Freaking Investments

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PROJECT

ON

DISINVESTMENT IN INDIA

A FAILURE STORY

Submitted To Submitted By

MR.G.S.KHERA JUBIN ANAND (FM-B-06)

NAVEEN RAMNANI (FM-B-06)


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Acknowledgement

Intuition and concepts constitute ...the elementsof all our knowledge, so that neither concepts

without an intuition in some way corresponding tothem, nor intuition without concepts, can yield

knowledge. In a similar way the credit of developingthis project goes to many others who helped us inbuilding both our concepts and intuitions.

We are indebted to our project guide Mr.G.S.Kherafor providing us with a challenging & interesting

project. We owe the credit of developing this projectto him. Without his guidance realization of thisproject would not have been possible.

We would also like to thank our batch mates for thediscussions that we had with them. All these have

resulted in the enrichment of our knowledge andtheir inputs have helped us to incorporate relevantissues into our project.

Regards

NAVEEN RAMNANI (FM-B-06)JUBIN ANAND (FM-B-07)


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Executive Summary

Privatization, a key component of economic liberalization remaineddormant for the nearly the entire first decade of significanteconomic reforms in India. The usual explanations have been thatweak governments could not overcome the many vested interests orthat there has been ideological resistance to economic reformsamong Indias elites.

Indian privatization came out of the shadows, however, when theformer Indian President Dr. A.P.J.Abdul Kalam stated, It is

evident that disinvestment in public sector enterprises is

no longer a matter of choice but an imperative The

prolonged fiscal haemorrhage from the majority of these

enterprises cannot be sustained any longer,"in his openingaddress to Parliament in the 2002 budget session.

How does one explain both the gradualism during the 1990s andthe recent episodic acceleration of privatization in India and what

does it reveal both about state capabilities and the strength ofsocietal actors?

This report argues that it was not vested interests alone, butinstitutional structures, in particular those embedded in the

judiciary, parliament and Indias financial institutions, that accountfor the lag between the onset of economic liberalization and

privatization and its episodic nature. Changes in the perceived costs

of the status quo of state-owned enterprises also played a role in thetiming of reforms. Just as the external debt crisis forced the initialround of economic reforms, the growing internal debt problem andthe fiscal crisis of the Indian state has increased theopportunity cost of state-owned enterprises (SOEs). The

passage of time has also resulted in significant changes in Indian


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policymakers and citizens attitudes regarding the relativeeffectiveness of state and markets in commercial activities, as wellas their assumptions about the Indian state being a guardian of the

public interest.


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TABLE OF CONTENT

Chapter 1 A background

ObjectiveRelevance of studyMethodologyLiterature review

Public sector performance since 1950 by R NagarajDisinvestment in India by Sudhir NairDisinvestment in India, I loose and you gain by P. Baijal

Brief Introduction

Chapter 2 Public Sector in India

Evolution of Public sectorObjective of formation of PSUsProblem of Public sector undertakingsGrowth in Public sector

Chapter 3 Disinvestment-Definition, Methods and

ProcessesDefinitionIndian scenarioTypes of disinvestmentObjectivesDisinvestment processMethods adopted in IndiaLegal issues

Chapter 4 - Disinvestment in India-Policies, procedure andproceeds

BackgroundTimeline

Phase 1 (1991 92 to 1995 96)Industrial reforms


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Rangarajan committee,1993Yearwisedisinvestment

Phase 2 (1996 97 to 1997 98)Disinvestment commission, 1996

Review of recommendations given byDisinvestment commission

Year wise disinvestmentPhase 3 (1998 99 to 2007 08)

Year wise disinvestmentNational investment fund

Phase 4 (2008 09 to present)Year wise disinvestment

The line up for disinvestmentNational Investment Fund, 2005

Summary of disinvestment

Chapter 5- Case studies

Modern food industries (India) LtdBALCOVSNL

Chapter 6 Critical Analysis

Review of Disinvestment in PrivatisationPerformance of PSUs after PrivatisationProblems of Corporate governanceDisinvestment Not a great piece of reformComparative experience

Chapter 7 Suggestions Bibliography


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Background

OBJECTIVE:

1. To Analyze the Disinvestment process in Indian PublicSector.

2. To study the disinvestment done was a Success or a Failurefor the Indian Economy.

RELEVANCE OF STUDY:

The report aims to study the evolution of disinvestment in Indiafrom the scratch and in thorough detail so as to, not onlyunderstand the need and the procedure of the same, but also to beable to critically evaluate the strategy and its severalimplementations till date.

The project enables us to discover and highlight several instancesand facts and conclude that the disinvestment was not efficientlyconducted. We also conclude that the objectives behinddisinvestment, stated by the government way back in 1991havefailed miserably.

After such an insightful analysis, we are in a position to say that

though disinvestment in India had several bounding objectives, ithas been a failure story and much has to be done to realize the

benefits. The group could even come up with some solutions andalterations that can be implemented to help the citizens of Indiareap the benefits of the strategy of disinvestment to a greaterextent.


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METHODOLOGY:

The report tries to study and analyze the disinvestment in India

from its very scratch. We begin studying the post independenceera, understanding the strategy of Public Sector Units used by thegovernment for common good, then pin-pointing the loop holesand the consequent shortcomings of this strategy, thus identifyingan emergent need for disinvestment.

We further study the objectives of disinvestment and the processfollowed for the same. A detail study over a timeline of eighteen

years is done, dividing this entire span into three phases. Thisstudy has helped us to cortically evaluate the disinvestment inseveral sectors and comment on the current situation i.e. 2008onwards.

Several legendary cases of disinvestment like the MFIL, BALCO,VSNL, Maruti Udyog Ltd., Lagan Jute Mill etc have beendeveloped to sheer details. This has enabled us to study the

situation then and comment upon their worthiness. We have goneone step ahead to state several in depth facts and conclude thatneither, the disinvestment was not carried out the way it must have

been nor have the funds realized been used for the purposesintended.

LITERATURE REVIEW

1. PUBLIC SECTOR PERFORMANCE SINCE 1950, A

FRESH LOOK -BY: R. NAGARAJ

The paper elicits that since the mid-1980s, the public sectors sharein domestic investment has been nearly halved, but its output share


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has remained roughly constant at about a quarter of GDP,suggesting a sustained rise in productivity over nearly two decades.The paper defines three major evidences for the improvement in

performance.

a rise in physical efficiency in electricity generation

a fall in public sector employment growth an increase in central public sector enterprises profitability

(even after excluding the petroleum sector)

The author then goes ahead to question why then the public sectorfinances remained adverse. In electricity, passenger road transport

and railways the revenue-cost ratio is less than one, and hasdeclined since the early 1990s. Moreover, over the last 40 years,the public sector price deflator declined by 17 percentage points,relative to the GDP deflator. Hence, the author concludes thatcorrect pricing and collecting user charges are probably key tosetting public sector finances right.

2. DISINVESTMENT IN INDIA BY: SUDHIR NAIB

The liberalization of the Indian economy remains an ideologicaland operational battleground. There is mainstream nationalconsensus on the need and irreversibility of reforms, butwidespread disagreement about its pace and the sharing of its

benefits. A basic aspect of the withdrawal of the state from theeconomic sphere has been the divestment to private parties of theshares (and in some cases control) of public sector enterprises(PSUs) or state-owned enterprises (SOEs)]. This has affectedthousands of Indians, and triggered fierce political debates.


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3. DISINVESTMENT IN INDIA, I LOSE AND YOU GAIN-

BY: PRADIP BAIJAL

The process of disinvestment in India has been fraught withchallenges and controversies. Disinvestment in India: I lose andYou Gain, written by one who has been at the centre of all

privatization debates and controversies, brings to light the factsthat surround the disinvestment story. It underlines the mostcompelling rationales behind privatization: relief to the taxpayerand the simultaneous need for funds for infrastructure developmentand Social-sector investment. It discusses the impact of

privatization and disinvestment on companies, economies andother stakeholders, and serves to initiate a healthy and wellinformed debate on the basis of facts.

INTRODUCTION

In macroeconomics, especially after the Latin American debt and

inflationary crisis in the 1980s, privatization was widely advocatedas a quick and sure means of restoring budgetary balance, to revivegrowth on a sustainable basis.

At the micro level, the change in ownership is often advocated toincrease domestic competition, hence efficiency; and encourage

public participation in domestic stock market all of which isbelieved to promote popular capitalism that rewards risk takingand private initiative, that is expected to yield superior economicoutcomes.

Employing about 19 million persons, Public Sector currentlycontributes about a quarter of Indias measured domestic output.Administrative departments (including defence) account for about2/5th of it, the rest comes from a few departmental enterprises (like


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railways and postal services), and a large number of varied non-departmental enterprises producing a range of goods and services.These include, close to 250 public sector enterprises (PSEs) ownedand managed by the central government, mostly in industry and

services (excluding the commercial banks and financialinstitutions). The contribution of varied publicly owned andmanaged entities to national development is widely acknowledged,their poor financial return has been a matter of enduring concern especially since the mid-1980s when, for the first time, the centralgovernments revenue account turned negative an imbalance thathas persisted ever since.

In 1991, a small fraction of the equity in selected central PSEs wassold to raise resources to bridge the fiscal deficit. Thoughquantitatively modest (as will be seen later), the disinvestmentsignaled a major departure in Indias economic policy. While therehave been instances of sale of publicly owned enterprises asrunning concerns on pragmatic considerations, it is only in the lastdecade that such sales (and sale of limited equity) acquired thestatus of public policy.


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PUBLIC SECTOR IN INDIA

EVOLUTION OF PUBLIC SECTOR:

Prior to Independence, there were few Public Sector Enterprisesin the country. These included the Railways, the Posts andTelegraphs, the Port Trusts, the Ordinance Factories, All IndiaRadio, few enterprises like the Government Salt Factories, QuinineFactories, etc. which were departmentally managed. India at thattime was predominantly an agrarian economy with a weakindustrial base, low level of savings, inadequate investments andinfrastructure facilities. In view of this type of socio-economic setup, our visionary leaders drew up a roadmap for the developmentof Public Sector as an instrument for self-reliant economic growth.

In early years of independence, capital was scarce and the base ofentrepreneurship was also not strong enough. Hence, the 1956Industrial Policy Resolution gave primacy to the role of the Statewhich was directly responsible for industrial development.

Consequently the planning process (5 year Plans) was initiatedtaking into account the needs of the country.

The new strategies for the public sector were later outlined in thepolicy statements in the years 1973, 1977, 1980 and 1991. Theyear 1991 can be termed as the watershed year, heraldingliberalization of the Indian economy.The public sector provided the required thrust to the economy and

developed and nurtured the human resources, the vital ingredientfor success of any enterprise; public or private.


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OBJECTIVES FOR THE FORMATION OF PSUS

The main objectives for setting up the Public Sector Enterprises asstated in the Industrial Policy Resolution of 1956 were:

To help in the rapid economic growth and industrializationof the country and create the necessary infrastructure foreconomic development

To earn return on investment and thus generate resourcesfor development

To promote redistribution of income and wealth To create employment opportunities;

To promote balanced regional development To assist the development of small-scale and ancillary

industries To promote import substitutions, save and earn foreign

exchange for the economy.

PROBLEMS OF PUBLIC SECTOR

UNDERTAKINGS

The most important criticism levied against public sectorundertakings has been that in relation to the capital employed, thelevel of profits has been too low. Even the government hascriticised the public sector undertakings on this count. Of thevarious factors responsible for low profits in the public sectorundertakings, the following are particularly important: -

1. Price policy of the Public Sector undertakings.2. Underutilization of capacity.3. Problem related to planning and construction of projects4. Problems of labour, personnel and management5. Lack of autonomy


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DISINVESTMENT: DEFINITION,

METHODS

DEFINITION:

Disinvestment refers to the action of an organization or thegovernment in selling or liquidating an asset or subsidiary. Insimple words, disinvestment is the withdrawal of capital from acountry or corporation.

Some of the salient features of disinvestment are: Disinvestment involves sale of only part of equity holdings

held by the government to private investors.

Disinvestment process leads only to dilution of ownershipand not transfer of full ownership. While, privatization refersto the transfer of ownership from government to privateinvestors.

Disinvestment is called as Partial Privatization.

TYPES OF DISINVESTMENT

There are various types of disinvestment. Some of them are asfollows:

1. OFFER FOR SALE TO PUBLIC AT FIXED PRICE:

In this type of disinvestment, the government holds the sale of theequity shares to the public at large at a pre determined price.Examples:-MFIL, BALCO, CMC, HTL, IBP, HZL, PPL, andIPCL.


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2. STRATEGIC SALE:

In this type, significant management rights are transferred to theinvestor i.e. majority of equity holdings is divested. Examples:

-Offer of 1 million shares of VSNL, listing of ONGC IPO.

3. INTERNATIONAL OFFERING:

This is essentially targeted at the FII (foreign institutionalinvestors). Ex:-GDR of VSNL, MTNL etc.

4. ASSET SALE AND WINDING UP:

This is normally resorted to in companies that are either sick orfacing closure. This is done by the process of auction or tender.Ex:-Auction of sick PSUs.

OBJECTIVES OF DISINVESTMENT:

Privatization intended to achieve the following:

Releasing large amount of public resources

Reducing the public debt

Transfer of Commercial Risk

Releasing other tangible and intangible resources

Expose the privatised companies to market discipline

Wider distribution of wealth

Effect on the Capital Market Increase in Economic Activity.


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METHODS ADOPTED IN INDIA:

There are three broad methods involved, which are used invaluation of shares.

1. NET ASSET METHOD:

This will indicate the net assets of the enterprise as shown in thebooks of accounts. It shows the historical value of the assets. It isthe cost price less depreciation provided so far on assets. It does

not reflect the true position of profitability of the firm as itoverlooks the value of intangibles such as goodwill, brands,distribution network and customer relationships which areimportant to determine the intrinsic value of the enterprise. Thismodel is more suitable in case of liquidation than in case ofdisinvestment.

2. PROFIT EARNING CAPACITY VALUE METHOD:

The profit earning capacity is generally based on the profitsactually earned or anticipated. It values a company on the basis ofthe underlying assets. This method does not consider or project thefuture cash flow.

3. DISCOUNTED CASH FLOW METHOD:

In this method the future incremental cash flows are forecasted anddiscounted into present value by applying cost of capital rate. Themethod indicates the intrinsic value of the firm and this method isconsidered as superior than other methods as it projects future cashflows and the earning potential of the firm, takes into accountintangibles such as brand equity, marketing & distributionnetwork, the level of competition likely to be faced in future, risk


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factors to which enterprises are exposed as well as value of its coreassets.

LEGAL ISSUES IN THE DISINVESTMENTPROCESS:

Legality of the disinvestment process has been challenged on avariety of grounds that slowed the sale of public assets. However,there were two significant judicial rulings that broadly set the

boundaries of the D-P process. These are:

1. Privatisation is a policy decision, prerogative of the executivebranch of the state; courts would not interfere in it.

2. Privatisation of the PSE created by an act of parliament wouldhave to get the parliamentary approval.

While the first ruling gave impetus for strategic sale of manyenterprises like Hindustan Zinc, Maruti, and VSNL etc. since2000, the second ruling stalled the privatisation of the petroleum

companies, as government was unsure of getting the laws amendedin the parliament.


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DISINVESTMENT IN INDIA

POLICY, PROCEDURE AND

PROCEEDS

The basic objective of starting Public Sector in India was to buildinfrastructure and rapid economic growth. However, a number of

problems such as low productivity, over-manning and othereconomic compulsions like deterioration of balance of payment

position and increasing fiscal deficit led to the adoption of new

approach toward the public sector in 1991.

BACKGROUND:

1. LOW PRODUCTIVITY OF INVESTMENT

From 1950-51 to 1980-81, Indias growth rate was roughlyconstant but savings and investment rate more than doubled. From

the table it can be seen that it was because of low productivity thatIndias growth was slow.

Year 1950-51 1960-61 1970-71 1980-81 1989-90

Investment(Current Prices,% GDP) 10.2 15.7 16.6 22.7 24.1

Investment(Constant 1980-81 prices,

%GDP) 14.7 18.1 18.7 22.7 21.8

Domestic Savings(Current Prices, %GDP) 10.4 12.7 15.7 21.2 21.7


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2. FISCAL DEFICIT OF THE CENTRAL GOVERNMENT

The fiscal deficit of the central govt rose consistently from 4% inmid 1970s to 8% of GDP in 1985-86.

Fiscal Deficit of Government 1975-76 to 1990-91

YearFiscalDeficit

BudgetDeficit

PrimaryDeficit

RevenueDeficit

MonetisedDeficit

1975-76 4.1 0.5 2.5 1.1 0

1980-81 6.2 1.8 4.3 1.5 2.6

1981-82 5.4 0.9 3.4 0.2 21982-83 6 0.9 3.8 0.7 1.9

1983-84 6.3 0.7 4 1.2 1.9

1984-85 7.5 1.6 5 1.8 2.6

1985-86 8.3 2 5.5 2.2 2.4

1986-87 9 2.8 5.8 2.7 2.4

1987-88 8.1 1.7 4.7 2.7 2

1988-89 7.8 1.4 4.2 2.7 1.6

1989-90 7.8 2.3 3.9 2.6 3.1

1990-91 8.4 2.1 4.4 3.5 2.8

A significant factor was governments non-plan expenditureand an inefficient interest payment system.

Again the gulf war of 1990 brought the nation to the brink ofinternational debt.

There were huge net outflows of NRI deposits from October1990 and continued till mid 1991.

Foreign Exchange Reserves were reduces $ 1 Billion whichcould support only two weeks imports.


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Inflation was staring at 14%

On July6, 1991 47 tons of gold were transferred from RBI toBank of England, London. Already 20 tons of gold were sold

in International market through State Bank of India.

TIMELINE:

The disinvestment announcement was made on 4March, 1991during the interim budget session for 1991-92 under theChandrashekhar government. The Policy of disinvestment has

evolved over the years. This period can be broadly divided into 4phases.

The first phase being 1991-92 to 1995-96 where partialdisinvestment was taken in piecemeal manner.

Second Phase 1996-97 to 1997-98, an effort toinstitutionalize the disinvestment process was undertaken on

a firm footing by constituting the DisinvestmentCommission.

The third Phase 198-98-99 to 2007-08 where Department ofDisinvestment (Now a Ministry) and National investmentfund was formed to look after the disinvestment process andthe funds generated from it.

Fourth phase, the Current one where government isplanning to sell its stake in NTPCL, SJVNL, RECL andNMDCL.


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PHASE 1 (1991-92 TO 1995-96):

Phase one Started when Chandrashekhar government, while

presenting the interim budget for the year 1991-92 declareddisinvestment up to 20%.The objective was to broad-base equity,improve management, enhance availability of resources for thesePSEs and yield resources for exchequer.

INDUSTRIES RESERVED FOR PUBLIC SECTOR PRIOR

TO 1991

1. Arms and Ammunition and allied items of defence equipment.2. Atomic energy.3. Iron and steel.4. Heavy castings and forgings of iron and steel.5. Heavy plant and machinery required for iron and steel

production, for mining.6. Heavy electrical plants.

7. Coal and lignite.8. Minerals oils.9. Mining of iron ore, manganese ore, chrome ore, gypsum.10. Mining and processing copper, lead, zinc, tin.11. Minerals specified in the Schedule to the Atomic Energy.12. Aircraft.13. Air transport.14. Rail transport.15. Ship building.

16. Telephones, Telephone cables, Telegraph and Wirelessapparatus (excluding radio receiving sets).


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INDUSTRIES RESERVED FOR PUBLIC SECTOR

AFTER JULY, 1991

1. Arms and Ammunition and allied items of defence equipment,aircraft and warship.2. Atomic Energy.3. Coal and Lignite.4. Mineral Oils.5. Mining of iron ore, manganese ore, chrome ore, gypsum,sulphur, gold and diamond.6. Mining of copper, lead, zinc, tin, molybdenum and wolfram.7. Minerals specified in the schedule to Atomic Energy Order,

1953.8. Railway Transport.

RANGARAJAN COMMITTEE 1992-1993

The committee included Dr. C. Rangarajan, the then MemberPlanning commission as chairman and Dr. Y. Venugopal Reddy as

Member Secretary. The committee gave its report on April, 1993.

The Highlights of the committee report are as follows:

1. 49% of equity could be divested for industries explicitlyreserved for the public sector

2. In exceptional cases the public ownership level could be kept

at26%.

3. Holding 51% or more equity by the Government wasrecommended only for six Schedule industries, namely:

Coal and lignite

Mineral oils


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Arms, ammunition and defence equipment

Atomic energy

Radioactive minerals

Railway transport

DISINVESTMENT IN 1991-92:

A) FIRST TRANCHE OF DISINVESTMENT (DECEMBER,

1991):

Out of 244 public enterprises 41 were selected, but 10 were

dropped on the grounds of being consultancy firms, negative assetvalue or they incurred losses in previous financial year.Bids were invited from 10 financial institutions/ mutual fundswhich consisted of 825 bundles each consisting of 9 PSEs. A totalof 710 bids for 533 bundles were received from 9 mutual funds/institutions and 406 bundles for a total value of Rs14.2billion weresold. Unit Trust of India was the major purchaser accounting forRs. 7.75 billion of the sale.

B) SECOND TRANCHE OF DISINVESTMENT

(FEBRUARY, 1992):

In second tranche, the reserve price fixed per bundle was Rs10.08crore. Bids were invited from 36 institutions and banks. A total ofRs.1611 crore were realised with Unit Trust of India again beingthe major purchaser. The Shares of Metal Scrap TradingCorporation remained unsold.


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Details of the PSEs Divested in 1991-92

Name of the Enterprise

No. OfShares(in

crore)

% of

Disinvestment

Andrew Yule (AY) 0.1015 9.6

Bharat Earth Movers Ltd. (BEML) 0.6 20

Bharat Electronic Limited (BEL) 1.6 20

Bharat Heavy Electricals Limited (BHEL) 4.8952 20

Bharat Petroleum Corporation Limited (BPCL) 1 20

Bongaigaon Refinery and Petrochemicals Ltd. (BRPL) 3.9961 20

Cochin Refineries Ltd. (CRL) 0.4219 10.01

Computer Maintenance Corporation (CMC) 0.2528 16.69

Dredging Corporation of India Ltd. (DCI) 0.0402 1.44

Fertilizers and Chemicals Ltd. (FACT) 0.5232 1.54

Hindustan Machine Tools Ltd. (HMT) 0.4268 5.43

Hindustan Organic Chemicals Ltd. (HOCL) 0.987 20

Hindustan Petroleum Corp. Ltd. (HPCL) 1.2768 20

Hindustan Photo Films Mfg. Co. Ltd. (HPF) 1.919 16.05

Hindustan Zinc Ltd. (HZL) 8.0746 20

Hindustan Cables Ltd. (HCL) 0.1669 3.64

Indian Petrochemical Corp. Ltd. (IPCL) 3.72 20

Indian Railway Construction, Co. Ltd. (IRCON) 3.72 20

Indian Telephone Industries Ltd. (ITI) 0.0013 0.27

Madras Refineries Ltd. (MRL) 1.7538 20

Mahanagar Telephone Nigam Ltd. (MTNL) 1.9316 20

Minerals & Metals Trading Corp. (MMTC) 12 20

National Aluminium co. Ltd. (NALCO) 0.0334 0.67

National Fertilizers Ltd. 3.51 2.72


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Neyveli Lignite Corp. Ltd. (NLC) 1.1163 2.28

Rashtriya Chemicals and Fertilizers Ltd. (RCFL) 7.1791 5

Shipping Corp. Of India Ltd. (SCI) 3.1136 5.64

State Trading Corp. Of India Ltd. (STC) 5.2246 20

Steel Authority of India Ltd. (SAIL) 0.2393 7.98

Videsh Sanchar Nigam Ltd. (VSNL) 19.9075 5


As per the budget of 1992-93 Rs. 3500 crore were to be raised bydisinvestment during the year. Out of this Rs. 1000 crore wasmeant for National Renewal Fund (NRF) which was set up inFebruary, 1992 to protect the interest of workers and provide asocial safety net for labour.

A) FIRST TRANCHE OF DISINVESTMENT (OCTOBER,

1992):

In this phase auctioning of shares on individual PSE basis wasdone. Tenders were invited for a total of 8 PSEs. The minimum bidlimit was set at Rs. 2.5 crore. A total of 12.87 crore shares weresold for a value of Rs 681.95 crore with 286 bids being received

Details of the PSEs Divested in October, 1992

Name of the EnterpriseNo. Of SharesSold(in crore)

% of Totalnumber of

shares of thePSE

Amount ofSale(in Rs

Crore)

Bharat Petroleum Corporation Limited (BPCL) 0.25 5 169.53

Hindustan Petroleum Corp. Ltd. (HPCL) 0.3192 5 178.1

Hindustan Zinc Ltd. (HZL) 1.0416 2.58 44.33

Hindustan Machine Tools Ltd. (HMT) 0.3928 5 21.98

National Aluminium co. Ltd. (NALCO) 6.4431 5 124.13


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Neyveli Lignite Corp. Ltd. (NLC) 1.4969 1.04 35.03

Rashtriya Chemicals & Fertilizers Ltd. (RCFL) 0.8685 1.57 26.36

Steel Authority of India Ltd. (SAIL) 2.0567 0.52 26.36

TOTAL 12.8688 681.95


(DECEMBER, 1992):

In November, 1992 the government invited bids for the purchaseof 46.27crore shares of 14 PSEs. The minimum bid limit wasreduced to Rs1crore from Rs2.5 crore. The criterion was kept sameas in first tranche. A total of 225 bids were received and 31.06

crore shares of 12 PSEs were sold at a total amount of Rs 1183.83crore.

Details of the PSEs Divested in October, 1992


% of Totalnumber of

shares of thePSE

Amount ofSale(in Rs

Crore)

Bharat Petroleum Corporation Limited (BPCL) 0.25 5 161.65

Bongaigaon Refinery & Petrochemicals Ltd. (BRPL) 1 5 42.18

Fertilizers and Chemicals Ltd. (FACT) 0.05 0.15 1.3

Hindustan Petroleum Corp. Ltd. (HPCL) 0.32 5 153.75


Indian Telephone Industries Ltd. (ITI) 0.1 1.14 10.78

National Aluminium co. Ltd. (NALCO) 6.44 5 118.19

National Fertilizers Ltd. 0.03 0.06 0.72


Rashtriya Chemicals & Fertilizers Ltd. (RCFL) 0.15 0.28 4

State Trading Corp. Of India Ltd. (STC) 0.03 0.1 2.25

Steel Authority of India Ltd. (SAIL) 19.93 5 617.6

TOATAL 31.06 1183.83


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B) THIRD TRANCHE OF DISINVESTMENT

(MARCH, 1993):

Shares of 15 PSEs were offered for sale thorough auction. Out of192 bids which were received, 57 bids emerged successful on the

basis of the reserve prices fixed by the core group based on therecommendations of the merchant bankers. A total amount ofRs46.73crore was realised through sale of 1.0096crore shares of 9PSEs.

PSE Disinvested in March, 1993


% of Totalnumber ofshares of the

PSE

Amount ofSale(in Rs

Crore)

Bharat Petroleum Corporation Limited (BPCL) 0.1117 0.45 8.21

Bongaigaon Refinery & Petrochemicals Ltd. (BRPL) 0.08 0.4 3.22

Hindustan Copper Ltd 0.3411 1.12 8.07


Hindustan Machine Tools Ltd 0.03 0.34 1.41

Indian Telephone Industries Ltd. (ITI) 0.07 0.79 4.85

National Aluminium co. Ltd. (NALCO) 0.1023 0.08 1.88

National Mineral Development Corp. Ltd 0.214 1.59 17.88


TOATAL 1.0096 46.73

Thus a total of 1912.51crore was realised during 1992-93 againstthe target of Rs2500crore.


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DISINVESTMENT IN 1993-94: DISINVESTMENT IN

1993-94:

The target during this fiscal year was kept at Rs 3500 crore but thegovernment could not goin for further sale of shares due to unfavourable stock marketconditions through 1993-94.


Actual realisation of funds took place from this round ofDisinvestment took place in 1994-95.

Changes effected in the procedure to encourage divestment are: Bidding amount was lowered from Rs 1,00,000 to Rs 25,000

or value of 100 shares(whichever higher)

Registered FIIs were permitted for auction of PSE shares.

A). FIRST TRANCHE OF DISINVESTMENT (MARCH

APRIL 1994):

PSE Divested in March/April, 1994


% of Totalnumber of

shares of thePSE

Amount ofSale(in Rs

Crore)

Bharat Electronics Limited 0.331 4.14 47.17

Bharat Earth Movers Ltd 0.15 4.07 48.27

Bharat Heavy Electricals Ltd 2.692 11.74 301.34

Hindustan Petroleum Corp Ltd 0.447 7 563.11

Mahanagar Telephone Nigam Ltd 7.694 12.82 1322.17

National Aluminium co. Ltd. (NALCO) 0.003 0.04 0.096

TOTAL 11.317 2282.156

Out of these 7 PSE, only 1 PSE was not sold as no bid had beenreceived.


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(OCTOBER 1994):

Non-Resident Indians (NRIs) and Overseas Corporate Bodies(OCBs) were permitted to bid for the shares for the first time.

PSE Divested in October, 1994


% of Total

number ofshares of thePSE

Amount ofSale(in RsCrore)

Container Corporation of India 1.299 20 99.71

Indian Oil Corporation 1.443 3.77 1028.11

National Fertilizers Ltd. 0.007 0.01 0.28

Oil and Natural Gas Co Ltd 0.686 2 1051.52

Steel Authority of India 0.372 0.41 22.66

Shipping Corporation of India Ltd. 0.387 1.37 28.08

TOTAL 4.194 2230.36

C) THIRD TRANCHE OF DISINVESTMENT

(JANUARY 1995):

In January 1995 shares of 6 PSEs were offered for sale. Out of 556bids received, 209 were accepted in respect to 5 companies andgovernment decided not to sell shares in VSNL.


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PSE Divested in January, 1995


% of Totalnumber of

shares of thePSE

Amount of

Sale(in RsCrore)

Engineers India Ltd 0.108 5.99 67.526

Gas Authority of India Ltd 2.853 194.12

ITDC 0.675 51.985

Indian Oil Corporation Limited 0.008 5.538

Kudremukh Iron Ore Company Ltd 0.616 11.399

TOTAL 4.26 330.568

DISINVESTMENT IN 1995 1996:

Against the target of Rs 7000 crore, the government decided todisinvest from only 4 PSEs MTNL, SAIL, CONCOR and ONGCin October 1995. Details are:

PSE Divested in October, 1995

Name of the enterpriseNo of shares sold

(In crore)Amount realised

(in crore)

Mahanagar Telephone Nigam Ltd (MTNL) 0.87 135.9

Steel Authority of India Ltd (SAIL) 0.44 13.3

Container Corp of India Ltd (CONCOR) 0.2 14.12

Oil & Natural Gas Corporation Ltd (ONGC) 0.02 5.16

TOTAL 1.53 168.48


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PHASE II (1996-97 TO 1997-98):

The government constituted Public Sector DisinvestmentCommission under G. V. Ramakrishna on 23 August, 1996 for a

period of 3 years with the objective of preparing an over-all longterm disinvestment programme for public sector undertakings.

The main terms of reference were:

A comprehensive overall long-term disinvestmentprogramme (extent of disinvestment, mode of disinvestmentetc.) within 5-10 years for the PSUs referred to it by the Core

Group To select the financial advisors for specified PSUs to

facilitate the disinvestment process. The core group industries-telecommunications, power,

petroleum etc that are capital-intensive and where the marketstructure could be an oligopoly

The commission also showed concern about slow progress in

implementation of its recommendations and it was particularlycritical of governments going ahead with strategic sales leading to

joint ventures in some PSEs not referred to the commission.

DISINVESTMENT IN 1996-97

In 1996-97 a target of Rs. 5000 crore was fixed for mobilization of

resources through disinvestment of PSE shares. In order to do this,companies from petroleum and communication sectors werechosen namely IOC and VSNL. But due to unfavorable marketconditions the GDR of only VSNL could be issued. In the GDR,39lakh shares of VSNL were disinvested resulting in an amount ofRs 380crore.


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DISINVESTMENT IN 1997-98

The budget for 1997-98 had taken a credit for an amount of Rs4800 crore to be realised from disinvestment of government held

equity in PSEs. This was supposed to be achieved by thedisinvestment of MTNL, GAIL, CONCOR and IOC.A GDR of 40 million shares held by the government in MTNL wasoffered in international market in November, 1997. A total of Rs.902 crore was collected but due to highly unfavourable marketconditions the GDR issue of GAIL, CONCOR, and IOC wasdeferred.

PHASE III (1998-99 TO 2007-2008)

First in the 1998 99 budgets BJP governmentdecided to bring down the governmentshareholding in the PSEs to 26 %to facilitateownership changes which were recommended

by Disinvestment Commission. In 1999 2000government state that its policy would be tostrengthen strategic PSEs privatise non-strategic PSEs through disinvestment and forthe first time the term privatisation were usedinstead of disinvestment. The government laterformed the

Department of Disinvestment on 10 December1999.

The following criteria were observed forprioritization for disinvestment:


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Where disinvestments in PSEs would leadto large revenues to the government

Where disinvestment can be implemented

with minimum impediments and inrelatively shorter time span; and

Where continued bleeding of governmentresources can be stopped earlier.

DIVESTMENT IN 1998 99:

The government decided to disinvest through offer of shares inGAIL, VSNL, CONCOR, IOC and ONGC. The budget for 1998 99 had taken a credit for Rs 5,000crore to be realised throughdisinvestment.

DISINVESTMENT IN 1999 -2000:

The budget for 1999 2000 had taken a credit for Rs 10,000 croreto be realised through disinvestment. The government disinvestedfrom Modern Foods India Ltd and did a strategic sale to theirstrategic partner HLL for Rs 105, 45 crore for a 74 % equitystake. This was the first time government had sold more than 50 %holding.

DISINVESTMENT IN 2000 -2001:

Against a target of 10,000 crore, the government realised Rs1868.73 crore. The details are:


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Disinvestment in 2000 2001

Name of the enterprise Mode of Disinvestment Receipts (in crore)

BALCO Strategic sale of 51% 551.5

BRPL and Chennai Refineries Taken over by IOC 658.13

Kochi Refinery Taken over by BPCL 659.1

TOTAL 1868.73


Against a target of 12,000 crore, the government realised Rs3130.94 crore during the year. The highlight of this disinvestmentwas that strategic sales were affected in CMC, HTL, IBP, VSNLand PPL. The details are:

Disinvestment in 2001 2002

Name of the enterprise Mode of Disinvestment Receipts (in crore)

CMC Strategic sale of 51 % 152

HTL Strategic sale of 74% 55

IBP Strategic sale of 33.58% 1153.68

VSNL Strategic sale of 25% 1439

PPL Strategic sale of 74% 151.7

ITDC Sale of 8 hotels and long term lease of one hotel 179.56

TOTAL 3130.94


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Target of the government for disinvestment in the year was Rs12,000crore. The major highlight was the two-stage sell off inMaruti Udyog Ltd with a Rs 400 crore right issue at a price of Rs3280 per share of Rs 100 each in which the government renouncedwhole of its rights share (6,06,585) to Suzuki, for a control

premium of Rs 1000 crore. Relative share holding of Suzuki andgovernment after completion of the rights issue was 54.20 % and45.54 % respectively. The second stage government offloaded its

holding in two tranches first where government sold 27.5 % ofits equity through IPO in June 2003. The issue was oversubscribed

by over 10 times. Later keeping in view the overwhelmingresponse from sale of Maruti, government sold its remaining sharesin the privatised companies of VSNL, CMC, IPCL, BALCO andIBP to public through IPOs.

Strategic sale of IPCL was also finalised in May 2002. The

decision to disinvest IPCL was although taken in December 1998,it took three and half years to finalise the deal. ReliancePetroindustries Ltd (Reliance group) was finally inducted as astrategic partner with a 26 % sale in IPCL.

DISINVESTMENT FROM 2003 2004 TO 2007 - 08:

The government had fixed a high target for the year 2003 04 as14,500crore. The strategic sale of JCL, and offer sales of manyPSEs like MUL, IBP, IPCL, CMC, DCI, GAIL andONGC has exceeded the target fixed by the government to a totalreceipt of Rs15,547.41crore . Out of this Rs12, 741.62crore


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receipts through sale of minority shareholding in CPSEs. In 2004 05 the target was reduced to Rs 4,000 crore and share sales of

NTPC, ONGC spillovers and IPCL shares to employees pushed thetotal receipts to Rs 2,764.87

crore. In the other 3 years of this phase from 2005 06 till 2007 2008 the government fixed no targets and the total receipts werevery less to with the year 2006 07 yielding no receipts at all.

NATIONAL INVESTMENT FUND

On 27 January 2005, the Government had decided to constitute a

National Investment Fund (NIF) into which the realization fromsale of minority shareholding of the GovernmentIn profitable CPSEs would be channelised. The Fund would bemaintained outside the Consolidated Fund of India. The incomefrom the Fund would be used for the followingBroad investment objectives: -

(a) Investment in social sector projects which promote education,

health care and employment.

(b) Capital investment in selected profitable and revivable PublicSector Enterprises that yield adequate returns in order toenlarge their capital base to finance expansion/Diversification.

SALIENT FEATURES OF THE N.I.F

(i) The proceeds from disinvestment of Central Public SectorEnterprises will be channelised into the National Investment Fundwhich is to be maintained outside the Consolidated Fund of India.

(ii) The corpus of the National Investment Fund will be of a


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permanent nature.

(iii) The Fund will be professionally managed to providesustainable returns to the Government, without depleting the

corpus. Selected Public Sector Mutual Funds will be entrusted withthe management of the corpus of the Fund.

(iv) 75 per cent of the annual income of the Fund will be used tofinance selected social sector schemes, which promote education,health and employment. The residual 25 per cent of the annualincome of the Fund will be used to meet the capital investmentrequirements of profitable and revivable CPSEs that yield adequate

returns, in order to enlarge their capital base to financeexpansion/diversification.

FUND MANAGERS OF THE N.I.F

The following Public Sector Mutual Funds have been appointedinitially as Fund Managers to manage the funds of NIF under the

discretionary mode of the Portfolio Management Scheme whichis governed by SEBI guidelines.

i) UTI Assets Management Company Ltd.

ii) SBI Funds Management Company (Pvt.) Ltd.

iii) Jeevan Bima Sahayog, Asset Management Company Ltd.

CORPUS OF NIF:

The corpus of The Fund is Rs.1814.45crore being the proceedsfrom the disinvestment in Power Grid Corporation and Rural


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Electrification Corporation.

The pay out on NIF was Rs.84.81crores in the first year.

The payout received in the second year was Rs.209.24crores.

Average income of first year was 8.47%.

Average income of second year was 10.02%.

Thus, the average income was 9.245% against the hurdle rate of9.25%.

RESTRUCTURING OF THE N.I.F

In view of the deceleration of GDP growth due to global economicdownturn coupled with unprecedented drought this summer, we arefacing a reduced budgetary resource generation possibility. Toensure that this does not negatively impact the growth of

economy;Government has approved (on 5TH November 2009) one-timeexemption permitting full utilization of disinvestment proceedsdeposited in the National Investment Fund, over this and the nexttwo Financial Years, in meeting the capital expenditurerequirements of selected social sector programs decided by thePlanning Commission/Department of Expenditure.Thestatus quo ante will be restored from April 2012.


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PHASE IV (Current Scenario)

THE LINE UP FOR DISINVESTMENT

It is quite clear that the Government does have divestment of

its stakes in PSUs high on its agenda for the near future. Which

companies are likely candidates? Heres a line-up:

The IPOs that may flag off the divestment process may well be

NHPC, RITES and Oil India, which have already filed theirrespective draft prospectuses with SEBI over the past twoyears.

NHPC: NHPC is the countrys largest hydro power generator,engaged in planning, development and implementation of hydro-electric projects. Based on the offer document, the governmentstake will come down to 86.3 per cent post-issue. The earnings per

share (EPS) for the FY09 is Rs 1.01.

RITES: RITES, under the Ministry of Railways, provides transportinfrastructure consultancy, engineering and project managementservices. The PSU plans a fresh issue, bundled with an offer forsale that may bring down the Governments stake to 72 per cent.The book value/share and EPS for the year ended FY07 were Rs133 and Rs 30 respectively.

OIL India: Oil India is engaged in the exploration, development,production and transportation of crude oil and natural gas onshore.The company comes under Ministry of Petroleum and Natural Gas.The Centers stake will fall to 89 per cent post-issue. The offer


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document mentions an EPS of Rs 73.6 for the last financial year.

Long on the stake sale shortlist, the following PSUs are possiblecandidates which may seek listing through an IPO/offer for sale

route.

Coal India is among the largest coal-producing companies in theworld and is the only un-listed navaratna PSU (except forHAL, which comes under strategic area). CIL had a turnoverof Rs38631crore in 2007-08. It is expected to hit the IPO market innear future.

Telecom major, BSNL and steel maker, RINL (Vizagsteel), Cochin Shipyard, Telecommunications Consultants Indiaand Manganese Ore are the other likely candidates that may tap themarket. These entities have been on the divestment shortlist forquite a while.

Stake dilution is also possible in listed PSUs with a highproportion of government holdings. A 5-10 per cent stake sale in

these companies will bring huge gains for the government, evenwithout losing the management control. NMDC, BHEL, NTPC,SAIL, Neyveli Lignite, MMTC, RCF are likely follow-on offercandidates.

At current market prices, a 5 per cent stake sale in NTPC wouldfetch the government around Rs 8,864crore. In case of NeyveliLignite, SAIL, BHEL, MMTC and NMDC, the receipts would bearound Rs 1,168crore, Rs 3,570crore, Rs 5,321crore, Rs6, 800crore

and Rs8, 900crore respectively.


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CASE STUDY

MODERN FOOD INDIA:

Modern Food Industries was incorporated as Modern Bakeries(India) Ltd. in 1965. It had 2042 employees as on31 January, 2000.It went through minor restructuring when its Ujjain plant wasclosed, the Silchar project was abandoned and the production ofRasika drink was curtailed. The company was referred to

Disinvestment Commission in 1996. In February 1997, theCommission recommended 100% sale of the company, treating itin the non-core sector. As per the Disinvestment Commissionthe major problems at MFIL were under-utilization of the

production facilities, large work force, low productivityand limited flexibility in decision-making.

PRE DISINVESTMENT SCENARIO:

MFIL: Pre-Disinvestment Performance

DETAILS 1995-96 1996-97 1997-98 1998-99 1999-00

SALES - BREAD 95 104 103.5 89 78

ENERGY FOOD/ NON-BAKERY 45.2 62.8 78 71 71

OPERATIONS

TOTAL 140.2 166.8 181.5 160 149

NET PROFIT/LOSS 11.52 16.45 7.65 (7) (48)


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During 1995-96 to 1997-98 MFIL recorded profits as wheat wasprovided to it at a subsidised rate but once that was withdrawn itstarted making losses as the increased costs could not be passed onthe consumers. Also the high overhead cost of Rs 1.90 per loafagainst the industry norm of Rs.0.90 per loaf added to the problem.

In September, 1997 the government approved 50% disinvestmentof MFIL to strategic partner through competitive global bidding. In

October 1998, ANZ investment Bank was appointed as the globaladvisor for assisting in disinvestment. In January, 1999the government decided to raise the disinvestment level to 74 %and an advertisement inviting expression of interest from

perspective strategic partners was issued in April, 1999.

DISINVESTMENT PROCESS:-

In a response to the advertisement 10 parties submitted Expressionsof Interest. Out of these, 4 conducted the due diligence of thecompany, which included visits to Data Room, interaction with themanagement of the MFIL, and site visits. In October, 1999 post duediligence, 2 parties remained in the field, and on the last day forsubmission of the financial bid (15.10.99), the only bid received

was that from Hindustan Lever Limited (HLL). Finally in January,2000, the Government approved the selection of HLL as thestrategic partner in and the deal was closed on 31.1.2000.


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VALUATION OF MFIL

The 100% value of MFIL by different methodologies is givebelow:

VALUTION ASSUMPTION VALUE (IN RS. CR.)

Transaction MultipleSales Multiple

78.55

Balance SheetNet Worth

28.51

Asset Valuation

Liquidation

68.18

Market Value of Land &Buildings

Unrestricted use 109

Discountedcash flow

Growthin market share

32.11

Sales realization for 74% equity was Rs.105.45crore. This

corresponds to Rs.142.50crore for sale of 100% equity. Theagreement with HLL provided for post-closing adjustments difference between net working capital as on 31st March 1999 andnet working capital on closing date 31st January 1999 and increasein debt amount on closing date 31st January 1999. Due to reducedworking capital and increase in debt amount, the government paid

back Rs.10.94crore. The net realisation was Rs.94.51 crore for 74%equity.


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POST DISINVESTMENT PROCESS

MFIL: Post Disinvestment Performance

Details Pre- Disinvestment Post-Disinvestment

YEAR 1988-1989 1999-2000 2000-2001

SALES - BREAD 89 78 102

ENERGY FOOD 71 71 66

TOTAL 160 149 168

Source: Ministry of Disinvestment, Government of India

The decline in the sales of Modern Bread, which continuedtill the beginning of 2000, was arrested. Weekly sales inDecember 2000 were around 44lakh SL, which is a 100%increase over the figure of April 2000.

As on 31.12.2000, HLL has extended secured corporate loansto MFIL to the extent of Rs.16.5crore for meeting the

requirement of funds for working capital and capitalexpenditure.HLL has provided a corporate guarantee toMFILs banker, viz., Punjab National Bank, which has helpedthe Company in getting the interest rate reduced considerablyto the extent of 3-4% of its earlier borrowing cost.

Steps were taken to improve the quality of bread, its packaging and

marketing with trade-promotion activities, and to train themanpower in quality control systems. In November, 2002 wageshave increased by an average of Rs.1800 per employee. Rs.30crorewas spent for VRS. Again Rs. 7 crore were infused for safety &hygiene purposes at various manufacturing locations.


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The Government was also entitled to Put its share of

remaining equity of 26 %at Fair Market Value for 2 yearsfrom 31 January 01 to 30 January 03. The Government

exercised this option and thereby received Rs.44.07crore on

28th November 02.

THE FAILURE:-

Despite HULs best efforts MFIL continued to make losses, HUL

had invested 157 crore in MFILs equity. In 2005, its losses wereRs 15 crore and accumulated losses were Rs 79 crore. At theoperating profit level, before interest and depreciation, it did makea profit though of Rs22crore compared to a loss of Rs 7 crore in the

previous year.

Bread sales grew by about 7%. The company suffered as it lostsome lucrative government contracts and changed its operationalstructure. Hence overall sales declined by 35% to Rs95crore.However, HUL did enjoy tax benefits as MFIL was a sickindustrial unit. The company put MFIL on the block in 2006 butfailed to clinch a deal.

However, HUL still was unsuccessful in turning around thebusiness and due to high employment costs and low margins. Asper the company, the culture of MFIL was a complete misfit withits own. The company has committed a mistake while conducting

the due diligence process.


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Bharat Aluminium CompanyLimited


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Company profile

Bharat Aluminium Company Limited, set up in 1965 atKorba in Madhya Pradesh to manufacture aluminium rods andsemi-fabricated products, is today the third largest player in theIndian aluminium industry.BALCO has its corporate office in New Delhi. Its main plant andfacilities are situated in Korba(Chhattisgarh), which includes

bauxite mines, an alumina refinery, a smelter and a fabricationunit, besides a 270 MW power plant which meets a substantial partof the unit's power requirements. It also has another fabricationunit in Bidhanbagh (West Bengal). The refining capacity ofBALCO is 2,00,000 tonnes per year and its smelting capacity is1,00,000 tonnes per year.

THE DISINVESTMENT DECISION

The Government of India had 100% stake in BALCO Prior todisinvestment. In 1997, the Disinvestment Commission classifiedBALCO as non-core for the purpose of disinvestment andrecommended immediate divestment of 40% of theGovernment stake to a strategic partner, and reduction of theGovernment stake to 26% within 2 years through a domestic

public offering It further recommended divestment of the entireremaining stake at an appropriate time thereafter. The Cabinetaccepted the recommendation of the Disinvestment Commission

for divestment of 40% stake through a strategic sale and furtherdivestment through the capital market.Later, in 1998 the Disinvestment Commission revised itsrecommendation and advised the Government to consider 51%divestment in favour of a strategic buyer along with transfer ofManagement, which was accepted by the Cabinet. The Government


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thereupon appointed M/s Jardine Fleming as Advisor to assist inthe sale of its 51% stake in BALCO to a strategic buyer.

This was followed by BALCO's equity being reduced by 50%

thereby reducing the subscribed share capital to Rs.244 crore fromRs.488 crore. As a result, the Government received Rs. 244 crorefrom the capital restructuring of BALCO and another Rs. 31 croreas tax on this amount, prior to disinvestment. The strategic sale

process for BALCO started in late 1997, after the first decision ofthe Government, and finally came to end in 2nd March 2001. The51% stake was sold to Sterlite Industries, the highest bidder, andfetched the Government Rs. 551.50 crore. The government thus

recovered Rs 827.50 crore from this privatization.

PRE DISINVESTMENT PERFORMENCE

DETAILS 1997-98 1998-99 1999-2000

Sales 848.51 870.90 896.64

Other income 48.10 68.84 70.08

Totalincome(1+2)

896.61 939.80 966.72

Totalexpenditure

714.08 758.24 806.28

PBDIT(profit before interestdepreciationand taxes)

182.53 181.56 160.44

PBIT(profit before interestand tax)

141.53 140.64 122.01

PBT(profitbefore tax)

134.87 134.34 116.19

PAT(profit 79.84 76.32 55.89


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after tax)

Dividend 20.00 23.00 18.00

VALUATION OF 51% STAKE:

There were three bidders viz the US-based Alcoa and Indianmarket leader Hindalco and Sterlite. Sterlites financial bid was thehighest among the bidders, according to an official release by thegovernment. The company was valued by three different methods:

Discounted cash flowComparative valuationBalance sheet and asset valuation

VALUATION METHOD VALUE (IN RS. CR.)

DISCOUNTED CASH FLOW 651.2 TO 994.7

COMPARABLES 587.0 TO 909.0

BALANCE SHEET 597.0 TO 681.9

ASSET VALUATION 1054.9 TO 1072.2

The valuation was applied by the official valuer J P Morgan. Thereserve price of Rs 514.40 crore was reached by marking up thevaluation, arrived at by using the discounted cash flow(DCF)technique, by 25 per cent, used as the control premium.


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POST SALE SCENARIO

Post sale, a number of doubts have been raised by various quarterson the disinvestment ofBALCO, especially with regard to

Transparency Valuation

Protection of employees interests

No sooner was the BALCO deal announced than it created a furorwithin and outside Parliament. The opposition raised eyebrows.There was distrust from state government and the workers ofBALCO went on a 67 days strike. It seemed as if the Sterlitemanagement had to sweat a lot before it actually got the right overthe catch it craved for. This finally came to an end when the new

management stroke a deal with the employees. Several new stepswere Undertaken, some of which are:

The new management had introduced VRS i.e. VoluntaryRetirement Scheme from 31.07.01 to 16.08.01.981 applications (151 executives and 830 workers) werereceived. 694 old VRS applications were pending. A total of 956applications were accepted mostly where units were lying closed.

In spite of losses of Rs. 200 crore due to the strike, an exgratiapayment of Rs. 5000 was made to all employees.

Workmen get a guaranteed benefit @ 20% of basic pay.

An Increase in allowances was also announced:


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Night shift allowance: Rs.10 to Rs.20 per shift.

Canteen allowance: Rs.400 p.m. (instead of subsidised canteen

facilities)

Education allowance: Rs. 50 to Rs. 75 per month

Hostel allowance: Rs.150 to Rs.200 per month

Scholarship amount to meritorious children doubled.

Leave Travel Assistance of around Rs. 6000 as cash every year.

Conveyance allowance: Scooter users Rs. 400 to Rs. 500 pm,Moped users Rs.240 to Rs. 350 pm

Several new practices introduced. Few were:

Job rotation Appraisal system

The new management is proposing an investment of Rs. 6000crore which will increase production 4 times.

THE REAL PICTURE:

The disinvestment of 51% stake in BALCO by the government ofIndia towards a strategic partner was backed by two justifications: From a market share of around 17 per cent in 1995-96 in the

primary aluminum Business, BALCOs share had dropped to 14per cent in 1998-99. Several reasons were mentioned that wereresponsible for hindering its growth. They were:


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Lack of economies of scale

Old age technology Overstaffing Operational bottlenecks Lack of managerial autonomy

Thus, a complete review and restructuring was urgent to enable thecompany to stand a better chance to stake its claim in the globallycompetitive Indian aluminium Industry.

Although there were three bidders, Sterlites financial bid was thehighest among the bidders, according to an official release by thegovernment. Intact, government claimed that it was getting a pricegreater than expected.

However, there are certain facts from the other angle that demandattention. The following tries to uncover some of them:

Government had no modernisation and expansion under

consideration for the aluminium giant:

To quote the Disinvestment Commission: "BALCO as a PSU

has suffered from procedural bottlenecks and lack of

managerial autonomy. The CRM project at Korba Has been

cleared after eight years with near-doubling of the capital

outlay.

The company was not able to get clearance from thegovernment for setting up 100% captive power generation. As

a result, the company had to depend on high cost power from

the State Electricity Board which resulted in avoidable cost

increases. The delays and the lack of autonomy have certainly


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affected its operating profits which would have been much

higher had it been able to implement these projects earlier."

Thus even the Disinvestment Commission's recommendation that

the government should resort to a strategic sale of 40 per cent ofBALCO equity can be seen as misplaced.What was required instead was a reorganisation aimed at allowingBALCO the freedom to use its own capacity to mobilise resourcesto modernise, expand its captive power facility and raise its

profitability. In practice, as a prelude to the privatisation process,in March 2000 the subscribed share capital of BALCO was

brought down to Rs.244 crore from Rs.488 crore, by appropriating

part of the Rs.437 crores into the government's account. This was aclear indication that modernisation and expansion was not evenunder consideration.

BALCO, a profit making PSU, was valued at what isconsidered a throwaway price:

Cash flows determined by undermining profitability:

This also implies that BALCO's profitability has been underminedby the government's own role in stalling modernization andexpansion at Korba. Hence, the then profit performance of the unitcannot be the basis on which the future profile of profits could beestimated. However, the tendency for Arun Shourie, theMinister for Disinvestment, to emphasize repeatedly that profitsearned by BALCO had fallen from Rs.163 crore in 1996-97 toRs.25 crore in 2000-01 suggests that this stream of profits hasentered into assessments of the future profile of profits that have

been discounted to value the worth of the company.

This amounts to squeezing the profits of a public sector unit andthen using that to undervalue the firm, consciously or otherwise.

BALCOs assets were undervalued:


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It is still being argued that a direct valuation of BALCOs assetswas worth around 10 times the value paid by Sterlite. In fact,officials from the power sector have Argued that the captive power

plant alone would cost more than the sum being paid by Sterlite.

According to reports, a senior official held that if Sterlite were toinvest in a captive power plant of the kind owned by BALCO, itcould cost Rs.1, 215 crore and this figure matters, for the value ofthe plant at Korba (set up in 1988-89) is still substantial, since athermal power plant has a lifespan of around 35 years.

BALCO was self-sufficient to fund its projects:

Since BALCO was a profitable and cash-rich public sectorcorporation with an extremely low debt to equity ratio, it wouldhave been possible for it to finance its proposed modernisation

plan (estimated to cost Rs.1, 000 crore) without recourse tobudgetary funds. The project was to include the setting up of a coldrolling mill, the expansion of captive power generation andmodernisation of existing facilities. This would have allowed thecorporation to improve its profitability and increase the dividend it

pays to the exchequer.

No transparency in the deal:

The valuation procedure that yielded the undeclared reserve pricebelow which the government was not willing to sell has neitherbeen transparent nor undertaken by qualified valuers capable ofvaluing the plant and machinery of the company and the

bauxite mines that it has on lease. The whole procedure had beengone through in haste. Even though the bids had been invited sometime back, the valuation of the firm, the setting of the reserve priceand the acceptance of Sterlite's bid were all allegedly done withinthe span of a month. Leaked evidence of undue haste has


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accumulated and this further puts a question mark over thegovernment's claims of transparency in the execution of the deal.

CONCLUSION:-

A combination of inappropriate procedure, undue haste andunwarranted secrecy had created a veritable mess.This wasfollowed by a roar and strike amongst the company workers.There was an opposition from the state government to the extent ofthrowing an offer to buy the Centres 51 % stake at Rs 5.52 bn.

The claims on the lack of transparency are beingcontinued till date. As stated by The Times of India, December 28,2009, in response to an RTI query filed by advocate ArjunHarkauli, the Central Information Commission (CIC) observed thatthe tender documents and minutes pertaining to the Rs 551.5-croredivestment of Bharat Aluminium Company (BALCO) inChhattisgarhs Korba district eight years ago could not be traced

by the ministries concerned.BALCO marks the first ever disinvestment deal in the history of

India and is stained with several question marks and pointingfingers. The deal certainly did not occur the way it was meant to,did not bring the profits to the extent possible, nor was it intendedtowards any social cause. Corruption and lack of accountabilitystill remain the two worms eating away the Indian economy.


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VIDESH SANCHAR NIGAM LTD.


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ABOUT VSNL

In 1947, the Overseas Communication Service (OCS)was established in the Department of Telecommunications (DoT).Videsh Sanchar Nigam Ltd (VSNL) was created from the OCS asa government owned corporate in 1986. The government felt thatcorporatization would enable it to raise financial resources, anactivity that would not have been possible under the governmentframework. It was envisaged that this would also enable greaterfreedom to managers to plan, operate, develop and acceleratethe international telecommunication services. In the initial years,VSNL offered voice telephone, telex, telegraph, television,

bureaufax etc. Efforts had started to increase Indias connectivitythrough investments in projects like submarine cables. Comparedwith 2.69 billion telephone minutes in 2000-1, in 1986-7 thefigure was 0.13 billion minutes. Table 1 gives some comparative

figures of VSNLs performance over the years.

YEAR VSNL

WORLD

1994 0.742 54.6

1995 0.972 61.6

1996 1.147 71.71997 1.384 82.5

1998 1.684 93

1999 1.935 108.9

2000 2.245 132.7


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The ratio of inbound to outbound calls had been 4:1 in 2001. Oneimportant reason for this is the discriminatory pricing by VSNL.Another factor is that India is a much poorer than the typicalcountries to which it connects (U.S., Europe and Gulf), so thatinbound calls are bound to be more than outbound calls.For the year 2000-1, the total revenue for VSNL was Rs 6,430.7

crore.The profit after tax stood at Rs 1,778.8 crore. This resulted inearnings per share of Rs 62.41 out of which Rs 50.00 was declaredas the dividend per share. VSNL had no debt. Its P/E ratio of eachVSNL share was 4.68.It is seen that a large part of the costs is the network andtransmission charge.Much of this was charges paid out to the DOT as traffic costs. In

this fixed revenue agreement, VSNL paid Rs 2,734 crore to DOTand Rs 1,386 crore to foreign operators during 2000-1 [VSNLAnnual Report, 2000-1].

DISINVESTMENT IN VIDESH SANCHAR NIGAM

LIMITED

1. Government had approved sale of 25% equity share holding outof a total government share holding of 52.97% in Videsh Sanchar

Nigam Limited (VSNL) on 5.02.2002. The total paid-up capital ofVSNL is Rs.285 crore, the Govt. holding being Rs.151crore.Rs.71.25crore of this equity is being sold to M/s Panatone (TataGroup) at a price of Rs. 1439 crore.


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2. Government had decided to disinvest in VSNL in January 2001and the advertisement for inviting Expression of Interest wasissued in February 2001. Several interested parties had submitted

their Expression of Interest. After the process of due diligence wascompleted and the transaction documents frozen, financial bidswere invited from the bidders on 1.2.2002. Two bids werereceived.

3. SBI Capital Markets Ltd. and CSFB were appointed as theadvisors at a fee of 0.19% of the transaction value. M/s CrawfordBayley & Co. is the legal advisor and the asset valuer is Price

Waterhouse Coopers Ltd. After considering the Advisor's report,the Evaluation Committee/IMG/CGD submitted theirrecommendations regarding acceptance of the higher bid to theCCD.

4. The Government has in the process of disinvestment in VSNLreceived approximately Rs.3689 crore, Rs. 1439 crore as the bid

price, Rs. 1887 crore as dividend and Rs. 363 crore as dividend tax

(table attached). Thus, the Government has sold its shares at aprice of Rs. 202 per share, taken additional amount as dividend,special dividend and dividend tax. Besides the Government hasalso taken measures to take out surplus, yet very valuable land(value Rs.778 crore) from VSNL, and also restrict use/sale of landthrough provisions in transaction documents.

5. The market price of VSNL shares as on 1.2.2002 was Rs.158/-.The Government had earned Rs.10.4 crore per year on 25% of its

equity in the last eight years. This year the Government has earnedRs. 3689 crore from sale of VSNL and if this money is kept in the

bank it would earn an interest of 368.9 crore, i.e. the Governmentwould gain more than Rs. 350 crore every year.


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6. The strategic partner has been provided a call option for the 5thyear subject to the condition that the Government would beretaining at least one share and hence one vote position to enforceits affirmative vote on assets. In addition, 1.97% share were given

to employees, at confessional rates.

After partial disinvestments through sale of shares, Videsh SancharNigam Limited (VSNL) underwent a strategic sale to the TataGroup in April 2002. Subsequent to the sale, the governmentholding became 26% and the Tata Group's 45%. The sale wasfollowed by VSNL's decision (taken by its new owners the Tatas)to invest Rs 1,200 crore in Tata Teleservices Limited (TTL), a

wholly owned subsidiary of the Tata group. This led to concernsregarding the appropriateness of the decision, since it involved acash outflow of Rs 1200 crore to a fledging private company in thetelecom sector.

REASONS FOR DISINVESTMENT

The Ministry of Disinvestment cited the non availability of fundsfor critical areas like education, health and social infrastructure

because of fiscal burden in the flow of government funds intoPSUs, as a strong argument for the disinvestment. There was also aneed to stem further outflow of resources into unviable, non-strategic PSUs. The divestment was also expected to reduce theunmanageable public debt.

PRIOR TO DIVESTMENT:

When the privatization process of VSNL began in 1991-2, therewas no blueprint for the same. In retrospect, there have been three

phases.The offloading of shares to domestic investors;The offloading of shares in the international market;


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Strategic sale.

In 1991-2, VSNL disinvested equity of the face value of Rs. 12crore in favour of various financial institutions, mutual funds and

banks. As of March 1993, out of a paid up equity capital of Rs 80crore, the Government of India (GoI) held 85% and financialinstitutions, banks and the public held another 15%. The shareswere listed in the stock exchanges of Mumbai, Kolkata, Delhi andChennai. As of 1995, the share of the GOI had come down to82.02%. This accompanied the transfer of shares from the GOI as a

bonus offer. The Indian investors share holding remained around16.5% in 1999-0 which came down to 9.97% (including the 1.96%

held by employees) as on March 31, 2001.

GDR ISSUES

The Global Depository Receipt (GDR) issue for VSNL was thefirst of its kind by the GOI. It helped VSNL to raise a substantialsurplus that was earmarked for investments for its growth. The firstGDR issue (listed on the London Stock Exchange) was offered in

1996-97. It fetched US$ 526.6 million in the market. At that time,it was the largest GDR issue from India. The offer wasoversubscribed, drawing 662 investors from 28 countries. Thesecond GDR issue was completed in February 1999. It involved adivestment of 10 million shares by the government of India tointernational investors. Priced at US$ 9.25 it was at a 15%

premium on the last closing domestic price of Rs. 682 and a 10%discount to the ten-day average GDR price of US$ 10.275. The

government realized US$ 185 million from the sale of 20 millionGDRs with each GDR being equivalent to half a share. Theorganizational problems in VSNL around the time of the secondGDR issue could have been one of the factors that led to lowervaluations. During the process of the second GDR issue, the VSNLstaff had threatened a walkout owing to the pending issue of


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allotting shares to employees. Due to delays in the governmentprocesses, VSNL did not have a chief executive and many othercrucial director level posts were vacant. The first GDRsInvestment promises were not fulfilled and a promised domestic

offering had not been made.THE VALUATION

The government had fixed a reserve price of Rs 1,218.375 crorefor its 25% stake in VSNL. In an effort to bolster the VSNLvaluation, the GOI intended to compensate the loss of monopolythrough special concessions. The government owned MTNL andBSNL would have to use VSNL as their ILD carrier for two years

on the condition that it would offer the most competitive terms inthe market. VSNL would also get a free license to provide NLD,and a nationwide ISP license. In addition, VSNL possessed primereal estate in Mumbai and Delhi and also cable capacities tofacilitate international traffic. One of the major assets was the cashstockpile of Rs 5,182 crore which was considerable even afterdisbursement of the special dividends. Among the concerns werethe loss of monopoly and the uncertainty of the loyalty of BSNLand MTNL to continue to use VSNL for their international traffic,the dipping share prices of VSNL and the falling accounting ratesthat could lead to lower revenues. One of the major issues involvedduring the valuation process included the management of realestate owned by VSNL. The disinvestment process stipulated thatat least four VSNL surplus properties valued at Rs 778 crore wouldnot be available and were to be disassociated from VSNL after thedisinvestment. Even so, real estate value that would accompanyVSNL was around Rs 1,200 crore


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CONCLUSION:

The privatisation of VSNL is seen as leading to public expenditureaccountability through a realisation of higher return on thegovernments asset formation. It also leads to an appreciation ofthe remaining shares that are held by the government. To thecitizen, the process is a step towards the provision of better qualitycommunication services at the most competitive prices. Publicflotation of stock might have led to better values for VSNL's stock,had the company been correctly `prepared' for privatisation. Thus,disinvestment of VSNL was clouded with controversies andspeculations and this fact further indicates the failure of thedisinvestment policy adopted in the case of VSNL, and alsohighlights the wrong reasons for which the disinvestment of VSNLtook place and its ultimate failure to match the required

expectation of such a step. This case on VSNL further corroboratesto the fact, that the disinvestment policies adopted in India have

been a failure so far.


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CRITICAL ANALYSIS

REVIEW OF DISINVESTMENT AND PRIVATIZATION

Disinvestment was initiated by selling undisclosed bundles ofequity shares of selected central PSEs to public investment

institutions (like the UTI), which were free to dispose of theseshares in the booming secondary stock market. The processhowever came to an abrupt halt when the market collapsed in theaftermath of Harshad Mehta led scam, as the asking prices

plummeted below the reserve prices. Since the stock marketremained subdued for much of the 1990s, the disinvestment targetsremained largely unmet. The change of government at the Centrein 1996 led to some rethinking about the policy, but not a reversal.

A Disinvestment Commission was constituted to advise thegovernment on whether to disinvest in a particular enterprise, itsmodalities and the utilization of the proceeds. The commission,among other things, recommended (Disinvestment Commission,1997):

Restructuring and reorganization of PSEs before disinvestment, Strengthening of the well-functioning enterprises, and

To utilize the disinvestment proceeds to create a fund forrestructuring of PSEs.

The new government that came to power in 1998 preferred to selllarge chunks of equity in selected enterprises to strategic

partners a euphemism for transfer of managerial control to


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private enterprises. A separate ministry was created to speed up theprocess, as it was widely believed that the operating ministries areoften reluctant to part with PSEs for disinvestments as it meansloss of power for the concerned ministers and civil servants.

The sales were organized through auctions or by inviting bids, bypassing the stock market (which continued to be sluggish), justifiedon the grounds of better price realization. Not withstanding theserious discussion on the utilization of disinvestment proceeds,they continued to be used only to bridge the fiscal deficit.Strategic sale in many countries have been controversial as it issaid to give rise to a lot of corruption, discrediting the policyprocess. Aware of such pitfalls, efforts were made to be

transparent in all the stages of the process: selection of consultantsto advice on the sale, invitation of bids, opening of tenders and soon. Between 1999 and 2003, much greater quantum of publicassets were sold in this manner, compared to the earlier process,though the realized amounts were consistently less than the targets

except in 2003.

There are series of allegations of corruption and malpractice in

many of these deals that have been widely discussed in the pressand the parliament. Instances of under pricing of assets, favoringpreferred buyers, non-compliance of agreement with respect toEmployment and retrenchment, and many incomplete contractswith respect to sale of land, and assets have been widely reported.

PERFORMANCE OF PSES AFTER

DISINVESTMENT & PRIVATIZATION:

In principle, disinvestment is unlikely to affect economicperformance since the state continues to be the dominantshareholder, whose conduct is unlikely to be influenced by share

prices movements (or return on equity). Privatization can beexpected to influence economic outcome provided the firmoperates in a competitive environment; if not, it would be difficult


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to attribute changes performance sole or mainly to the change inownership.

PROBLEM OF CORPORATE GOVERNANCE:

In the evolution of modern capitalism, with separation ofownership from control as firms grow in size and complexity,agency problem arises: how to ensure that the managers(promoter in Indian parlance) work to maximize return on

shareholders capital. Given theinformation asymmetry, managerscould pursue their private goal disregarding the shareholdersinterests. This is at the heart of the problem of modern literature oncorporate governance. Various institutional and contractualmechanisms have evolved in the last century to grapple with thisProblem. In the context of efficiency of resource use in a socialisteconomy, to solve the problem of how to ensure that managers of

public firms maximized efficiency consistent with the goals set bythe central planners. However, looking at the microeconomics of

firms in a socialist economy, it has been argued that they wereunlikely to be efficient because of the soft budget constraint: thatis, firms do not go bankrupt or managers do not lose their jobs fortheir poor performance. Firms can always renegotiate theircontracts with the planners to hide their inefficiency.In India public sector firms are often face with multiple objectives,and multiple owners or monitors central government, stategovernments, legislators, public auditors and so on. Managers may

not necessarily maximise profits as they could always highlight aparticular achievement to suit their convenience. Managers may berisk averse as they face constitutionally mandated procedural audit

by the CAG if an enterprise is majority government owned.Managers efficiency objectives may come in conflict withdysfunctional political interference in operational matters (at the


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expense of policy issues) to meet narrow political goals. However,at the same time, poor performance by managers does not involveany punishment as they can re-negotiate the output prices,

budgetary support, or have access to soft and/or government

guaranteed loans; in other wards they do not face a hard budgetConstraint. Thus, the agency problem is endemic to all economicsystems. Moreover, problem of soft budget constraint is notrestricted to socialist economies but evident in market economiesas well when the firm is question is large and considered ofstrategic importance for the economy, though perhaps too muchlesser extent. Rescue of Chrysler Corporation the third largestautomotive firm in the US in the late 1970s and United Airlines

after 9/11 in the US are clear instances of state support forfailing companies. Such support is more common in financialsector, where failure of firms can have significant systemic risk.

DISINVESTMENT IS NOT A GREAT PIECE OF REFORM

Disinvestment is considered desirable for two sets of reasons. Onehas to do with the money that flows into the governments coffers

as a result of the stake sale, augmenting the governments non-borrowed receipts and, thereby, reducing the fiscal deficit. Theother set of arguments of disinvestment has to do with efficiency.Disinvestment would bring in shareholders who would, it is hoped,question arbitrary decisions by the government that harm thefinances of these public enterprises. Both benefits are exaggerated.Look at the reduction in the governments fiscal deficit broughtabout by disinvestment. The effect of selling shares to the public is

not materially different from the effect of selling governmentbonds, as far as the quantity of the publics savings mopped up bythe government is concerned. In the year in which thedisinvestment takes place, the private sector would feel squeezedfor funds exactly as it would if the government were to raise thesame amount by issuing bonds. The public ends up holding shares,


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in one case, and bonds, in the other. In either case, the publicssavings stand transferred to the government, rather than to the

private sector looking for funds to invest. That said, the futureeffect of selling shares would prove superior, from a budgetary

point of view, to the future effect of issuing bonds. By issuingbonds, the government takes on the obligation to pay interest, yearafter year. By selling shares, the government forgoes dividendreceipts on the shares sold. Both widen the fiscal deficit in thesubsequent years. However, the interest payment obligation takenon to get one rupee from selling bonds would be significantlyhigher than the dividend forgone per rupee received from sellingshares in public enterprises. This is because these shares would be

valued significantly higher, in termsof asset price per rupee ofincome accruing from that asset, than the bonds sold to fill theFiscal gap. What about the efficiency gains at the enterprise level

by inducting non-government shareholders into the ownershipstructure, and possibly onto the board of directors? There islikely to be some additional benefits, given the political culturethat treats public enterprises as sources of revenue for the minister(and officials) in charge of the controlling ministry. However, the

overall reform project entails improving corporate governanceacross the board to a level where the running of any companyseeks to maximise the returns to shareholders regardless of who theshareholders are, whether the state or private shareholders. If thisgoal is realised, efficiency arguments for disinvestment wouldlose steam.

More germane is to what end the government keeps someenterprises under its ownership and control. If it wants to own

nuclear power companies because of the risks involved, or if itwants to own the Food Corporation of India to ensure foodsecurity, the companies in question sub serve public goals outsidethe calculus of commercial profit and loss. It does not make senseto privatize such public enterprises. Many other public enterpriseswere set up at a time when the private sector was too weak to


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create production capacity in areas considered vital for theeconomys long-term dynamism. Steel, or machine tools, forexample. Now, every Punj, Mittal and Jindal makes steel, of thehighest quality and lots of it. Is there any strategic goal being

served by retaining steel production in the public sector, anymorethan is served by keeping hotels and banquet halls in the publicsector? Satellite, aero plane and rocket manufacture, in contrast,are still beyond the Indian private sectors capacity. It mightarguably make sense for the government to own enterprises inthese sectors. What are strategic sectors would change, with time.The government should ideally exit from areas that are no longerstrategic, and use the re-sources to build new strategic capability.

However, we dont live in an ideal world. Even if the governmentcontinues to own some companies in non-strategic sectors, butthese companies are professionally run as commercial enterprises,there would be little efficiency loss to the economy as a whole.Therefore, disinvest

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Freaking Investments