessment criteria must be linked to our stated aims and strategies.

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To inform the review comparative information across the portfolio would normally be prepared to give a context to the decisions. Looking at the portfolio as a whole the regional Senior Management Team would propose the most effective portfolio to meet the aims and agreed strategies through regular funding. The scoring arising from the individual assessments will be a guide in making the decision but the decision can be affected by other factors. The guidance on regularly funded organisation assessment sets out how these decisions will be made.

When considering disinvestment the question should be asked: why does the organisation not contribute to our strategies and aims while other organisations do? The lead officer must provide evidence to support the assessment for any organisation for which disinvestment is being considered.

After the evidence has been compiled, the regional Senior Management Team will agree which organisations are to continue to be considered for disinvestment and notified.

3. Formally notifying the organisation that we are considering disinvestment

a) Where the proposal is to disinvest without offering an opportunity to address concerns-

Once the case for disinvestment has been established the Arts Council must notify the organisation, confirming the reasons this is being considered and allow the organisation an opportunity to comment and feed into the final decision. In most cases this can take place through discussions with the organisation either face to face or on the telephone. Where the organisation is informed verbally a note of the discussion must be made and any comments recorded. These notes must be placed on the organisations file.

In all circumstances we should write to confirm our proposal to disinvest providing full details of the case that will be considered. We should attach the full documentation that will be submitted to inform the decision including any covering note or report. Within the letter we should offer the organisation an opportunity to respond within four weeks if they have comments that might affect the final decision. This letter marks the point at which the formal timetable for disinvestment starts. Appendix 1 is a sample letter.

All letters should include:

details of the reasons for considering disinvestment

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the basis for on which any response should be made: accuracy; any mitigating circumstances; any relevant information that they feel has not have been taken into consideration

In some circumstances, especially where the proposal is driven by a financial strategy to address restricted or reduced resources, it should be acknowledged that there may be little time to discuss the matter with the organisations affected and it is unlikely that any comments would influence the final decision. However we should inform the organisation that disinvestment is being considered at the earliest opportunity, especially if they had not been aware of the possibility of disinvestment up until this point.

b) Where an opportunity is being offered for the organisations to address organisational weaknesses-

We should write to the organisation to confirm our concerns and offer the organisation an opportunity to respond to these concerns. The letter should also ask the organisation to submit a detailed plan for addressing the concerns we have identified and when this should be submitted. We would normally expect a plan to be submitted no later than three months of our notifying the organisation. The time allowed to develop and deliver a plan will vary depending on:

the issues to be addressed whether the organisation has been offered an opportunity to address these concerns

previously

We will not offer the organisation an additional period to address the reasons for disinvestment if we do not feel it is an effective use of our continued funding or if the decision to disinvest is part of a strategic review of the portfolio. In these circumstances we would notify them of the date on which the final decision will be made and when funding would cease should that decision be to disinvest.

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4. Reviewing the case in the light of any response from the organisation or any action they plan to take

The response may highlight inaccuracies in the reasons we have given for disinvestment, bring to our attention factors we had not taken into consideration and address any perceived misconceptions. We must review the proposal to disinvest in the context of any response. If no response is made or the response does not materially change the case we should continue with the recommendation to disinvest.

Where the organisation has been offered an opportunity to address the issues identified we would expect an effective plan for addressing the concerns to be submitted within three months although the time to develop a plan would depend on the issue. We would provide support where relevant but the plan must be developed by the organisation itself.

For a plan to be considered effective it must:

be realistic occur within a reasonable time effect change at the organisation address the problems/failings that have been identified

We may offer additional time to ensure a plan is in place if reasonable steps are seen to have been taken already, but if we have not reached an agreed way forward within six months we would continue with the disinvestment process.

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The agreed plan must include clear milestones and we would monitor the organisation against these milestones. The frequency of the monitoring would depend on the issues being addressed, but should be at least quarterly. If over an agreed period usually six months to a year sufficient progress has not been achieved we would continue with the disinvestment process.

5. Making the decision to disinvest

Once a case has been made and the organisation has been offered an opportunity to respond, a recommendation must be made to regional council. This recommendation must provide details of:

the original case the response of the organisation, any actions they have already taken to address these concerns, any plans the organisation has developed to continue to address concerns lead officer assessment responses of consultation with national art form directors and networking groups and

external partners

There should be nothing contained within the case for disinvestment made to the regional council that the organisation has not been made aware of or allowed to comment on.

On the basis of this information the regional council will make a decision on whether to disinvest.

Where the recommendation comes as part of a portfolio review the recommendations will form part of the overall case for investment for the region or part thereof.

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Where the recommendation is on an individual organisation either because lack of effective management or breach of conditions the lead officer should prepare the recommendations.

For organisations we have offered the opportunity to actively address the problems the lead officer should review formally and report on progress at six monthly intervals or if there had been any significant change in the position of the organisation, either positive or negative. On the basis of these reports the regional council would be asked to agree:

to disinvest to continue monitoring progress to formally remove the organisation from notice of potential disinvestment

6. Formally notifying the organisation of the decision to disinvest and the date that fundin will end.

After the decision to disinvest has been made we should formally notify the organisation in writing. The letter should confirm that we are ceasing on-going funding and when. A standard letter is at appendix 2.

We should cease funding at the end of the current funding agreement or if there is less than six months to run an additional period can be offered to allow the organisation to manage the process. For the vast majority of our organisations six months will be adequate notice of the cessation of funding.

For some organisations we can consider extending the period of funding beyond six months if we feel this is required either to ensure the long-term future of the organisation or to manage the closure of the organisation in an effective manner. We would not fund the organisation for more than eighteen months after the formal notification of disinvestment.

The organisation will be asked to consider the implications of the end of our regular funding and how they will manage this process. They should submit a detailed plan of the activity up until the end of our funding.

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a) Disinvestment and Grants for the arts

We recognise that some of the organisations we are disinvesting from deliver key provision and play a strategic role, helping us to deliver our aims. Our role is to advise and support them on next steps and each lead officer will make a judgement about what is appropriate in each case.

Whilst Grants for the art is not a permanent source of revenue funding it will fill some of the gaps left by disinvestments. It funds projects and time limited activities with a clear start and end. It has and will continue to support the arts infrastructure by providing grants to a number of existing arts organisations and programmes of arts activity. These organisations and activities may be of longer-term strategic significance helping us to deliver our aims.

Where we feel it is appropriate for an organisation to apply for Grants for the arts and wish to encourage this we should confirm this in the letter confirming our disinvestment decision. The following are a likely range of options for funding from Grants for the arts for disinvested regularly funded organisations. To ensure that we are communicating consistently it provides a paragraph for inclusion in the disinvestments letters.

Option Programme of arts activities

(over one year or a number of years) Text for letter We would particularly like to discuss with you the opportunities for funding

from Grants for the arts for a programme of arts activities for [insert] year[s]Notes A reasonable contribution to on-going overheads (including salaries) and/or

additional overheads directly related to the programme of activities can be included (where these are not funded from elsewhere). 

Option Repeat activities

(eg an annual festival, programme of regular established work)Text for letter We would particularly like to discuss with you the opportunities for funding

from Grants for the arts for your annual festival/programme of work.Notes We would encourage the organisation to consider how the activity is

developing over time as this would strengthen its ability to meet the assessment criteria.

A reasonable contribution to on-going overheads (including salaries) and/or

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additional overheads directly related to the programme of activities can be included (where these are not funded from elsewhere). 

Option Organisational development support

Text for letter We would particularly like to discuss with you the opportunities for funding from Grants for the arts for organisational development support.

Notes Organisational development funding can support a range of activities aimed at improving the long-term stability of the organisation. This can include time limited salary costs.    

Staff should also familiarise themselves with the following information sheet:

There are circumstances where we do not consider Grants for the arts as appropriate or do not anticipate an ongoing funding relationship and as such an additional paragraph as above would be inappropriate.

7. Agreeing a programme for the disinvestment and how the long-term implications for the organisation are to be managed.

Once the decision to disinvest has been confirmed the organisation must consider the implications and whether it wishes to continue trading or winding up. We would recommend that wherever appropriate the organisation take professional advice on how to manage this process.

The organisation should submit a programme of activity for final period of funding including proposed costs. We would fund the organisation’s on-going running costs to the end of the funding term up to the value of the remaining grant. The organisation must submit a schedule of costs for this period and we should assess what proportion of what costs we can fund. We would not fund any historic debt that the organisation had accrued. We would not fund any costs for activities that fall outside the agreed period of funding.

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If the organisation is to wind up the final period of funding should be used to support staff and artists affected by the closure and dispose of assets. If there is more than six months left of the existing funding we may seek agreement with the organisation to shorten the period of funding if this is felt to be appropriate.

If the organisation wishes to continue trading, the final period of on-going funding should be used to make changes to the organisation to enable it to survive without our regular funding. This may be through changing its funding profile and attracting alternative funding or changing the way the organisation operates.

THE DISINVESTMENT PROCESS

The disinvestments process is related to the procedure adopted by the Government. The procedure involves the valuation of shares and modalities to be adopted for sale of such shares. There are three broad methods, which are used for valuation of shares.

1.  Net Asset Value Method:

This will indicate the net assets of the enterprises as shown in the books of accounts. If shows the historical values of assets. It is cost price less depreciation provided so far on assets. It does not reflect position of profitability.

2.  Profit Earning Capacity Value Method:

The profit earning capacity is generally based on the profits actually earned or anticipated. It is excess of earnings over expenditure. It does not really indicate the intrinsic value of the enterprises.

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3. The Discounted Cash Flow Method:

This technique is popularly used to evaluate viability of an investment proposal. In this method the future incremental cash flows are forecasted and discounted into present value by applying cost of capital rate. This method indicates the intrinsic value of the enterprises. This method is a far more comprehensive and complicated method of reflecting the expected income flows to the investors.

Out of these three methods the discounted cash flow method is greatest relevance though it is the most difficult.

THE STEP BY STEP DISINVESTMENT PROCEDURE

Proposals for disposal of any PSU (Public Sector undertaking), based on recommendations of DC (Disinvestment Commission) or CCD (Cabinet Committee on Disinvestment).

After CCD clears, selection of Advisor through competitive bidding process. The Advisor assists GOI (Government) in the preparation and issue of EOI (Expression

of Interest) in newspapers. After receipt of EOI from interested parties, prospective bidders are short-listed. Due diligence (DD) by concerned PSU. Based on DD by PSU, the Advisor prepares Information Memorandum for giving it to

the short-listed bidders who has entered into a confidentially Agreement. Advisor, with the help of Legal Advisor, prepares Share Purchase Agreement. Discussions among Advisors, Govt. & representatives of PSU. Valuation of the PSU in accordance with the standard national practice. The share Purchase Agreement (SPA) is finalized based on the

reactions received from the prospective bidders.

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These Agreements are then vetted by the Minister of Law and areapproved by Govt.

Thereafter these are sent to prospective bidders for inviting finalbidding bids.

The bids received are examined, analyzed and evaluated by the IMG(Inter Ministerial Group) and placed before the CCD for final approval of bids.

After the transaction is completed, all papers and documents relating to it are too turned to the C&AG (Controller and Auditor general of India, to enable C&AG to undertake an evaluation of the disinvestments, for placing it in parliament and releasing it to the public.

In the disinvestments process mentioned above, the DOD (Department of Disinvestment) is assisted at each stage by an IMG (Inter Ministerial Group) comprising, Officers from the Ministry of Finance, Department of Public Enterprises, and the administrative Ministry, Department of controlling PSUs (Dep't. of (HI&PE) and Officers of Department of disinvestments & Advisors.

SEBI'S ROLE IN DISINVESTMENt

As per regulation 10 of the SE13I (Acquisition of Shares) Regulation, 1997 No acquirer shall acquire shares or voting rights in a company, unless such acquirer makes a public announcement to acquire shares of such company in accordance with the regulations.

Hence SEBI's Takeover Code gets triggered when a person (Strategic Partner) acquires more than 15% of the Voting equity shares is required to make a public offer to purchase shares not less than 20% of the equity of the  company. This provision has a great impact on the strategic sale transaction. For instance, in such case the Strategic Partner would be required to buy another 20% of the shares from public, which means SP, has to buy total 45% of the shares.

RBI'S   ROLE   IN   DISINVESTMENT

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After the Completion of the several successful disinvestments in PSUs by GOI, RBI has issued guidelines governing the provisions of bank finance for PSU disinvestments exempting the banks from the restrictions earlier imposed on lending against shares and lending for acquisition of corporate control. Now a days all PSU disinvestments are funded primarily by pledging of the shares acquired through the disinvestments with additional/third party security of varying degrees as appropriate from bidder to bidder.

As a safety policy, the government insists that the successful bidder remains committed to not disturbing the status quo with the PSU for at least 3 years that means the shares initially purchased from government are subject to a contractual 'lock-in', requiring the winning bidder not to sell these shares.

Even a financial pledge of these shares has to be approved by the Government and enforcement to the pledge requires government approval. RBI guidelines impose a condition that the bank finance may be extended only for acquiring shares from the government and under open offer prescribed under the SEBI Takeover Code. Subsequent acquisition can't be funded and hence put and call options will not enjoy bank funding.

RBI guidelines permit bank finance only for disinvestments approved by the government and therefore, bidders for state levels PSUs are excluded from access to bank finance. RBI has also directed to banks not to lend unless the bidder has an excellent track of record of servicing the loans from the banking systems.

A Case of Bharat Heavy Electricals Ltd. (BHEL)

Decision on disinvestment strategy ONGC, BHEL deferred

A decision on the disinvestment strategy for two leading state run companies - ONGC and BHEL was deferred after a meeting of the empowered group of ministers.It was expected that in wake of the new guidelines issued by the market regulator SEBI, the government will once again kick start the divestment process in these two companies, which may fetch it around Rs 14,000 crore.

"We have discussed today the implications of the new SEBI guidelines. We are yet to take a decision in regard to mode and timing to be adopted (for divestment in ONGC)," said Oil Minister Jaipal Reddy.According to a senior finance ministry official, the panel of ministers will meet within this fortnight to finalise the modalities for stake sale. The government which has a disinvestment target of Rs 40,000 crore has raised on Rs 1,145 crore so far.

Oil minister, Reddy expressed hope that government would be able to complete 5% stake sale in oil major ONGC in this fiscal.

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"Both the options are open (follow-on public offer and auction route). It will be our attempt to do something in this fiscal," he said, adding

that the government has not taken a view and will meet once again when the deputy chairman of planning commission is available.

Under the institutional placement programme (IPP), shares can be sold only to qualified institutional buyers. The offer for sale (OFS) route will help promoters offload their stakes through a separate window in stock exchanges.

The government plans to sell 5 % stake in ONGC , which will bring down its stake to 69.14% from 74.14%.

Disinvestment Secretary Mohammad Haleem Khan, who was present in the meeting, said the Cabinet approval will be sought, if required, for the IPP or auction route.On the proposed disinvestment in BHEL, he added, the discussion on the matter was not taken up because "Heavy Industries Minister Praful Patel was not there." Government intends to sell its 5% stake in the company.

The government is expected to go ahead with the disinvestment process in seven state-run companies in which it holds more than 90% stake. The companies include MMTC, HMT, National Fertilisers, Neyveli Lignite, RCF, and STC.

Conclusion

The following conclusion is drawn from the analysis

a) The profitability ratio such as profit net profit to sales and capital employed is poor in PSE's This shows the performance of PSE's is declining rapidly.

b) The targeted amount and actual realized disinvestments amount showed that Government has not fulfilled the target except in two rest years in 1994-95 and 1998-99. The realized value is much lower than the targeted amount.

c) If the government borrows amount equivalent to the money realized from disinvestments, the interest burden will be much higher than the dividend received from the equities sold.

Suggestion

The disinvestments process should cover not only for loss making PSE's but also the profit making units

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Bibliography

http://www.bsepsu.com/importance-disinvestment.asphttp://wiki.answers.com/what is disinvestment http://wiki.answers.com/Q/What_are_the_disadvantage_of_disinvestmenthttp://www.investopedia.com/terms/d/disinvestment.asphttp://en.wikipedia.org/wiki/Disinvestmenthttp://www.slideshare.net/ellenwhite1291/disiinvestment-strategieshttp://www.ey.com/US/en/Newsroom/News-releases/News_Strategic-Disinvestment-Activity-Expected-to-Increase-in-Next-Two-Yearshttp://financial-dictionary.thefreedictionary.com/Disinvestmenthttp://www.thefreedictionary.com/disinvested

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