Professional Documents
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Disinvestment in India 2
Disinvestment in India 2
A PROJECT REPORT ON
.......Amartya Sen
Submitted By Gaurav Vijay Shah (91080) Harish Mittal Harsh Lakhotia Himani Agarwal Jitesh Kejriwal Karan Soni (91081) (91082) (91083) (91084) (91085)
Acknowledgement
Intuition and concepts constitute ... the elements of all our knowledge, so that neither concepts without an intuition in some way corresponding to them, nor intuition without concepts, can yield knowledge. In a similar way the credit of developing this project goes to many others who helped us in building both our concepts and intuitions. We are indebted to our project guide Dr K. L. Chawla for providing us with a challenging & interesting project. We owe the credit of developing this project to him. Without his guidance realization of this project would not have been possible. We would also like to thank our batch mates for the discussions that we had with them. All these have resulted in the enrichment of our knowledge and their inputs have helped us to incorporate relevant issues into our project.
Regards Gaurav Vijay Shah (91079) Harish Mittal Harsh Lakhotia Himani Agrawal Jitesh Kejriwal Karan Soni (91081) (91082) (91083) (91084) (91085)
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Executive Summary
Privatization, a key component of economic liberalization remained dormant for the nearly the entire first decade of significant economic reforms in India. The usual explanations have been that weak governments could not overcome the many vested interests or that there has been ideological resistance to economic reforms among Indias elites. Indian privatization came out of the shadows, however, when the former 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 opening address to Parliament in the 2002 budget session. How does one explain both the gradualism during the 1990s and the recent episodic acceleration of privatization in India and what does it reveal both about state capabilities and the strength of societal actors? This report argues that it was not vested interests alone, but institutional structures, in particular those embedded in the judiciary, parliament and Indias financial institutions, that account for 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 the timing of reforms. Just as the external debt crisis forced the initial round of economic reforms, the growing internal debt problem and the fiscal crisis of the Indian state has increased the opportunity cost of state-owned enterprises (SOEs). The passage of time has also resulted in significant changes in Indian policymakers and citizens attitudes regarding the relative effectiveness of state and markets in commercial activities, as well as their assumptions about the Indian state being a guardian of the public interest.
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Table of Contents
Chapter 1 A background
Objective Relevance of study Methodology Literature review Public sector performance since 1950 by R Nagaraj Disinvestment in India by Sudhir Naib Disinvestment in Privatisation in India, Assessments and options by R Nagaraj Disinvestment in India, I loose and you gain by Pradeep Baijal Brief Introduction
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BACKGROUND
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OBJECTIVE:
1. To Analyze the Disinvestment process in Indian Public Sector. 2. To study the disinvestment done was a Success or a Failure for the Indian Economy.
RELEVANCE OF STUDY:
The report aims to study the evolution of disinvestment in India from the scratch and in thorough detail so as to, not only understand the need and the procedure of the same, but also to be able to critically evaluate the strategy and its several implementations till date. The project enables us to discover and highlight several instances and facts and conclude that the disinvestment was not efficiently conducted. We also conclude that the objectives behind disinvestment, stated by the government way back in 1991have failed miserably. After such an insightful analysis, we are in a position to say that though disinvestment in India had several bounding objectives, it has been a failure story and much has to be done to
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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 independence era, understanding the strategy of Public Sector Units used by the government for common good, then pin-pointing the loop holes and the consequent shortcomings of this strategy, thus identifying an emergent need for disinvestment. We further study the objectives of disinvestment and the process followed for the same. A detail study over a timeline of eighteen years is done, dividing this entire span into three phases. This study has helped us to cortically evaluate the disinvestment in several sectors and comment on the current situation i.e. 2008 onwards. Several legendary cases of disinvestment like the MFIL, BALCO, VSNL, Maruti Udyog Ltd., Lagan Jute Mill etc have been developed to sheer details. This has enabled us to study the situation then and comment upon their worthiness. We have gone one step ahead to state several in depth facts and conclude that neither, the disinvestment was not carried out the way it must have been nor have the funds realized been used for the purposes intended.
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 share in domestic investment has been nearly halved, but its output share 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
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3. DISINVESTMENT NAGARAJ
AND PRIVATIZATION IN
INDIA,
BY: R
The author studies close to 250 public sector enterprises (PSEs) owned and managed by the central government, mostly in industry and services (excluding the commercial banks and financial institutions). The study suggests an alternative institutional arrangement for
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INTRODUCTION
In macroeconomics, especially after the Latin American debt and inflationary crisis in the 1980s, privatization was widely advocated as a quick and sure means of restoring budgetary balance, to revive growth on a sustainable basis. At the micro level, the change in ownership is often advocated to increase domestic competition, hence efficiency; and encourage public participation in domestic stock market all of which is believed to promote popular capitalism that rewards risk taking and private initiative, that is expected to yield superior economic outcomes. Employing about 19 million persons, Public Sector currently contributes about a quarter of Indias measured domestic output. Administrative departments (including defence) account
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Source: http://dpe.nic.in/newpayrevision/Chapter-1-Overview%20&%20Profile_Final.pdf
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DEFINITION:
Disinvestment refers to the action of an organization or the government in selling or liquidating an asset or subsidiary. In simple words, disinvestment is the withdrawal of capital from a country 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 ownership and not transfer of full ownership. While, privatization refers to the transfer of ownership from government to private investors. Disinvestment is called as Partial Privatization.
INDIAN SCENARIO:
A large number of PSUs were set up across sectors, which have played a significant role in terms of job creation, social welfare, and overall economic growth of the nation; they rose to occupy commanding heights in the economy. Over the years, however, many of the PSUs have failed to sustain their growth amidst growing liberalization and globalization of the Indian economy. Loss of monopoly and a protectionist regime, and rising competition from private sector competitors have seen many of the government-owned enterprises lose their market share drastically. In many instances, many of the PSUs have found themselves unable to match up to the technological prowess and efficiency of private sector rivals, although many have blamed lack of autonomy and government interventions for their plight.
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The difficulties of governments that run businesses are well-known. PSUs face little "market discipline". There is neither a fear of bankruptcy, nor are there incentives for efficiency and growth. The government is unable to obtain efficiency in utilising labour and capital; hence the GDP of the country is lowered to the extent that PSUs control labour and capital.
When an industry has large PSUs, which are able to sell at low prices because capital is free or because losses are reimbursed by periodic bailouts, investment in that entire industry is contaminated. This was the experience of Japan, where the "zombie firms" - loss-making firms that were artificially rescued by the government - contaminated investment in their industries by charging low prices and forcing down the profit rate of the entire industry.
Further, in many areas, the government faces conflicts of interest between a regulatory function and an ownership function. As an example, the Ministry of Petroleum crafts policies which cater for the needs of government as owner, which often diverge from what is best for India.
There is a fundamental loss of credibility when a government regulator faces PSUs in its sector: there is mistrust in the minds of private investors, who demand very high rates of return on equity in return for bearing regulatory risk.
Then the problem of corruption and misappropriations are all well known in India.
TYPES OF DISINVESTMENT
There are various types of disinvestment. Some of them are as follows:
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PUBLIC
AT FIXED PRICE:
government holds the sale of the equity shares to the public at large at a pre determined price. Examples:-MFIL, BALCO, CMC, HTL, IBP, HZL, PPL, and IPCL.
2. STRATEGIC
SALE:
investor i.e. majority of equity holdings are divested. Examples: -Offer of 1 million shares of VSNL, listing of ONGC IPO.
3. INTERNATIONAL
OFFERING:
4. ASSET SALE AND WINDING UP: This is normally resorted to in companies that are either
sick or facing 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
DISINVESTMENT PROCESS:
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parliamentary approval. While the first ruling gave impetus for strategic sale of many enterprises like Hindustan Zinc, Maruti, and VSNL etc. since 2000, the second ruling stalled the privatisation of the petroleum companies, as government was unsure of getting the laws amended in the parliament.
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DISINVESTMENT PROCEEDS
IN
AND
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The basic objective of starting Public Sector in India was to build infrastructure and rapid economic growth. However, a number of problems such as low productivity, over-manning and other economic 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 roughly constant but savings and investment rate more than doubled. From the table it can be seen that it was because of low productivity that Indias growth was slow. Investment and Savings as a percentage of GDP
Year Investment (Current Prices,% GDP) Investment (Constant 1980-81 prices, %GDP) Domestic Savings (Current Prices, %GDP) 1950-51 10.2 14.7 10.4 1960-61 15.7 18.1 12.7 1970-71 16.6 18.7 15.7 1980-81 22.7 22.7 21.2 1989-90 24.1 21.8 21.7
Revenue Current Expenditure Current Revenue Balance Capital Expenditure Total Expenditure Fiscal Deficit Primary Fiscal Deficit
3. FISCAL DEFICIT OF THE CENTRAL GOVERNMENT The fiscal deficit of the central govt rose consistently from 4% in mid 1970s to 8% of GDP in 1985-86. Fiscal Deficit of Government 1975-76 to 1990-91
Year 1975-76 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 Fiscal Deficit 4.1 6.2 5.4 6.0 6.3 7.5 8.3 9.0 8.1 7.8 7.8 8.4 Budget Primary Revenue Monetised Deficit Deficit Deficit Deficit 0.5 2.5 1.1 0.0 1.8 4.3 1.5 2.6 0.9 3.4 0.2 2.0 0.9 3.8 0.7 1.9 0.7 4.0 1.2 1.9 1.6 5.0 1.8 2.6 2.0 5.5 2.2 2.4 2.8 5.8 2.7 2.4 1.7 4.7 2.7 2.0 1.4 4.2 2.7 1.6 2.3 3.9 2.6 3.1 2.1 4.4 3.5 2.8 Source: Economic Survey, 1992-93, Government of India
A significant factor was governments non-plan expenditure and an inefficient interest payment system. Again the gulf war of 1990 brought the nation to the brink of international debt. There were huge net outflows of NRI deposits from October 1990 and continued till mid 1991.
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RBI adopted sharp contractionary measures and had taken huge amounts from International Monetary Fund in July, 1990 and January, 1991 amounting to $2.4 billion.
Foreign Exchange Reserves were reduces $ 1 Billion which could support only two weeks imports. Inflation was staring at 14% On July6, 1991 47 tons of gold were transferred from RBI to Bank of England, London. Already 20 tons of gold were sold in International market through State Bank of India.
When India turned to IMF and World Bank for further support, they showed concerns over returns on State owned enterprises and budgetary support provided to them. It was then a decision was taken in July, 1991 to bring about macroeconomic stabilisation and structural reforms of industrial and trade policy.
TIMELINE:
In February, 1991 the Department of Economic Affairs submitted a paper to Cabinet Committee on Political Affairs (CCPA) to approve the government intentions to disinvest up to 20% of its equity in selected public sector undertakings. The disinvestment announcement was made on 4March, 1991 during the interim budget session for 1991-92 under the Chandrashekhar government. The Policy of disinvestment has evolved over the years. This period can be broadly divided into 4 phases.
The first phase being 1991-92 to 1995-96 where partial disinvestment was taken in piecemeal manner. Second Phase 1996-97 to 1997-98, an effort to institutionalize the disinvestment process was undertaken on a firm footing by constituting the Disinvestment Commission.
The third Phase 198-98-99 to 2007-08 where Department of Disinvestment (Now a Ministry) and National investment fund was formed to look after the disinvestment process and the funds generated from it.
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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 Wireless apparatus (excluding radio
receiving sets).
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8. Railway Transport.
Coal and lignite Mineral oils Arms, ammunition and defence equipment
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DISINVESTMENT IN 1991-92:
A steering Committee was formed for selection of PSEs for disinvestments. The Department of Public Enterprises (DPE) coordinated all activities under the Ministry of Industry.
A)
Out of 244 public enterprises 41 were selected, but 10 were dropped on the grounds of being consultancy firms, negative asset value or they incurred losses in previous financial year. The Remaining 31 were grouped into 3 categories Very Good, Good and Average on the basis of net assets value per share vis-a-vis face value of Rs10 as on March,1991. The total value of equity in each basket was Rs50 million. Bids were invited from 10 financial institutions/ mutual funds which consisted of 825 bundles each consisting of 9 PSEs. A total of 710 bids for 533 bundles were received from 9 mutual funds/ institutions and 406 bundles for a total value of Rs14.2billion were sold. Unit Trust of India was the major purchaser accounting for Rs. 7.75 billion of the sale.
B)
In second tranche DPE asked ICICI to evaluate and advice issue price equity of selected PSEs. A List of 16 PSEs was prepared and shares were grouped into 120 bundles as before. The reserve price fixed per bundle was Rs 10.08 crore. Bids were invited from 36 institutions and banks. A total of Rs. 1611 crore were realised with Unit Trust of India again being the major purchaser. The Shares of Metal Scrap Trading Corporation remained unsold. Details of the PSEs Divested in 1991-92
Name of the Enterprise Andrew Yule (AY) Bharat Earth Movers Ltd. (BEML) FMG 18 B, GROUP-IV No. Of Shares(in crore) 0.1015 0.6000 % of Disinvestment 9.60 20.00 Page 28
The Narasimha Rao Government kick started this phase with small lots of disinvestment of shares in 47 companies, a record. A sum of Rs 3,038 Crore was generated against a target of Rs 2,500 Crore making 1991-92 one of only three years in the last 13 when actual disinvestments receipts exceeded the target.
DISINVESTMENT IN 1992-93:
As per the budget of 1992-93 Rs. 3500 crore were to be raised by disinvestment during the year. Out of this Rs. 1000 crore was meant for National Renewal Fund (NRF) which was set up in February, 1992 to protect the interest of workers and provide a social safety net for labour.
A)
In this phase auctioning of shares on individual PSE basis was done. Tenders were invited for a total of 8 PSEs. The minimum bid limit was set at Rs. 2.5 crore. The minimum reserve price was fixed on the basis of recommendations from merchant bankers like ICICI, IDBI and SBCM (State Bank of Capital Market) The average of their prices was set as the Upset Price. A total of 12.87 crore shares were sold for a value of Rs 681.95 crore with 286 bids being received.
0.2500 0.3192
5.00 5.00
In November, 1992 the government invited bids for the purchase of 46.27 crore shares of 14 PSEs. The minimum bid limit was reduced to Rs 1 crore from Rs 2.5 crore. The criterion was kept same as 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 1183.83 crore. Details of the PSEs Divested in October, 1992
No. Of Shares Sold(in crore) % of Total number of shares of the PSE
Amount of Sale(in Rs Crore) 161.65 42.18 1.30 153.75 36.47 10.78 118.19 0.72 34.94
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Bharat Petroleum Corporation Limited (BPCL) Bongaigaon Refinery & Petrochemicals Ltd. (BRPL) Fertilizers and Chemicals Ltd. (FACT) Hindustan Petroleum Corp. Ltd. (HPCL) Hindustan Zinc Ltd. (HZL) Indian Telephone Industries Ltd. (ITI) National Aluminium co. Ltd. (NALCO) National Fertilizers Ltd. Neyveli Lignite Corp. Ltd. (NLC)
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Shares of 15 PSEs were offered for sale thorough auction. Out of 192 bids which were received, 57 bids emerged successful on the basis of the reserve prices fixed by the core group based on the recommendations of the merchant bankers. A total amount of Rs 46.73 crore was realised through sale of 1.0096 crore shares of 9 PSEs. PSE Disinvested in March, 1993
No of shares sold (in crore) Bharat Heavy Electricals Limited Bongaigaon Refinery & Petrochemicals Ltd Hindustan Copper Ltd Hindustan Zinc Ltd Hindustan Machine Tools Ltd Indian Telephone Industries Ltd National Aluminium Company Ltd National Mineral Development Corp. Ltd Neyveli Lignite Corp Ltd Total 0.1117 0.0800 0.3411 0.0300 0.0300 0.0700 0.1023 0.2140 0.0305 1.0096 % of total no of shares of the PSE 0.45 0.40 1.12 0.07 0.34 0.79 0.08 1.59 0.02 Amount of sale (in Rs crore) 8.21 3.22 8.07 0.75 1.41 4.85 1.88 17.88 0.46 46.73
Source: Enterprise-wise details regarding number of shares and amount realised obtained by author from Department of Public Enterprises, Percentages of equity disinvested worked out by author based on paid up equity. Amount realised from divestment in 1992 93 FMG 18 B, GROUP-IV Page 32
Thus a total of 1912.51 crore was realised during 1992-93 against the target of Rs 2500 crore.
DISINVESTMENT IN 1993-94:
The target during this fiscal year was kept at Rs 3500 crore but the government could not go in for further sale of shares due to unfavourable stock market conditions through 1993-94.
DISINVESTMENT IN 1994-95:
No divestment of PSE shares took place during 1993-94 due to adverse market conditions. In spite of this an advertisement for sale of shares in some PSEs was released in March 1994. Actual realisation of funds took place from this round of divestment took place in 1994-95. Changes effected in the procedure to encourage divestment are:
A)
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.
Considering the stock market conditions, Government evaluating the recommendations of two merchant bankers Industrial Credit and Investment Corporation of India, and Industrial Development Bank of India fixed the minimum price to off-load shares of 7 PSE in March 1994.Out of these 7 PSE, only 1 PSE was not sold as no bid had been received. PSE Divested in March/April, 1994
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Total 11.317 2282.156 Source: Details of total number of shares sold and amount realised as per Public Enterprises Survey, 1995-96, VOL-I Percentage of equity disinvested worked out by author based on paid-up equity.
B)
Notice inviting tenders was issued in October 1994 for sale of shares in seven PSEs. Shares were not sold for MTNL as there was no bid. 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
No of shares sold (in crore) 1.299 1.443 0.007 0.686 0.372 0.387 % of total no of shares of the PSE 20.00 3.77 0.01 2.00 0.41 1.37 Amount of sale (in crore) 99.71 1028.11 0.28 1051.52 22.66 28.08
Name of the Enterprise Container Corporation of India Indian Oil Corporation National Fertilizers Ltd. Oil and Natural Gas Co Ltd Steel Authority of India Shipping Corporation of India Ltd.
Total 4.194 2230.36 Source: Details of total number of shares sold and amount realised as per Public Enterprise Survey, 1995-96, VOL-I. Percentage of equity disinvested worked out by author based on paid up equity.
C)
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Source: Details of number of shares sold and amount realised as per Public Enterprises Survey, 199596, VOL-I. Percentage disinvested worked out by author on the basis of paid-up equity.
No of PSEs Disinvested 6 6 5 17
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In addition, shares of Industrial Development Bank of India (IDBI) were disinvested during the year and an amount of Rs 193 crore was realised. Although Public Enterprises Survey does not reflect this amount but Ministry of Finance takes this into account. So the total disinvestment receipts for the year was Rs 362 crore (Rs. 168.48 crore from disinvestment in 4 PSEs plus Rs 193 crore from disinvestment in IDBI).
To select the financial advisors for specified PSUs to facilitate the disinvestment process. To monitor the progress of disinvestment process and take necessary measures and report periodically to the Government. The core group industries-telecommunications, power, petroleum etc that are capital-intensive and where the market structure could be an oligopoly.
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Public Service Enterprises Bongaigaon Refineries and Petro Chemicals Ltd (BRPL) IBP Ltd Sponge Irol India (SIIL) Rashtriya Ispat Nigam Ltd (RINL) Hindustan Zinc Ltd (HZL) Hindustan Copper Ltd (HCL) Bharat Aluminium Co (BALCO) Kudremukh Iron Ore Co Ltd (KIOCL) Manganese Ore India Ltd (MOIL) Pawan Hans Helicopters Ltd (PHL) Shipping Corporation of India (SCI) Engineers India Ltd (EIL) Engineering Projects (I) Ltd (EPIL) Metallurgical and Engg Consultants (India) Ltd. (MECON) Indian Petrochemicals Corp Ltd (IPCL) Hindustan Insecticides (HIL) Hindustan Organic Chemicals Ltd (HOCL) Fertilizers and Chemicals (Travancore) Ltd (FACT) National Fertilizers Ltd (NFL) Madras Fertilizers Ltd (MFL) Pyrites, Phosphates and Chemicals Ltd (PPCL) Rashtriya Chemicals and Fertilizers Ltd (RCFL) Paradeep Phosphates Ltd (PPL)
Transportation services
Fertilizer
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Tourist Services
Consumer goods
Disinvestment Modalities Recommended by the Disinvestment Commission Modalities of Disinvestment No of PSEs Name of PSEs
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ITDC, MFIL, HCIL, R-Ashok U-Ashok, PHL, SIIL, MSTC Trade sale 8
Involving no change in ownership/management Offer of shares 6 8 4 1 58 GAIL, CONCOR, MTNL, NALCO, NMDC, RITES OIL, ONGC, NTPC, NHPC, POWERGRID, SAIL, CEL, MECL EPIL, ET&T, HVOC, RICL PEC
No change disinvestment deferred Closure/sale of assets Management employee buyout/strategic sale/closure Total
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 were chosen namely IOC and VSNL. But due to unfavourable market conditions the GDR of only VSNL could be issued. In the GDR, 39 lakh shares of VSNL were disinvested resulting in an amount of Rs 380 crore.
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4.0840 4.0840
Cross holding by ONGC Cross holding by IOC Cross holding by GAIL GDR issue
Note: All these PSEs were partially disinvested earlier also Source: Public Enterprises Survey, 1998 99, VOL-I gives total amount realised as Rs 5,371 crore. Enterprise-wise details are obtained from Ministry of Disinvestment
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Note: Other than MFIL, all other enterprises were partially disinvested earlier also. Source: Enterprise wise details obtained from Ministry of Disinvestment.
Note: Other than BALCO, all other enterprises were partially disinvested earlier also. Source: Ministry of Disinvestment
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Strategic sale of 33.58 % Strategic sale of 25 % Strategic sale of 74 % Sale of 8 hotels and long term lease of one hotel
Note: Out of these six PSEs, three CMC, VSNL and ITDC were partially disinvested earlier also. Source: Ministry of Disinvestment website
Strategic sale of 26 % Sale of 10 properties Residual sale of 26 % equity 6.06 % equity disinvested in favour of employees
Note: Other than Maruti Udyog Ltd, other PSEs were partially disinvested earlier. Source: Ministry of Disinvestment reply to Lok Sabha. Unstarred question no. 1351 answered on 26 Feb 2003.
From a summary of the Disinvestment from 1991-92 to 2002-2003 we can know what targets were set by the government and how much was realised. Also the various companies from which the government has disinvested are mentioned.
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yield adequate returns in order to enlarge their capital base to finance expansion/ diversification.
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CORPUS OF NIF:
The corpus of the Fund is Rs.1814.45 crore being the proceeds from the disinvestment in Power Grid Corporation and Rural Electrification Corporation. The pay out on NIF was Rs.84.81 crores in the first year. The payout received in the second year was Rs.209.24 crores. 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 of 9.25%.
RESTRUCTURING OF NIF:
In view of the deceleration of GDP growth due to global economic downturn coupled with unprecedented drought this summer, we are facing a reduced budgetary resource generation possibility. To ensure that this does not negatively impact the growth of economy; Government has approved (on 5th November, 2009) one-time exemption permitting full utilization of disinvestment proceeds deposited in the National Investment Fund, over this and the next two Financial Years, in meeting the capital expenditure requirements of selected social sector programmes decided by the Planning Commission/Department of Expenditure. The status quo ante will be restored from April 2012.
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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 their respective draft prospectuses with SEBI over the past two years. 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 government stake will come down to 86.3 per cent post-issue. The earnings per share (EPS) for the FY09 is Rs 1.01.
Coal India is among the largest coal-producing companies in the world and is the only unlisted navaratna PSU (except for HAL, which comes under strategic area). CIL had a turnover of Rs 38631 crore in 2007-08. It is expected to hit the IPO market in near future. Telecom major, BSNL and steel maker, RINL (Vizag steel), Cochin Shipyard, Telecommunications Consultants India and Manganese Ore are the other likely candidates that may tap the market. These entities have been on the divestment shortlist for quite a while.
Stake dilution is also possible in listed PSUs with a high proportion of government
holdings. A 5-10 per cent stake sale in these companies will bring huge gains for the government, even without losing the management control. NMDC, BHEL, NTPC, SAIL, Neyveli Lignite, MMTC, RCF are likely follow-on offer candidates. At current market prices, a 5 per cent stake sale in NTPC would fetch the government around Rs 8,864 crore. In case of Neyveli Lignite, SAIL, BHEL, MMTC and NMDC, the receipts would be around Rs 1,168 crore, Rs 3,570 crore, Rs 5,321 crore, Rs 6,800 crore and Rs 8,900 crore respectively.
Public sector banks that have a high proportion of government holdings are ripe for a
dilution of stake, given their capital needs. While the stake dilution in PSBs will not help the government in terms of receipts, as fresh issues may be needed to bolster the banks capital adequacy requirements, it will save the government equity infusion from time to time.
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30 (30)
Minority shares sold by auction method in bundles of very good, good, and average companies. Bundling of shares abandoned. Shares sold separately for each company by auction method. Equity of 7 companies sold by open auction but proceeds received in 1994 Page 50
1992 93
2.500
1912.51
16 (2)
1993 94
3.500
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1995 96
7,000
362.00
4 (-)
1999 00
10,000
1573.78
5 (1)
2000 01 2001 02
10,000 12,000
1868.73 3130.94
3 (1) 6 (3)
2002 03
12,000
3265.14
5 (1)
2003 - 04
14,500
15,547
10
2004 - 05
4,000
2,764.87
2005 - 06
No target fixed
1,569.68
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4,259.90 --
OIL) (60)
37,803.46
Note: *Enterprises disinvested for the first time given in brackets. * Out of Rs.5371.11, Rs. 4184 crore constitute receipts from cross purchase of shares of ONGC, GAIL and IOC. ** Out of Rs.1479.27, Rs.459.27 crore constitutes receipts from cross purchase of shares of ONGC, GAIL and IOC.
CASE STUDIES
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During 1995-96 to 1997-98 MFIL recorded profits as wheat was provided to it at a subsidised rate but once that was withdrawn it started making losses as the increased costs could not be passed on the consumers. Also the high overhead cost of Rs 1.90 per loaf against the industry norm of Rs.0.90 per loaf added to the problem. In September, 1997 the government approved 50% disinvestment of MFIL to strategic partner through competitive global bidding. In October 1998, ANZ investment Bank was appointed as the global advisor for assisting in disinvestment. In January, 1999 the 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 Expressions of Interest. Out of these, 4 conducted the due diligence of the company, which included visits to Data Room, interaction with the management of the MFIL, and site visits. In October, 1999 post due diligence, 2 parties remained in the field, and on the last day for submission 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 the strategic partner in and the deal was closed on 31.1.2000.
VALUATION OF MFIL:
The 100% value of MFIL by different methodologies is give below: MFIL: Valuation under different Methods
Valuation Discounted Cash Flow Key Assumption As is Where is& Value (in Rs crore) Negligible
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Sales realization for 74% equity was Rs. 105.45 crore. This corresponds to Rs. 142.50 crore for sale of 100% equity. The agreement with HLL provided for post-closing adjustments difference between net working capital as on 31st, March, 1999 and net working capital on closing date 31st January, 1999 and increase in debt amount on closing date 31st, January, 1999. Due to reduced working capital and increase in debt amount, the government paid back Rs. 10.94 crore. Thu the net realisation was Rs. 94.51 crore for 74% equity.
POST-DISINVESTMENT PROCESS:
MFIL: Post Disinvestment Performance Details Year Sales -Bread Energy Food Total Net Profit / Loss Pre- Disinvestment 1998-1999 89 71 160 (7) 1999-2000 78 71 149 (48) Post-Disinvestment 2000-2001 102 66 168 (20)
The decline in the sales of Modern Bread, which continued till the beginning of 2000, was arrested. Weekly sales in December 2000 were around 44 lakh SL, which is a 100% increase over the figure of April 2000.
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Steps were taken to improve the quality of bread, its packaging and marketing with trade-promotion activities, and to train the manpower in quality control systems. In November, 2002 wages have increased by an average of Rs.1800 per employee. Rs. 30 crore was spent for VRS. Again Rs. 7 crore were infused for safety & hygiene purposes at various manufacturing locations
The Government was also entitled to Put its share of remaining equity of 26 % at Fair Market Value for 2 years from 31st January 01 to 30th January 03. The Government exercised this option and thereby received Rs. 44.07 crore 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 were Rs 15 crore and accumulated losses were Rs 79 crore. At the operating profit level, before interest and depreciation, it did make a profit though of Rs 22 crore compared to a loss of Rs 7 crore in the previous year. Bread sales grew by about 7%. The company suffered as it lost some lucrative government contracts and changed its operational structure. Hence overall sales declined by 35% to Rs 95 crore. However, HUL did enjoy tax benefits as MFIL was a sick industrial unit. The company put MFIL on the block in 2006 but failed to clinch a deal However, HUL still was unsuccessful in turning around the business and due to high employment costs and low margins. As per the company, the culture of MFIL was a complete misfit with its own. The company has committed a mistake while conducting the due diligence process.
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1998 - 99 870.90 68.84 939.80 758.24 181.56 140.64 134.34 76.32 23.00
1999 2000 896.64 70.08 966.72 806.28 160.44 122.01 116.19 55.89 18.00
Sales Other income Total income (1+2) Total expenditure Profit before depreciation, interest & taxes (PBDIT) Profit before interest & taxes (PBIT) Profit before tax (PBT) Profit after tax (PAT) Dividend
Source: Public Enterprises Survey, 1999 2000
The valuation was applied by the official valuer J P Morgan. The reserve price of Rs 514.40 crore was reached by marking up the valuation, arrived at by using the discounted cash flow (DCF) technique, by 25 per cent, used as the control premium.
No sooner was the BALCO deal announced than it created a furore within and outside Parliament. The opposition raised eyebrows. There was distrust from state government and the workers of BALCO went on a 67 days strike. It seemed as if the Sterlite management had to sweat a lot before it actually got the right over the catch it craved for. This finally came to an end when the new management stroke a deal with the employees. Several new steps were undertaken, some of which are:
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In spite of losses of Rs. 200 crore due to the strike, an exgratia payment of Rs. 5000 was made to all employees. Long-term wage agreement for a period of 5 years was entered into/ Workmen get a guaranteed benefit @ 20% of basic pay. An Increase in allowances was also announced: 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, others users Rs. 150 to Rs. 260 pm.
Several new practices introduced. Few were: Job rotation Appraisal system
The new management is proposing an investment of Rs. 6000 crore which will increase production 4 times.
From a market share of around 17 per cent in 1995-96 in the primary aluminum business, BALCOs share had dropped to 14 per cent in 1998-99. Several reasons were mentioned that were responsible for hindering its growth. They were: Lack of economies of scale
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BALCO, a profit making PSU, was valued at what is considered a throwaway price:
Cash flows determined by undermining profitability: This also implies that BALCO's profitability has been undermined by the government's own role in stalling modernization and expansion at Korba. Hence, the then profit performance of the unit cannot be the basis on which the future profile of profits could be estimated. However, the tendency for Arun Shourie, the Minister for Disinvestment, to emphasize repeatedly that profits earned by BALCO had fallen from Rs.163 crore in 1996-97 to Rs.25 crore in 2000-01 suggests that this stream of profits has entered 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 and then using that to undervalue the firm, consciously or otherwise. BALCOs assets were undervalued: It is still being argued that a direct valuation of BALCOs assets was 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 to invest in a captive power plant of the kind owned by BALCO, it could cost Rs.1, 215 crore and this figure matters, for the value of the plant at Korba (set up in 1988-89) is still substantial, since a thermal power plant has a lifespan of around 35 years.
TO CONCLUDE:
A combination of inappropriate procedure, undue haste and unwarranted secrecy had created a veritable mess. This was followed by a roar and strike amongst the company workers. There was an opposition from the state government to the extent of throwing an offer to buy the Centres 51 % stake at Rs 5.52 bn. The claims on the lack of transparency are being continued till date. As stated by The Times of India, December 28, 2009, in response to an RTI query filed by advocate Arjun Harkauli, the Central Information Commission (CIC) observed that the tender documents and minutes pertaining to the Rs 551.5-crore divestment of Bharat Aluminium Company (BALCO) in Chhattisgarhs 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 pointing fingers. The deal certainly did not occur the way it was meant to, did not bring the profits to the extent possible, nor was it intended towards any
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GENESIS
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Government; in 1995-96, the State subsidy payable had gone into arrears totaling Rs.369
Due to OSEBs overall pathetic performance, the Government of Orissa commenced, in 1993, an extensive reform programme of the electricity sector. The reform programme was intended at improving the quality of electricity supply and stimulates economic growth in the region.
To give the power sector autonomy by keeping it away from governmental control.
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To attract large amounts of private finance into the power sector. To introduce competition in the power sector.
TO
To establish a separate act (The Orissa Electricity Reform Act) To un-bundle and corporatize OSEB To develop an autonomous power sector regulatory body To privatise the generation and distribution businesses
PROCESS:
The reforms process started with the enactment of The Orissa Electricity Reform Act in 1995. The Act was designed to address the fundamental issues responsible for the poor performance of the power sector in the State. The new legislation was aimed at restructuring the electricity industry, taking measures conducive to increasing the efficiency of generation, transmission, and distribution of electricity, opening avenues for private participation, and establishing a Regulatory Commission. The Act allowed for transfer of the assets, liabilities, staff, and statutory obligations of the OSEB to successor companies. Chart-2 below gives a pictorial representation of the change in the structure of the industry.
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1st Stage
2nd Stage
Some of the important steps taken after the enactment of the OER Act are as follows:
THE
PREPARATORY
STAGE
FOR
To ensure that privatisation leads to efficiency gains, Gridco had to bring changes in the internal environment variables like management, labour relations, and communication and
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ir c le
I I I
iv is io n s
iv is io n s
iv is io n s
u b d iv is io n s
Each distribution division was managed by a divisional manager (Executive Engineer) who reported to the circle manager (Superintending Engineer). The latter, in turn, reported to the
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28 % 18 %
This finding of high T&D losses against the reported 22 per cent figure in various forums and published sources was an eye opener to both the shareholders and the management. The programme established that, though the reduction of technical losses requires huge capital
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Energy Delivery
Meter Reading
Bill
Bill Distribution
Collection
Preparation
Credit Control
In the process, even before the privatisation, Gridco improved its performance in the following areas: (1) Regularisation of un-authorised connections, (2) Increase in bills based on actual meter reading, (3) Increase in billing as a percentage of input, (4) Increase in collection as a percentage of billing, and (5) Improvement in customer relationship. However, RIAP could not be extended to all the divisions of Gridco. As a result, the financial and operational performance of most of the divisions could not be improved.
GOVERNMENT
Government is major winner in this reform, which allowed it to reduce its exposure to this volatile sector at a time when its financial position was precarious. It realized Rs.159 crore by divesting 51 per cent of its stake in the distribution companies and around Rs.600 crore by divesting its stake in OPGC. It also got Rs.356 crore by selling TTPS (Talcher Thermal Power Station) to NTPC, which was adjusted against erstwhile OSEBs overdue payments to NTPC. But, more important, the Government has already saved more than Rs.1200 till now by stopping subsidy to the electricity sector.
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INVESTORS
Table below shows the parties who have acquired stakes in the newly formed distribution companies. New Investor Cesco Wesco Nesco Southco AES BSES BSES BSES Stake acquired 51% 51% 51% 51% Money paid (Rs. in crore) 42.00 88.19 28.80
The balance-sheets of Gridco (which remained as a transmission company) and the four distribution companies highlight the benefit that has been extended to the investors. Common size balance sheet of these companies is as follows.
Gridco Cesco Wesco Total Funds Capital and 20% 13 18 Reserves Accumulated Profit -26% 0 0 (- for Loss) Long Term Loans 69% 48% 50% Current Liabilities 37% 40% 33% Total Assets Fixed Assets 61% 60% 67% Current Assets 39% 40% 33% Source: Based on the Government of Orissa Gazette. Nesco 13% 0 50% 37% 63% 37% Southco 13% 0 57% 30% 70% 30%
It is interesting to note that the entire loss of transmission and distribution business was retained in the balance-sheet of Gridco, resulting in a negative book net-worth of Gridco; the distribution companies were not required to share it. Moreover, the capital structure of
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CONSUMERS
Consumers can be divided into three broad categories, namely, LT, HT, and EHT. As the reforms endeavour to reduce the cross-subsidization there is every possibility of the large consumers to benefit from the process. Consumers, irrespective of the category, benefit if the tariff reduces and the service improves. But, the tariff has already been revised four times. And, what is more important, the increase in tariff has far surpassed the rate of inflation, as depicted by Figure-4 below. Moreover, though the overall power available has increased over the years, the quality of service has not improved to the extent it was expected. Since the distribution companies have decided not to make any capital expenditure, the quality of the service that was offered by them has been affected. Consumers clearly have, so far, borne the brunt of the reforms and privatisation.
1.
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VSNL TRAFFIC
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Source: VSNL annual reports The ratio of inbound to outbound calls had been 4:1 in 2001. One important reason for this is the discriminatory pricing by VSNL. Another factor is that India is a much poorer than the typical countries to which it connects (U.S., Europe and Gulf), so that inbound 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 in earnings per share of Rs 62.41 out of which Rs 50.00 was declared as the dividend per share. VSNL had no debt. Its P/E ratio of each VSNL share was 4.68.It is seen that a large part of the costs is the network and transmission 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 DOT and Rs 1,386 crore to foreign operators during 2000-1 [VSNL Annual Report, 2000-1].
share holding of 52.97% in Videsh Sanchar Nigam Limited (VSNL) on 5.02.2002. The total paid-up capital of VSNL is Rs.285 crore, the Govt. holding being Rs.151crore. Rs.71.25crore of this equity is being sold to M/s Panatone (Tata Group) at a price of Rs. 1439 crore.. 2. Government had decided to disinvest in VSNL in January 2001 and the advertisement for inviting Expression of Interest was issued in February 2001. Several interested parties had submitted their Expression of Interest. After the process of due diligence was completed and the transaction documents frozen, financial bids were invited from the bidders on 1.2.2002. Two bids were received. 3. SBI Capital Markets Ltd. and CSFB were appointed as the advisors at a fee of 0.19% of the transaction value. M/s Crawford Bayley & 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 their recommendations regarding acceptance of the higher bid to the CCD. 4. The Government has in the process of disinvestment in VSNL received 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 a price of Rs. 202 per share, taken additional amount as dividend, special dividend and dividend tax. Besides the Government has also taken measures to take out surplus, yet very valuable land (value Rs. 778 crore) from VSNL, and also restrict use/sale of land through 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 earned Rs. 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 Government would gain more than Rs. 350 crore every year. 6. The strategic partner has been provided a call option for the 5th year subject to the condition that the Government would be retaining at least one share and hence one vote
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PRIOR TO DIVESTMENT:
When the privatization process of VSNL began in 1991-2, there was 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; Strategic sale.
In 1991-2, VSNL disinvested equity of the face value of Rs. 12 crore in favour of various financial institutions, mutual funds and banks. As of March 1993, out of a paid up equity capital of Rs 80 crore, the Government of India (GoI) held 85% and financial institutions, banks and the public held another 15%. The shares were listed in the stock exchanges of Mumbai, Kolkata, Delhi and Chennai. As of 1995, the share of the GOI had come down to
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GDR ISSUES
The Global Depository Receipt (GDR) issue for VSNL was the first of its kind by the GOI . It helped VSNL to raise a substantial surplus that was earmarked for investments for its growth. The first GDR 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 was oversubscribed, drawing 662 investors from 28 countries. The second GDR issue was completed in February 1999. It involved a divestment of 10 million shares by the government of India to international 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 million GDRs with each GDR being equivalent to half a share. The organizational problems in VSNL around the time of the second GDR issue could have been one of the factors that led to lower valuations. During the process of the second GDR issue, the VSNL staff had threatened a walkout owing to the pending issue of allotting shares to employees. Due to delays in the government processes, VSNL did not have a chief executive and many other crucial director level posts were vacant. The first GDRs investment promises were not fulfilled and a promised domestic offering had not been made. The sanctions against India also created an environment of high perceived country risk, which lowered VSNL's valuation.
THE VALUATION
The government had fixed a reserve price of Rs 1,218.375 crore for its 25% stake in VSNL. In an effort to bolster the VSNL valuation, the GOI intended to compensate the loss of monopoly through special concessions. The government owned MTNL and BSNL would have to use VSNL as their ILD carrier for two years on the condition that it would offer the most competitive terms in the market. VSNL would also get a free license to provide NLD,
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CONCLUSION:
The privatisation of VSNL is seen as leading to public expenditure accountability through a realisation of higher return on the governments asset formation. It also leads to an appreciation of the remaining shares that are held by the government. To the citizen, the process is a step towards the provision of better quality communication services at the most competitive prices. Public flotation 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 and speculations and this fact further indicates the failure of the disinvestment policy adopted in the case of VSNL, and also highlights the wrong reasons for which the disinvestment of VSNL took place and its ultimate failure to match the required expectation of such a step. This case on VSNL further corroborates to the fact, that the disinvestment policies adopted in India have been a failure so far.
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WITH
In May 2002, a two-stage sell off began in Maruti Udyog Ltd (MUL) with a Rs 400 crore (4 billion) rights issue at a price of Rs 3,280 per share of Rs 100 each (12,19,512 shares) in which the government renounced whole of its rights share (6,06,585) to Suzuki, for a control premium of Rs 1000 crore. Relative share holding of Suzuki and government after completion of the rights issue was 54.20 % and 45.54 % respectively. The second stage government offloaded its holding in two tranches first where government sold 36 lakh shares out of then existing 65.80 lakh shares in March 2003. After the public offer, governments share had been down to 25%.
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Details
1997 - 98
1998 99
1999 - 2000
Machinery sold (nos) Exports of spares (in Rs crore) Gross turnover (Rs in crore) Loss ( in Rs crore)
58 0.11
59 0.17
51 0.27
4 0.05
5.77 -1.04
6.47 -0.74
6.32 -0.42
0.60 -1.00
The government decided in July 1997 to disinvest 74 % of the equity of LJMC. M/s A. F. Ferguson & Co were appointed in May 1998 as advisors to execute the transaction. Accordingly, the advertisements inviting EOTs were issued in January 1999 and financial bids were invited in May 1999. The cabinet approval the disinvestment in December 1999 and execution of the transaction documents and receipt of final payment was effected in May
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There was no retrenchment of employees but there was reduction due to resignation/natural separation. However, change in employee service condition was made by rolling back retirement age from 60 to 58 years.
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Critical Analysis
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Nonetheless, there are series of allegations of corruption and malpractice in many of these deals that have been widely discussed in the press and the parliament. Instances of under pricing of assets, favouring preferred buyers, non-compliance of agreement with respect to employment and retrenchment, and many incomplete contracts with respect to sale of land, and assets have been widely reported. Thus, during the last 13 years Rs. 29,520 crore were realized by sale of equity in selected central government PSEs, (in some cases) relinquishing managerial control as well.
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This formed less than one per cent of central governments cumulative fiscal deficit in this period.
ASSESSING
PROCESS:
Instead of seeking the reasons for privatization, one could instead ask why a certain firm should remain in public sector. Some would contend that with rapid technological change, natural monopoly, as a powerful argument for public ownership has simply disappeared. Such an argument would surely hold for telecommunications, not but for the rest of public monopolies. Based on studies of privatization of natural monopolies, some important implications that can be carried out are:
Sectors such as railways, however, are harder to regulate after privatization. The regulatory task can be especially difficult in sectors such as highways, or water or sewage, where competition is weak or totally absent, investments are lumpier, externalities are much more important, and pay back periods run 8-10 years or more, thereby increasing uncertainty and risk for contracting parties. Renegotiations are likely to be the rule, brought on by unanticipated developments or simply opportunism on the part of investors or governments.
But in the twentieth century, with the separation of ownership from control in modern industry, there is a serious agency problem regardless of its ownership. The view that the secondary capital market and the market for managers provide adequate discipline on a firms performance is at variance with evidence.
WHAT
IT
IS HIGHLY
In fact, one of the authors of the study, Pankaj Tandon, in an independent paper was more categorical in rejecting the hypothesis of efficiency gains from privatization in less developed
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Updating these estimates for the 1990s using a more refined method, the estimated deficits of the general government confirmed our previous findings. 16 Governments share (in terms of equity and debt) as a proportion of PSEs total fixed investment shows a steady decline since the mid-1970s, suggesting a gradual tightening of their budget constraint. The decline in governments contribution is being met increasingly by a rise in internal resources.
These long-term trends indicate, contrary to the widely held views, the growing fiscal deficit since the 1980s is not on account of financial losses of the enterprises. The above evidence suggests that the popularly used indicator of net profit as a proportion of total equity does not adequately reflect PSEs financial performance. While such a measure may be useful for a private shareholder, it has many shortcomings to gauge the return on public investment. For many reasons, PSEs tend to be over capitalized. While these enterprises are expected to develop infrastructure on their own using budgetary resources, state government agencies usually vie with each other to provide larger and better infrastructure for private firms, thus reducing their capital cost. Therefore, depreciation charges for PSEs tend to be much larger.
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It is widely believed that PSEs respectable profitability ratio (gross profits to capital employed) is mainly on account of the surpluses of the petroleum sector enterprises whose pricing includes an element of taxation. Interestingly, as shown in Figure, the profitability ratio has improved since the 1980s even excluding the petroleum sector enterprises clear evidence on improvements in PSEs financial performance. But could it be merely due a faster rise in administered prices of PSEs output? This is not so, as evident from the fact that the ratio of deflators of public sector output and GDP has declined since the mid-1980s. Public sector GDP deflator, relative to GDP deflator, 1982-96
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IF PSES
The problem seems to lay in poor financial returns in electricity boards, road transport corporations and railways, which are probably not adequately reflected in the above measures. For instance, revenue-to-cost ratio in SEBs has remained less than one for much of the 1990s, a decade of much talked about reforms, despite a steady rise in physical efficiency of thermal power plants.
.
Source :Disinvetment Ministery Report
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COMPARATIVE EXPERIENCE:
Experience of the last century shows how different economic systems have sought to solve this problem in a variety of ways with varying degrees of success. The Soviet system was perhaps quite capable of solving the problem in the initial phases of extensive growth with a clear objective of maximization of national output. However the system began to falter, as the economy got more complex, in the phase of intensive growth when objective was to increase productivity of resources. The command economy was unable to resolve the agency and incentive problems at the micro level because of the soft budget constraint. As noted earlier, in the Anglo Saxon economies, the secondary stock market acted as the disciplining device on corporate performance and as market for managers. In principle, stock prices that summarize all publicly available information on the firm performance should provide adequate signals for managers to act optimally. The system is also seems capable of providing risk capital to spur rapid technological progress, as witnessed in the role that venture capital funds played in promoting the Internet revolution. However, given the agency problem, there is enormous scope for abuse of the system, adversely affecting the shareholders interests and possibly hurting economic efficiency in the aggregate. Hostile takeovers and leveraged buyouts have exposed the inefficiency of such a disciplining mechanism. The recent implosion of some of the worlds biggest companies, astronomical rise in managerial remuneration disproportionate to performance of firms, and widespread abuse of stock options by top managements in firms like Enron and Tyco by the turn of the last century have seriously dented the credibility of the stock market based principles of corporate governance.
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SOME FACTS
6 out of Top 10 companies in India are Public Sector Companies. Of the 50 companies which make up the NIFTY, 10 companies are PSUs. In many businesses PSUs are virtual monopolies. Top 18 PSU companies (called Navratnas) total income is equal to 15% of Indias GDP. In 2008, Public Sector Companies paid over 33.5% of their net profits as dividends.
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diversified public shareholdings. This requirement should be uniformly applied to the private sector as well as listed public sector companies. I propose to raise, in a phased manner, the
threshold for non-promoter public shareholding for all listed companies. Looking at the growth story of India and the optimism of future growth as well, the govt. of India has already planned and finalized its expansion projects. It has planned to come out in a big way in infrastructure development projects.
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Candidates for 2nd round of divestment Source : Bloomberg; Prowess. BSE India ; Data as on 31/08/2009
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A portfolio of these 10 stocks (equal weighted) has outperformed the Nifty in the last 1 year, by generating returns of 24.36% vis--vis Nifty return of 6.89% BSE PSU Index (an aggregate of 47 PSU companies) has appreciated by 24.09% over the last 1 year, as against BSE Sensexs return of 7.52%
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BIBLIOGRAPHY
RESEARCH PAPERS
Disinvestment and Privatisation in India Assessment and OptionsBy: R Nagaraj Disinvestment in India, I lose and you gain...By: Pradip Baijal Public Sector performance since 1950, a fresh look... By: R. Nagaraj PRIVATIZATION IN India: THE IMPERATIVES AND CONSEQUENCES OF GRADUALISM by: Devesh Kapur and Ravi Ramamurti World Economic Forum: India ECONOMIC SUMMIT Indian Economic Reforms: A Stocktaking By: T. N. Srinivasan Planning Commssion Report Disinvestment Commission Report, 1999 Public enterprise Survey Report 1996-1997,2002-2004 Vol-1. Annual Report of VSNL
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BOOKS
INTERNET
www.divest.nic.in www.india.gov.in/sectors/finance/disinvestment www.ircc.iitb.ac.in www.livemint.com www. economictimes.indiatimes.com www.indiastat.com Department of disinvestment, Ministry of Finance , www.divest.nic.in www.cmie.com www.planningcommission.nic.in http://india.gov.in/sectors/agriculture/index.php
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