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7/31/2019 Government Disinvestment Plan for PSUs
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GOVERNMENT
DISINVESTMENT PLAN FORPSUS Chirag JainAmarinder Singh
BFIA 3A
Amarinder Singh
Chirag Jain
BFIA 3A
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Introduction
Disinvestment is selling the
equity invested by the
government in Public Sector
Enterprises(PSU). PSUs areenterprises which are either
owned completely by the
government or whose sharesare maximum owned by the
government(51% or above).
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Types of Disinvestment
Strategic Sale to Private Entity
Transactions involving sale of shares held by thegovernment in CPSEs, including subsidiaries of CPSEs,along with transfer of management control, to a strategic
private partner identified through a process ofcompetitive bidding and subsequent sales to the partnerthrough call/put options.
Public Offer Transactions
Involving sale of shares held by the government in CPSEsthrough a Public Offer
CPSE to CPSE Sale
Transactions involving sale of shares held by theGovernment in one CPSE to another CPSE
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Types of Disinvestment
Auction to Financial Investors
Transactions involving sale of shares held by thegovernment in CPSEs through an auction to definedfinancial investors/investor groups like public sector
financial institutions Auction to Private Entities
Transactions involving sale of shares held by theGovernment in CPSEs through an auction to private
entities Sale To Employees
Transactions involving sale of shares held by the
government to employees of the respective CPSEs
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Why Disinvestment?
The premise accepted by most of the high-ups in the top echelon of the
Central Government is that the PSUs which were once created for "Public
Interest" should gradually be disinvested in the "Public Interest" only.
The logic and rationale behind such disinvestment policy are therefore,
according to them, now stand well defined and transparent. It is for thatreason, they feel, public exchequer in lieu of funding the PSUs should
better be utilised for basic education, primary health, family welfare etc.
of the country for which Government has at present hardly any surplus to
allocate.
This is more so when a vast amount of money is already being blocked inPSUs in non- strategic sectors in the form of hotels, consumer goods
companies, pharma companies, consultancy companies so on and so forth.
These PSUs are not only blocking huge public money, but also causing a
big drain on the public exchequer in the form of Plan and Non-Plan
support from the Government for their sustenance.
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Objectives of Disinvestment
ReduceFinancialBurden on
Government
ImprovePublic
Finances
IntroduceCompetitionwith MarketDiscipline
EncourageWide Share
in
Ownership
DepoliticizeEssentialServices
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Benefits of Disinvestment
For t he Gove rnm en t
Raising valuable resources for the government which couldbe used to bridge the fiscal deficit and also for variousdevelopmental projects.
The government can focus more on core activities such asinfrastructure, defense, education, healthcare, and law andorder.
For t h e PSUs
Greater autonomy leading to higher efficiencies
For t he Mark e ts and Econom y
Brings greater efficiencies for the economy and markets asa whole
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Benefits of Disinvestment
For t he Taxp ayers
Letting go of these assets is best in the longterm interest of the tax payers
Unlocking of shareholder (in this case the citizens
of India) value
For t he Em p loyees
Greater opportunities and avenues for career
growthMonetary gains through ESOPs and preferential
issue of shares
Pay rises, as has been seen in past divestments
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The 10% Challenge?
Corporate Restructuring at its best
PSUs to have a 10 per cent non-promoter holding
IPPs (Institutional Placement Programme) can be
brought in to raise this float holding and are a
convenient way to sell shares.
As many as 11 listed PSUs currently have promoter
(read Central Government) holdings of 90 per centplus and can easily adopt this route to comply' with
minimum public shareholding norms.
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"With a view to establishing a systematic policy approach to disinvestment and
privatisation and to give a fresh impetus to the Government's disinvestment programme",
the Ministry of Disinvestment (MOD) was formed on 10th December, 1999.
As per the Government of India (Allocation of Business) Rules, 1961, the Department of
Disinvestment is responsible for divesting Government of India shareholding in Central
Public Sector Enterprises (CPSEs) with Government retaining at least 51% equity andmanagement control.
Additionally, it deals with all matters relating to sale of Central Government equity
through offer for sale or private placement in the erstwhile Central Public Sector
Undertakings.
Public issues are governed by SEBI regulations. The entire process of disinvestment
follows the procedures laid down by Regulatory authorities including SEBI.
For every transaction professionals (Merchant Bankers, Legal Advisors and other
intermediaries) are appointed for the Issue on a transparent basis and allowed to
function within the concerned regulations. The Department is thus not involved in the
delivery of any public services or has any direct interface with the citizen or public at
large.
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Disinvestment Procedure
Proposals for disinvestments in any PSU, based on the recommendations of the
Disinvestment Commission or in accordance with the declared Disinvestment
Policy of the Government, are placed for consideration of the Cabinet
Committee on Disinvestment (CCD).
After CCD clears the disinvestment proposal, selection of the Advisor is done
through a competitive bidding process.
After receipt of the Expression of Interest (EOI), in pursuance of Advertisement
in newspapers / website, advisors are selected based on objective screening in
the light of announced criteria / requirements.
Bidders are invited through advertisement in newspapers / website to submit
their Expression of Interest. On receiving EOI from bidders, the advisors, after
due diligence of the PSU, prepare the information memorandum in consultation
with the concerned PSU. This is given to the short listed prospective bidders
who have entered into a confidentiality agreement. The list of bidders is
prepared after scrutiny of EOIs and those are shortlisted, who meet the
prescribed qualification criteria.
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Disinvestment Procedure
The draft share purchase agreement and the shareholder agreement are also prepared
by the Advisor with the help of the legal Advisors, and the final draft is prepared after
detailed consultation with the bidders, in consultation with the Inter-Ministerial Group
(IMG).
The prospective bidders undertake due diligence of the PSU and hold discussions with
the Advisor/ the Government/ the representatives of the PSU for any clarifications. Concurrently, the task of valuation of the PSU is undertaken in accordance with the
standard national and international practices.
Based on the feedback received from the prospective bidders, the Share Purchase
Agreement (SPA) and Shareholders Agreement (SHA) are finalised by IMG. After getting
them vetted by the Ministry of Law, they are approved by the Government (CCD).
Thereafter, they are sent to the prospective bidders for inviting their final bindingfinancial bids.
The material for finalising upset price is taken from the advisors after receipt of financial
bids. The bids are not opened at this stage and are sealed after receipt, in presence of
bidders. Upset price determination exercise is thereafter completed by inter-ministerial
Evaluation Committee and the IMG. The sealed bids are then opened by IMG (in
presence of bidders).The Upset Price. Is then compared by the IMG.
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Disinvestment Procedure
After examination, analysis and evaluation, the recommendations of the Inter Ministerial
Group (IMG) are placed before the Core Group of Secretaries on Disinvestment (CGD),
whose recommendations are placed before the Cabinet Committee on Disinvestment
(CCD) for a final decision regarding selection of the strategic partner, signing of the
Share Purchase Agreement and Shareholders Agreement, and other related issues.
In case the disinvested PSU's shares are listed on the Stock Exchange, an open offerwould be required to be made by the bidder before closing the transaction, as per SEBI
guidelines: Takeover Code.
In the disinvestment process mentioned above, Ministry of Disinvestment is assisted at
each stage by an IMG, headed by Secretary (Disinvestment) and comprising officers
from the Ministry of Finance, Department Of Public Enterprises, the Administrative
Ministry / Department controlling the PSU, Department of Company Affairs, Departmentof Legal Affairs, CMD / Director (Finance) of the company being disinvested, and the
Advisors and the Legal Advisors.
After the transaction is completed, all papers and documents relating to it are turned
over to the CAG of India; the CAG prepares an evaluation for sending to Parliament
and releasing to the public.
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Approach for Disinvestment
On 5th November 2009, Government approved the following action plan for
disinvestment in profit making government companies:
Already listed profitable CPSEs (not meeting mandatory shareholding of 10%)
are to be made compliant by Offer for Sale by Government or by the CPSEs
through issue of fresh shares or a combination of both
Unlisted CPSEs with no accumulated losses and having earned net profit in three
preceding consecutive years are to be listed
Follow-on public offers would be considered taking into consideration the needs
for capital investment of CPSE, on a case by case basis, and Government could
simultaneously or independently offer a portion of its equity shareholding
In all cases of disinvestment, the Government would retain at least 51% equityand the management control
All cases of disinvestment are to be decided on a case by case basis
The Department of Disinvestment is to identify CPSEs in consultation with respective
administrative Ministries and submit proposal to Government in cases requiring
Offer for Sale of Government equity
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RECEIPTS FROM STRATEGICSALE DURING 1999-2000
TO 2003-04
http://../Windows/Documents/RECEIPTS%20FROM%20STRATEGIC%20SALE%20DURING%201999-2000%20TO%202003-04.xlsxhttp://../Windows/Documents/RECEIPTS%20FROM%20STRATEGIC%20SALE%20DURING%201999-2000%20TO%202003-04.xlsxhttp://../Windows/Documents/RECEIPTS%20FROM%20STRATEGIC%20SALE%20DURING%201999-2000%20TO%202003-04.xlsxhttp://../Windows/Documents/RECEIPTS%20FROM%20STRATEGIC%20SALE%20DURING%201999-2000%20TO%202003-04.xlsxhttp://../Windows/Documents/RECEIPTS%20FROM%20STRATEGIC%20SALE%20DURING%201999-2000%20TO%202003-04.xlsxhttp://../Windows/Documents/RECEIPTS%20FROM%20STRATEGIC%20SALE%20DURING%201999-2000%20TO%202003-04.xlsx7/31/2019 Government Disinvestment Plan for PSUs
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Recent Disinvestments (April 2009
Onwards)
Sl.No. Company1. NBCC2. ONGC3. MOIL LTD.4. COAL INDIA LTD.5. POWER GRID CORP.OF INDIA LTD.6. ENGINEERS INDIA LTD.7. SJVN LTD.8. NMDC LTD.9.
RURAL ELECTRIFICATION CORP.LTD.
10. NTPC LTD.11. OIL INDIA LTD.12. NHPC LTD.13. SHIPPING CORP.OF INDIA LTD.,THE14.
POWER FINANCE CORP.LTD.
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Forthcoming Disinvestments
Sl.No. Company1. TYRE CORPORATION OF INDIA LTD2. HINDUSTAN COPPER LTD.3. STEEL AUTHORITY OF INDIA LTD.4. RASTRIYA ISPAT NIGAM LTD.5. BHARAT HEAVY ELECTRICALS LIMITED
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` 33,500-cr shares on the block: Govt plans to
sell stake in 15 PSUs this fiscal
The government is planning disinvestment in 15
public sector enterprises in the current fiscal,
including sale of shares worth ` 7,000 crore in the
state-owned mining company NMDC. "Shares worth $6 billion (about ` 33,500 crore) are
on the block," a senior official of the finance
ministry said, adding that the government has lined
up disinvestment in companies such as Hindustan
Copper, BHEL, Engineers India and NHPC.
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Disinvestment Companies
Sovereign wealth funds
from the region, such as
KIA, Mumtalakat, Saudi
Arabian Bank andstate pension funds,
have evinced interest to
invest in India through
the framework, anofficial said.
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Initiatives
The ministry is hopeful of receiving the first investment through this route within
a month.
The roadshows, held in Riyadh, Dubai, Muscat and Bahrain, included one-on-
one meetings with investors and officials from RBI, Sebi, departments of
disinvestment, revenue and economic affairs, and ministry of external affairs.
Industrial groups from the region, such as Zubair group, Al Khonji, Bahwan
group and Qurum business group, showed interest in realty, banking and
manufacturing firms.
The disinvestment department is exploring options, such as creation of an
exchange-traded fund with PSUs, which will provide the government a stablemechanism to raise large sums of money from the market with minimal
disruption to the share prices of these companies.
Choppy markets forced the government to defer much of its disinvestment
programme in last fiscal, when just ` 13,894 crore could be collected against
a target of ` 40,000 crore.
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How to and how not to Disinvest
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Government planning ETF for PSU
stake sale
The finance ministry is mulling setting up of an exchange traded fund (ETF) for
selling shares of state-owned companies as part of steps to meet the
disinvestment target of 30,000 crore in the current fiscal.
The disinvestment department is considering setting up of an exchange traded
fund in the format of Hong Kong Tracker Fund and has floated a concept note for
implementing it, a top official in the finance ministry told PTI.
Thedisinvestment department is planning to create a pool of shares of the PSUs it
wants to divest and create a fund (ETF), which would be listed on stock exchanges.
The ETF, which is an investment fund traded on stock exchanges much like stocks,
would have an underlying benchmark which could be an index on the stock
exchange. The government has already identified a host of companies fordisinvestment in the current fiscal.
These include Hindustan Copper, Oil India, SAIL, BHEL, HAL and RINL.
The government is seriously pursuing this concept, after the offer for sale (OFS)
and institutional placement programme (IPP) model, to meet the ` 30,000 crore
target.
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Funds procured how to use
The government is likely to revert to the policy of using 25 per cent ofthe disinvestment proceeds for reviving sick PSUs and recapitalisingthe profitable ones from the next fiscal.
The earlier stated policy of the government was to utilise 75 per centof the disinvestment proceeds for social sector programmes and the
rest for recapitalisation and revival of sick and profitable units.
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