Disinvestment Manual - February 2003-0-0 - 0

Disinvestment Manual - February 2003
1. CHAPTER: INTRODUCTION
This compilation, in three parts deals with the issues of "Why to Privatise", "How to
Privatise", and what has been done in this regard. Part A deals with the rationale, Part
B with the procedure and Part C with the progress made so far in privatisation.
Privatisation has different nomenclature in different countries like ‘disinvestment’,

‘peopalisation’, ‘popular capitalism’, ‘denationalisation’, ‘prioritisation’, ‘industrial
transition’, ‘economic democratisation’, ‘partners in development,’ ‘dis-
incorporation’, ‘transformation and restructuring’. The words privatisation and
disinvestment are often used interchangeably. Disinvestment leads to privatisation
when the Government held equity is reduced to a level when the company no longer
remains a Government company.
1.1 Why this Compilation?
Policymakers, be it in the administrative Ministries or in the State Governments,

occasionally face a dilemma. They are often convinced about the merits of
Privatisation, but do not know how to implement it. The enormous outpouring of
literature on Privatisation, the dramatic success of privatisation in a large number of
diverse countries, and the economic realities of excessive burden of overstretched
public sector in their States, have convinced them to try privatisation. Yet to most of
them, the process of implementing privatisation is often shrouded in mystery. This
fear of the unknown often discourages them from taking the first step.
They are often confronted with a number of questions like which Public Sector
Enterprises should be taken up for disinvestment, which method of disinvestment
should be followed, how to disinvest to get the best realization and optimise on the
objectives, how to prepare documents etc. This seems difficult, particularly because of
the diverse nature of PSEs.
Though a group of international practitioners and advisors in the art and science of
privatisation have developed in the West ie. lawyers, bankers, accountants, business
consultants, communicators and the like, with their large body of accumulated
experience and expertise, which is largely related to the Western economies, not much
is available to guide the policy makers and practitioners, in the developing economies.
Thus, while one would do well to learn from the successful experience, one would
have to be careful of the pitfalls as well. In the final analysis, while experience of
other countries is available by way of guidance, one would have to evolve one’s own
techniques, best suited to the level of development of the country. It makes a
difference whether or not there already exist fully functioning markets, which could
integrate or assimilate the former PSEs. The historic, cultural and institutional context
influences the way in which and the pace at which privatisation is implemented.
Where market economy is not fully developed, ways would have to be found to
safeguard the interests of consumers and investors, which would ensure a fuller play
to the wealth-creating role of the entrepreneurs. The main purpose of this manual is to
demystify this process and to share with policymakers and practitioners the national
experience on implementation of privatisation.
1.2 Who will benefit?
This compilation is primarily meant for public policy makers entrusted with the job of
implementing privatisation decisions. It will be useful to them in the following ways:
· Provide overall understanding of the privatisation process.
· Assist in planning the logistics to implement the privatisation decision.
· Enable to implement the privatisation transactions.
· Guide the supervision of consultants (financial advisors) recruited to

implement the privatisation transactions.
· Improve design of privatisation policies by painting a realistic picture of the

implementation phase.
· Understanding the benefits of the privatisations completed.
1.3 What kinds of Privatisation Transactions will benefit from this

Compilation?
This compilation is intended to be useful for a wide variety of privatisation

transactions, for example, the sale of a bulk of shares in a public enterprise to a
strategic investor, and quasi-privatisation transactions such as management contracts,
leases and concessions to the private sector for operating a public utility. Much of the
material in the compilation is relevant to almost any kind of privatisation transaction
that involves competitive bidding. However, the base case is a common form of
privatisation transaction: the sale of a bulk of shares in a state-owned enterprise to a
strategic partner. Deviations from this base case and their implications on
implementation have also been discussed.
While it is not necessary and probably not possible to plan every detail in advance,
certain principles and basic modus operandi need to be agreed upon, different
objectives prioritised, the trade-off identified and a commitment made to drive the
programme through, despite the opposition that might develop from those in favour of
maintaining the status quo.
The issues relating to disinvestment/privatisation which have been discussed and the
possible solutions provided thereto, which may be adopted for specific disinvestment/
privatisations are only illustrative and not exhaustive.
2. CHAPTER: GLOBAL PERSPECTIVE
Globally, the root of the State intervention in economic activities in the previous
century can perhaps be traced back to early 30s when, in the wake of the Great
Depression, Roosevelt tried to rein in the dubious behaviour of the wayward private
enterprises in the US through the New Deal, which witnessed the setting up of the
regulatory agencies like the Securities and Exchange Commission (SEC) and the
onset of large federal deficits, public works expenditure and cheap money. The US
Government's intervention involved support to markets when they failed to generate
socially desirable outcomes and a check on the power of private monopolies. State
intervention in commercial activities seemed to have got a further fillip with the
perceived success of the Soviet industrialisation. This was followed by the large-scale
state intervention / nationalisation during late 40s and 50s, all over the world, driven
by the pressure / resource requirements of rebuilding the post War and postcolonial
economies. There appeared to be an economic consensus around the world accepting
public enterprises as an inevitable part of the economy, especially to manage natural
monopolies and the core industries. The lack of entrepreneurship, security of the
country, concern for balanced regional development, employment generation etc.,
were some of the other major motivators for encouraging the public sector trend.
Thus, Britain nationalised its core industries, such as coalmines, iron and steel,
electricity, gas, ports and shipbuilding. In post war France, the economy was divided
into three segments - the private, the controlled and the nationalised. Public utilities,
core and strategic sectors, telecommunications, airlines, automobiles were all either
nationalised or brought under majority ownership and control. In the developing
countries too, public sector came to acquire a major role. Here, the state intervention
was fuelled by other considerations also. It was thought that the social welfare
objectives could be best achieved through comprehensive state intervention. This
trend continued throughout 60s and 70s, in several countries.
The reversal of the trend, pursuant to disenchantment with public sector started in
1970s. It was observed in many countries that the performance of the public
enterprises was far below the expectations and often worse than that of the private
sector. The public sector seemed to perform well only when protected through
Government created monopolies, entry reservations, high tariffs and quotas etc. The
problems got further accentuated due to pre-emption of massive resources by the
under performing public sector which left little money for more urgent social needs
and public welfare. These problems were brought in sharp focus after the second oil
shock of 1979, when it became clear that the experiments with Government
ownership of commercial activities were not succeeding.
In the 1980s, around the globe, the pendulum of political opinion was swinging
decisively towards the view that the proportion of the GNP due to Government
economic activity should be reduced to the extent possible. This coincided with the
belief that even for natural monopolies, effective regulatory surrogates for
competition could be devised that would protect the consumers from the abuse of the
monopoly or dominance power of these companies.
Many eminent economists have argued that Government must not venture into those
areas where the private sector can undertake the job efficiently. Lot of emphasis was
laid on market driven economies, rather than state administered economies. The
collapse of socialist economy of the Soviet block convinced the policy planners,
around the world, that role of the state should be that of a regulator and a facilitator
rather than of the producer. The resources deployed by the Government for
undertaking commercial activities should be unlocked and deployed in social
activities.
During the 1980s, the disillusionment witnessed in the socialist economies added to
the disenchantment with the public sector in the mixed economies in the world. USSR
started the economic reforms under Perestroika, which swept the economies of
Eastern Europe. China also introduced far reaching economic reforms and it was
recognized that public sector did not optimise efficiency and productivity of capital. It
was realized that the large number of public enterprises working under mixed
economies were plagued by over-centralization in decision-making and excessive
bureaucratisation.
A new trend of global integration began to emerge and countries all over the world,
whether developed or developing, capitalist or socialist, started undergoing vast
economic changes, witnessed by the decline in the role of the State in commercial
activities and increasing privatisation of state owned enterprises. In 1980s,
privatisation had started in real earnest in several parts of the world. This was
facilitated by the gradual integration of the world economies, which ensured that
capital and goods flowed more freely to countries suffering from lack of resources.
Foreign capital became freely available to finance large infrastructure projects, for
want of which the domestic private parties were hitherto unable to come forward, and
State support was necessary. Acceptance of the WTO regime by most of the countries
has since led to gradual abolition of quantitative restrictions and reduction in duties
and removal of restrictions on inter country trade. As a result, the relevance of the
State in providing resources for various commercial activities and protecting the
interests of consumers has considerably reduced.
It became increasingly evident that to maximize choice before the consumers, all
bureaucratic shackle and controls over business activities should be
removed. Business and private entrepreneurship are to be encouraged to face
competition for optimal utilization of capital and resources – leading to greater
consumer choice and enhanced efficiency of production and services.
3. CHAPTER: EVOLUTION OF PUBLIC SECTOR IN INDIA
3.1 Industrial Policy Resolution 1956
"The State will progressively assume predominance and direct responsibility for
setting up new industrial undertakings and for developing transport facilities."
-Industrial Policy Resolution 1956.
Before independence, there was almost no 'Public Sector' in the Indian economy. The
only instances worthy of mention were the Railways, the Posts and Telegraphs, the
Port Trust, the Ordnance and the Aircraft factories and few Government managed
undertakings like the Government salt factories, quinine factories etc. After
independence and with the advent of planning, India opted for the dominance of the
public sector, firmly believing that political independence without economic self-
reliance was not good for the country. The passage of Industrial Policy Resolution of
1956 and adoption of the socialist pattern of society led to a deliberate enlargement of
our public sector. It was believed that a dominant public sector would reduce the
inequality of income and wealth, and advance the general prosperity of the nation.
The planners also seemed to believe that by placing the management and workers in
public enterprises in a position of responsibility and trust, they would be so imbued
with a sense of the public good that their actions and aspirations would naturally
reflect what was best for the country.
3.2 Main objectives for setting up the Public Sector Enterprises

The main objectives for setting up the Public Sector Enterprises as stated in the
Industrial Policy Resolution of 1956 were:
· To help in the rapid economic growth and industrialisation of the country

and create the necessary infrastructure for economic development;
· To earn return on investment and thus generate resources for development;
· To promote redistribution of income and wealth;
· To create employment opportunities;
· To promote balanced regional development;
· To assist in the development of small-scale and ancillary industries; and
· To promote import substitutions, save and earn foreign exchange for the
economy.
In tune with the widespread belief at that time, the 2nd Five Year Plan stated very
clearly that 'the adoption of socialist pattern of society as the national objective, as
well as the need for planned and rapid development, require that all industries of
basic and strategic importance, or in the nature of public utility services, should
be in the public sector. Other industries, which are essential and require
investment on a scale, which only the state, in the present circumstances, could
provide, have also to be in the public sector. The state has, therefore, to assume
direct responsibility for the future development of industries over a wider area '.
The Second Plan further emphasized that ' the public sector has to expand rapidly. It
has not only to initiate developments which the private sector is either unwilling or
unable to undertake, it has to play the dominant role in shaping the entire pattern of
investment in the economy, whether it makes the investments directly or whether
these are made by the private sector. The private sector has to play its part within the
framework of the comprehensive plan accepted by the community.'
3.1.3 Growth of Investment
The investment in public sector enterprises has thus grown enormously from Rs.29
crore as on 1.4.1951 to Rs.2,74,114 crore as on 31.3.2001. The growth of investment
in the central public sector enterprises, including those enterprises that are under
construction, over the years, is given below:
Investment in Public Sector Enterprises
Particulars Total Investment Enterprises

(Crore) (Numbers)
At the commencement of the 1st 5-Year Plan
29 5
(1.4.1951)
At the commencement of the 2nd 5-Year Plan
81 21
(1.4.1956)
At the commencement of the 3rd 5-Year Plan
948 47
(1.4.1961)
At the end of the 3rd 5-Year Plan (31.3.1966) 2,410 73
At the commencement of the 4th 5-Year Plan
3,897 84
(1.4.1969)
6,237 122
(1.4.1974)
At the end of 5th 5-Year Plan (31.3.1979) 15,534 169
18,150 179
(1.4.1980)
42,673 215
(1.4.1985)
At the end of 7th 5-Year Plan (31.3.1990) 99,329 244
1,35,445 246
(1.4.1992)
At the end of 8th 5-Year Plan (31.3.1997) 2,13,610 242
As on 31.3.1998 2,31,024 240
As on 31.3.1999 2,39,167 240
As on 31.3.2000 2,52,554 240
As on 31.03.2001 2,74,114 242
Source: Public Enterprises Survey, 2000-2001

4. CHAPTER: GENESIS AND RATIONALE FOR DISINVESTMENT IN
INDIA
" While the case for economic reforms may take good note of the diagnosis that India
has too much government interference in some fields, it ignores the fact that India also
has insufficient and ineffective government activity in many other fields, including
basic education, health care, social security, land reforms and the promotion of social
change. This inertia, too, contributes to the persistence of widespread deprivation,
economic stagnation and social inequality."
Amartya Sen and Jean Dreze
In India for almost four decades the country was pursuing a path of development in
which public sector was expected to be the engine of growth. However, the public
sector had overgrown itself and their shortcomings started manifesting in the shape of
low capacity utilization and low efficiency due to over manning and poor work ethics,
over capitalisation due to substantial time and cost overruns, inability to innovate, take
quick and timely decisions, large interference in decision making process etc.
The Government started to deregulate the areas of its operation and subsequently, the
disinvestment in Public Sector Enterprises was announced. The process of
deregulation was aimed at enlarging competition and allowing new firms to enter the
markets. The market was thus opened up to domestic entrepreneurs / industrialists and
norms for entry of foreign capital were liberalised.
Prior to 1991, a large number of industries were reserved for the public sector:
4.1.1 Industries reserved for PSUs prior to July 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, for machine tool manufacture and such other industries as may be
specified by the Central Government.
6. Heavy electrical plant including large hydraulic and steam turbines.
7. Coal and lignite.
8. Minerals oils.
9. Mining of iron ore, manganese ore, chrome ore, gypsum, sulphur, gold and
diamond.
10. Mining and processing copper, lead, zinc, tin molybdenum and wolfram.
11. Minerals specified in the Schedule to the Atomic Energy (Control of

Production and Use) Order 1953.
12. Aircraft.
13. Air transport.
14. Rail transport.
15. Ship building.

16. Telephones and telephone cables, telegraph and wireless apparatus
(excluding radio receiving sets).
17. Generation and distribution of electricity.
Through Notification No. 477(E) dated 25.7.1991, the industries reserved for PSUs
were reduced to eight areas from the previous list of seventeen.
4.1.2 Industries reserved for PSUs since July 1991:
1. Arms and Ammunition and allied items of defence equipment, defence

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 (Control of production
and use) Order, 1953.
8. Railway Transport.
This list by December 2002 includes only three areas reserved for PSUs:
Atomic Energy.
2. Minerals specified in schedule to atomic Energy (Control of Production

and Use) Order, 1953.
3. Railway Transport.
Because of the current revenue expenditure on items such as interest payments, wages
and salaries of Government employees and subsidies, the Government is left with
hardly any surplus for capital expenditure on social and physical infrastructure. While
the Government would like to spend on basic education, primary health and family
welfare, large amount of resources are blocked in several non-strategic sectors such as
hotels, trading companies, consultancy companies, textile companies, chemical and
pharmaceuticals companies, consumer goods companies etc. Not only this - the
continued existence of the PSEs is forcing the Government to commit further
resources for the sustenance of many non-viable PSEs. The Government continues to
expose the taxpayers' money to risk, which it can readily avoid. To top it all, there is a
huge amount of debt overhang, which needs to be serviced and reduced before money
is available to invest in infrastructure. All this makes disinvestment of the
Government stake in the PSEs absolutely imperative.
4.2 Primary objectives for privatising the PSEs
The primary objectives for privatising the PSEs are, therefore, as follows:
· Releasing large amount of public resources locked up in non-strategic PSEs,

for redeployment in areas that are much higher on the social priority, such as,
basic health, family welfare, primary education and social and essential
infrastructure;
· Stemming further outflow of scarce public resources for sustaining the

unviable non-strategic PSEs;
· Reducing the public debt that is threatening to assume unmanageable

proportions;
· Transferring the commercial risk, to which the taxpayers’ money locked up

in the public sector is exposed, to the private sector wherever the private sector
is willing and able to step in - the money that is deployed in the PSEs is really
the public money and is exposed to an entirely avoidable and needless risk, in
most cases;
· Releasing other tangible and intangible resources, such as, large manpower
currently locked up in managing the PSEs, and their time and energy, for
redeployment in high priority social sectors that are short of such resources.
4.3 Other benefits expected from privatisation
The other benefits expected to be derived from privatisation are:
· Disinvestment would expose the privatised companies to market discipline,

thereby forcing them to become more efficient and survive or cease on their
own financial and economic strength. They would be able to respond to the
market forces much faster and cater to their business needs in a more
professional manner. It would also facilitate in freeing such companies from
Government control and introduce corporate governance in the privatised
companies.
· Disinvestment should result in wider distribution of wealth through offering

of shares of privatised companies to small investors and employees.
· Disinvestment would have a beneficial effect on the capital market; the

increase in floating stock would give the market more depth and liquidity, give
investors easier exit options, help in establishing more accurate benchmarks for
valuation and pricing, and facilitate raising of funds by the privatised
companies for their projects or expansion, in future.
· Opening up the public sector to appropriate private investment would

increase economic activity and have an overall beneficial effect on the
economy, employment and tax revenues in the medium to long term.
· In many areas, e.g., the telecom and civil aviation sector, the end of public
sector monopoly and privatisation has brought to consumers greater satisfaction
by way of more choices, as well as cheaper and better quality of products and
services.
· With the quantitative restrictions removed and tariff levels revised owing to
opening of world markets/WTO agreements, domestic industry has to compete
with cheaper imported goods. In the bargain, the common man now has access
to a whole range of cheap and quality goods. This would require Indian
industries to become more competitive and such restructuring would be easier
in a privatised environment.
5. CHAPTER: DISINVESTMENT POLICY
5.1 The Initial Phase
The policy of the Government on disinvestment has evolved over a period and it can
be briefly stated in the form of following policy statements made in chronological
order:
5.1.1 Interim Budget 1991-92 (Chandrashekhar Government)
The policy, as enunciated by the Government, under the Prime Minister Shri
Chandrashekhar was to divest up to 20% of the Government equity in selected PSEs
in favour of public sector institutional investors. The objective of the policy was stated
to be to broad-base equity, improve management, enhance availability of resources for
these PSEs and yield resources for the exchequer.
5.1.2 Industrial Policy Statement of 24th July, 1991
The Industrial Policy Statement of 24th July 1991 stated that the government would
divest part of its holdings in selected PSEs, but did not place any cap on the extent of
disinvestment. Nor did it restrict disinvestment in favour of any particular class of
investors. The objective for disinvestment was stated to be to provide further market
discipline to the performance of public enterprises.
"In the case of selected enterprises, part of Government holdings in the equity share
capital of these enterprises will be disinvested in order to provide further market
discipline to the performance of public enterprises ".
5.1.3 Budget speech: 1991-92
In this pronouncement, the cap of 20% for disinvestment was reinstated and the
eligible investors' universe was again modified to consist of mutual funds and
investment institutions in the public sector and the workers in these firms. The
objectives too were modified; the modified objectives being: "to raise resources,
encourage wider public participation and promote greater accountability".
"In order to raise resources, encourage wider public participation and promote greater
accountability, up to 20 per cent of Government equity in selected public sector
undertakings would be offered to mutual funds and investment institutions in the
public sector, as also to workers in these firms".
5.1.4 Report of the Committee on the Disinvestment of Shares in PSEs

(Rangarajan Committee): April 1993
The Rangarajan Committee recommendations emphasised the need for substantial

disinvestment. It stated that the percentage of equity to be divested could be up to
49% for industries explicitly reserved for the public sector. It recommended that in
exceptional cases, such as the enterprises, which had a dominant market share or
where separate identity had to be maintained for strategic reasons, the target public
ownership level could be kept at 26%, that is, disinvestment could take place to the
extent of 74%. In all other cases, it recommended 100% divestment of Government
stake. Holding of 51% or more equity by the Government was recommended only for
6 Schedule industries, namely:
i. Coal and lignite

ii. Mineral oils
iii. Arms, ammunition and defence equipment
iv. Atomic energy
v. Radioactive minerals, &
vi. Railway transport
5.1.5 However, the Government did not take any decision on the
recommendations of the Rangarajan Committee.
5.1.6 The Common Minimum Programme of the United Front Government:

1996
The highlights of the policy formulated by the United Front Government were, as
follows:
· To carefully examine the public sector non-core strategic areas;
· To set up a Disinvestment Commission for advising on the disinvestment

related matters;
· To take and implement decisions to disinvest in a transparent manner;
· Job security, opportunities for retraining and redeployment to be assured.
No disinvestment objective was, however, mentioned in the policy statement.
5.1.7 Disinvestment Commission Recommendations: Feb.1997- Oct. 1999
Pursuant to the above policy of the United Front Government, a Disinvestment

Commission was set up in 1996. By August 1999, it made recommendations on 58
PSEs. The recommendations indicated a shift from public offerings to strategic / trade
sales, with transfer of management.
5.2 The Second Phase
5.2.1 Budget Speech: 1998-99
In its first budgetary pronouncement, the new Government decided to bring down
Government shareholding in the PSUs to 26% in the generality of cases, (thus
facilitating ownership changes, as was recommended by the Disinvestment
Commission). It however, stated that the Government would retain majority holdings
in PSEs involving strategic considerations and that the interests of the workers would
be protected in all cases.
5.2.2 Budget Speech: 1999-2000
The policy for 1999 - 2000, as enunciated by the Government, was to strengthen
strategic PSUs, privatise non-strategic PSUs through gradual disinvestment or
strategic sale and devise viable rehabilitation strategies for weak units. One highlight
of the policy was that the expression 'privatisation' was used for the first time.
5.2.3 Strategic & Non-strategic Classification

On 16th March 1999, the Government classified the Public Sector Enterprises into
strategic and non-strategic areas for the purpose of disinvestment. It was decided that
the Strategic Public Sector Enterprises would be those in the areas of:
· Arms and ammunitions and the allied items of defence equipment,

defence air-crafts and warships;
· Atomic energy (except in the areas related to the generation of nuclear

power and applications of radiation and radio-isotopes to agriculture,
medicine and non-strategic industries);
· Railway transport.
All other Public Sector Enterprises were to be considered non-strategic. For the non-
strategic Public Sector Enterprises, it was decided that the reduction of Government
stake to 26% would not be automatic and the manner and pace of doing so would be
worked out on a case-to-case basis. A decision in regard to the percentage of
disinvestment i.e., Government stake going down to less than 51% or to 26%, would
be taken on the following considerations:
· Whether the industrial sector requires the presence of the public sector as
a countervailing force to prevent concentration of power in private hands,
and
· Whether the industrial sector requires a proper regulatory mechanism to

protect the consumer interests before Public Sector Enterprises are
privatised.
5.2.4 Budget Speech: 2000 - 2001
The highlights of the policy for the year 2000 - 01 were that for the first time the
Government made the statement that it was prepared to reduce its stake in the non-
strategic PSEs even below 26% if necessary, that there would be increasing emphasis
on strategic sales and that the entire proceeds from disinvestment / privatisation would
be deployed in social sectors, restructuring of PSEs and retirement of public debt. The
main elements of the policy are reiterated as follows:
· To restructure and revive potentially viable PSEs;
· To close down PSEs which cannot be revived;

· To bring down Government equity in all non-strategic PSEs to 26% or
lower, if necessary;
· To fully protect the interests of workers;
· To put in place mechanisms to raise resources from the market against the
security of PSEs' assets for providing an adequate safety-net to workers and
employees;
· To establish a systematic policy approach to disinvestment and

privatisation and to give a fresh impetus to this programme, by setting up a
new Department of Disinvestment;
· To emphasize increasingly on strategic sales of identified PSEs;
· To use the entire receipt from disinvestment and privatisation for meeting
expenditure in social sectors, restructuring of PSEs and retiring public debt.
5.2.5 Excerpts from the Address by the President to the Joint Session of
Parliament (February, 2001)
"The public sector has played a vital role in the development of our economy.
However, the nature of this role cannot remain frozen to what it was conceived fifty
years ago - a time when the technological landscape, and the national and
international economic environment were so very different. The private sector in India
has come of age, contributing substantially to our nation-building process. Therefore,
both the public sector and private sector need to be viewed as mutually
complementary parts of the national sector. The private sector must assume greater
public responsibilities just as the public sector needs to focus more on achieving
results in a highly competitive market. While some public enterprises are making
profits, quite a few have accumulated huge losses. With public finances under intense
pressure, Governments are just not able to sustain them much longer. Accordingly, the
Centre as well as several State Governments are compelled to embark on a
programme of disinvestment.
The Government’s approach to PSUs has a three-fold objective: revival of potentially

viable enterprises; closing down of those PSUs that cannot be revived; and bringing
down Government equity in non-strategic PSUs to 26 percent or lower. Interests of
workers will be fully protected through attractive VRS and other measures. This
programme has already achieved some initial successes. The Government has decided
to disinvest a substantial part of its equity in enterprises such as Indian Airlines, Air
India, ITDC, IPCL, VSNL, CMC, BALCO, Hindustan Zinc, and Maruti Udyog.
Where necessary, strategic partners would be selected through a transparent process".
5.2.6 Budget Speech: 2001 - 2002
To use the proceeds for providing -
· Restructuring assistance to PSUs
· Safety net to workers
· Reduction of debt burden
·
Additional budgetary support for the Plan, primarily in the social and infrastructure
sectors (contingent upon realisation of the anticipated receipt.)
5.2.7 Excerpts from the Address by the President to the Joint Session of
Parliament (February, 2002)
“The Public sector has played a laudable role in enabling our country to achieve the
national objective of self-reliance. However, the significantly changed economic
environment that now prevails both in India and globally makes it imperative for both
the public sector and the private sector to become competitive. Learning from our
experience, especially over the last decade, 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. The disinvestment policy and the transparent procedures
adopted for disinvestment have now been widely accepted and the shift in emphasis
from disinvestment of minority shares to strategic sale has yielded excellent results.
The Government has taken two major initiatives to improve the safety net for the
workers of PSUs. The first enhanced VRS benefits in those PSUs where wage
revision had not taken place in 1992 or 1997. The second increased training
opportunities for self-employment for workers retiring under VRS.”
5.2.8 Excerpts from the Budget Speech for 2002-03 of the Finance Minister
Privatisation:
“With the streamlined procedure for disinvestment and privatisation, I am happy to

report that the Government has now completed strategic sales in 7 public sector
companies and some hotels properties of the Hotel Corporation of India (HCI) and the
India Tourism Development Corporation (ITDC). The change in approach from the
disinvestment of small lots of shares to strategic sales of blocks of shares to strategic
investors has improved the price earning ratios obtained. We expect to complete the
disinvestment in another 6 companies and the remaining hotels in HCI and ITDC this
year. Disinvestment receipts for the present year are estimated at Rs. 5,000 crore
excluding the special dividend from VSNL of Rs. 1,887 crore. Encouraged by these
results, I am once again taking credit for a receipt of Rs. 12,000 crore from
disinvestment next year.”
5.2.9 Suo – Moto Statement of Shri Arun Shourie, Minister of Disinvestment,

made in both Houses of Parliament on 9th December, 2002
Review of policy and new directions
The main objective of disinvestment is to put national resources and assets to optimal
use and in particular to unleash the productive potential inherent in our public sector
enterprises. The policy of disinvestment specifically aims at:
· Modernization and up gradation of Public Sector Enterprises;
· Creation of new assets;
· Generating of employment; and
· Retiring of public debt.
Government would continue to ensure that disinvestment does not result in alienation
of national assets, which, through the process of disinvestment, remain where they
are. It will also ensure that disinvestment does not result in private monopolies.
In order to provide complete visibility to the Government’s continued commitment of

utilisation of disinvestment proceeds for social and infrastructure sectors, the
Government would set up a Disinvestment Proceeds Fund. This Fund will be used
for financing fresh employment opportunities and investment, and for retirement of
public debt.
For the disinvestment of natural asset companies, the Ministry of Finance and the
Ministry of Disinvestment will work out guidelines.
The Ministry of Finance will also prepare for consideration of the Cabinet Committee
on Disinvestment a paper on the feasibility and modalities of setting up an Asset
Management Company to hold, manage and dispose the residual holding of the
Government in the companies in which Government equity has been disinvested to a
strategic partner.
On 27th December 2002, the CCD decided that Multi State Cooperative Societies
under the Deptt. Of Fertilizers be allowed to participate in the disinvestment of
fertilizer PSUs including National Fertilizers Ltd. (NFL).

6. CHAPTER: MAJOR ISSUES IN DISINVESTMENT
6.1 Performance of PSEs
6.1.1 Profitability
If one examines the achievements of the PSEs by the yardstick of objectives they
were expected to achieve, one would observe that many of these objectives have, at
best, met with limited success. The return on investments in PSEs, at least for the last
two decades, has been quite poor, and the PSEs have not been able to generate
resources for development. The PSE Survey shows that between 1986-87 & 1997-98,
the Central Government owned PSEs, as a whole, never earned post tax profits that
exceeded 5% of total sales or 6% of capital employed. Thus, the return earned by the
public sector was significantly lower than the rate of return for a time deposit of one
year in commercial banks. Also, the PSEs' highest return on Capital Employed (6% in
1995-96 and 1997-98) is at least 3% points below the interest paid by the Government
on its borrowings. Thus, adjusted for the effective interest rate, they had actually been
giving negative return on capital. Besides, huge relief had to be given to the loss
making PSEs, to help them survive, as shown later in this chapter.
PSE Profitability Compared to the Private Sector
If the profits of the PSEs working in the monopoly environment are excluded, the
picture becomes even worse. A study shows that, for the period 1990-91 to 1997-98,
the unit gross profits and post tax profits of a sample of PSEs in the manufacturing
sector were significantly lower than those for the private sector companies (when
measured as a proportion of sales revenue net of indirect taxes). The following Table
demonstrates the above point:
{Profit After Tax (PAT) / Net Sales (%)}
As on 31 90- 91-92 92-93 93-94 94-95 95-96 96-97 97-98

91
March
Pure
manufacturing
CPSUs -4.50 -5.30 -5.40 -6.90 -2.30 -2.40 -4.30 -3.90
Manufacturing 5.70 4.90 4.90 6.60 9.10 9.00 7.00 6.20
Private Sector
Source: NCAER Study Report. “The Lost Decade”
6.1.2 Cost Control:
The table which follows shows a comparison between the PSEs and the private sector
companies and reveals how the cost structure in PSEs is increasing as compared to
private sector, which is able to contain costs on all parameters. The table shows that
whereas the private manufacturing industry was able to take measures to cut costs, the
public sector could not take such measures, perhaps owing to the nature and
compulsions of its ownership. With the advent of WTO, all the manufactured items
being on OGL and in a falling tariff protection regime, the private sector has been
taking measures to cut costs. Public Sector Enterprises have not been successful in
this regard. PSEs' performance with regard to manpower costs has also been
disappointing. A study commissioned by NCAER has pointed out that between 1984-
85 and 1997-98, whereas the per capita emoluments of the PSE employees have risen
at a compound annual rate of 3.95% in real terms, the real value of sales was 3.51%,
which indicates, "that the PSE Labour force has appropriated disproportionately large
factor payments at the expense of sales".
Comparison of Cost Structure (As Percentage of Sales)
As on 31 March 90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98
Power & fuel /Net sales
PSEs minus petro 10.3 10.9 12.7 13.5 12.9 13.3 14.9 19.5
Pvt. sector mfg. 6.8 7.0 6.9 6.6 6.2 6.5 6.6 5.0
Wages/Net Sales
PSEs minus petro 18.6 17.3 18.1 17.7 17.6 19.2 19.1 23.3
Pvt. sector mfg. 8.9 8.8 8.6 8.1 7.9 7.9 8.2 6.5
Interest / Net sales
PSEs minus petro 8.8 9.9 11.3 11.5 9.0 9.1 9.8 11.7
Pvt. sector mfg. 6.0 6.7 6.0 5.2 5.2 5.8 5.9 4.7
Total 16.0 15.6 20.6 22.8 20.2 21.4 23.1 38.1
Wages+
Interest +
Power differential
Source: NCAER Study Report. “The Lost Decade”

6.1.3 Recurring Budgetary support to PSEs
The next two tables show that despite huge investment in the public sector, the
Government is required to provide more funds every year that go into maintaining of
the unviable / weak PSEs and the extent of drain that the PSEs continue to cause on
the exchequer.
(Rs. in crore)
(1) (2) (3) (4) (5) (6) (7)
Year Total Dividend Budgetary Guarantees Waiver Total

investment in declared support (RE) for loans of loans, liability on
CPSUs /LCs/ intt, Govt. on
other penal intt account of
payments CPSUs
Equity Loans Equity Loans (4+5+6)
1997-98 76591 154433 3609 3004 4133 5372 556 13065
1998-99 80313 158854 4932 3215 4015 4059 1769 13058
1999-00 84436 168309 5455 4378 4028 6094 6191 20691
2000-01 89337 184777 8260 4742 4154 14651 1830 25377
Source: Finance Ministry (Budget document), CAG Report, DPE Survey

The Hidden Subsidies
Cost of Revival / Restructuring of Sick PSEs
(Rupees in crore)
Since 1992- Proposals* approved in the Total

93 last 3 years upto
March2000
* (23 new proposals

approved)
Fresh infusion of 3190 2053 5243
funds
Loans converted 7630 2720 10350
into equity
Loans written off 10126 8285 18411
Total amount 20,946 13,058 34,104
involved
Plus: Waiver of guarantee fee, freezing of loan / interest payments, moratorium on

repayment, exemption from payment of taxes, etc.
1.1.4 Industrial Sickness in CPSUs
To save the PSUs from sickness, the government has been sanctioning restructuring
packages from time to time. The table below is only an illustrative list of the losses
which the PSEs have accumulated in spite of several restructuring packages:
ILLUSTRATIONS OF PSEs: RESTRUCTURING / REHABILITATION

UNDERTAKEN
(Rs. in crore)
N PSE No. of Approx. Paid Net P. &L.

o rehabilitation/ amount of up Worth (31.3. A/C
restructuring waiver/ Capital 00) accumulat
attempts made fresh funds ed losses
for revival infused * (31.3.00)
Haldia Fertiliser Project never got
1 Project commissioned. 1040.49 520.9
Paradeep
2 Phosphates Ltd. 1994, 2000, 2001 568.72 432.65 1.15 -431.5
3 EPIL ------- 901.44 8 -806.52 -873.99
Hindustan
4 Paper Corp. ltd. 1994, 1996 136.68 691.41 102.28 -595
5 HMT 2000 347.09 130.5 24.1 -301.93
6 NEPA 1999 72.15 65.06 -18.8 -124.3
Praga Tools
7 Ltd. 1999 81.06 15.73 -148.88 -185.05
Scooters India
8 Ltd. 1996 661.8 38.38 40.08 NA
Triveni
9 Structural 1977& 1986 117.74 21.02 -99.59 -120.61
Tungbhadra
Steel Product
10 Ltd. 1986 437.87 7.09 7.47 -2.11
Hindustan
11 Copper 1998 762.16 531.61 5.53 -342.6
Heavy
Engineering 1972, 75, 81, 89,
12 Corp. 97, 1999 1640.34 448.12 -695.07 -1152.41
Bharat Refracto Two revival
13 ries packages approved 61.64 103.9 -66.19 -169.06
(July 96 and
Jan.99)
Hindustan Jan-99
14 Cables 432.78 411.41 -93.03 -559.74
Hindustan Two attempts
15 Shipyard since 1995 470.9 96.81 -969.58 -1071.49
Hind.Steel 1997-99
Works Const.
16 Ltd. 1469.96 20 -414.43 -531.55
Indian Drugs & 1993-2002 630.58
17 Pharma.Ltd. 116.88 -1095.72 -1425.21
Instrumentation Referred to BIFR
18 s in 1993 133.98 24.05 -26.76 -101.3
19 Jessop & Co. 1986,1997, 2002 466 49.16 -211.2 -302.41
Mining and (1973, 76, 1980,86
20 Allied etc) 134.5 39.19 -1060 -1053.8
Machinery
Corporation
Rashtriya Ispat July 93 & May 98 7827.3
21 Nigam Ltd. 4509.79 2 3197.97 -4615.51
11599.
TOTAL 15077.67 19 -2327.19 -13959.57
Source: BIFR, CAG Report, administrative ministry of the PSU concerned.
* indicates only one part of rehabilitation packages, which included many other
concessions as follows:
The revival packages include a combination of some or all of the following:
1. Conversion of cash losses to interest free loans or equity
2. Moratorium on payment of all loans
3. Interest holiday on outstanding government loans
4. Write off of outstanding non-plan loans
5. Write off interest on government loans
6. Conversion of loans into equity, etc.
8. Conversion of outstanding cash credit into working capital term loan
9. Concession on existing power tariff (by State Government)
10. Release of fresh loans
11. Conversion of loans into equity, etc.
Despite huge investments shown above the Government has not even been able to
achieve turnaround in any of the sick companies shown in the Table.
Of the total operating CPSUs as on 31.3.01, which are 234, 111 were loss-making
and 66 were registered with the BIFR.
Status of 66 PSUs registered with BIFR (as on 31.12.2001)
Sr. No. Status No. of Companies

1. Declared No Longer Sick 3
2. Dismissed As Non 2
Maintainable
3. Draft Scheme Circulated 13
4. Failed and Reopened 5
5. Revival Scheme Sanctioned 10
6. Under Enquiry 9
7. Winding Up Notice 6
8. Winding Up Recommended 18
9. TOTAL 66
The Public Enterprises Survey 2000-01 shows that out of the equity invested in the
Central Government PSEs (Rs.86152 crore.), the Central Government, State
Government, holding companies and foreign investors held as much as Rs. 83725
crore. Of the remaining equity (Rs. 2427 crore), a substantial chunk was held by
financial institutions and banks. Thus, there has been little redistribution of wealth to
the small investor / public at large either.
As regards the objective of balanced regional development, despite five decades of

attempted industrialisation through the PSEs, there are still many pockets, especially
in the eastern and northeastern parts of the country, which woefully lack in industrial
growth and infrastructure. Commendable growth has, no doubt, taken place as far as
the small scale and ancillary industries are concerned. However, most of these have
not been able to keep pace with the times and the changing scenario and suffer from
lack of economies of scale, obsolete technologies and many other ills.
The objectives of import substitution, saving and earning foreign exchange through
the PSEs too, have met with only limited success.
It has been widely observed that the PSEs have no commercial motivation. Their
financial needs have often to be subordinated to other macro-economic considerations
and they often face shortage of funds. They generally survive on monopolistic profits.
Apart from all this, the increasing integration of the Indian financial, capital and
foreign exchange markets with global markets, starting with the economic reforms of
July 1991 and the recent WTO Agreements, have exposed the public sector to market
forces, as a result of which it now finds itself unable to stand on its own feet without
State support.
6.2 Employee issues
The table below illustrates that barring the organized private sector, employment
levels were stagnant in the 1990’s. Of the 1.6 million jobs added in the organized
sector 1 million, or two thirds, were added in the private sector during the period 1991
to 2000. This indicates that the private sector has become the major source for
incremental employment in the organized sector of the economy over the last decade.
Employment in organized sectors (million nos.)
GOI State Municipalities Quasi- Private Total

Government government
1990 3.4 7.0 2.2 6.2 7.6 26.4
2000 3.3 7.5 2.3 6.3 8.6 28.0
Source: Economic Survey 2001-02
According to NSSO statistics, the total workforce in India during 1997 was about 355
million. Out of this, the organized sector accounted for 27 million workers, of which the
Central and State Governments and the Central and the State PSEs employed only 2
million workers.
NSSO Statistics
1. Total workforce in
India Rural: 269 million
(Source NSSO
1997) Urban: 86 million
Total: 355
million
2. Total workforce in organised

sector Government: 20 million*
Private: 7
million
Total: 27
million
3. Total workforce in
CPSEs About 2 million
4. Investment supporting retention
of this workforce (as on 31.3.01) Rs. 274,114 cr.
(*Includes Central / State / Semi Government, Central / State / Semi Public Sector)
Despite these investments, and no privatisation until 1999, the CPSEs workforce is
declining.
It is worth noting that even before privatisation, the PSEs workforce has been
consistently going down - at least during the last ten years - due to economic
pressures. The total work force in Central PSEs has come down i.e. from 2.18 million
as on 31st March 1992 to 1.74 million as on 31st March 2001.
Protection of Workers’ Interests
CPSE Employment
Year No. of employees
(millions)
1991-92 2.18
1992-93 2.15
1993-94 2.07
1994-95 2.06
1995-96 2.05
1996-97 2.00
1997-98 1.96
1998-99 1.90
1999-00 1.80
2000-01 1.74
(Source: Public Enterprises Survey)
However, in the companies privatised till now, no labour retrenchment has taken
place. Whenever, rationalization has been undertaken, a VRS package at least equal to
that offered by the PSU before privatisation is offered. As a policy, employees are
given shares at discounted rates, even at lower of 1/3 rd of the strategic sale price or
market price. At the time of privatisation, suitable provisions are made in the Share
Holders’ Agreement (SHA) to protect employee interest. “Best efforts” clause is also
incorporated in SHA mentioning the benefits given by the Government to the
members of SC/ST, physically challenged person and other socially disadvantaged
categories of the society stating that the Strategic Partner shall use its best efforts to
cause the company to provide adequate job opportunities to such persons.
In most of the privatised companies better working conditions have been

provided. Training, use of computers and other employee welfare measures have
been introduced.
If the funds invested in the PSEs' shares were to be deployed in areas such as
infrastructure that would have perhaps generated more employment and ensured better
redistribution of wealth.
The DPE Survey points out that large scale employment by public sector enterprises
has, over the years, led to a situation where some of the enterprises are saddled with
over employment or excess manpower resulting in low level of per capita
productivity. If the privatised companies grow rapidly, no labour restructuring may be
required. In some companies where strategic sale has taken place, employees have
often been rewarded with better pay scales and allowances, details of which can be
seen in other Chapters.
6.3 Mode of Disinvestment and advantages of Strategic Sale
Before the year 2000, the Government had primarily sold minority shares in public
sector companies. The price realized through the sale of shares, even in blue chip
companies like IOC, BPCL, HPCL, GAIL & VSNL was low as the following table
indicating Price to Earning Ratios would indicate. On the other hand, the prices
realized through strategic disinvestment have been very much higher.
SALE OF SHARES Vs. STRATEGIC DISINVESTMENT
PRICE EARNING RATIOS
Sale of Shares Strategic Disinvestment

1991-99 2000-2002
1. IOC 4.9 BALCO 19**
2. BPCL 5.7 CMC 12
3. HPCL 5.9 HTL 37
4. GAIL 4.4 IBP 63
5. VSNL 6.0 VSNL 11 **
(in monopoly (after the

days) end of
monopoly)
6. HZL 26
7. MFIL Very high *
8. LJMC - do-
9 PPL - do-
10 JESSOP - do-
11 MARUTI 89
12 IPCL 58
*As earning per share was negative.
**Inclusive of income from special dividend prior to disinvestment etc.
During the period 1991-2000, the sale of minority share of public sector undertakings
had led to an income of about Rs. 19,000 crore. Most of the shares during this period
were picked up by financial institutions. Unit Trust of India was one such institution,
which had picked up sizeable number of shares. Since the public perception of public
sector companies is that they would not be paying good dividends, the prices of shares
fell in a number of cases, with the result that UTI lost Rs. 5056 crore over an
investment of Rs. 6403 crore made by them. However, with the market prices of PSU
shares picking up after a few major disinvestments, the loss to UTI on PSU portfolio
has decreased to Rs. 4284 crore as shown in the table below:
Sale to UTI
(Rs. in Crore)
As on As on
4.09.01 19.08.02
1. Payment for PSUs shares divested from 1991-92 6403 6403
to 1994-95 by UTI.
2. Value of investment as on date would have been 13109 14185
@ 9% p.a. compounded annually.
3. Notional profit on deposit. 6706 7782
4. UTI earned net profit on this investment * 1650 3498
5. Net loss as compared to bank deposit * 5056 4284
* Notional, at market price.
The experience so far has shown the distinct advantage of strategic sale option
over other modes of disinvestments.
6.4 Disinvestment and Stock Markets
Bombay Stock Exchange has established a PSU index comprising 34 listed Public
Sector Undertakings (PSUs) in June 2001. The value of PSU index and their market
capitalisation this year have been tracked and it can be observed that market value of
listed PSU shares have responded to Government’s disinvestment decisions.
While the share prices in the year have seen many highs and lows due to attack on
WTC in New York on September 11, 2001 and the attack on Parliament in New Delhi
on December 13, 2001, it may be observed from the table that on 2nd April, 2001 and
8th Jan 2002, the percent of PSU market cap to total BSE market cap and the BSEPSU
index was almost the same. However, February 2002 onwards has seen a rise in
market cap of PSU shares (big disinvestments like VSNL, IBP, HZL, Maruti and
IPCL have established Govt.’s earnestness in the process).
However, due to uncertainties in government decisions regarding certain

disinvestments, the index and the market cap. of BSEPSU and total BSE has reduced
drastically and was at its lowest on 1st October 2002.
PERFORMANCE OF LISTED PSUs: MARKET CAPITALISATION
Date BSE-PSU TOTAL Market Capital (Rs. Crs.)

INDEX PSU Total-BSE %
PSU/Total
BSE
April 2, 2001 934.09 97501.33 560617.39 17.39
Jan. 8, 2002 932.32 96062.63 556551.62 17.26
July 15, 2002 1699.74 170375.17 645774.25 26.38%
Between Increase 77.3 % 16 %
8/1/02- (Rs. 74312.54 (Rs. 89222.63 cr.)

15/07/02 cr.)
Oct. 1, 2002 1370.98 137421.11 565778.89 24.29%
Between Decrease 19.3 % 12 %
15/7/02-
1/10/02 (Rs.32954.06 (Rs.79995.36 cr.)
cr.)
Source: BSE
The PSUs that were under disinvestment have also shown particular increase in their
share prices during this period.
Source: BSE
Company Name Market share price as Market share price as % Increase

on January 8, 2002 on July 15, 2002
(Rs. per share) (Rs. per share)

Madras Fertiliser Ltd. 3.5 13.20 277
Engg. India Ltd. 80.15 374.55 367
Balmer Lawrie Ltd. 23.85 97.90 310
Hindustan Organics 7.25 22.45 209
Chemicals Ltd.
Shipping Corpn. Of India 31.55 86.20 173
Hindustan Machine Tools 4.50 28.40 531
Total 150.80 622.70 313
The companies in which disinvestment decision was deferred show specifically high
percent of decline in their share prices as shown below:
Company Market price as on Market price as on

Name 1/04/02 (Rs. per share) 1/10/02 (Rs. per share) % Decrease
BPCL 338.5 175.95 48
HPCL 312.95 172.45 44.89
Source: BSE
6.5 Legal Issues
Since the Ministry of Disinvestment came into being in December 1999, there have
been a large number of lawsuits filed against the process for various reasons.
SUMMARY OF DISINVSTMENT RELATED COURT CASES
(AS ON 31.12.002)
1. Total number of cases filed up to 30.11.2002- 40
2. ITDC related cases 23
3. Total cases out of 40 dismissed 21
4. Number of pending cases 19
5. Out of pending cases related to ITDC cases
Transferred to Supreme Court 7
Note: The above table does not include cases where the challenge is not to
disinvestment but to other aspects like pay revision etc.
Out of the cases indicated above, there has been a landmark judgement delivered on
10th December 2001 validating the disinvestment by the Government in BALCO.
LANDMARK JUDGEMENT IN BALCO DISINVESTMENT
51% of Government held equity in Bharat Aluminium Company Ltd. (BALCO) was
disinvested on 2nd March 2001 in favour of Sterlite Industries (India) Ltd. for Rs.
551.50 crore. In protest, the workers went on a 67-day strike. Three writ petitions -
two in Delhi High Court and one in Chhattisgarh High Court were filed against
disinvestment in BALCO in February 2001. Since the issues involved in all three
cases were similar, a transfer petition was filed by the Ministry of Disinvestment in
the Supreme Court. Supreme Court considered the petition, stayed the proceedings in
the High Courts and transferred all the three petitions for hearing to itself. A three-
judge bench in the Supreme Court heard the case.
Concluding Summary of the Judgement
“In a democracy, it is the prerogative of each elected Government to follow it's own
policy. Often a change in Government may result in the shift in focus or change in
economic policies. Any such change may result in adversely affecting some vested
interests. Unless any illegality is committed in the execution of the policy or the same
is contrary to law or mala fide, a decision bringing about change cannot per se be
interfered with by the Court.
Wisdom and advisability of economic policies are ordinarily not amenable to judicial
review unless it can be demonstrated that the policy is contrary to any statutory
provision or the Constitution. In other words, it is not for the Courts to consider
relative merits of different economic policies and consider whether a wiser or better
one can be evolved. For testing the correctness of a policy, the appropriate forum is
the Parliament and not the Courts. Here the policy was tested and the Motion defeated
in the Lok Sabha on 1st March 2001.
Thus, apart from the fact that the policy of disinvestment cannot be questioned as
such, the facts herein show that fair, just and equitable procedure has been followed in
carrying out this disinvestment. The allegations of lack of transparency or that the
decision was taken in a hurry or there has been an arbitrary exercise of power is
without any basis. It is a matter of regret that on behalf of State of Chhattisgarh such
allegations against the Union of India have been made without any basis. We strongly
deprecate such unfounded averments, which have been made by an officer of the said
State.
The offer of the highest bidder has been accepted. This was more than the reserve
price, which was arrived at by a method, which is well recognized, and, therefore, we
have not examined the details in the matter of arriving at the valuation figure.
Moreover, valuation is question of fact and the Court will not interfere in matters of
valuation unless the methodology adopted is arbitrary [see Duncans Industries Ltd. vs.
State of U.P. and Others, (2000) 1 SCC 633].
The ratio of the decision in Samatha’s case (supra) is inapplicable here as the legal
provisions here are different. The land was validly given to BACLO a number of
years ago and today it is not open to the State of Chhattisgarh to take a summersault
and challenge the correctness of it's own action. Furthermore even with the change in
management the land remains with BALCO to whom it had been validly given on
lease.
Judicial interference by way of PIL is available if there is injury to public because of

dereliction of Constitutional or statutory obligations on the part of the government.
Here it is not so and in the sphere of economic policy or reform the Court is not the
appropriate forum. Every matter of public interest or curiosity cannot be the subject
matter of PIL. Courts are not intended to and nor should they conduct the
administration of the country. Courts will interfere only if there is a clear violation of
Constitutional or statutory provisions or non-compliance by the State with it's
Constitutional or statutory duties. None of these contingencies arise in this present
case.
In the case of a policy decision on economic matters, the Courts should be very
circumspect in conducting any enquiry or investigation and must be most reluctant to
impugn the judgement of the experts who may have arrived at a conclusion unless the
Court is satisfied that there is illegality in the decision itself.
Lastly, no ex-parte relief by way of injunction or stay especially with respect to public
projects and schemes or economic policies or schemes should be granted. It is only
when the Court is satisfied for good and valid reasons, that there will be irreparable
and irretrievable damage, can an injunction be issued after hearing all the parties.
Even then the Petitioner should be put on appropriate terms such as providing an
indemnity or an adequate undertaking to make good the loss or damage in the event
the PIL filed is dismissed.
It is in public interest that there should be early disposal of cases. Public Interest
Litigation should, therefore, be disposed of at the earliest as any delay will be contrary
to public interest and thus become counter-productive.
For the aforesaid reasons stated in this judgment, we hold that the disinvestment by
the Government in BALCO was not invalid.”
6.6 Disinvestment Fund
The proposal to set up a Fund with the proceeds from disinvestment has been
raised from time to time. Disinvestment Commission in its First Report
submitted in February 1997 recommended “The proceeds of disinvestment be
placed separately in a Disinvestment Fund (DF) and not be fungible with other
government receipts…The resources in the Disinvestment Fund may be used
for temporarily meeting the losses of some PSUs before disinvestment, where
required, for a limited period during the process of short term restructuring or
closure, for strengthening marginally loss making PSUs in preparation for
disinvestment and for providing benefits to workforce found to be surplus
during restructuring or closure. The savings to the Budget on account of such
recurring budgetary support to loss making PSUs could be diverted for
investment in sectors like infrastructure, education and health and retirement of
public debt. In addition, it is proposed that the funds for conducting the
publicity campaign for the disinvestment of PSU shares be drawn from the
Disinvestment Fund. Since the PSUs come under various administrative
Ministries, it is proposed that the Disinvestment Fund be administered by the
Ministry of Finance in order to facilitate better co-ordination and smoother
administration.”
The setting up of a Disinvestment Proceeds Fund has recently been announced

by the Government and its structure / modalities will be notified shortly.

7. CHAPTER: THE LESSON OF EXPERIENCE
In “Privatisation: The lesson of Experience”, the authors Sunita Kikeri, John Nellis &
Mary Shirley of the World Bank, make the point that governments intent on
privatising, face a challenge: the benefits of efficiency and innovation only materialize
if privatisation is done correctly. The following checklist provides some basic
guidelines.
 The more market-friendly a country's policy framework - and appropriate

policy is corrected with capacity to regulate - the less difficulty it will have in
privatising on State Owned Enterprises (SOE), and the higher the likelihood
that the sale will turn out positively.
 SOEs functioning in competitive markets, or in markets easily made

competitive, are prime candidates for privatisation. Their sale is simple
compared with that of public monopolies, and they require little or no
regulation.
 An appropriate regulatory framework must be in place before monopolies are

privatised. Failure to regulate properly can hurt consumers and reduce public
support for privatisation.
 Countries can benefit from privatising management through management

contracts, leases, contracting out, or concessions.
 The primary objective of privatisation should be to increase efficiency, not to

maximize revenue (for example, by selling into protected markets) or even to
distribute ownership widely at the expense of managerial efficiency.
 Rather than restrict the market by excluding foreign investors and favouring
certain ethnic groups, governments should experiment with "golden shares"
(devices that prevent complete takeover by non-government interests without
retaining management control by government) and partial share offerings.
These could help to win acceptance for foreign and other buyers.
 Avoid large new investments in privatisation candidates; the risks usually

outweigh the rewards. Rather prepare for sale by carrying out legal, managerial
and organisational changes.
 Experience shows that labour does not, and need not, lose in privatisation, if
governments pay attention to easing the social cost of unemployment through
adequate severance pay, unemployment benefits, retraining and job search
assistance.
 Ideally, let the market set the price, and sell for cash. Realistically, though,
negotiated settlements and financing arrangements or debt-equity swaps may
be unavoidable.
 In all privatisations, in all countries, the transaction must be transparent.

8. CHAPTER: DISINVESTMENT COMMISSION
The Disinvestment Commission was set up on 23.8.1996 for a period of 3 years with
the following terms of reference:
1. “To draw a comprehensive overall long-term disinvestment programme within

5-10 years for the PSUs referred to it by the Core Group.
2. To determine the extent of disinvestment (total/partial indicating percentage) in

each of the PSU.
3. To prioritise the PSUs referred to it by the Core Group in terms of the overall
disinvestment programme.
4. To recommend the preferred mode(s) of disinvestment (domestic capital

markets/international capital markets / auction / private sale to identified
investors / any other) for each of the identified PSUs. Also to suggest an
appropriate mix of the various alternatives taking into account the market
conditions.
5. To recommend a mix between primary and secondary disinvestments taking

into account Government's objective, the relevant PSU's funding requirement
and the market conditions.
6. To supervise the overall sale process and take decisions on instrument, pricing,
timing etc. as appropriate.
7. To select the financial advisors for the specified PSUs to facilitate the
disinvestment process.
8. To ensure that appropriate measures are taken during the disinvestment process
to protect the interests of the affected employees including encouraging
employees' participation in the sale process.
9. To monitor the progress of disinvestment process and take necessary measures

and report periodically to the Government on such progress.
10. To assist the Government to create public awareness of the Government's

disinvestment policies and programmes with a view to developing a
commitment by the people.
11. To give wide publicity to the disinvestment proposals so as to ensure larger
public participation in the shareholding of the enterprises.
12. To advice the Government on possible capital restructuring of the enterprises

by marginal investments, if required, so as to ensure enhanced realization
through disinvestment.
The Disinvestment Commission will be an advisory body and the Government will
take a final decision on the companies to be disinvested and mode of disinvestment on
the basis of advice given by the Disinvestment Commission. The PSUs would
implement the decision of the Government under the overall supervision of the
Disinvestment Commission.
The Commission, while advising the Government on the above matters, will also take
into consideration the interests of stakeholders, workers, consumers and others having
a stake in the relevant public sector undertakings.”
8.1 Modified Terms Of Reference
The terms of reference of Disinvestment Commission were modified on 12.1.1998.

The modified terms of reference were as follows:
1. “Disinvestment Commission shall be an advisory body and its role and function
would be to advise the Government on disinvestment in those public sector
units that are referred to it by the Government.
2. The Commission shall also advise the Government on any other matter relating
to disinvestment as may be specifically referred to it by the Government, and
also carry out any other activities relating to disinvestment as may be assigned
to it by the Government.
3. In making its recommendations, the Commission will also take into

consideration the interests of workers, employees and others stakeholders, in
the public sector unit(s).
4. The final decision on the recommendations of the Disinvestment Commission

will vest with the Government.”
The Commission gave recommendations on 58 PSEs out of the 72 PSEs referred to it

as per details given below: -
Mode of disinvestment recommended Number of PSEs
A. Involving change in ownership / management
1. Strategic sale 31
2. Trade sale 08
3. Employee buy out/strategic sale
02
B. Involving no change in ownership / management
05
1. Offer of shares
C. No change
1. No disinvestment 08
D. Closure / sale of assets 04
GRAND TOTAL 58
Action on all of these has been taken.
8.2 New Disinvestment Commission
As the term of the first Disinvestment Commission expired in the year 1999, a new
Disinvestment Commission was constituted in the month of July 2001 on the same
‘Terms of Reference’ as were modified for the pervious Commission. The
Composition of the Disinvestment Commission is as follows:
1. Dr. R.H. Patil - Chairman
2. Shri N.V. Iyer - Member
3. Shri T.L. Shankar - Member
4. Dr. V.V. Desai - Member
5. Prof. K.S.R. Murthy - Member
6. Shri A. Bhattacharya - Member Secretary

(since April 2002)
6.2.1 Reference of all Non-Strategic PSEs including their subsidiaries to

Disinvestment Commission
As per the earlier practice the Government referred specific CPSUs to the
Disinvestment Commission. The Government has now decided to refer to the
Disinvestment Commission all “non-strategic” Public Sector Enterprises (PSEs)
including their subsidiaries, excluding IOC, ONGC & GAIL, for prioritisation and
make recommendations.
Since such PSEs would be quite large in number, the Commission would prioritise the
cases and make recommendations to the Government on the basis of 16th March 1999
and subsequent cabinet decisions:
1. PSE where disinvestment would lead to large revenues to the Government,
2. Where disinvestment can be implemented with minimum impediments and in

a relatively shorter time span, and
3. Where continued bleeding of Government resources can be stopped earlier.
While prioritising the cases, the Commission will not examine cases, which have been
referred to BIFR.
Cases where a decision for disinvestment or for location of a joint venture partner has
already been taken by the Government and some progress achieved, a decision would
be taken by the Ministry of Disinvestment in consultation with the Administrative
Ministry concerned whether such cases should be referred to the Disinvestment
Commission.
6.2.2 Recommendations of the Disinvestment Commission
The reports recently received from the Disinvestment Commission are being
examined. Report XIII contains reports on PSEs, which had been referred to the
earlier Commission. The recommendations in Report XIII are:
1. Neyveli Lignite Corporation Ltd. (NLC). “…In case there is no legal

hurdle to a power manufacturing company from becoming a strategic partner in NLC,
Government could consider selling up to 51% of its equity to a strategic partner after
the bidders have been suitably prequalified. If there is a legal hurdle, then at least 49%
of the equity could be disinvested in the first instance.”
2. Manganese Ore (India) Ltd. “…a minimum of 51% of Government equity

in MOIL should be disinvested to a strategic buyer.”
3. Rail India Technical and Economic Services Ltd. (RITES). “…a minimum
of 51% of Government equity may be given to the employees (both present and past)
of RITES while Government should retain 25% of the equity. The balance equity may
be distributed among reputed infrastructure consultancy organisations and
infrastructure leasing and financing organisations after suitable prequalification.”
4. Projects & Equipment Corporation Ltd. (PEC). “…Government should

divest 100% of its shareholding…Since the assets of the company are mainly
knowledge-based, Government could consider a management-employee buy-out in
PEC. If this is not found feasible, Government could consider a strategic sale of 100%
to any reputed international trading organisation. In case there is no investor interest
in the company, there would be no option but to close the company after liquidating
its assets.”
Recommendations in Report XIV are as follows:
1. IRCON International Ltd. “…In order to bring in efficiencies by way of

greater focus on value drivers, strategic sale of 51% stake and transfer of management
control in the company through a competitive bidding process is recommended, after
having withdrawn necessary surplus from IRCON..…With a view to ensuring the
retention of the employees on deputation from Indian Railways as well as other key
employees of IRCON, suitable schemes of incentivisation of employees such as
Employee Stock Option Plan (ESOP) / Employees Stock Purchase Scheme should be
explored…..The government should undertake a phased dilution of equity, having
ensured that the government’s stake does not fall below 26% at least for 3-5 years.”
2. Central Inland Water Transport Corporation Ltd. “…in view of the

potential of Inland Water Transport that can be harnessed by private sector
participants, the Commission recommends that the first option of selling entire equity
of GoI to a strategic buyer may be pursued together with necessary capital
restructuring. The restructuring package is to be finalised in consultation with
prospective buyers. If, however, no buyer shows interest, assets of CIWTC may be
sold and the company may be wound up following the prescribed procedure.”
3. Cochin Shipyard Limited. “…the Commission recommends that at least 51%

control in CSL should be sold to a strategic partner who can bring in the required
efficiencies as well as capital, to the extent needed. Given the upward potential of
CSL, it would be desirable for GoI to retain some share for some more time.”
4. Hindustan Shipyard Limited. “…recommends disinvestment of the entire

GoI shareholding in HSL to a strategic buyer. The restructuring package, formulated
in consultation with prospective buyers, should be concurrent with the disinvestment
programme. This would help in bringing in productivity improvements and marketing
ability needed to turn around HSL. In case the process of disinvestment does not
succeed, owing to lack of interest from prospective buyers, closure of HSL may be
inevitable.”
Recommendations in Report XV are as follows:
1. DREDGING CORPORATION OF INDIA LTD. (DCI). “…recommends

that GoI should disinvest at least 51% shareholding in DCI to a strategic partner after
withdrawal of necessary cash surplus. GoI should hold at least 26% share for a
minimum period of 5 years.”
2. NATIONAL PROJECTS CONSTRUCTION CORPORATION LTD

(NPCC).
“…recommends that a restructuring package, in consultation with prospective buyers,

be formulated and the entire GoI stake disinvested in favour of a strategic buyer. The
restructuring of NPCC and its total disinvestment should be concurrent. In case no
strategic buyer shows interest, or in the event the cost of closure turns out to be much
cheaper compared to the cost of revival and disinvestment, the option of closure has to
be pursued.”
3. SEMICONDUCTOR COMPLEX LIMITED (SCL). Due to “ the

strategic nature of business of SCL may need to be sustained in the national interest,
the Commission recommends that SCL could be merged with a Public Sector
company in a related line of business, like BEL. …..In case merger with BEL is not
considered feasible, Government could explore the possibility of integration of Very
Large Scale Integrated Circuits (VLSI) facilities of Bangalore (Society for Integrated
Circuits Technology & Applied Research) and Gallium Arsenide Enabling
Technology Centre (GAETEC), Hyderabad with SCL to achieve synergy and
optimisation of resources as well as to strengthen the national capability in the field of
semiconductor / micro-electronics.”
4. TELECOMMUNICATIONS CONSULTANTS INDIA LTD. (TCIL).
“…recommends that a minimum of 51% of TCIL’s equity, held by Government of

India, be disinvested in favour of a strategic partner, after withdrawal of surplus cash
reserves. Government should retain at least 26% equity for a period of 3-5
years…..Continuation of technical workforce of TCIL on deputation from the
Department of Telecommunications / BSNL, post privatisation, may be needed for a
few years till the company builds up its own high-tech human resources and becomes
an international major on its own.”
Report (XVI) contains recommendations in respect of the following companies:
1. Cotton Corporation of India Ltd. (CCI). “…If MSP continues, it is

recommended that the GoI disinvests initially 51% of its shareholding in CCI in
favour of a strategic partner, retaining the balance 49% for a minimum period of 3
years. ……………..If MSP is discontinued, 100% disinvestment of CCI in favour of a
strategic buyer is recommended.”
2. Indian Medicines Pharmaceuticals Ltd (IMPCL). “…Government of India

holds 51% share and the balance is held by Kumaon Mandal Vikas Nigam Limited
(KMVNL), a profit-making undertaking of the Government of
Uttaranchal…………...first offer to sell its equity to KMVNL at a negotiated price. In
case KMVNL is not interested, GoI should sell its entire equity in IMPCL in favour of
a strategic partner through a competitive bidding route. Should KMVNL be also
interested to simultaneously exit from IMPCL, 100% equity of IMPCL may be
disinvested in favour of a strategic buyer.”
3. Jute Corporation of India Ltd. (JCI). “…In case Government continues the
price support operations for jute, the Commission recommends that JCI should not be
disinvested now…………In the event of MSP policy for jute being discontinued, the
Commission recommends that the entire equity of JCI be disinvested in favour of a
strategic buyer, together with organisational and financial restructuring. In case
disinvesment of JCI is not possible, owing to lack of interest of buyers or any other
reason, closure/winding up of JCI should be pursued.”
4. National Buildings Construction Corpn. Ltd. (NBCC). “…recommends

that upto 74% equity in NBCC, held by Government of India, be sold to a strategic
partner through the competitive bidding route. The Commission further recommends
that a financial and organisational restructuring package for NBCC be formulated in
consultation with the prospective bidders and implemented at the time of
disinvestment. At least 26% shares should be retained with the Government for a
minimum period of 3 years.”
All these recommendations are being examined for action now.
The complete reports can be accessed through the Ministry’s website and the website
of the Disinvestment Commission at www.disinvest.gov.in
9. CHAPTER: OVERVIEW OF THE PRIVATISATION PROCESS
9.1 Overview of procedure
The procedure followed by Government of India for disinvestment seeks to promote

administrative simplicity and speed of decision-making without compromising on
transparency and fair play. The process is as follows:
· 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.
· 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
binding financial 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.
· 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 offer
would 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, Department of 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.
The process flow chart on the next page shows the various stages of a typical
privatisation transaction through strategic sale route.
9.2 Disinvestment – Process Flow Chart
10. CHAPTER: SYSTEMS AND PROCEDURES OF DISINVESTMENT
For decision-making and implementation of disinvestment there is a three-tier

mechanism in Government of India:
1. Cabinet Committee on Disinvestment (CCD)

2. Core Group of Secretaries on Disinvestment (CGD)
3. Inter-Ministerial Group (IMG)
10.1 Cabinet Committee on Disinvestment
The Cabinet Committee on Disinvestment (CCD) is chaired by the Prime Minister

and comprises of the Deputy Prime Minister, Minister of Power, Minister of Law &
Justice, Minister of Commerce and Industry, Minister of External Affairs, Minister of
Finance & Company Affairs, Minister of Petroleum and Natural Gas, Minister of
Civil Aviation, Deputy Chairman of Planning Commission, Minister of Disinvestment
and the Minister concerned with the CPSU under disinvestment.
The functions of the Committee are as follows:
1. To consider the advice of the Core Group of Secretaries regarding policy issues
relating to the disinvestment programme.
2. To decide the price band for the sale of Government shares through
international/domestic capital market route prior to the book building exercise, and
to decide the final price of sale in all cases.
3. To decide the final pricing of the transaction and the strategic partner in case of
strategic sales.
4. To decide on cases where there is disagreement between the recommendations of

the Disinvestment Commission and the views of the Ministry of Disinvestment.
5. To approve the three-year rolling plan and the annual programme of disinvestment
every year.
10.2 Core Group of Secretaries on Disinvestment
The Core Group of Secretaries is headed by the Cabinet Secretary and comprises
Secretaries from Ministries of Finance, Industry, Disinvestment, Planning
Commission and Administrative Ministry and any other Department as may be
required, like Departments of Legal Affairs, Company Affairs etc.
The Core Group directly supervises the implementation of the decisions of all
strategic sales.
The Core Group monitors the progress of implementation of the CCD decisions.
The Core Group makes recommendations to the CCD on disinvestment policy

matters.
10.3 Inter-Ministerial Group
The Inter-Ministerial Group is chaired by Secretary, Ministry of Disinvestment and

comprises officers of Ministry of Finance, Department of Public Enterprises, Deptt. of
Legal Affairs, Deptt. of Company Affairs, Administrative Ministry, the CMD and the
Director (Finance) of the Public Sector Enterprise concerned.
The Inter-Ministerial Group is the forum where inter-ministerial consultation takes

place at the primary level.
10.4 Ministry of Disinvestment
The Department of Disinvestment was set up vide Notification No.CD-551/99 dated

the 10th December 1999. Vide Notification No. CD-442/2001 dated 6th September
2001; the Department of Disinvestment was renamed as Ministry of Disinvestment.
Business Allocated to Ministry of Disinvestment:
1. All matters related to disinvestment of Central Government equity from Central

Public Sector Undertakings.
2. Decisions on the recommendations of the Disinvestment Commission on the

modalities of disinvestment, including restructuring.
3. Implementation of disinvestment decisions, including appointment of advisors,

pricing of shares, and other terms and conditions of disinvestment.
4. Disinvestment Commission.
5. Central Public Sector Undertakings for purposes of disinvestment of Government

equity only.
In the above process, the Ministry of Disinvestment is assisted by Advisors for
different purposes.
Normally the disinvestment process is carried out with the assistance of an Advisor
(known as Global Advisor or Financial Advisor). They could be Merchant Bankers or
Consultancy / Advisory firms, but in addition legal advisors, chartered accounts, asset
valuers and other valuers are also required for specific services.
10.4.1 Advisor
Advisors assist Government in all aspects of privatisation transactions. In addition to

implementing the basic steps mentioned earlier, advisors also counsel Government on
the strategic options open to it for privatisation. The responsibilities of the Advisor,
would inter-alia, cover rendering of advice and assisting government in the
disinvestment of the PSU, suggesting measures to enhance sale value, preparing a
detailed information memorandum, marketing of the offer, inviting and evaluating the
bids, assisting during negotiations with prospective buyers, drawing up the sale/other
agreements and advising on post-sale matters.
Advisors are appointed by a competitive bidding procedure. The Ministry of

Disinvestment, in consultation with the CPSU and Administrative Ministry
concerned, prepares a brief Terms of Reference (TOR) for the Advisors and invites
expression of interest from them to submit proposals. They are asked to make a
presentation before the Inter Ministerial Group. The Advisors offering the best
technical and financial terms are hired to implement the privatisation transaction.
Advisors are selected on the basis of the following parameters for:
A. Strategic sale.
S.No Criteria
1. Strategic sale experience
2. Sector expertise and experience
3. Local presence and level of commitment to India
4. Understanding of the PSE
5. Deal team and manpower commitment
6. Research capability
7. Global presence
B. Public offer
S.No Criteria
1. Experience and capabilities in handling similar transactions as
Advisors/Global Coordinators
2. Sector expertise and experience
3. Understanding of the PSE
4. Deal team qualification and Manpower commitment to the Deal
5. Marketing strategy & after market support
6. Local presence and commitment to India
7. Global presence and distribution capabilities
8. Research capabilities
A typical letter of mandate to be signed between the Advisor and the Government is
enclosed at Annexure – I. This may require some modifications depending on the
nature of transaction.
Government has also issued guidelines for qualifications of Advisors as enclosed at

Annexure – II.
For strategic sale the fees payable to the Advisors is generally of two types. The first
type is called 'success fee' which is a fixed percentage of the gross proceeds to be
received by the Government from the disinvestment. Since it is directly linked with
the amount of money realizable from disinvestment, it serves as an incentive to the
Advisor to get the best price from disinvestment.
The other type of fee is called 'drop dead fee' which is a lump sum amount payable to
the Advisor only in the event of the transaction being called off by the Government.
The fees for specific transactions vary from transaction to transaction depending on
various factors like mode of disinvestment, total realizable value, quantum of work
required to complete the transaction, degree of difficulty and chances of success of the
transaction etc. Consultants appointed for disinvestment in certain cases are also given
flat / fixed / lump sum fee / asset valuation fee / out of pocket expenditure depending
on different criteria.
10.4.2 Legal Advisor
For each privatisation, it is considered necessary to involve legal advisors who look
into the legal issues and advise the government with respect to documentation etc. on
contractual terms. They are invited on the basis of their work experience and are
selected through a process of limited competitive bidding by an Inter-department
Committee, from a panel suggested / recommended by the Advisors, and are paid a
lump sum amount as fees. They help the Government in drafting and finalising
various agreements.
Legal advisors examine the following documents and advise the Government on
1. Material contracts and agreements.
2. Loan and lease agreements to ensure that there are no unduly onerous
conditions.
3. Title deeds to ensure that there are no defects of title or onerous conditions.
4. The adequacy of insurance cover and compliance with any legal or other
requirement.
10.4.3 Accounting Advisors
The Accounting Advisors review the financial, accounting, reporting and planning
systems.
They help the government in analysing the balance sheet of the company, its assets
and liabilities and contingent liabilities.
The Accounting Advisors are required to re-cast the final Accounts of the PSU as per
the Accounting standards acceptable to the bidding parties, if necessary.
The Accounting Advisors pay particular attention to the way the following items have
been treated:
1. Extraordinary and exceptional items
2. Amortisation and depreciation
3. Capitalisation of expenditure
4. Recognition of revenue and expenditure items
5. Basis of consolidation of subsidiaries, if any
6. Deferred taxation, and

7. Revaluation of assets.
The task includes:
· Strategic evaluation of operating capability finances and post privatisation

prospects of the state enterprise.
· Evaluation of capital structure
· A calculation of the impact of taxation on the privatised enterprise.
The accounting advisor is appointed through a process of limited competitive bidding

and is paid a lump sum fees.
10.4.4 Asset Valuer
The asset valuation is conducted by well-established government-approved valuers.

Normally, the valuer is selected by an inter-departmental committee, consisting of
representatives from the Ministry of Disinvestment / administrative Ministry and the
CMD of the company, from out of a panel suggested / recommended by the Advisor.
While assessing the fair value of the property, the valuer takes into consideration the
following:
1. The status of the title of the company over land and building.
2. Any restrictive covenants incorporated in the title documents imposing

limitations on the use or transfer of the property or any other restrictions.
3. Any restrictions pertaining to the use or transferability of the property or other

restrictions arising from any civic regulations or Master Plan or other reasons.
4. The values at which transactions have taken place in the recent past for
properties of comparable nature, in terms of use, size, location and other
parameters.
5. Valuation parameters currently in use by Authorities for determination of stamp

duty and other taxes.
6. Assessment of demand and supply of comparable properties at given locations.

7. The state of maintenance and depreciation of the property, and evaluation of
expenditure, if any, required repairing and renovating the property to suit the intended
use.
8. Terms and conditions of the proposed new lease agreements to be entered into
with the lessors for the purpose of disinvestment.
The valuation of the property is done by the asset valuation methodology taking into
consideration the above factors.
Valuation is done for:
· Plant and Machinery
· Land and Building
· Mines, if any.
· Intangibles, if required.
· Other assets.
Environmental Auditors and Public Relations firms have also been appointed for
some CPSUs under divestment.
11. CHAPTER: VARIOUS METHODOLOGIES FOR DISINVESTMENT
The various methodologies include:
1. STRATEGIC SALE
2. CAPITAL MARKET
a. Offer for sale to public at a fixed price
b. Offer for sale to public through book building
c. Secondary market operation
d. International offering
e. Private placement
f. Auction
3. WAREHOUSING
4. REDUCTION IN EQUITY
a. Buy-back of equity
b. Conversion of equity into debt exchangeable into capital market
instruments
5. TRADE SALE
6. ASSET SALE / WINDING UP
7. MANAGEMENT / EMPLOYEE BUY OUT (M/EBO)
8. CROSS SALE
9. SALE THROUGH DEMERGER / SPINNING OFF
11.1 Strategic Sale
 Pricing: Optimisation / maximisation through competitive tension

and control premium
 Target investor set: Investors with strategic fit - techno-commercial

credentials
 Transaction costs: Low
 Time involved: 6-10 months
 Regulation: Companies Act, SEBI Take-over code, Stock Exchange,

RBI regulations, FIPB clearance (for foreign investors).
 Suitability
- Non-strategic Companies
- Companies where Government is willing to give significant

management control
 Precedents: MFIL, BALCO, CMC, HTL, VSNL, IBP, HZL, PPL,

IPCL etc.
 Methodology: Structuring the transaction in terms of:
- Extent of stake to be divested
- Extent of management rights
- Decisions on pre qualification criteria, bid evaluation criteria and

bidding process
- Preparation and circulation of information memorandum to pre-

qualified buyers
- Due diligence and preparation of transaction documents
- Valuation of Assets/shares
- Receiving of bids
- Evaluation of bids
- Signing of Sale Agreement
 Advantages
- Maximises price because of transfer of management rights
- Brings technical / marketing / financial / managerial expertise of the

buyer to the company
- Increased value of residual Govt. shareholding
- Low cost and less regulation

 Disadvantages
- Time consuming
- Issues relating to management, land and labour etc. to be resolved
11.2 Capital Market
(a) Offer For Sale To Public At Fixed Price
 Pricing: Decided before the transaction; at a discount to market to

ensure success and immediate capital appreciation for investors
 Target investor set: Mix of retail and wholesale, with some

reservation for small investors
 Transaction costs: High, in the range of 2-5% depending on issue

size
 Time involved: 3 - 4 months
 Regulation: SEBI guidelines, Stock Exchange requirements
 Suitability
- Companies for which small investor interest is expected to be

substantial
- Profit making companies with good future prospects
- Companies not in need of significant technical, managerial and

marketing inputs
 Precedents: Offer of 1 million shares of VSNL @ Rs.750 per share.
 Methodology: Offer for sale
- An issue of Equity Shares held by GoI to the public at large at a pre-

determined price
- Through an Offer Document

- Equity Shares can be accompanied by sweeteners such as warrants
- Issue amount is thus automatically obtained (No. of securities

multiplied by price)
- Issue underwritten by the Syndicate Members (may or may not be)
 Advantages
- Ensures broad-based shareholding
- Sets valuation benchmarks for further fund raising / offer for sale
- Relatively quick method
- Transparent method
 Disadvantages
- Dependent on capital market conditions
- Price at a discount to market/ intrinsic price to ensure good response
- Process expensive - cost approx. 2 – 5 %
- Regulatory compliances: SEBI and Stock Exchanges
b) Offer For Sale To Public Through Book Building
 Pricing: Optimised, since price is discovered through a bidding

process
 Target investor set: Essentially wholesale but small investor also
 Transaction costs: High, in the range of 2 - 5% depending on issue

size
 Regulation: SEBI guidelines, Stock Exchange requirements
 Suitability:
- Companies for which institutional interest is expected to be
substantial
- Profit making companies with good intrinsic value and future

prospects
- Companies not in need of significant technical, managerial,

marketing inputs
 Precedents: none among PSEs - Hughes Software Ltd., HCL

Technologies Ltd. and Bharati Televentures in the private sector.
 Methodology: Offer for sale
- Issue of Equity Shares to the public at large
- Number of securities to be pre-determined and disclosed
- Price discovery through bidding by interested investors
- Issue amount is thus automatically obtained (No. of securities

multiplied by price)
- Issue underwritten by the Syndicate Members (may or may not

be)
- Offer made through an Offer Document
 Advantages
- Optimises price
- Ensures broad based shareholding
- Sets valuation benchmarks for further fund raising / offer for sale
for IPOs
- Relatively quick method - Transparent method

 Disadvantages
- Expensive - with cost of 2 - 5%
- Regulatory compliances – SEBI Regulations & Stock Exchange
(c) Secondary Market Operation
 Pricing: at market prices
 Target investor set: Essentially wholesale could be retail investor

also
 Transaction costs: Low, in terms of brokerage
 Time involved: spot transactions
 Regulation: Stock Exchange requirements
 Suitability:
- Companies which have a sizeable floating stock with good intrinsic

value and good future prospects
- Companies not in need of significant technical, managerial,

marketing inputs etc.
 Precedents: none
 Methodology: sale through market operations
- A secondary market sale of Equity Shares.
- Through brokers
- To interested buyers - institutional and retail
- At trading market prices
 Advantages
- Low costs - only brokerage to be paid
 Disadvantages
- Unsuitable for Companies with low floating stock
- Interest may be low
- Price dependent on day to day market conditions
- Amount of proceeds uncertain - Possibility of price rigging
- Highly dependent on the day-to-day demand for the shares
- Method may not be considered transparent
(d) International Offering [Global Depository Receipts (GDR) / American

Depository Receipts (ADR)]
 Pricing: valuation by International Qualified Institutional Buyers

(QIBs) (through book building) and related to domestic market
prices
 Target investor set: Essentially foreign institutional investors, (retail

investor also for ADR)
 Transaction costs: High, in the range of 2-5% depending on issue size

(cost of ADR is higher)
 Regulation: Disclosure requirements by Securities Exchange

Commission (SEC) and accounting in accordance with US Generally
Accepted Accounting Practices (GAAP) (for ADRs), NASDAQ /
NYSE/ LSE listing requirements
 Suitability
- Companies which have stocks listed in the international markets or

companies with actively traded stock in domestic markets
- Companies with good intrinsic value, good future prospects and of
international repute
 Precedents: VSNL, MTNL, GAIL
 Methodology: offer for sale in the international markets
- An offer to international investors through issue of Depository

Receipts, which represent underlying shares (ADRs in the USA market
and GDRs in markets other than the USA)
- Recasting of accounts as per US GAAP for issue of ADRs and

consolidation of accounts for issue of GDRs
- Preparation of red herring (Offer Document) and road shows
- Price discovery through bidding and allocations made at cut-off price

(Dutch Auction) or at bid price (French Auction)
- The issue is usually fully underwritten
- Offer through an offering document
 Advantages
- Access to deeper international markets and capital, sometimes at

better price.
- Creates price tension between the overseas and home market
- Enhances visibility
 Disadvantages
- Time consuming process
- Stringent regulatory requirements
- Accounting norms and disclosures and regular reporting to SEC in

case of ADRs
- High cost about 4-5% for ADRs and about 3% for GDRs
(e) Private Placement of Equity
 Pricing: valuation by merchant banker and feedback from

institutional investors or price discovered through book building
 Target investor set: Essentially institutional including multilateral

agencies, private equity funds
 Transaction costs: low
 Regulation: Foreign investment guidelines in case of overseas

investors, SEBI guidelines in case of domestic listed companies
 Suitability
- Unlisted companies
- Listed companies with low floating stock and low volumes
- Companies with good intrinsic value and good future prospects
 Precedents: CONCOR, GAIL (Domestic issue with FIIs

participation)
 Methodology: placement of equity
- To a set of institutional investors
- At a negotiated price arrived at through valuation or price discovery

through book building
- With issues of management rights and exit option resolved
- Through an information memorandum circulated among institutional

investors and due-diligence
- In case of listed companies as placement of less than 15% equity to

investors does not trigger Take-over code (as per SEBI guidelines)
 Advantages
- Less time consuming
- No regulatory compliance requirements, except in case of foreign

investment
- Low transaction cost
 Disadvantages
- Does not ensure widespread shareholding
- May not be considered transparent
(f) Auction
 Pricing: optimised through bidding. In case of Dutch Auction,

allotments made at single price. In case of French Auction, allotments
made at bid price
 Target investor set: Essentially institutional
 Transaction costs: Low
 Regulation: SEBI Take-over code
 Suitability
- Companies with good intrinsic value
§ Unlisted companies
§ Listed companies with low floating stock
 Precedents: Initial rounds of disinvestment in CPSUs.
 Methodology: Auction through the Dutch / French Auction
- To a set of institutional investors
- At a price discovered through the bidding process

- For a pre-determined number of Equity Shares
- Allocations made
§ At a cut-off price to all investors above the cut-off price in case of

Dutch Auction
§ At the bid price in case of French Auction
- Marketing through Analysts' meet and one-on-one discussions
- In case of listed companies, placement of less than 15% equity to

each investor to avoid trigger of Take-over code (or as per SEBI
guidelines)
 Advantages
- Optimises receipts to the GoI (amount higher in case of French

Auction)
- Transparent mechanism
- Less time consuming with no regulatory compliance requirements
- Low transaction cost
 Disadvantages
- Does not ensure broad based shareholding
11.3 Warehousing
 Pricing: Market determined price, after building in returns to the

warehouser. Profit on sale, net of selling expenses by warehouser
shared in pre-determined ratio
 Target investor set: Essentially institutional
 Transaction costs: Fixed return to warehouser less cost of funds for
GoI
 Time involved: within 1 month
 Regulation: RBI restrictions on bank investments
 Suitability:
- Listed companies with adequate liquidity
- Potential for growth in market prices
 Precedents: None
 Disadvantages
- Who will buy shares from the GoI
- At a discount to the market price
- To sell the shares at a later date in the market, within a specified time
frame
11.4 Reduction in Equity
(a) Buy Back Of Shares
 Pricing: In accordance with SEBI Buyback regulations
 Target investor set: Shares bought back by the company
 Transaction cost: Low
 Time involved: Within three months
 Regulations: Companies Act, SEBI Buyback regulations
 Suitability:
- Cash rich companies with no immediate capex plans
- Low geared companies with good intrinsic value, which is not

reflected in accretion to shareholder value and market price
 Precedents: None in Public sector, Indian Rayon, Reliance Industries

Limited in private sector
 Methodology: Offer by company to buy-back its shares from others
- Through tender route
§ Buy-back at fixed price
§ In case of over subscription, acceptance on proportionate basis
- Through book building
§ Buy-back through Dutch Auction route- price discovery through

bidding by interested investors- and allocations made at cut-off-price
- Valuation to factor in future loss of dividend to the sellers.
 Advantages
- Reduces capital and thus improves EPS, Book Value & RoE of the
Company post buy-back
- Low cost transaction
 Disadvantages
- Regulatory requirements
- Post buy-back debt equity ratio not to exceed 2: 1
- Maximum number of Equity Shares to be bought back should not

exceed 25% of the existing paid-up capital
- The maximum amount that can be expected on a buy-back should not

exceed 25% of the Company's paid- up capital and free reserves
· Reduces cash surplus with the company
(b) Conversion of Equity Into Another Instrument

 Pricing: Book value / market price based
 Target investor set: Wholesale
 Transaction costs: Low - Placement costs
 Time involved: Up to 3 months
 Regulation: Companies Act
 Suitability:
- Cash rich companies with no immediate capex plans
- Low geared companies with good intrinsic value which is not

reflected in accretion to shareholder value and market price
 Precedents: NALCO
 Methodology
- Conversion of equity into an attractive and suitable capital market

instrument, plain vanilla bonds, deep discount bonds, fully / partially
convertible bonds, bonds with warrants attached, preference shares with
/ without warrants
- Preparation and circulation of an information memorandum (IM)

among institutional investors
- Placement of the instrument
 Advantages
- Results in improvement in the capital structure of the Company

combined with funds inflow to seller
- Reduces capital & thus improves EPS, Book Value & RoE of the
Company
- Low cost of transaction

- No reduction in cash surplus with the Company
 Disadvantages
- More regulatory compliance requirements for listed companies
11.5 Trade Sale
Trade Sale means sale of a business or a division or a non-core activity. In addition to

price, the auction to take into account factors such as capital investment to which the
bidder is willing to commit and guarantees the bidder makes to employees and
customers.
Though the total amount offered is an important factor in the auction, there is also a
trade-off for the seller between
(1) obtaining the maximum amount of sale proceeds and
(2) ensuring that charges to the customers remain at affordable prices.
For this reason, the seller generally develops a number of selection criteria e.g.
 Indicative bids
 Strengths and capabilities of prospective operators
 Financial strength and credentials of bidders
 Any special conditions/assumptions attached to the bids such as spelling

out in advance the extent to which rate increase will be permitted over a
transition period.
A Trade Sale is generally regarded as a quicker option to execute. Public offerings

make more sense when the company to be sold has a reasonable strong skill base and
capital markets are liquid. In UK, Trade sales have generally been used with smaller
industries or enterprises.
11.6 Asset Sale and Winding up
This is normally resorted to in companies that are either sick or facing closure. The
Asset Sale is normally done either by open auction or by tender method. Sick
companies under SICA are wound up on the findings of BIFR and orders of the
concerned High Court and handed over to the official liquidator for realisation of dues
through liquidation.
11.7 Management/Employees Buyout (M/EBO)
For smaller companies, particularly those that are highly dependent on their
personnel, management/employee buyouts may be suitable privatisation techniques.
Although most buyouts are led by management, active participation by the workforce
is a pre-requisite for success. The workforces are to be necessarily taken along,
contributing some of their own money towards the enterprise. London's Bus service
was reorganized into companies, which were purchased by their managers and
employees. Other than National Freight Corporation of UK, which is often cited as the
classic case of 100% employee buyout, there are not well-known examples of such
cases in large companies with huge manpower. Perhaps such option is suitable in
highly profit–making, low asset based companies with small and highly motivated
manpower.
11.8 Cross Sale
Cross sale is not an option for privatisation. However, Governments seeking to sell
enterprises via Trade Sales should decide at the outset what their policy would be with
regard to bids from Government owned enterprises and spell out such policies in their
initial request for qualifications from potential bidders.
11.9 Sale Through Demerger/Spinning off
Sections 391-394 of the Companies Act 1956 govern demerger. The basic concept of
demerger requires transfer of an undertaking from an existing company ("Transferor
Company") to another existing company (Transferee Company"). The demerged
companies have a shadow shareholding as that of the Transferor Company. For a
government Company, the scheme of demerger has to be approved by Department of
Company Affairs. To minimize time, new transferee companies can be incorporated
as shell companies in which the properties of Transferor Company can be hived off
i.e. demerged. Such new companies remain as "shell" companies until the properties
are transferred to them as per the order of DCA. These new companies continue as
Government Companies under Section 617 of the Companies Act and are formed for
the limited purpose of facilitating the demerger on transfer of shares to successful
bidders, whereupon they cease to be Government Companies. Successful sale of a few
hotels of ITDC and HCI (a subsidiary of Indian Airlines) has taken place through this
method.
12. CHAPTER: STRATEGIC SALE
The strategic sale method was the preferred option by the Rangarajan Committee, as
early as 1993 and also recommended by the Disinvestment Commission. Presently,
the Finance Minister's Budget Speeches also spell out the advantages of this method.
The Ministry’s website can be accessed for its publication ‘Understanding the
Strategic Sale Agreements’. The various stages of a strategic sale have been spelt out
below.
A typical three-stage strategic sale process is as follows:
12.1 Stage I : Inviting Expression of Interest and Qualification of Bidders

12.1.1 Issue of Advertisement inviting Expression of Interest (EoI)
A public announcement of a privatisation transaction assures the people of the

transparency of the transaction. A typical advertisement in this category provides a
short profile of the enterprise being privatised, the bidding procedure, deadline for
submission of expression of interest or bids, and the address for further information.
Advertisement is normally given in three major national newspapers and one
international newspaper besides an industry/trade journal to which the enterprise
being disinvested belongs, if necessary. A copy of the advertisement along with
details of EOI, and PIM are placed on the websites of the PSU, administrative
ministry and Ministry of Disinvestment.
Submission of Preliminary Information Memorandum (PIM) & Supporting

Documents to interested parties.
Preliminary Information Memorandum (PIM)
Before submitting their expression of interest, the prospective investors would be

interested in knowing details about the company. The purpose of Preliminary
Information Memorandum is to assist the investors in deciding whether they should
proceed with the proposed disinvestment.
Structure Of PIM
A typical Preliminary Information Memorandum includes the following information:
a. Introduction
This gives a brief of the government decision regarding disinvestment in the

company, the extent of equity held by the Government, the extent of equity to be the
disinvested, the contact person, the relevant telephone numbers and fax nos. and email
addresses.
b. Information About The Company
This contains information about the company, its history, its activities, the location,
management, human resources, quality control, markets and marketing arrangements,
capital structure, various assets and other details about the company. It also gives the
strengths and opportunities of the company.
c. Financial Details
The Preliminary Information Memorandum gives the profit and loss account and
balance sheet of the company for the last five year.
12.1.2 Submission of Expression of Interest
Any company / consortium, participating in a privatisation transaction has to submit

an Expression of Interest. It is normally submitted along with a statement of legal
capacity and a litigation impact statement. It is the responsibility of the applicant to
ensure that EOI is delivered at the prescribed address by the stated deadline. The
covering envelope of all EOIs submitted should be clearly marked "Private and
Confidential - Expression of Interest for the Strategic Sale". Responses received
after the deadline or not accompanied by the required documentation are not
considered. A company /consortium may be disqualified for any misrepresentation,
failure to provide the required information or if any member has already submitted a
separate EoI.
Formats
The preliminary information memorandum contains the conditions for (a)

qualification of bidders and (b) formats for submitting (i) Expression of Interest (ii)
statement of legal capacity and (iii) Request for Qualification (RFQ). Standard
formats used for the purpose are enclosed at Annexure II, III, IV and V.
Detailed contents of EOIs
All EOIs generally include the following information:
1. Executive Summary
This provides a brief description of the company and (where appropriate) of each
member in the consortium, containing details like ownership structure, write up on
business history and growth, business areas / activities, respective revenue details, etc.
It includes a brief commentary on the capability of the company / consortium, as
demonstrated, inter alia, in its past track record, to run its own business.
2. Background Information
a) The Applicant
The full name, address, telephone and facsimile numbers, e-mail address of the
company or of each member of the consortium and the names and the titles of the
persons who are the principal points of contact.
b) Basic Information
This contains the details of the place of incorporation, registered office, current
directors, key management personnel and principal shareholders of the company /
companies in the consortium. It also contains a copy of its current Memorandum and
Articles of Association and copies of audited accounts for the last three years of the
company / companies in the consortium.
3. Management Organization
i) An overview of the applicant's senior management and organisation structure and in

the case of a consortium, that of each member; and
ii) Summaries of the roles and responsibilities of the directors, key management
personnel of the applicant and, in case of a consortium, those of each member.
4. International Operations / Joint Ventures / Alliances
Brief write up of the company's or, in the case of a consortium, of the members, of
their international operations, joint ventures / alliances (whether international or
domestic), nature and size of such operations, equity ownership, if applicable, copies
of the audited accounts for the last one year of such companies.
5. Professional Advisors
The names and addresses of those companies and the professional firms, if any, who
are (or will be) advising the applicant/consortium, together with the names of the
principal individual advisors at those companies and firms.
6. Legal Capacity of the Company / Accuracy of Information
Every company and each member of a consortium must provide with the EOI a
representation, duly executed by its authorised official/ representative that it has the
requisite corporate authorisation to submit the EOI and that all information provided
in the EOI is complete and accurate in all material respects to the best of their
knowledge. If, at a subsequent date, it is discovered that the company or any
consortium member did not either possess the requisite authorisation or that any part
of the information provided in the EOI was not complete or accurate in any material
respect, the Government reserves the right to disqualify such company or consortium
or member of the consortium from the process.
7. Outstanding Litigation
Each company and each member of a consortium must provide with the EOI a
statement of pending litigation.
12.1.3 Guidelines for Appointment of Bidders
On the basis of the criteria decided for the qualification of bidders for acquiring stakes
in any Public Sector Undertaking slated for disinvestment, any company, in private or
public sector, can take part in a competitive bidding process. However, depending on
the unique features of a case, and taking into consideration all relevant factors,
Government can always impose reasonable restrictions in specific cases, in public
interest and in the interest of privatisation of “non-strategic” PSUs.
The Ministry of Disinvestment has laid down guidelines for qualification of bidders
seeking to acquire stakes in Public Sector Enterprises through the process of
disinvestment. The prospective Bidders have to give an undertaking at this stage of
submission of EOI that they are eligible as per the criteria fixed by the said guidelines
and that they have not been facing proceedings by any Regulatory Authority against
any “Grave Offence” or “fraud” or have not been convicted by any Court of law. It
had been clarified vide O.M. NO.4/20/2001-DD II dated 9 January 2002 that an
offence will be treated as grave when “grave offence” is:
a. Only those orders of SEBI are to be treated as coming under the category
of “grave offences” which directly relate to “fraud” as defined in the SEBI Act
and / or regulations.
b. Only those orders of SEBI that cast a doubt on the ability of the bidder to
manage the public sector unit when it is disinvested, are to be treated as
adverse.
c. Any conviction by Court of Law.
d. In cases in which SEBI also passes a prosecution order, disqualification

of the bidder should arise only on conviction by the Court of Law.
A detailed book on “Guidelines on Qualification for Bidders” has also been

published by the Ministry of Disinvestment for reference of prospective bidders that is
enclosed as Annexure VI. These can also be accessed from the website of the
Ministry.
On receiving the details through the above process, the interested parties are requested
to submit their EOI to the Advisors/Ministry of Disinvestment by a fixed time and
date.
12.1.4 Qualification of Companies/Consortia
Based on the information submitted in EOIs, the Ministry and the advisors will carry
out an evaluation of the qualifications of the companies / consortia and subsequently
notify in writing those companies / consortia which qualify to participate in the next
stage of the process.
12.2 Stage II : Request for Proposal (RFP) & Submission of Bids
12.2.1 Request for Proposal & Bid Process
The proposed Strategic Sale process, consequent to the submission of EOI, involves a
detailed due diligence exercise to be undertaken by the Bidder followed by
submission of a Financial Bid.
The due diligence phase involves providing a Bid Pack containing various documents
to the Bidder. Besides, visits to the Data Room, including site visits to the units of the
company form a part of the due diligence phase. At the end of this phase, the Bidder is
expected to submit his Financial Bid. Details of form and content of the Bids and the
proposed due diligence process are given in RFP.
Notification to qualified / short listed parties & issue of Bid Packs
A Bid Pack containing the following documents is made available to the qualified /
shortlisted bidders, along with RFP after getting a confidentiality undertaking signed
by them:
i) Confidential Information Memorandum (CIM)

ii) Previous 3 years' audited annual accounts of the company, and
iii) Data Room Rules.
The following documents (which may or may not form a part of the Bid Pack) are also
made available to the qualified / shortlisted bidders in due course:
i) Draft Share Purchase Agreement;

ii) Draft Shareholders' Agreement, and
iii) Provisional results for the current Financial year
Where the EOI has been submitted by a Consortium, it is expected that there shall not
be any changes in the Members of the Consortium consequent to the submission of
EOI.
However, if a change is desired by some or all the Members prior to the submission of
the Financial Bid, such change shall have to be approved by GoI. Similarly,
consequent to the submission of EOI, if the Bidder desires to form a Consortium by
inducting new Member(s), it shall have to seek an approval from GoI.
Where the Bidder is a Consortium, the stake in the ordinary share capital of the
company can be acquired and held either through an investment vehicle ("Consortium
Vehicle") or through direct holding in the company by each Member or through any
Group Company (ies).
12.2.2 Confidentiality Undertaking
The CIM being a much more detailed document, it is customary to send it only to
those who have given a Confidentiality Undertaking. Typically, this undertaking
requires that the potential bidders do not misuse this wealth of information. It is not
uncommon for competitors to send a bogus team to discover the trade secrets of the
other parties.
It is an undertaking made by the bidder in favour of President of India (acting through

Joint Secretary of the administrative ministry), the company and advisors to treat all
the confidential information in Confidence and not to disclose to any person, the fact
that he has been provided the Confidential information or has inspected any
confidential documents or the discussion/negotiation regarding the transaction.
Confidential information means all information, concerning the business, operations,

prospects, finances, or other affairs of the company. It includes documents delivered
in connection with a due diligence investigation, information concerning business
activities, products, specifications, data know-how, compositions, designs, sketches,
photographs, graphs, drawings, research and development, marketing or distribution
methods and processes, customer lists, customer requirements, price lists, market
studies, computer software and programs, database technologies, systems structures
and architectures, historical financial projects and budgets, historical and projected
sales, capital spending budgets and plans, current or prospective financing sources, the
names and background of personnel, personnel training techniques and materials.
It also includes information memorandum, request for proposal, draft of shareholders
and share purchase agreements or other materials prepared in connection with the
transaction.
Confidentiality undertaking also provides that the bidder shall not deal with any
officer, Director or employee of the Govt. or Company, regarding the business,
operations, prospects or financing of the company without advisor's express written
consent.
The confidentiality undertaking contains an indemnity clause, whereby the bidder

agrees to indemnify the advisor, the Govt. and the company any damages, loss, cost or
liability arising out of any unauthorised use or disclosure by the bidder.
Request For Proposals (RFP) :
A typical RFP consists of the following three main sections:
1. Background and General Information:
This section describes the goals of the privatisation transaction and provides
information on the company that is being privatised.
2. Conditions of Agreement:
In this section of the RFP, a summary of contractual obligations is provided in simple,

non-legalistic language.
3. Proposals and Selection Process:
This section describes the entire privatisation procedure including the process of
evaluation of bids.
1.2.3 Confidential Information Memorandum (CIM)
As mentioned earlier, after obtaining the confidentiality undertaking, Advisors send

out a Confidential Information Memorandum (CIM) along with the RFP. The
Confidential Information Memorandum (CIM) Memorandum is a much more in-depth
description of the company to be privatised than provided in the PIM.
This reduces the cost of preliminary due diligence for all potential bidders, thereby
increasing the chances of attracting quality players who are in great demand.
A typical confidential information memorandum usually has the following sections:

1. Executive Summary: This is a brief chapter containing introduction of the
company, investment considerations, business overview, objectives of Government of
India and the role of the strategic partner. Business overview will include information
on business activities, infrastructure, marketing and distribution, land and summary
financial performance.
2. General Information on India includes introduction about India, its institutional

framework, demography, language and literacy, international relations, economic and
financial indicators, foreign trade, balance of payments, economic indicators and PSU
reforms, if relevant for that particular PSU.
3. Sector Scenario generally contains an overview of the industry, its segmentation,

regulatory environment governing the sector in India, and policy initiatives in the
sector. Industry segmentation would include various segments of the industry in India.
Regulatory environment governing the sector in India would include compulsory
legislation, voluntary standards, policy relating to small scale undertakings, policy
related to foreign investments in the sector and laws pertaining to employer -
employee relations. Policy initiatives would include regulation and control, fiscal
policy and taxation.
4. Business Review contains introduction of the company, chronology of its growth,

overview of its business, its operations. Operations include facilities, land, marketing
and distribution, manufacturing plants and process, raw materials and research and
development (R & D).
5. Structure, Responsibilities and Systems contains structure of the company,

structure of the manufacturing units and financial and management information
systems. Structure of the company means finance, marketing, operations, human
resources development and administration. Financial and management information
systems contains financial accounting, management accounting and budgeting.
6. Directors, Management and Employees contain description of the Directors,

Senior Management and Employees. It contains information on the remuneration,
employee entitlements, recruitment, retirement and dismissal, training and
development, pension and welfare obligations and industrial relations. Employee
entitlements generally means basic salary, dearness allowance (DA), residential
accommodation / house rent allowance (HRA), conveyance, provident fund (PF) and
gratuity, bonus, productivity linked scheme, overtime, annual increments, accident
insurance, medical reimbursement scheme, health scheme, loans / advances, other
benefits and perquisites, leave, holidays and leave travel concession benefits.
7. Financial Statements of the company include profit and loss data, balance sheet
data and operational results normally for the last 5 years.
1.2.4 Share Purchase Agreement
The bidders put in their bid based on the last audited balance sheet information made
available to them. However, the company is transferred to them at a later stage. There
could be either an increase or decrease in working capital and debt during this period.
Share Purchase Agreement fixes the closing date on which the company is handed
over to the buyer so that the difference between the closing date and the date of last
audited balance sheet can be arrived at and accounted for. It describes the purchase
price, the mode of payment and the actions at closing time. It also lays down
representations and warranties given by both the parties.
Share Purchase Agreement is entered into among the President of India (acting
through the Joint Secretary of the Administrative Ministry), the company, the strategic
partner and other principals as applicable.
It contains the following sections:
1. Definitions and principles of interpretation: This section deals with the

definitions contained in the agreement, certain rules of implementation and the
summary of the entire agreement along with the schedules.
2. Purchase and sale: It describes the actions at closing time, other actions and the
place of closing along with other documents relevant for the above transaction.
3. Purchase price: It describes the purchase price and the mode of payment.
4. Representations and Warranties of the Government: It describes the right to

sell, due authorization, enforceability of obligations, regulatory approvals,
incorporation, due authorization, enforceability of obligations, absence of conflicting
agreements, litigation, regulatory approvals, foreign participation, strategic partner
review; access to information, investment intent, source of funds, technical proposals
and shareholding structure.
5. Agreements on Representations and Warranties: It describes the various

representations and warranties given by both the parties.
6. Covenants of the parties: It describes the actions to satisfy closing conditions, the
requirements of preservation of records and of making public announcements.
7. Conditions precedent: It lays down that the representations at the closing time be
true and accurate. It also lays down the performance of obligations, receipt of closing
documentation, consents, authorisations and registrations.
8. Indemnification: It lays down the conditions for the indemnification by the

strategic partner.
9. Termination: It lays down the conditions for termination of the contract and effect
of this termination.
10. Waiver/Survival: The waiver/survival clause is added at the end of the

agreement.
11. General: The general section includes the various provisions regarding expenses,
notices, assignment, further assurances, dispute resolution/submission to jurisdiction,
amendments, governing law, appointment of agent and severability.
1.2.5 Shareholders' Agreement
Shareholders' Agreement is a very important agreement. It defines the rights and

obligations of both the parties. Concerns of Government on protection of employees'
rights, future investment / business plans and the precautions against assets stripping
are generally reflected in it. It lays down the survival period after which the claims
become time barred and the indemnification limit to which a purchaser can be
indemnified. It also lays down the terms and conditions of indemnification for any
disputed tax liabilities, litigation liabilities and environmental liabilities. It lays down
the procedure for management of the company after disinvestment. It also includes
various representations and warranties given by both the parties. It lays down the
dispute resolution mechanism for both the parties.
Shareholders' Agreement is entered into among the President of India (acting through
the Joint Secretary of the Administrative Ministry), the company, the strategic partner
and other principals as applicable.
It contains the following sections:
1. Definitions and principles of interpretation: It contains the various

definitions and rules of interpretation given in the agreement.
2. Purpose and scope: It defines the purpose and the scope of the agreement.
It also lays down the conditions for compliance with the agreement.
3. Equity participation, financial support: It lays down the conditions for

equity participation, additional capital and dilution of Government Equity
Interest.
4. Management of the company: It describes the constitution of the Board of

Directors, procedure for removal and replacement of nominees, procedure for
calling meetings of Board, quorum, procedure for approval of matters, deemed
consent, casual vacancies and filling the post of alternate Director and
Managing Director.
5. Shareholder meetings: It describes the procedure for general meeting of

shareholders, notice of shareholder meetings, quorum and voting requirements.
6. Transfer of equity shares: It lays down the conditions for general

restriction on transfer, rights of first refusal, change in control, event of default,
government's right to sell, Strategic Partner's right to buy, determination of fair
market value, procedure for call and put options, permitted transfers and
compliance with legal requirements.
7. Representations and Warranties: It describes the various representations

and warranties given by the company, the strategic partner and the government.
It also includes a survival clause.
8. Indemnification and confidentiality: It lays down the various

indemnifications given by all the parties in case of breach of contract. It also
includes a confidentiality clause. It lays down the various equitable remedies
and costs in the event of a breach of contract.
9. Miscellaneous: It includes clauses on arbitration, application of this

agreement, assurances, benefit of the agreement, amendments and waivers,
assignment, severability, notices, governing law and expenses.
The Ministry has placed on its website ‘Sample Transaction Document’ which can
be a useful guide for preparing SHA and SPA.
1.2.6 Due Diligence
The purpose of the due diligence programme is to provide the Bidder an overview of
the Strategic Sale programme and a detailed information on the company's businesses.
In order to enable the Bidder to obtain the required information, the programme
provides data room visit. The data room is created by the Company containing all
information required by the prospective bidder followed by site visit.
The following is a summarised, indicative list of types of documents and information

required.
· Financial Documents
o All annual reports.
o Quarterly reports.
o All accountant and auditor's reports and opinions.
o Management financial reports, capital expenditure budgets, projections and

reports for last five years.
o Operating budgets, projections, and reports for last five years.
o Any financial information presented to GoI in last five years.
o Operating revenue accounts for last five years.
o Operations and maintenance accounts for last five years.
· Accounts and Investments
o List of all bank accounts and investments, including account balances and
value of investments.
· Loan Documents
o A chart setting forth loan amortisation and interest payments (with the
company both as borrower and, if applicable, lender).
o A chart showing other debt-like obligations of the company (letter of credit

repayment obligations, instalment sales obligations, capitalised lease
obligations).
o All loan agreement in which the company is a borrower (together with

related promissory notes, security documents, and ancillary agreements).
o All loan agreements in which the company is a lender (together with related
promissory note, security documents and ancillary agreements).
o All documents relating to debt-like obligations of the company (letter of

credit repayment obligations, installment sales obligations, capitalised lease
obligations).
· Equity Documents
o A chart setting forth all capital contributions of the company and share
issuances by the company; share issuance and transfer ledger.
o All equity subscription agreements, option agreements, etc.
· Corporate Documents
o Memorandum and articles of association.
o Bylaws.
o Minutes of shareholder and board meetings for last five years.
· Licenses and Permits
o List of all required licenses and permits.
o All licenses/permits.
o All correspondence relating to revocation, modification, or non-issuance of

any license or permit.
o All laws and regulations applicable to the company (including any laws
relating to environmental and safety matters).
o All environmental and safety permits.
o All tariffs applicable to the company in last five years.
o All environmental and safety reports prepared in last five years.
· Litigation
o Status report of all litigation, disputes, etc., pending or concluded in last five
years.
o Litigation files relating to pending matters.
· Employee Matters
o List of all employees indicating name, years of service, position, and salary
(employees below a particular grade could be classified in groups).
o List of all welfare, pension, and health plans, together with a brief description
of each and a financial summary relating to each (i.e., the company's assets and
liabilities).
o List of unionised workers and unions. All unions and collective bargaining
agreements.
o Employment agreements.
o Description of bonus and profit sharing arrangements, together with any

related documents.
· Tax Matters (including income tax, sales tax, excise duty, and other taxes)
o List of tax liabilities and payments during last five years.
o Tax filings and notices for last five years.
o All disputes relating to tax matters.
· Real Estate
o List of all owned and leased real property, together with schedule of annual
lease payments and lease expiry dates.
o Title documents relating to owned real property.
o Leases relating to leased real property.
· Property, Plant and Equipment
o List of all owned/ leased tangible property (if appropriate by class) and
inventory, together with schedule of annual lease payments and lease expiry
dates.
o All purchase and services contracts under which equipment and services are
to be provided to the company.
o Plant accounts.
· Intellectual Property
o List of all intellectual property owned or used by the company.
o All intellectual property ownership, license, royalty and similar documents.
o Description of computer systems and hardware.
· Customer Documents
o Standard forms, if any, of customer contracts, billing documents, etc.
o Customer service policies and records of service.
o Copies of material customer complaints.
o Customer statistics for each class of customer.
· Technical Data
o System maps.
o Technical assessments and reports prepared in last five years.
1.2.7 Negotiations & Finalisation Of Contractual Documents
During the course of due diligence, and thereafter, the qualified bidders are also
invited to offer their comments on the contracted documents (i.e. the draft Share
Purchase and the Shareholders Agreement) provided to them, with a view to finalising
those and making terms and conditions thereof uniform, so that the bids are submitted
by all bidders on same terms and conditions.
1.2.8 Submission of final bid
Details of Financial Bids
Form and Content of the Financial Bid

The Financial Bid must be: -
(i) In the form to be provided by GoI;
(ii) Expressed in Indian Rupees;
(iii) Made on the basis of the terms of the revised final drafts of the Contractual
Documentation as may be circulated to the Bidder
(iv) Unconditional and open for acceptance for a period of 180 days from the
stipulated deadline;
(v) Must be signed by the Bidder or, where the Bidder is a Consortium by all the
Members of the Consortium, and
(vi) Submitted to GoI on or prior to the stipulated deadline.
The Bidder submits to GoI one copy of its Financial Bid, contained in a separate
sealed package. The covering envelope on the package containing the Financial Bid
must be clearly marked 'Private and Confidential - Financial Bid for Strategic Sale'
and include on the envelope the name of the contact person and address of the Bidder
(to whom any unopened Financial Bid should be returned).
1.2.9 Earnest Money Guarantee
The Bidder or in the case of Consortium any of the Members of that Consortium,
singly or jointly, shall be required to enter into an Earnest Money Guarantee
agreement for a stipulated amount. The draft of the Earnest Money Guarantee
agreement is also provided to the Bidder at the time of providing all other draft
documents.
All the bids have to be submitted before a stipulated deadline.
The selection of Purchaser is based on an evaluation of the Financial Bid.
1.2.10 BIDDING PROCEDURE BEING FOLLOWED BY MINISTRY OF

DISINVESTMENT FOR STRATEGIC SALE IN PSUs
Ministry of Disinvestment, with a view to maintaining absolute transparency and

ensuring a foolproof process removing all possibilities of tampering, has evolved a
bidding procedure, which is explained below. The criteria that need to be satisfied
are: -
1. Reserve Price should not be fixed by the Government before the bidders
submit their financial bids, so that there is no chance of the bidders knowing
the Reserve Price fixed by Government.
2. The Government, while fixing the Reserve Price, should not have
knowledge of the price bids submitted so that the fixing of the Reserve
Price is not influenced by such knowledge.
3. The Advisors do not finalise Reserve Price, as a conflict of interest may

arise with them trying to keep a low Reserve Price.
4. The bidders are provided full comfort that their bids, once submitted,
can in no way be tampered with by any agency.
It would be noticed that the bidding procedure, which has now been adopted by
the Ministry of Disinvestment and which is explained below, satisfies all the
foregoing criteria.
Activity I- Receiving the bids and Valuation Reports
Bids are received in two separate sealed envelopes from the bidders on a specified
date, time and venue.
1. One envelope contains only the price bids (first envelope)
2. The other envelope (second envelope) contains other documents: -
· Bank Guarantee by the bidder
· Board Authorisations
· Section 108A(Companies Act) application, if required
· FIPB / SIA application, if required
· Copy of the SHA / SPA authenticated by the bidder, based on which

the bid has been made
· Other documents, if necessary, on a case-to-case basis.
Secretary, Ministry of Disinvestment and Secretary of the Administrative Ministry

receive the bids. The Global Advisors and Legal Advisors are present.
· The second envelope is opened and the Global Advisors and the
Legal Advisors scrutinise these documents and certify that they are in
order.
· Both the Secretaries then authenticate each financial bid envelope

without opening it by signing on the envelopes. Thereafter the signature
of each bidder is also obtained on these envelopes. Any bidder, who has
come to attend this meeting but does not submit a financial bid, is also
permitted to be present and his signature may also be obtained on these
envelopes.
· The sealed envelopes containing the financial bids thus authenticated

by the Secretaries and the bidders are then put in a third envelope, sealed
and authentication of both the Secretaries and all the bidders obtained on
the third envelope, thus ensuring that no tampering can take place. (In
case of hotel properties of ITDC/HCI, since there are common bidders in
several hotels, in order that the bank guarantee of the losing bidders
could be immediately returned to them, the Secretaries open the financial
bid envelopes at this stage itself and announce the highest bidder to
all but the highest bid amount is not disclosed at this stage. Signature
of Secretaries and the bidders are obtained on the reverse of the price
bids and these are then kept in a separate sealed envelope.)
· In the same meeting the Global Advisors submit in a sealed cover the
business valuation report prepared by them and the asset valuers report.
Secretary (Disinvestment) authenticates these envelopes by putting his
signature on the sealed envelopes.
· These sealed envelopes containing the business valuation report and

asset valuers report are then handed over to the Chairman of the
Evaluation Committee.
Activity-II- Proceedings of the Evaluation Committee
1. The Evaluation Committee typically commences business immediately

after Activity-I and the envelope containing the business valuation report and
asset valuers report are opened by the Chairman of the Committee.
2. The Global Advisors make a detailed presentation before the Evaluation
Committee on the business valuation and the asset valuation as also their
recommendation of what should be the reserve price.
3. At this stage, the Global Advisors withdraw from the meeting and the
Evaluation Committee thereafter deliberates on the issue, if necessary in more
than one session sometimes spreading over more than one day, and
recommends a reserve price.
4. The Global Advisors are not involved in the process of making the final
recommendation of the reserve price by the Evaluation Committee. Their
contribution is only to provide the business valuation/asset valuation report,
making a presentation and furnishing any further details/clarification that the
Evaluation Committee may seek. Thus, the Global Advisors are not a member
of the Evaluation Committee but attend its meetings as special invitees.
Activity-III- Meeting of the Inter-Ministerial Group (IMG) to consider Reserve Price

and Bids.
1. At the meeting of the IMG, the IMG first deliberates on the report of the
Evaluation Committee and the Reserve Price recommended by the Evaluation
Committee. In this process the Global Advisors also make a presentation
before the IMG.
2. At this stage the Global Advisors withdraw and the IMG then recommends a
Reserve Price, which could be different from that recommended by the
Evaluation Committee. In case of a difference of opinion, detailed reasons are
recorded in the minutes.
3. After the Reserve Price is decided upon by the IMG, the third envelope
containing the sealed envelopes containing price bids (on which signatures of
both the Secretaries and the bidders had been obtained during Activity-I) is
scrutinised by both the Secretaries and the bidders (the Global Advisors and
the bidders are invited to be present at this point of time) to ensure that they
have not been tampered with.
4. The third envelope is then opened and the sealed envelopes containing price
bids are scrutinised by both the Secretaries and the bidders to ensure that they
have not been tampered with.
5. Then the sealed envelopes containing the price bids (on which signatures of
both the Secretaries and the bidders had been obtained during Activity-I) are
opened and signature of the Secretaries and the bidders obtained on the reverse
of the price bids. The signatures of the bidders are obtained to give comfort to
the bidders that no tampering could take place even after this stage in the bids
submitted by them. Their signatures are obtained on the reverse to ensure that
none of the bidders come to know what bid the others have submitted. (The
above procedure in Activity III is different in the case of ITDC/HCI hotels. In
those cases, after the Reserve Price is decided by the IMG, the sealed
envelopes containing the authenticated price bids of the bidders are opened by
the Secretaries.)
6. Thereafter, the bidders and Global Advisors withdraw from the meeting and
the IMG makes its recommendations on whether or not to accept the highest
bid in view of the Reserve Price.
Activity-IV- Consideration of the bid by the Core Group of Secretaries for

Disinvestment
The recommendations of the IMG, including the recommendations of the Evaluation

Committee are thereafter placed before the CGD for making recommendations to the
CCD.
Activity-V Consideration and Approval of the bid by the Cabinet Committee on

Disinvestment
Recommendations of the CGD are thereafter placed before the CCD for final
approval.
Note: - Time frame for Activity-I to Activity-V is about a week to ten days.
12.3 Stage III : Completion
a) Govt. approval /regulatory approvals.

The necessary approvals from RBI, Department of Company Affairs, FIPB (wherever
necessary) are applied for and obtained at this stage.
b) Signing of contractual documents
The Share Purchase Agreement is signed and on receipt of the bid money from the
purchaser i.e. strategic partner, the Share Holders Agreement is also signed.
c) Completion/closure of strategic sale
In case a listed PSU is being sold to a strategic partner (SP) and if the acquiring
company is purchasing more than 15% of share of the PSU the SP is required to make
an open offer to buy back 20% of the shares from the floating stock of the PSU as per
SEBI guidelines under the Takeover Code. This offer is to be made within 4 working
days of the date of signing of Share Purchase Agreement (SPA) and only then will the
transaction be deemed to be closed.
The other conditions precedent to Closing are also spelt out in the SPA.
1.4 Post Closure
1.4.1 Post Closing Adjustments
The bidder submits his bid based on information supplied to him in the data room.
This information is the last audited balance sheet. However, from the date of the last
audited balance sheet, till the date of handing over (called the closing date), there may
be accretion or depletion in the current assets, current liabilities resulting in the
change in Net working Capital and the debt position. The difference between these
figures between the date of the last audited balance sheet and the closing date is called
post closing adjustment and depending on whether there is an accretion or depletion
of the current assets and debts, this amount is paid by the government/purchaser to the
other party, if decided as per the Share Purchase Agreement.
Within 90 days following the closing date, an accounting firm is jointly selected by
the Government and the purchaser, from the CAG's approved panel or otherwise as
mutually agreed. The firm finalises the "Closing Date Net working Capital Amount"
and the "Closing Date Debt Amount". These computations are final and binding on
both the parties.
If there is accretion in the Net working capital on the closing date, the purchaser
would pay the differences to the government. Conversely, if the working capital
decreases on the closing date, the government would pay the difference to the
purchaser.
Similarly if the closing date debt amount exceeds the amount given in the last balance
sheet (which was the basis of the bid), then the government would pay the difference
to the purchaser. Conversely if the closing date debt amount is less than the debt
amount given in the last balance sheet, the purchaser would pay the difference to the
government.
All payments are normally settled within 45 days of the date of handing over the
closing date accounts by the auditors.
No provision of post-closing adjustment is made for listed companies.
12.4.2 Indemnification by the Government
The Government indemnifies the purchaser from any actual losses, liabilities,
damages, judgments, settlements and expenses arising out of any breach by the
government of any representations and warranties contained in the agreement.
For calculations of Purchase Losses in individual events, a figure (say Rs.1 lakh or
Rs.10 lakh in each incident) is agreed to, which is called De-Minimis Purchaser loss.
All individual amounts less than this De-Minimis figure are ignored in calculating the
purchaser loss. This mutually decided threshold is normally 3-4% of the total
Purchase Price. If the losses are more than this threshold level, and arise out of some
breach or violation by the government, then the purchaser is indemnified these losses
by the government. A cumulative aggregate amount of losses (called the Aggregate
Liability threshold) is also decided. This total amount indemnified by the government
is limited to an agreed limiting percentage of the purchase price. Normally,
irrespective of the loss, the indemnified amount would be around 50-70% of the total
purchase price. All the claims of indemnity are to be preferred within the survival
period (normally 24 or 36 months) after which they become time-barred. In certain
cases, complete indemnity is provided against environmental liability. However,
these details vary from case to case, and depend, inter alia, upon the nature of the
company being disinvested.
12.4.3 Tax-liabilities
If there is any liability of sales tax, income tax or excise duty at closing time, which is
disputed, the company pays that under protest. If that dispute is resolved unfavourably
against the company, the government would indemnify that amount to the company,
provided the purchaser has informed the government within the stipulated period and
provided that the purchaser has not been compensated for this liability earlier.
12.4.4 Litigation
If there are certain litigations, which are listed in the schedule of agreement, the
government may retain all or some liabilities in their respect, subject to the clauses of
the agreement and would make all efforts to resolve them. Also, subject to the
conditions of agreement the government would indemnify all or some liabilities
arising out of these litigations to the purchaser.
12.4.5 Environmental Liabilities
If there are any claims regarding environmental damages arising out of the acts of
commission/omission on the part of government during the period prior to
disinvestment, and the claim has been preferred during the survival period, then
subject to the clauses of the agreement, the government would indemnity the
liabilities arising out of these claims to the purchaser. It is advisable to have an
environmental audit done prior to the disinvestment to benchmark the extent of such
liabilities. An environmental due diligence/audit was conducted by an international
agency prior to the strategic sale of Bharat Aluminium and Co. (BALCO) and
Hindustan Zinc Ltd. which facilitated their smooth sale and good price to the
Government.
13. CHAPTER: VALUATION
In any sale process, the sale will materialise only when the seller is satisfied that the
price given by the buyer is not less than the value of the object being sold.
Determination of that threshold amount, which the seller considers adequate,
therefore, is the first pre-requisite for conducting any sale. This threshold amount is
called the Reserve Price. Thus Reserve Price is the threshold amount below which the
seller generally perceives any offer or bid inadequate. Reserve Price in case of sale of
a company is determined by carrying out valuation of the company. In companies that
are listed on the Stock Exchanges, market price of the shares serves as a good
benchmark for assessing the fair value of the company, though the market price is
usually characterized with significant short-term variance due to investor sentiments
being influenced by short-term events and environmental aspects. More importantly,
most of the PSUs are either not listed on the Stock Exchanges or command extremely
limited traded float. They are, therefore, not correctly valued. Thus, deciding the
worth of a PSU is indeed a challenging task.
Valuation of a PSU is different from establishing the price for which it can be sold.
While the fair value of an asset is based on the assessment of intrinsic value accruing
from fundamentals on a stand-alone basis, varying return expectation and underlying
strategic aspects for different bidders could influence the price. A purchase and sale
would be possible only when two parties while forming different views as to the value
of an asset, are eventually able to reach agreement on the same price. It would be
better appreciated by recognition of the fact that Government can only realise what a
buyer is willing to pay for the PSU, as the purchase price ultimately agreed reflects its
value to the buyer.
Another notable point is that valuation is a subjective figure arrived at by the bidder
by leveraging his strengths with the potential of the company. Depending on the level
of business synergy with the target company, perception of specific value realization
and varying assessment regarding productivity, capex, etc., this figure may vary from
bidder to bidder.
13.1 Disinvestment Commission's Recommendations
Keeping in view the above problems regarding valuation specific to a PSU, the issue
was discussed in detail by the Disinvestment Commission in its First Report.
Underlining the importance of valuation, the Commission felt that the valuation of
equity of a firm gains importance in case of disinvestment of companies which are not
listed or in cases where capital markets may not fully reflect the intrinsic worth of a
share disinvested earlier.
Disinvestment Commission, in its Discussion Paper while emphasizing that valuation

should be independent, transparent and free from bias, has discussed three methods of
valuation:
(i) The 'Discounted cash flow' (DCF) approach relates the value of an asset to the
present value of expected future cash flows of the asset.
(ii) The 'Relative valuation' approach is used to estimate the value of an asset by
looking at the pricing of comparable assets relative to a common variable like
earnings, cash flows, book value or sales.
(iii) The 'Net asset value' approach provides another basis for valuation.
Regarding the application of Valuation Methods, Disinvestment Commission felt that

the use of a particular method of valuation will depend on the health of the company
being evaluated, the nature of industry in which it operates and the company's
intrinsic strengths. The depth of capital markets will also have an impact on the
valuation. For example, in the United Kingdom, the London Stock Exchange has
helped in creating markets by enabling credible price discovery for the shares of
privatised companies listed on the exchange. Although valuation methods will
indicate a range of valuations, Disinvestment Commission felt that some discounts
might need to be applied for arriving at the final value depending on the liquidity of
the stock and the extent of disinvestment:
a) ‘Lack of marketability' discount takes into account the degree of marketability (or
the lack of it) of the stocks being valued. This is applicable especially to cases,
which had been disinvested earlier and have been referred for disinvestment again.
Discount on this consideration stems from the fact that an investor will probably
pay more for a liquid stock than for a less liquid one. However, the concern of an
overhang of supply may adversely affect valuation even for liquid stocks.
b) Disinvestment Commission felt that the extent of disinvestment in core, non-

strategic & non-core PSUs would have a bearing on the valuation process. The
transfer of a controlling block may help to reduce the discount that has to be
applied, as the prospective investor would be willing to pay a certain 'control
premium' towards enhanced management participation, board control and majority
shareholder rights.
c) If all the businesses of a PSU are not equally profitable, it may be necessary to
restructure the business before disinvestment. However, if this is not possible, a
minority discount may have to be applied.
Disinvestment Commission also sought to correct some erroneous perceptions about

valuation. There is a general perception that since valuation models are quantitative,
valuation is objective. The Commission felt that though it is true that valuation does
make use of quantitative models, the assumptions made as inputs to the model leave
plenty of room for subjective judgments. At the same time, there may be no such
thing as a precise estimate of a value. Even at the end of the most careful and detailed
valuation of a company, there could be uncertainty about the final numbers, as they
are shaped by assumptions about the future of the company's operations.
Another wrong perception sought to be corrected by the Commission was the

relationship attributed between valuation and market price. The benchmark for most
valuations remains the market price (either its own price, if it is listed or that of a
comparable company). When the value from a valuation analysis is significantly
different from the market price, the two possibilities are that either one of the
valuations could be incorrect. The Commission felt that the valuation done before
listing takes into account anticipated factors, whereas market price reflects realized
events that are influenced by unanticipated factors. However, a specific valuation
itself may not be valid over a period of time. It is a function of the competitive
position of the company, the nature of market in which it operates and Government
policies. Therefore, it may be appropriate to update or revise valuations.
In cases where strategic sale is done with transfer of management control, the
Commission felt that asset valuation should also be done. The views of the
Commission in this regard are as follows:
"Strategic sale implies sale of a substantial block of Government holdings to a single

party which would not only acquire substantial equity holdings of upto 50% but also
bring in the necessary technology for making the PSU viable and competitive in the
global market. It should be noted that the valuation of the share would depend on the
extent of disinvestment and the nature of shareholder interest in the management of
the company. Where Government continues to hold 51% or more of the share
holding, the valuation will relate mainly to the shares of the companies and not to
the assets of the company. On the other hand, where shares are sold through strategic
sale and management is transferred to the strategic partner, the valuation of the
enterprise would be different, as the strategic partner will have control of the
management. In such cases, the valuation of land and other physical assets should also
be computed at current market values in order to fix the reserve price for the strategic
sale.
To get best value through strategic sales, it would be necessary to have a
transparent and competitive procedure and encourage enough competition
among viable parties."
13.2 Valuation Methodologies being followed
Making a valuation requires an examination of several aspects of a company's

activities, such as analysing its historical performance, analysing its competitive
positioning in the industry, analysing inherent strengths/weaknesses of the business
and the opportunities/threats presented by the environment, forecasting operating
performance, estimating the cost of capital, estimating the continuing value,
calculating and interpreting results, analysing the impact of prevailing regulatory
frame work, the global industry outlook, impact of technology and several other
environmental factors.
Based on the recommendations of the Disinvestment Commission and in keeping with

the best market practices the following four methodologies are being used for
valuation of PSUs: -
a) Discounted Cash Flow (DCF) Method.

b) Balance Sheet Method.
c) Transaction Multiple Method.
d) Asset Valuation Method.
While the first three are business valuation methodologies generally used for
valuation of a going concern, the last methodology would be relevant only for
valuation of assets in case of liquidation of a company. In addition, in case of listed
companies, the market value of shares during the last six months is also used as an
indicator. However, most PSU stocks suffer from low liquidity and the price
determination may not be always efficient. Moreover, there could be increased
trading activity after announcement of the disinvestment, which could be on account
of high market expectation of the bid price and even based on malafide intent. This
could lead to the price being traded up to unsustainable levels, which is not desirable.
13.2.1 Discounted Cash Flow (DCF) method
The Discounted Cash Flow (DCF) methodology expresses the present value of a
business as a function of its future cash earnings capacity. This methodology works on
the premise that the value of a business is measured in terms of future cash flow
streams, discounted to the present time at an appropriate discount rate.
This method is used to determine the present value of a business on a going concern
assumption. It recognises that money has a time value by discounting future cash
flows at an appropriate discount factor. The DCF methodology depends on the
projection of the future cash flows and the selection of an appropriate discount factor.
When valuing a business on a DCF basis, the objective is to determine a net present
value of the free cash flows ("FCF") arising from the business over a future period of
time (say 5 years), which period is called the explicit forecast period. Free cash
flows are defined to include all inflows and outflows associated with the project prior
to debt service, such as taxes, amount invested in working capital and capital
expenditure. Under the DCF methodology, value must be placed both on the explicit
cash flows as stated above, and the ongoing cash flows a company will generate after
the explicit forecast period. The latter value, also known as terminal value, is also
to be estimated.
The further the cash flows can be projected, the less sensitive the valuation is to
inaccuracies in the assumed terminal value. Therefore, the longer the period covered
by the projection, the less reliable the projections are likely to be. For this reason, the
approach is used to value businesses, where the future cash flows can be projected
with a reasonable degree of reliability. For example, in a fast changing market like
telecom or even automobile, the explicit period typically cannot be more than at least
5 years. Any projection beyond that would be mostly speculation.
The discount rate applied to estimate the present value of explicit forecast period free
cash flows as also continuing value, is taken at the "Weighted Average Cost of
Capital" (WACC). One of the advantages of the DCF approach is that it permits the
various elements that make up the discount factor to be considered separately, and
thus, the effect of the variations in the assumptions can be modelled more easily. The
principal elements of WACC are cost of equity (which is the desired rate of return for
an equity investor given the risk profile of the company and associated cash flows),
the post-tax cost of debt and the target capital structure of the company (a function of
debt to equity ratio). In turn, cost of equity is derived, on the basis of capital asset
pricing model (CAPM), as a function of risk-free rate, Beta (an estimate of risk profile
of the company relative to equity market) and equity risk premium assigned to the
subject equity market.
For example, the following profit and loss account shows the computation of the
Profit Before Depreciation, Interest and Tax (PBDIT) of Company X for the first year
of business projections:
Figure 1: Profit and loss account of Company X Rs million

Revenue
Sales receipts 500
Expenses
Consumption of material 300
Other overheads 50
Total expenses 350
PBDIT 150
Computation of Free Cash Flow to Firm (‘FCF’): Free cash flow (FCF) for a year is
derived by deducting the total of annual tax outflow inclusive of tax shield enjoyed on
account of debt service, incremental amount invested in working capital and capital
expenditure from the respective year’s profit before depreciation interest and tax
(“PBDIT”) for the explicit period.
Therefore, for Company X, the computation of FCF would look like the following:
Figure 2: FCF computation for Company X Rs million
Year 1 Year 2 Year 3 Year 4 Year 5
PBDIT of Company X
* 150 200 300 400 500
Less: Income tax -20 -40 -60 -80 -100
(assumed)
Less: Capital -50 -50 -50 -50 -50
expenditure (assumed)
Less: Incremental -25 -50 -75 -100 -125
working capital
(assumed)
FCF 55 60 115 170 225
* Notice that a growth has been assumed in the PBDIT
Weighted Average Cost of Capital (‘WACC’)
The FCF is then discounted at a discount rate, which represents the WACC. The
computation of the WACC is set out below:
Figure 3: WACC parameters
Cost of equity Assumption

Risk Free Rate Yield to maturity on Government of India
Securities based on current traded value
(preferably these should be of a long-term tenor
beyond the forecast period i.e. minimum 10 years)
Beta For the purpose of analysis, average unlevered
beta of listed industry comparables is computed,
which is then levered to the Company’s own
target debt equity ratio
The levered (equity) Beta of a scrip is a measure
of relative risk to market, arithmetically computed
as covariance of equity and market return divided
by variance of market return (over a long
historical data run) followed with certain
adjustments
Equity Risk Premium = Beta * (Market Risk Premium)
Market Risk Premium is equal to the difference of
average market return and risk free rate #
Cost of Equity =Risk Free Rate + (Equity Risk Premium*Beta)
Cost of debt
Estimated Corporate Tax Current corporate tax rate in India
Rate
Comp’s Pre-Tax Cost of Cost of debt provided by the Management
Debt
Comp’s After-Tax Cost of Pre-Tax Cost of Debt*(1-Tax Rate) @
Debt
Target Debt equity ratio Average debt equity ratio of the Company
WACC (Debt/Total Capital)*(After-Tax Cost of

Debt)+(Equity/Total Capital)*(Cost of Equity)
@ This is the tax shield referred to earlier.
# Higher the beta means more riskier the stock, beta = 1 means the stock
of the company is in perfect synchronise with the sensex (average market
return). Higher than one means the stock is more volatile (and hence more risky)
than the sensex and lower than one means the stock is less volatile (and hence less
risky).
To illustrate, for Company X, the computation of WACC typically could be as

follows:
Figure4: WACC calculation for Company X
Cost of Equity Assumptions

Risk Free Rate 9.00% 10-year Treasury GoI Bond Yield
Beta 1.50 Unlevered beta of industry
comparables, levered to Company
X debt equity ratio (high risk
stock!)
Equity Risk Premium 9.00% Total Stock Returns less Treasury
Bond Total Returns. Market Risk
Premium is equal to the difference
of average market return and risk
free rate. Average market return
has been assumed to be 18% and
beta has been assumed to be 1.5.
Cost of Equity 22.50% = Risk Free Rate + (Equity Risk
Premium*Beta)
Cost of Debt
Estimated Corporate 35.70% Current corporate tax rate in India
Tax Rate
Comp’s Pre-Tax Cost of 16.50% Cost of debt provided by the
Debt Management
Comp’s After-Tax Cost 10.61% Pre-Tax Cost of Debt*(1-Tax Rate)
of Debt
Target Debt equity ratio 1.00 Average debt equity ratio of

Company X for past five years
WACC 16.55% (Debt/Total Capital)*(After-Tax

Cost of Debt)+(Equity/Total
Capital)*(Cost of Equity)
Based on the WACC, arrived as above, the FCF of each year is discounted to the
present period. This factor is known as the discounting factor.
Discount factor = Discount factor of previous year
(1 + WACC)
In year 1, the discount factor is equal to 1. Thus, the discount factor of Company X
for the first year will be as follows:
Discount factor for year 1 = 1 / (1 + 0.1655) = 0.858
Discount factor for year 2 = 1 / (1 + 0.1655)2 = 0.736, and so on for year 3 etc.
Therefore, for Company X, the computation of discounted cash flow (DCF) is as

follows:
Figure 5: DCF computation for Company X Rs million
Year Year Year Year Year

1 2 3 4 5
FCF 55 60 115 170 225

Discounting factor based
on WACC 0.858 0.736 0.632 0.542 0.465
Discounted cash flows 47 44 73 92 105
The value arrived through the submission of the DCF of the explicit period is known
as the primary value. The primary value of the business of Company X as computed
above is Rs 361 million.
Terminal Value
This value reflects the average business conditions of the Company that are expected
to prevail over the long term in perpetuity i.e. beyond the explicit period. The DCF
approach assumes that by the terminal date, the business will have achieved a steady
state and will be growing at a constant rate.
At the end of the explicit period the terminal value is calculated as follows:
Terminal Value = Terminal Cash flow (for last year of explicit period) * (1 + g)
Discount Factor - g
Where; Discount Factor = Weighted Average Cost of Capital, and;
g = Estimate of average long term growth
rate of cash flows in perpetuity assumed to be 5%
Therefore, for Company X, the computation of terminal value is as follows:
Terminal Value = 105 * (1 + 0.05) / (0.1655 - 0.05) = Rs. 951 million
This is further discounted to the valuation date to provide the contribution of

continuing cash flows in the total net present value. This net present value is
commonly known as the "Enterprise Value" (EV) which is the sum of value of debt
as well as equity. To arrive at the Equity value, the outstanding net debt as on the
valuation date is deducted from the Enterprise value.
Figure 6: Valuation of Company X based on DCF methodology Rs million

Rs
million
Primary value 361
Terminal value 951
Enterprise value 1,311
Add: Value of surplus land outside factory area (assumed)@ 200
Less: debt (assumed) -600
Equity value of Company X 911
@ This is being shown to illustrate that DCF captures only cash flows
from core business. Therefore, the non-core asset value should be added to arrive
at EV.
The DCF methodology is the most appropriate methodology in the following cases:
· Where the business is being transferred / acquired on a going concern basis;
· Where the business possesses substantial intangibles like brand, goodwill,

marketing and distribution network, etc;
· Where the business is not being valued for the substantial undisclosed assets it
possesses.
The DCF methodology is considered to be the best methodology for valuation the
world over because it takes into account all the factors relevant for valuation. It takes
into consideration all the cash flows available to stakeholders of a firm and the
necessary outflows, as estimated for the future. Further, the net present value takes
into account the cost of debt, cost of equity and target capital structure. It also takes
into account the risks to which the enterprise is exposed. The discount rate (i.e. the
average expected return on capital employed) is based on the overall risk perception
of the business. It also takes into account the value of the non-core assets of the
company. Any business has two kinds of assets - core assets that are a part of the
business and non-core assets that are not directly utilized as part of core operations
and hence can be treated as surplus assets. The asset value of core assets is reflected in
the cash flows of the company and, therefore, should not be added separately to it.
However non-core assets are not reflected in the cash flows. Therefore, asset valuation
of non-core assets should be done separately and should be added to DCF valuation.
Being fundamentally driven by future business plan of the company and associated
cash flows, a prudent DCF valuation should be able to capture the capital costs for
renovation and modernization of plant and machinery. The age and condition of
assets like plant and machinery and their replacement value would be relevant for
estimating expenditure on their replacement whenever necessary. This expenditure
will reduce cash flows and DCF value. Valuation of plant and machinery would be a
relevant item that would influence the DCF valuation. For example, a person
acquiring a company operating a fleet of taxis would examine the conditions of
vehicles for valuation of the company. If the vehicles need replacement of a low
cost item like hub caps, the impact on DCF will be less than if they need to replace
gear boxes in a high proportion of vehicles. The person would also calculate DCF
with reference to the demand for taxis, the average mileage, cost of maintenance etc.
Valuation of plant and machinery is not a simple addition to DCF, but a factor to be
taken into account while calculating DCF. In such calculation, plant and machinery
may be a net negative factor in the DCF if replacement costs are high. Where surplus
land would be sold this would be a positive factor. If the sale of land can cover the
cost of plant replacement the net effect would be neutral on DCF.
For a going concern, various intangibles like brand equity, market share, competition,
etc have a significant bearing on the valuation of the company. One cannot place a
money value for these factors. They have no financial value of their own that can be
measured in money terms. Hence, there is no way of evaluating them in any other
methodology. DCF is the only methodology, which takes into account these factors by
incorporating them intrinsically in estimated cash flows. In calculating DCF, different
assumptions will be made of market share, competition from imports etc, which are
translated into financial terms. Sensitivity analysis can also be made for different
assumptions. The Financial Advisor and the Seller should exercise the judgment on
the most likely financial impact of the intangible assets the company possesses, on
cash flows and also on the discount rate to be applied while arriving at the optimum
DCF value, as strong intangible assets would help reduce the overall risk perception
of the company.
In a strategic sale, the bidders take into account not only DCF valuation, but also a
premium for management control. Premium for management control would be a
subjective item for each bidder and will be reflected in the competitive bids.
Therefore, the seller, while calculating the Reserve Price, should not incorporate this
premium in the valuation amount separately. Since there is no scientific method to
quantify the control premium, it may be arbitrary to add control premium while
arriving at the Reserve Price. In the book, “Corporate Valuation: Tools for Effective
Appraisal and Decision Making” by Bradford Cornell, it is stated “Without knowing
why premiums are paid it is impossible to determine whether it is reasonable to apply
a premium (or the associated discount) to the appraiser target. In this respect both
research and common sense support the proposition that a buyer is willing to pay
more than the market price for a controlling interest in a company only when the
buyer believes that the future cash flow of the company, and thereby the value of the
company, can be increased once it is under his/her control.” Further, it states, “…if
the appraiser cannot identify what a buyer of the appraiser target would change to
increase cash flow, then there is no reason to assume that a control premium exists.”
In the broad conclusions, of the Proceedings of the Seminar on Disinvestment in

Public Sector held by Comptroller and Auditor General of India in New Delhi on
11th/12th October, 2001, it was clearly indicted that “Reserve Price should not include
Control Premium.” The following conclusions were made:
· There were considerable discussions on issues relating to valuation and the

fixation of reserve price. Valuation was an essential exercise for the Vendor and
the Purchaser but a firm or fixed price was impossible to get. Two independent
valuations often gave widely different values. Valuation was more an art than a
science. Regarding Reserve Price, it was generally felt that a Reserve Price should
be fixed, as it is essential that any seller established a benchmark value for the
company to be sold. In any case it should be more than the liquidation value.
· It was widely accepted that the most effective method of obtaining the best price
possible would be to have bids from a large fleet of competitors rather than
pegging reserve price at artificially inflated levels.
· It was also recognized that valuation would be quite subjective and that it was
possible that different valuations could yield widely varying figures.
13.2.2 Balance Sheet method
The Balance sheet or the Net Asset Value (NAV) methodology values a business on
the basis of the value of its underlying assets. This is relevant where the value of the
business is fairly represented by its underlying assets. The NAV method is normally
used to determine the minimum price a seller would be willing to accept and, thus
serves to establish the floor for the value of the business. This method is pertinent
where:
· The value of intangibles is not significant;

· The business has been recently set up.
This method takes into account the net value of the assets of a business or the capital
employed as represented in the financial statements. Hence, this method takes into
account the amount that is historically spent and earned from the business. This
method does not, however, consider the earnings potential of the assets and is,
therefore, seldom used for valuing a going concern. The above method is not
considered appropriate, particularly in the following cases:
· When the financial statement sheets do not reflect the true value of assets, being
either too high on account of possible losses not reflected in the balance sheet or
too low because of initial losses which may not continue in future;
· Where intangibles such as brand, goodwill, marketing infrastructure, and

product development capabilities, etc., form a major part of the value of the
company;
· Where due to the changes in industry, market or business environment, the

assets of the company have become redundant and their ability to create net
positive cash flows in future is limited.
13.2.3 Market Multiple method
This method takes into account the traded or transaction value of comparable
companies in the industry and benchmarks it against certain parameters, like earnings,
sales, etc. Two of such commonly used parameters are:
· Earnings before Interest, Taxes, Depreciation & Amortisations (EBITDA).
· Sales
Although the Market Multiples method captures most value elements of a business, it
is based on the past/current transaction or traded values and does not reflect the
possible changes in future of the trend of cash flows being generated by a business,
neither takes into account the time value of money adequately. At the same time it is a
reflection of the current view of the market and hence is considered as a useful rule of
thumb, providing reasonableness checks to valuations arrived at from other
approaches. Accordingly, one may have to review a series of comparable transactions
to determine a range of appropriate capitalisation factors to value a company as per
this methodology.
i) EBITDA multiple
The EBITDA multiple or the earnings method is based on the premise that the value
of a business is directly related to the quantum of its gross profits. The net profits are
adjusted to reflect the operating recurring profits of the business on a standalone basis
(i.e. after deducting extraordinary or unusual items, or items of a non-recurring
nature). Further, the profits are adjusted for non-cash items (including depreciation
and amortisation) and other factors, such as interest and taxation (which vary from
business to business) to derive EBITDA (Earnings Before Interest, Taxation,
Depreciation and Amortisations).
The EBITDA multiple method takes into account the value or consideration paid by
acquirers of similar businesses, and is computed by dividing the total consideration
paid (after adjusting for any debt assumed) by the EBITDA to derive a multiple,
which can be applied to the EBITDA figure of the business being valued. i.e. adjusted
maintainable EBITDA are capitalised by an appropriate factor ("capitalisation factor")
to arrive at the business value.
EBITDA multiple = Enterprise Value / EBITDA
Where:
Enterprise Value (EV) = Market value of Equity + Market value of Debt
EBITDA = Earnings Before Interest, Tax, Depreciation and Amortization
To illustrate, if we are valuing Company X with EBITDA of Rs. 150 million and in a
similar transaction EV/EBIDTA has been 10 (EBIDTA multiple) then EV of
Company X would be worked out as Rs. 1500 million and then debt would be
deducted to arrive at the equity value of Company X.
ii) Sales multiple
The sales multiple techniques are based on a similar analysis of relevant acquisitions
and are the ratio of Enterprise Value to the current sales (net of excise duty, sales tax
and non-recurring extra-ordinary income). It is calculated as follows:
· Sales multiple = Enterprises Value / Net sales of the current year

To illustrate, if we are valuing Company X with sales of Rs. 500 million and in a
similar transaction EV/Sales has been 4 (Sales multiple) then EV of Company X
would be worked out as Rs. 2000 million. Then debt would be deducted to arrive at
the equity value of Company X.
The Transaction Multiple methodology suffers from the following drawbacks:
· Actual money required to earn the maintainable profits / sales of the business as
a going concern (for instance, future capital expenditure) are not considered.
· This methodology does not take into account the time value of money.
Notwithstanding these limitations, these multiples are widely used by investors to

arrive at benchmark values for a company.
13.2.4 Asset Valuation Methodology
The asset valuation methodology essentially estimates the cost of replacing the
tangible assets of the business. The replacement cost takes into account the market
value of various assets or the expenditure required to create the infrastructure exactly
similar to that of a company being valued. Since the replacement methodology
assumes the value of business as if we were setting a new business, this methodology
may not be relevant in a going concern. Instead it will be more realistic if asset
valuation is done on the basis of the new book value of the assets. The asset valuation
is a good indicator of the entry barrier that exists in a business. Alternatively, this
methodology can also assume the amount which can be realized by liquidating the
business by selling off all the tangible assets of a company and paying off the
liabilities.
The asset valuation methodology is useful in case of liquidation/closure of the

business. In this case certain adjustments may have to be made to the equity value
arrived at by this method including settlement of all borrowings on the company’s
balance sheet on the date of valuation and settlement of employee dues. These
adjustments should include all the process related cost involved in closure and
liquidation. For example, in the case of the settlement of the employee dues, the
assumed severance packages may have to be calculated based on the latest available
VRS schemes for the PSU or other such modes that help in determining the most
appropriate amount of settlement that the employees will have to be paid in the event
the PSU shuts down its operations. The following example demonstrates the value of
Company X based on asset valuation methodology:
Figure 1: Asset Valuation of Company X
Rs million
Part A: Immoveable assets (valued by Government

approved valuer)
Value of buildings in factory area 100
Value of buildings at staff colony 50
Value of surplus land outside factory area 200
Part B: Moveable assets (valued by Government approved

valuer)
All moveable assets 250
600
Add: Other assets as per latest balance sheet
Value of current assets as per last audited accounts 300
Cash balance as per last audited accounts 250
550
Less: Liabilities
Estimated Voluntary retirement scheme cost for all employees -250
Total outstanding borrowings including bank loans, -650
government loans, current liabilities (trade creditors, non trade
creditors and statutory liabilities)
-900
Equity value 250
In a strategic sale process, however, the proposal is normally to transfer management

control of a going concern to a strategic partner. These concerns may contain surplus
assets as land and building which may not form part of the core assets required for
operations and hence their fair value may not be captured if the valuation of subject
entity is based on DCF or Market Multiples approaches. To protect this, certain
restrictions are imposed on the strategic partner on usage and disposal of such surplus
assets e.g. the land and property of the business cannot be sold or put to alternate use
by the strategic partner. However, certain economic benefits from such assets would
still accrue to an extent to the strategic partner as the owner of majority interest in the
company. Accordingly, while the asset valuation method may not provide the best
estimate of the value of the enterprise, application of this approach to surplus assets
would help provide a better assessment of the Reserve Price. In practice, it has been
used so far for valuing the CPSUs under disinvestment because the Disinvestment
Commission had recommended that this method should also be followed for valuation
in the case of strategic sale.
The Asset Valuation approach suffers from certain very serious limitations. These are
detailed below:
(i) Practically, it is extremely difficult to determine the exact replacement cost of the
assets owned by a company. This is so on account of number of reasons, such as
(a) changes in technology over a period of time (resulting in certain products not
being produced at all or being produced with far more efficiencies than earlier)
(b) absence of a marketplace where such assets are or can be traded
(c) inability of the seller to be able to actually realise the value of assets in one go
should the company be liquidated
(d) changes in the duty structure (like excise, import duties, etc which may impact
the value of the asset over different periods of time) etc.
(ii) The Asset Valuation approach also does not take into account the very purpose
for which a company acquired the assets, i.e., for future economic benefits. Hence,
the historical or replacement cost of a particular asset may tend to convey a wrong
picture of the value that the buyer may perceive in the asset. These factors often
tend to result in a higher value being attributed to the assets and the companies, if
the asset valuation approach is followed. Assets are bought and sold for their
future economic benefits, and for established and running businesses; the
economic benefits of owning the assets are far more relevant than the historical
cost or replacement cost of the assets.
(iii) The Asset Valuation approach also tends to overlook the intangible assets that a
company, over a period of its existence tends to build, such as goodwill, brands,
distribution network, customer relationships, etc, all of which are very important to
determine its true intrinsic value.
(iv) In the case of a majority of the PSUs it may be found that the replacement cost or
liquidation value is higher than the intrinsic value of the company, if determined
on the basis of the company's future profitability (cash flows). As against this, a
company, which has been generating very healthy returns and has built strong
brand equity, goodwill etc., will tend to command a value that is far higher than
the value of its tangible assets.
The abovementioned limitations of the asset valuation approach have been highlighted
very clearly in the valuation reports submitted by the Advisors in different cases of
valuation so far. In case of strategic sales, the Advisors have expressed that
the Discounted Cash Flow approach may be the most appropriate methodology to be
relied upon for valuing businesses on a going concern basis.
It should be noted that the DCF methodology expresses the present value of the
business as a function of its future cash earning capacity. This methodology works on
the premise that the value of a business is measured in terms of future cash flows,
discounted to the present time at an appropriate discount rate. The methodology is
able to capture the value of all the tangible and intangible assets of the Company
based on the possible future cash flows. The value of all the intangibles of a company
such as brand, marketing and distribution network and goodwill get captured either in
the form of higher sales or as higher profits of the company in comparison to its
competitors who may not have as strong or similar brand or distribution
network. Hence, the asset valuation approach may be useful only for a limited
purpose of valuing the non-core assets where it is felt that DCF approach (or market
multiples or book value/ balance sheet approach) is not able to capture the fair value
of such assets.
13.3 Standardising The Valuation Approach & Methodologies
Although the aforesaid valuation methodologies being followed are broadly based on
the Discussion Paper of the Disinvestment Commission and the best market practices,
it is necessary to standardize the valuation methodology for all PSU disinvestments so
that there are no variations from case to case. Therefore, all the four methodologies
for valuation should be followed for all PSU disinvestments, with further
improvements in respect of DCF Method and Asset Valuation Method as detailed
below, for arriving at a range of valuation figures, to arrive at the indicative
Benchmark or Reserve Price.
DCF Method
In the DCF method, while computing the cash flows, cash out flows for renovation
and modernization of plant and machinery should also be discounted for arriving at
realistic figures. Since non-core assets are not reflected in the cash flows, the Asset
Valuation Method should separately value the non-core assets and they should
invariably be added to the valuation figure arrived at by the DCF method.
Asset Valuation
In general, the approach should be used primarily to value the non-core or surplus
fixed assets, whose value are not appropriately accounted for in the valuation by DCF
or other approaches. However, in cases, where the entity has significant non-core
assets and where the application of Asset Valuation approach to the enterprise is
deemed necessary, following should be noted:
 The Asset Valuation would be more realistic, if we compute the value of only
the realizable amount, after discounting the non-realizable portions. The
realizable market value of all real estate assets, either owned by the company as
freehold properties or on a lease/rental basis will be determined, assuming a
non-distress sale scenario. The value would be assessed after taking into
account any defects/restrictions/encumbrances on the use/lease/sublease/sale
etc. of the properties or in the title deeds etc.
 Since Asset Valuation normally reflects the amount which may need to be
spent to create a similar infrastructure as that of a business to be valued or the
value which may be realised by liquidation of a company through the sale of all
its tangible assets and repayment of all liabilities, adjustments for an assumed
capital gains tax consequent to the (hypothetical) outright sale of these assets as
also adjustments to reflect realization of working capital, settlement of all
liabilities including VRS to all the employees will have to be made.
14. CHAPTER: EMPLOYEES' ISSUES
A general fear among the employees at the time of disinvestment is that they may be
retrenched or their pay scales and services conditions may be adversely affected.
Global experience shows that if the privatised companies grow rapidly, labour
restructuring may not be required. A number of protections are available to the
employees under various labour laws. These labour laws are applicable to the
company irrespective of whether it is in the Public Sector or in the Private Sector.
Besides this, employee protection is ensured by incorporating suitable clauses in the
Shareholders' Agreement.
14.1 Applicability of Industrial Disputes Act 1947
The provisions of Industrial Disputes Act, 1947 are applicable to the company even
after disinvestment. Under the Industrial Disputes Act, "Industrial establishment or
undertaking" has been defined under Section 2(Ka). The Section reads as follows:
2(Ka) "Industrial establishment or undertaking" means an establishment or

undertaking in which any industry is carried on:
Provided that where several activities are carried on in an establishment or

undertaking and only one or some of such activities is or are an industry or industries,
then,
a) if any unit of such establishment or undertaking carrying on any activity, being

an industry, is severable from the other unit or units of such establishment or
undertaking such, unit shall be deemed to be a separate industrial establishment
or undertaking;
b) if the predominant activity or each of the predominant activity carried on in such

establishment or undertaking or any unit thereof is an industry and the other
activity or each of the other activities carried on in such establishment or
undertaking or unit thereof is not severable from and is, for the purpose of
carrying on, or aiding the carrying on of, such predominant activity or activities,
the entire establishment or undertaking or, as the case may be, unit thereof shall
be deemed to be an industrial establishment or undertaking.
In view of the above definition the company will remain an industrial establishment
even after the disinvestment and all the provisions of Industrial Disputes Act will
automatically apply to the company. The trade unions may have an apprehension that
workers of a PSU enjoy more protection under the law of the land than those in the
private sector. As a matter of fact, as long as venture is "industrial establishment", the
provisions of Industrial Disputes Act are applicable to that venture, irrespective of it
being in public sector or private sector.
14.2 Provisions governing service conditions
The companies normally have "Certified Standing Orders" for their workmen. The
Standing Orders have been certified under the Industrial Employment (Standing
Orders) Act, 1946. The service conditions of the workmen of the company are
normally governed by the said "Certified Standing Orders". If, after disinvestment, the
prospective buyer proposes to make any change in the service conditions applicable to
the workmen, he has to give a notice in the prescribed manner under Section 9-A of
the Industrial Disputes Act which reads as follow:
SECTION 9-A
NOTICE OF CHANGE
No employer, who proposes to affect any change in the conditions of service

applicable to any workman in respect of any matter specified in the Fourth Schedule,
shall affect such change-
(a) without giving to the workmen likely to be affected by such change a notice
in the prescribed manner of the nature of change proposed to be affected; or
(b) within twenty-one days of giving such notice
Provided that no notice shall be required for affecting any such change-
(a) where the change is affected in pursuance of any settlement or award; or
(b) where the workmen likely to be affected by the change are persons to whom
the Fundamental and supplementary Rules, Civil Services (Classification,
Control and Appeal) Rules, Civil Service (Temporary Service) Rules, Revised
Leave Rules, Civil Service Regulations, Civilians in Defence Services
(Classification, Control and Appeal) Rules, or the Indian Railway
Establishment Code or any other rules or regulations that may be notified in
this behalf by the appropriate Government in the official Gazette, apply.
The Fourth Schedule as mentioned in the above definition is being reproduced below:
-
THE FOURTH SCHEDULE (See Section 9-A)
Condition Of Service For Change Of Which Notice Is Given
1. Wages, including the period and mode of payment;
2. Contribution paid, or payable, by the employer to any provident fund or

pension fund or for the benefit of the workmen under any law for the time being
in force;
3. Compensatory and other allowance;
4. Hours of work and rest intervals;
5. Leave with wages and holidays;
6. Starting, alteration or discontinuance of shift working otherwise than in

accordance with standing orders;
7. Classification by grades;
8. Withdrawal of any customary concession or privilege or change in usage;
9. Introduction of new rules of discipline, or alteration in existing rules, except

in so far as they are provided in standing orders;
10. Rationalisation, standardisation or improvement of plant or technique, which

is likely to lead to retrenchment of workmen;
11. Any increase or reduction (other than casual) in the number of persons
employed or to be employed in any occupation or processes or department of
shift (not occasioned by circumstances over which the employer has no control).
Thus under the provisions of Industrial Disputes Act, 1947, read with the provisions
of Industrial Employment (Standing Orders) Act, 1946, any change in the service
conditions of the workmen will be governed by the provisions of the law of the land
as applicable in the company prior to the disinvestment. This is not to say that
Certified Standing Orders cannot be changed even prior to the disinvestment by the
company management. But as law prescribes, a notice has to be given by the
management to the workmen which does not necessarily mean that just by giving a
notice, service conditions may be changed in a manner detrimental to the interest of
the workers. If the workers find that notice envisages change in working conditions
detrimental to their interests, they can immediately raise an "Industrial Dispute"
before the Appropriate Authorities defined under the Act. The "Industrial Dispute"
has been defined under Section 2K of the Industrial Disputes Act, which reads as
follows:
"Industrial Dispute" means any dispute or difference between employers and

employees, or between employers and workmen, or between workmen and workmen,
which is connected with the employment or non-employment or the terms of
employment or with the conditions of labour of any person;"
Chapter II of the Industrial Disputes Act deals with Authorities under the Act and
subsequent chapters lay down procedures etc. with regard to the redressal of Industrial
Disputes. Hence, under the existing provisions of Industrial Disputes Act, 1947, the
interests of the workmen will remain protected as much as these are protected now
under the present dispensation.
In an organised sector, the issues of job security, wage structure, perks, welfare
facilities, etc. of the workers are governed by bipartite/tripartite agreements. These
agreements are in the nature of "settlement" as defined under Section 2p and as
protected under various provisions of the Act. Even after the disinvestment, the
company management will be required to enter into bipartite/tripartite agreements
with the workmen through Unions, and the terms and conditions in the agreement
would be always governed by the practices and procedures applicable under collective
bargaining. It is a fact that any agreement between two or more parties is based on the
principles of mutual consent. Hence, the consent of the management to better service
conditions, etc. would certainly depend on the achievement of the productivity and
production targets by the workers from time to time.
14.3 Protection against arbitrary closure of an undertaking
Regarding protection against arbitrary closure of any establishment of the Company, it

is to be noted that the "Closure" of an Industrial Establishment is governed by Section
25(O) of the Industrial Dispute Act. Section 25(O) reads as follows:
1. An employer who intends to close down an undertaking of an industrial

establishment to which this chapter applies shall, in the prescribed manner, apply,
for prior permission at least ninety days before the date on which the intended
closure is to become effective, to the appropriate Government, stating clearly the
reasons for the intended closure of the undertaking and a copy of such application
shall also be served simultaneously on the representatives of the workmen in the
prescribed manner:
provided that nothing in this sub-section shall apply to an undertaking set up for
the construction of buildings, bridges, roads, canals, dams or for other construction
work.
2. Where an application for permission has been made under sub-section (1), the
appropriate Government, after making such enquiry as it thinks fit and after giving
a reasonable opportunity of being heard, to the employer, the workmen and the
person interested in such closure may, having regard to the genuineness and
adequacy of the reasons stated by the employer, the interests of the general public
and all other relevant factors, by order and for reasons to be recorded in writing,
grant or refuse to grant such permission and a copy of such other order shall be
communicated to the employer and the workmen.
3. Where an application has been made under sub-section (1) and the appropriate
Government does not communicate the order granting or refusing to grant
permission to the employer within a period of sixty days from the date on which
such application is made, the permission applied for, shall be deemed to have been
granted on the expiration of the said period of sixty days.
4. An order of the appropriate Government granting or refusing to grant permission

shall, subject to the provision of sub-section (5), be final and binding on all the
parties and shall remain in force for one year from the date of such order.
5. The appropriate Government may, either on its own motion or on the application
made by the employer, or any workman, review its order granting or refusing to
grant permission under sub-section (2) or refer the matter to a Tribunal for
adjudication: Provided that where a reference has been made to a Tribunal under
this sub-section, it shall pass an award within a period of thirty days from the date
of such reference.
6. Where no application for permission under sub-section(1) is made within a

period specified therein, or where the permission for closure has been refused, the
closure of the undertaking shall be deemed to be illegal from the date of closure
and the workmen shall be entitled to all the benefits under any law for the time
being in force as if the undertaking had not been closed down.
7. Notwithstanding anything contained in the foregoing provisions of this section,

the appropriate Government may, if it is satisfied that owing to such exceptional
circumstances as accident in the undertaking or death of the employer or the like, it
is necessary so to do, by order, direct that the provisions of sub-section (1) shall
not apply in relation to such undertaking for such period as may be specified in the
order.
8. Where an undertaking is permitted to be closed down under sub section(2) or

where permission for closure is deemed to be granted under sub-section(3) every
workman who is employed in that undertaking immediately before the date of
application for permission under this section, shall be entitled to receive
compensation which shall be equivalent to fifteen days' average pay for every
completed year of continuous service or any part thereof in excess of six months.
From the above definition it is clear that the company management before or after
disinvestment is not free to close down any part of the company at their sweet will.
The closure is governed by the law of land and as far as the existing provisions of
Industrial Disputes Act are concerned, "genuineness and adequacy of the reasons
stated by the employer" and "the interests of the general public and all other relevant
factors", have to be examined by the appropriate Government and for doing that the
Government has to give a reasonable opportunity of hearing to the employer and
workmen and the persons interested in such closure. It means that unless and until the
appropriate Government grants permission, the company management will not be
competent to close down any undertaking of the company even after disinvestment.
So there are protections available under the Act against arbitrary closure of any
undertaking of the company after disinvestment.
At times, some trade unions demand assurances regarding peripheral development

after the disinvestment of the company, which are being enjoyed by the villages
adjoining the plant. Contract labourers also demand regularisation of their jobs before
the disinvestment. Under the law, no employer can be forced to make investment in
the peripheral development. However, as a prudent management practice, bigger
companies invest substantially in the development of the areas around them. It is
expected that the successor management will consider this issue favourably. So far the
regularisation of contract labour is concerned, PSU or no PSU, an industrial
undertaking in this regard is governed by the provisions of Contract Labour
(Regulation and Prohibition) Act, 1970 and Rules made thereunder. Hence, the
contract labour and unions representing their interest may take recourse to the said
Act and Rules after disinvestment and may pursue the matter in furtherance of their
demands.
14.4 Functional Directors
Regarding functional Directors, it is required that they resign along with the complete
Board as per requirements of Closing of the transaction of Strategic Sale. These
whole-time Directors may, however be renominated by the Strategic Partner and such
provisions are made in the Share Purchase Agreement. However, if any whole-time
director(s), whose resignation is accepted at the Closing Board Meeting, is not
nominated to the Board by the Purchaser or is not re-employed by the Company on
terms and conditions mutually acceptable to the Purchaser and such whole time
director(s), which are no less favourable than the terms and conditions of employment
of such whole time director(s) before the closing date, then such whole-time
director(s) shall be entitled to compensation from the company that is the equivalent
to amounts that are the higher of:
(i) remuneration for the balance period remaining of their term of employment
under their respective employment contract(s) with the Company; or
(ii) remuneration as provided under their respective employment contract(s) for

a period of six months.
In any case, functional Directors are contractual appointees and after termination of
the contract, they are entitled to terminal benefits, leave encashment, gratuity etc. as
per the rules of the company.
14.5 Provisions in the Shareholders' Agreement
Protection of Employees interest forms an integral part of the disinvestment Process.

The Government is committed to protect the interests of all the workers, including
those belonging to the Scheduled Castes and Scheduled Tribes. Transaction
Agreements entered into by the Government with the Strategic Partner (SP), at the
time of strategic sale, state that the SP recognizes that the Government follows certain
employment principles for the benefit of the members of the Scheduled
Caste/Scheduled Tribes, physically handicapped persons and other socially
disadvantaged sections of the society and that the strategic partner shall use its best
efforts to cause the Company to provide adequate job opportunities for such persons.
Further, in the event of any reduction in the strength of the employees of the
Company, the SP shall use its best efforts to ensure that the physically handicapped
persons, Scheduled Castes / Scheduled Tribes are retrenched at the end. A specimen
copy of the typical provisions related to employees’ interest incorporated in the
Shareholders Agreement is given below:
Recitals:
· Subject to the substantives clauses in this regard, the Parties envision that all
Employees of the Company on the date hereof will continue in the employment of
the Company.
· The SP recognizes that the government in relation to its employment policies
follows certain principles for the benefit of the members of the Scheduled Caste /
Scheduled Tribes, physically handicapped persons and other socially
disadvantages categories of society. The SP shall use its best efforts to cause the
Company to provide adequate job opportunities for such persons. Further, in the
event of any reduction in the strength of the employees of the Company, the SP
shall use its best efforts to ensure that the physically handicapped persons,
Scheduled Castes/Scheduled Tribes are retrenched at the end.
Substantive Clauses:
· Notwithstanding anything to the contrary in this Article __, the Government,

shall at any time and at its sole discretion, have the option of selling shares from its
shareholding in the company, representing not more than __ of the share capital of
the company existing as of date of this Agreement, to the employees of the
Company (“employees sell share”). In the event that the Government exercises its
option to sell part of its shares to the employees, the employees shall be issued
fresh share certificates for the shares transferred to the employees. The
Shareholders agree that, upon the completion of transfer, the shares transferred to
the employees pursuant to this sub-clause shall not be subject to any restrictions in
this Agreement, whether by way of a voting arrangement or a right of first refusal.
· The SP covenants with the Government that
(a) notwithstanding anything to the contrary in this Agreement, it shall not

retrench any of the Employees of the Company for a period of 1 (one) year
from the Closing Date other than any dismissal or termination of Employees
of the Company from their employment in accordance with the applicable
staff regulations and standing orders of the Company or applicable Laws;
(b) notwithstanding anything to the contrary in this Agreement, but subject to
Sub-Clause (a) above, any restructuring of the labour force of the Company
shall be implemented in the manner recommended by the Board and in
accordance with all applicable Laws;
(c) notwithstanding anything to the contrary in this Agreement, but subject to
Sub-Clause (a) above, in the event of any reduction of the strength of the
Company’s Employees, the SP shall ensure that the Company offers its
Employees an option to voluntarily retire on terms that are not, in any
manner, less favourable than the VRS applicable before disinvestment.
14.6 Labour Related Issues In PSUs Under Disinvestment:
A Cell has been created in the Ministry to look into labour related issues and will act
as a focal point for the Public Sector Undertakings slated for disinvestment. Minister
and the Secretary of MODI meet the representatives of the workers’ Unions of the
PSUs where disinvestment process is underway and explain the policy of the
Government in this regard and solicit their cooperation, whenever needed. Similarly,
the administrative Ministries and the management of the companies discuss labour-
related issues with the trade-union representatives and other leaders to clarify the
Government’s position and allay misgivings, if any.
Films have also been made by Ministry of Disinvestment and certain States, which
depict how labour has fared post-disinvestment. They have encouraging experiences
to share. However, employees of some companies which have not been privatised but
have fallen on bad days, can be seen to be lamenting at the idle state of their once very
well managed and profit making company. As a consequence, these employees also
have to bear uncertainties like non-payment of wages for months together, doubts on
continuation of employment etc. The employees in these companies feel that if they
had been privatised before their company came to this state, they would also have had
better pay packets and working conditions that they see in privatised companies.
15. CHAPTER: DISINVESTMENT TILL NOW
Other than Modern Food Industries (India) limited, only minority stakes in different
PSEs were sold before the year ending March 2000. The Government has since
modified its policy to emphasise on strategic sales. The disadvantages of sale of
minority stakes by the Government have been found to be as follows:
 Lower realisations because management control is not transferred.

 With the limited holding remaining with the Government after minority sales,
only small stakes can be offered to the strategic partner, if it is decided to go for
a strategic sale subsequently. This depresses the possibility of higher
realizations from the strategic partner, especially since the latter has to offer the
same price to other shareholders also through an open offer.
 The minority sales also give a wrong impression that the main objective of the
Government is to obtain funds for reducing its fiscal deficit, and not to improve
performance or governance.
The following table indicates the actual disinvestment from the year 1991-92 to
30th Nov. 2002, the methodologies adopted for such disinvestment and the extent of
disinvestment in different CPSUs:
No. of Target Actual

Companies receipt for receipts
Year in which the year
equity sold (Rs In (Rs. In
Crore) Crore) Methodology
1991-92 47 2500 3038 Minority shares sold by auction method
(31 in one in bundles of “very good”, “good”, and
tranche and “average” companies.
16 in other)
1992-93 35 2500 1913 Bundling of shares abandoned. Shares

(in 3 sold separately for each company by
tranches) auction method.
1993-94 -- 3500 Nil Equity of 7 companies sold by open
auction but proceeds received in 94-95.
1994-95 13 4000 4843 Sale through auction method, in which
NRIs and other persons legally
permitted to buy, hold or sell equity,
allowed to participate.
1995-96 5 7000 362 Equities of 4 companies auctioned and
Government piggy backed in the IDBI
fixed price offering for the fifth
company.
1996-97 1 5000 380 GDR (VSNL) in international market.
1997-98 1 4800 902 GDR (MTNL) in international market.
1998-99 5 5000 5371 GDR (VSNL) / Domestic offerings with
the participation of FIIs (CONCOR,
GAIL). Cross purchase by 3 Oil sector
companies i.e. GAIL, ONGC & Indian
Oil Corporation
No. of Target Actual

Companies receipt for receipts
Year in which the year
equity sold (Rs In (Rs. In
Crore) Crore) Methodology
1999-00 4 10000 1829 GDR—GAIL, VSNL-domestic issue,
BALCO restructuring, MFIL’s strategic
sale and others
2000-01 4 10000 1870 Strategic sale of BALCO, LJMC;
Takeover - KRL (CRL), CPCL (MRL),
BRPL
2001-02 10 12,000 5632 # Strategic sale of CMC – 51%, HTL –
74%, VSNL – 25%, IBP – 33.58%,
PPL-- 74%, and sale by other modes:
ITDC & HCI; surplus reserves: STC and
MMTC
2002-03 6 12,000 4777 # Strategic sale of JESSOP-72%, HZL –
26%, MFIL-26%, IPCL – 25% and
other modes: HCI, ITDC, Maruti
Total 48 * 78, 300 30917#
* Total number of companies in which disinvestment has taken place so far.
# Figures (inclusive of amount expected to be realised, control premium,

dividend/dividend tax and transfer of surplus cash reserves prior to disinvestment etc.)
The disinvestment phase can be divided into 2 parts as per the mode of disinvestment
and the methodologies adopted. The following table shows the realisations in the two
periods.
Actual Disinvestment from April 1991 till November 30, 2002; Realisation and
Methodologies Adopted
Sale of shares – 1991- Strategic sale Total

92 to 1999-2000 1999-2000 till date
1 No. of Companies 39 * 36 *^^ 68 *
2 Equity sold (Rs. in crore) 2347.5 894 3241.5
3 As % of total equity of central 3 % 1.13 %
Govt. and holding cos. (as on
march 2000)
4 Total Receipts (Rs. in crore) 19573 11344 ^ 30917 ^
5 Realisation as multiple of 7 ** 12
equity sold
* Seven companies are common in both modes
** Of profit making companies in monopoly days
^ Includes expected accruals from deals finalised
^^ From 25 loss making & 11 profit making
In the first phase disinvestment through sale of shares yielded over Rs.19,000 crore by
selling equity worth Rs. 2347 crore. In the latter phase Govt. has already realised
around Rs. 11000 crore by selling equity worth Rs. 894 crore.
The company wise realisation through strategic sale is shown below:
Strategic Disinvestment beginning 1999-2000 till 30th November 2002
(Rs. in crore)
Sr.No Name GoI Realisation Govt. borrows Dividend recd by

Equity @ 10%; Govt. on equity
sold Interest on sold average of
last 8 years upto
realization 2000
annually
1a. MFIL 9.63 105 10.5 0.48
1b. MFIL – Phase 3.38 44 4.4 0.17
II
2. BALCO 112.52 826.5^ 82.65 5.69
3. CMC 7.73 152 15.2 0.8
4. HTL 11.1 55 5.5 0.29
5. LJMC 0.77 2.53 0.25 Nil
ITDC-19
HOTELS
6. Agra 1.70 3.61 0.36 NIL ## (Annual
Loss 1.51)
7. Bodhgaya 0.44 1.81 0.18 NIL ## (AL 0.30)
8. Hassan 0.21 2.27 0.23 NIL ## (AL 0.63)
9. Mamallapuram 0.83 6.13 0.61 NIL ## (AL 0.51)
10. Madurai 0.71 4.97 0.50 NIL ## (AL 0.89)
11. Bangalore 0.96 39.41(up-front 6.00 * NIL ## (AL 1.78)
fee); (4.11 –
MGAP)
12. Qutab 0.83 34.46 3.85 * NIL ## (AL 0.2)
13. Lodhi 0.96 71.93 8.68 * NIL ## (AL 2.0)
14. LVPH, 0.55 6.77 0.68 NIL ## (AL 1.0)
Udaipur
15. Manali 0.63 3.65 0.37 NIL ## (AL 0.3)
16. Kovalam 1.85 40.39 4.04 NIL ## (AL 1.9)
17. Aurangabad 1.16 16.50 1.65 NIL ## (AL 1.1)
18. Airport 0.66 19.39 1.94 * NIL ## (AL 2.6)
Kolkata
19. Khajuraho 0.97 2.19 0.22 NIL ## (AL 0.80)
20. Varanasi 1.74 8.38 0.84 NIL ## (AL 1.9)
21. Kanishka 1.90 92.37 10.97 * NIL ## (AL 7.6)
22. Indraprastha 0.80 43.39 5.18 * NIL ## (AL 3.4)
(AYN)
23. Chandigarh 7.00 17.27 2.03 * Incomplete
project project
24. Ranjit 3.20 29.20 2.92* NIL ## (AL 3.2)
Sub-total 27.10 444.09 51.25 NIL ## (AL 31.6)

HCI-3
HOTELS
25. Juhu, Bombay 8.95 153 15.3 NIL ## (AL 1.56)
26. Rajgir 1.72 6.51 0.65 NIL ## (Profit
0.32)
27. Airport, 4.0 83 9.96 * NIL ## (AL 3.24)
Mumbai
Sub-total 14.67 242.51 25.91 * NIL ## (AL 4.48)
28. IBP 7.44 1153.68 115.36 1.84
29. VSNL 71.25 3689^ 368.9 10.4
30. STC ----- 40^ 4 ------
31. MMTC ---- 60^ 6 ------
32. PPL 320.16 151.70 15.17 (-) 71#
33. JESSOP 68.13 18.18 ** 1.82 (-) 55#
34. Hindustan Zinc 109.85 445 44.5 3.5
Ltd.
35. Maruti Udyog 66.00 2424 ^^ ** 242.4 13
36. IPCL 64.5 1490.84 149 16.24
Grand Total 894.23 11344.03 1142.79 - 73.59
* Including NPV of future earnings on MGAP & lease

rentals ** expected ## Loss making for latest years
^ including dividend & divi. Tax,cash surpluses ^^ minimum amount to be

received over 3 tranches; could go up to Rs. 3158 cr
.# Restructuring/Conversion of Loan into equity & waiver of interest - hence a

loss. Companies at Sr. No. 5, 23, 25, 26, 27 & 33 are subsidiaries. Sale at 33 to
be approved by Government/BIFR
The table reveals that during the last two years the Government has sold a little
over 1% of its total equity.
The Government has received Rs. 11344 crore from these sales. Some sales also lead
to annual revenue. The Government of India’s borrowing rate is of the order of
10%. Hence, this realisation would lead to a benefit of Rs. 1140 crore to the country
every year in perpetuity. As against this benefit, the dividends received by
Government on its equity, which has been sold, averaged Rs. 52.41 crore during the
last eight years. However, PPL and Jessop led to an average annual outgo of Rs. 126
crore as shown in the Table. Thus, the Government lost Rs. 73.59 crore ever year due
to its majority equity presence in these companies. The sales of part equity in 36
companies would bring an annual real benefit to the economy to the tune of Rs.1140 +
73 crore = Rs. 1213 crore. There can be no justification for maintaining public sector
character in these industries, if the taxpayer has to lose more than Rs. 1213 crore
every year by non-privatisation.
There is often an argument that the Government should not sell profit-making
companies. BALCO was a profit making company, which earned the Government an
average dividend (over eight years) of Rs. 5.69 crore every year on the equity sold. As
shown in the Table, the Government would now get Rs. 82.65 crore every year. CMC
was a very well managed and profitable company, yet the average dividend was only
Rs. 0.80 crore. The Government’s benefit now is Rs. 15.2 crore annually. Similarly,
Maruti Udyog Ltd. gave average returns to the tune of Rs. 13 crore annually to the
Govt. and IPCL gave Rs. 16.24 crore on equity sold against Rs. 242 crore and Rs. 149
crore respectively which can be expected now. The argument can be multiplied in
each sale of profit making company implemented so far. Thus the reason to privatise
these companies
In case of a loss making company like PPL, the Government was losing Rs. 12 crore
every month (after privatization, the revised accounts reveal that the losses were
higher) and there can be no justification for maintaining it in the public sector. All
hotels of ITDC sold so far were loss making. There were some hotels whose losses
exceeded their turnover. The sale of such hotels, besides getting revenue for the
government have saved the tax payer from having to make good these losses at some
future date.
16. CHAPTER: SUCCESSFUL PRIVATISATIONS IN INDIA
All cases of privatisation since the Department / Ministry was created have been of
different nature and taught new lessons for refining / fine-tuning the procedures. The
highlights of the privatisations completed by the Ministry of Disinvestment so far are
given below. The month-wise progress of completing privatisation and the time taken
in completing each transaction, the performance of privatised listed companies and
available details of post-disinvestment performance is also shown in this chapter.
16.1 Modern Food Industries (India) Limited (MFIL)
MFIL was incorporated as Modern Bakeries (India) limited in 1965. It had 2042
employees as on 31.1.2000. It went through minor restructuring during 1991-94 when
its Ujjain Plant was closed, the Silchar project abandoned and the production of
Rasika drink curtailed. The company was referred to Disinvestment Commission in
1996. In February 1997, the Commission recommended 100% sale of the company,
treating it in the non-core sector. While making this recommendation, the
Disinvestment Commission cited under-utilisation of the production facilities, large
work force, low productivity and limited flexibility in decision-making, as some of its
weaknesses.
In September 1997, the Government approved 50% disinvestment to a 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 the prospective Strategic Partners,
was issued in April 1999.
Pursuant to the advertisement and other marketing efforts by the Advisor, 10 parties
submitted Expressions of Interest. Out of these, only 4 conducted the due diligence of
the company, which included visits to Data Room, interaction with the management
of the MFIL and site visits. After due diligence, only 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). The Government approved
the selection of HLL as the strategic partner in January 2000, and the deal was closed
on 31.1.2000.
As per the accounting procedure followed prior to disinvestment (31.1.2000), the

Company did not make a provision for outstanding recoveries exceeding 5 years even,
whereas the new management made provision for all outstanding recoveries which
were more than 3 years old on the grounds that strict application of accounting
principles warrant so. The accounts for the year 1999-2000, thus prepared, show an
accumulated loss of Rs. 3099.97 lakhs, with the net-worth of the company as Rs.
201.45 lakhs. Since the net-worth of the company got eroded by more than 50% of its
peak net-worth (Rs. 1756.79 lakhs), during the immediately preceding four financial
years, MFIL had to file a report with the BIFR in accordance with the requirements of
Sick Industrial Company (Special Provisions) Act, 1985.
The following Table shows the highlights of the Strategic Sale.
Modern Food Industries (India) Ltd.
PRIOR TO SALE AFTER SALE

Authorised share Rs. 15.00 cr. 1. 74% of the
capital Paid shares sold for
up capital Rs.13.01 cr. Rs. 105.45 cr.
and further Rs.
Losses 1998-99 Rs. 6.87 cr. 20 cr. Invested
by HLL in the
Losses 1999- Rs.48.23 cr. (Inclusive of an company.
00 amount of Rs. 35.19 cr.
towards provisions made for
previous years.)
2042
Number of
employees
Net Worth (and total expected Rs. 28.51 cr. 2. Thus, the
realization) as per DPE Survey Government
1998-99 gained by
selling Rs. 1000
Value of assets as per 31.3.99 shares for Rs.
accounts 11,490 each i.e.,
Gross Rs. 38.76 cr. more than 11
Market value of land & building as times the face
per Government valuer Net Rs. 18.99 cr. value & 3.68
(unrestricted use) times the Book
Rs.109.00 cr.
Value.
3. Valuation of 100% equity by 3. HLL's share
different methods – as value went up
Rs. 30 cr. to Rs. 70 cr. from Rs. 2138
done by global advisors on 30th
Dec.’99 (prior to
sale) to Rs. 3247
on 25th
Feb.’00 (post
sale).
4.The
employees of a
company
incurring
losses became
HLL employees
- an efficient
company. The
Shareholders'
Agreement
envisages:" the
parties envision
that all
employees of
the company on
the date hereof
will continue in
the employment
of the
company."
Post - Disinvestment Scenario
1. Wages have increased by an average of Rs. 1800/- per employee. Company has
incurred an expenditure of Rs. 30 crore on VRS.
2. Due to the erosion of entire net worth of the company because of poor performance
during the pre-disinvestment period, MFIL had to be referred to BFIR as per statutory
requirements immediately after its take over by HLL. But, HLL has not sought any
relief on rehabilitation and has categorically indicated that it is confident of turning
around the company with its management strength and capability of injecting
additional funds. BIFR has approved the Plan of Action for revival of the company,
as submitted by HLL, for implementation vide its order dated 5.3.2002. An additional
amount of around Rs. 7 crore has been infused for safety and hygienic purposes at
various manufacturing locations.
3. During the period 1/4/2000 to 31/12/2000, HLL has given financial support to
MFIL by way of secured loans to the extent of Rs. 16.50 crore. HLL had also given a
corporate guarantee for Rs. 9.50 crore to Punjab National Bank as collateral security
for the cash credit facility of the Company.
4. Steps have been taken towards improvement in quality of bread, its packaging and
marketing with trade-promotion activities besides training the manpower in quality
control systems. MFIL is thus registering strong and steady growth. Sales in 2000-
2001, the first year under HLL’s management, had increased by 52% over the
previous year and 20% in the year 2001-2002 over the corresponding period.
As per the Share Holders Agreement, the Purchaser is entitled to Post Closure
Adjustments as declared by the Post closing Auditor. A sum of Rs.17.48 crore is
payable to the Purchaser of which Rs.4 crore is still pending settlement. 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
has exercised this option and thereby received Rs. 44.07 crore on 28 th November 02
thus finalising the complete sale of MFIL.
16.2 Bharat Aluminium Company Ltd. (BALCO)
BALCO is a fully integrated aluminium producing company, having its own captive
mines, an alumina refinery, an aluminium smelter, a captive power plant, and down-
stream fabrication facilities. It was set up in 1965 and has its corporate office in New
Delhi. Its main plant and facilities are situated in Korba (Chhattisgarh). It also has a
fabrication unit in Bidhanbag (West Bengal). The refining capacity of BALCO is 2
lakh tonnes per year and its smelting capacity is one lakh tonnes per year. Its
employee strength was 6436 as on 2nd March 2001.
In pursuance of the recommendations of the Disinvestment Commission, the

Government appointed M/s Jardine Fleming as Advisor to assist in the sale of its 51%
stake in BALCO to a strategic buyer.
Simultaneously, it was brought to the attention of the Government that BALCO had a
bloated equity of Rs. 489 crore and large unutilized free reserves of the level of Rs.
424 crore. It was suggested by the Ministry of Mines that BALCO's equity be reduced
by 50% prior to disinvestment, using its substantial cash surplus. This proposal was
accepted. As a result, the Government received Rs. 244 crore from the capital
restructuring of BALCO, and another Rs. 31 crore as tax on this amount, prior to
disinvestment.
The strategic sale process for BALCO started in late 1997, after the first decision of
the Government, and finally came to an end on 2nd March 2001. The 51% stake was
sold to Sterlite Industries, the highest bidder, and fetched the Government Rs. 551.50
cr. The price received was higher than the values indicated by the various methods of
valuation used. The Government thus recovered a total amount of Rs 826.50 crore
from this privatisation and looking at a 10% rate of interest on Government of India
borrowing the Government gains about Rs. 82 crore against approximately Rs. 5.69
crore as dividend it used to get for the 51% shares, in earlier years. The Government /
tax-payer thus gain by around 15 times every year through this privatisation.
Post sale, a number of issues were raised in certain quarters on the disinvestment of
BALCO, especially with regard to transparency, valuation and protection of
employees interests. However, the entire sale process, including the appointment of
Advisor and the approval of the price bid, has been carried out in an extremely
transparent manner, in keeping with the highest standards of global practices. Of
special mention are the clauses in the Shareholders Agreement with the strategic
buyer, which offer adequate protection to all levels of employees with regard to their
job safety and severance packages.
Post Disinvestment Scenario
1. The new management had introduced VRS from 31.07.01 to

16.08.01. 981 applications (151 executives and 830 workers) were
received. 694 old VRS applications were pending. A total of 956 applications
were accepted mostly where units were lying closed.
2. In spite of losses of Rs. 200 crore due to the strike (at the time of
disinvestment), an exgratia payment of Rs. 5000/- was made to all employees.
3. Long-term wage agreement for a period of 5 years was entered into on

7.10.2001 (Wage revision was due w.e.f. 01.04.99 and earlier revision was for
ten years) as follows:
a) Workmen get a guaranteed benefit @ 20% of basic pay.
b) Increase in allowances:
· 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.
4. New practices introduced:
a) Job rotation
b) Appraisal system
5. The new management is proposing an investment of Rs. 6000 crore

which will increase production 4 times.
LANDMARK JUDGEMENT IN BALCO DISINVESTMENT
In protest of the BALCO disinvestment, the workers went on a 67-day strike. Three
writ petitions - two in Delhi high Court and one in Chhatisgarh High Court were filed
against disinvestment in BALCO in February 2001. The Supreme Court in its
unanimous judgement delivered on 10th December 2001 validated disinvestment by
the Government in BALCO. The landmark judgement also defined, amongst others,
the parameters of judicial review in Government’s economic policy matters. The
Hon’ble Supreme Court, while validating BALCO disinvestment and dismissing the
petitions, remarked, “Thus, apart from the fact that the policy of disinvestment cannot
be questioned as such, the facts herein show that fair, just and equitable procedure has
been followed in carrying out this disinvestment.” This judgement facilitated the path
of other successful privatisations.
16.3 Computer Maintenance Corporation Ltd. (CMC Ltd.)
CMC Ltd. was incorporated in 1975 with a paid up capital of Rs. 15.15 crore, 83.31%
of which was owned by the Government. The company is mainly involved in
hardware maintenance, systems engineering, system design, development,
consultancy and networking with an employee strength of 3200.
The Company has a wholly owned subsidiary – Baton Rouge International Inc., USA
In April 1999, CMC was referred to the Disinvestment Commission but was
withdrawn as Government decided raising of additional equity via private placement
or by directly going for public issue. The company could not raise the funds till
November 2000, by way of private placement of shares or through public issue.
On 1st February 2001, Government decided to bring down its equity to 26% by way of
induction of a Strategic Partner and other means and appointed KPMG Pvt. Ltd. as the
Advisor.
Tata Sons Limited have acquired 51% stake in CMC Ltd. for Rs.152 crore at a per
share price of around Rs.197/- on October 16, 2001. PE Ratio at which CMC shares
were sold is 12. Government also approved allotment of 6.31% equity shares of CMC
Ltd. to employees under the Employees Stock Option Scheme.
As per the requirements under the SEBI’s Takeover Code the strategic partner had
announced an open offer for acquiring shares from the market. The opening date was
27.11.2001 and the closing date was 26.12.2001. In response to this public offer 96
applications were received for 18561 shares i.e. 0.12% of CMC’s paid up capital.
Post sale, the new management distributed 50% of Productivity Linked Incentive for
the FY 2000-2001 to all eligible staff members amounting to about 4-6 months’ basic
pay in the pre-revised grade. Provision for Productivity Linked Incentive for the FY
2001-2002 was also made in the 2nd quarter financial results. Fresh recruitment of 558
personnel has also taken place in the one year after privatisation.
Since disinvestment, CMC and the Strategic partner are offering their complementary
products and services to many of their customers both in domestic and international
markets. The share prices are also soaring showing positive market sentiment. The
Government was getting a dividend (8 year average) of Rs. 0.80 crore annually
whereas now the Government can gain Rs. 15.2 crore per year on the disinvested
amount at a 10% annual rate of return.
16.4 HTL Limited
The Company was wholly owned by the Government of India, and was incorporated
in 1960 primarily for manufacture of electromechanical teleprinters, to cater to the
needs of erstwhile Post and Telegraph Department. Since the early 1990s, HTL
diversified its product portfolio to digital telephone exchange products, transmission
products, access products and data & terminal products. HTL employs approximately
1100 people.
Despite being one of the largest revenue earners amongst the telecom equipment
companies in India, HTL’s profit margins had been low. HTL’s main product line,
digital telephone products (manufactured with technology support from C-DoT and
Siemens) contributed to the top line substantially. These products commanded a lower
margin than the other categories like transmission and access products.
The Disinvestment Commission in its 2nd report of April 1997 had classified HTL in
the non-core category and interalia recommended for strategic sale of either 100% or
50% of its shares through competitive bidding.
The Cabinet on December 1998 decided to disinvest 50% of the equity in HTL to a
strategic partner. Subsequently, in May 2000, Government decided to disinvest 74%
of the equity in HTL, as there was lukewarm response from the bidders for the earlier
proposal of 50% disinvestment.
KPMG India Private Limited was appointed as Advisors.
Himachal Futuristic Communications Ltd. (HFCL), a leading Indian telecom

equipment manufacturer won the transaction at Rs 55 crore for 74% of the equity. The
takeover formalities were completed on October 16, 2001. This corresponds to Rs.
74.3 crore for 100% of the equity and Rs. 495.50 per share for a Rs. 100 share. HTL
was giving the Government Rs.0.29 crore average dividend in the last 8 years on the
equity disinvested. For this equity Govt. has received Rs. 55 crore and at a 10%
annual rate of return, Government can now expect a gain of Rs. 5.5 crore per year.
After disinvestment there was no retrenchment. The Chairman of HFCL announced

two special increments to all the employees. In order to keep the infrastructure and
manpower force fully utilized, DOT/BSNL has agreed to support HTL including
reservation of orders for the next two years for stabilizing this large company to stand
on its own feet.
The present management sees synergies in this acquisition as they were strong in
transmission and access products and did not make switching equipments. Now, they
have the entire range of telecom products. The new management is however facing
hardship due to lack of orders from the Deptt. of Telecom as they do not seem to have
placed any orders under the Reservation Quota HTL is entitled to as per the Share
Holders Agreement. There are also inordinate delays in release of outstanding
payments by BSNL / MTNL. DOT is trying to sort out these matters.
16.5 Indian Tourism Development Corporation (ITDC)
India Tourism Development Corporation (ITDC) was set up as a wholly owned

government company in 1966 for the development and promotion of tourism in India.
In 1996, GoI’s shareholding in ITDC was reduced to 89.97%. Over the years ITDC
has built a portfolio of 33 hotels including 7 hotels as Joint Ventures with State
Governments or their agencies.
The Disinvestment Commission identified hotels as a non-core business for GoI on

the basis that the initial objectives of the public sector in this industry had been met.
The existing public sector in this industry may not have any unique or special
responsibilities and accordingly the Commission recommended restructuring of ITDC
for the purpose of disinvestment.
The Government of India (GoI) accepted the recommendations of the Disinvestment

Commission and accordingly approved the disinvestment of its holding in ITDC.
The disinvestment / restructuring of ITDC hotels include either (a) handing over the
hotel properties to established hotel chains for operating on a long-term structured
contract on lease-cum-management basis, or (b) sale of properties as separate entities.
The major issues in the disinvestment of ITDC are enumerated below:
1) Lack of records or documents, like completion plans and other real estate
information or lease agreements;
2) Frequent changes in management at the units and the corporate office;
3) Resistance from Labour Unions
The resistance from ITDC’s labour unions led to interruptions and postponement of
due diligence by bidders and advisors’ visits to ITDC properties resulting in delays.
4) Issues with Other Government Agencies.
A majority of the 26 hotel properties of ITDC have issues with State / Central
Government departments and other Public Sector Units and Statutory Authorities that
have been outstanding in some cases for more than 20 years. Some of the agencies
include:
- State Governments of States where ITDC hotels are located
- Land & Development Office
- New Delhi Municipal Council
- Municipal Corporation of Delhi
- Airports Authority of India
Some of the issues that arose involving these agencies include:
§ Violations by ITDC and lack of co-ordination between ITDC and

agencies to resolve the issues. viz.,
i) Unauthorized construction at most of the hotel units
ii) Absence of completion plans for buildings
iii) Issues like payment of property taxes outstanding for over two decades.
§ Resolving these issues was very critical for the closure of the transaction
to
i) Ensure adequate interest by prospective bidders
ii) Mitigate the risk of subsequent litigations and financial implications on

the GoI
iii) Prevent large dilution in value of these properties
· Demands by agencies
The real estate of most of the properties of ITDC were made available by State and
Central Government Agencies at nominal costs as ITDC was viewed as a Government
Agency. With the process of disinvestment of ITDC, these agencies also got an
opportunity to raise their claims.
ITDC Properties Sold/ Let out on Long Term Lease
Eighteen hotel properties of ITDC have been sold and one property has been let out
on Long Term Lease cum Management Agreement by November 2002, after sorting
out outstanding issues with other agencies, as mentioned in the previous paragraph.
The total proceeds from all the properties sold upto 30th November 2002 are Rs.
444.09 crore to the Government.
The performance of these hotels in the year 2000-01 was as follows:
Property Avg. Occupanc Sales Salaries & Gross GOP Net Net
Room y (%) (Rs Wages (Rs Operating Margin Profit (R Profit
Rent crore) . crore) Profit (Rs. s crore) Margi
(Rs) crore) n
Hotel Ashok,
Bangalore 2,297 36% 12.42 6.65 -1.39 -11% -1.87 -15%
Hotel Hassan
Ashok 1,136 17% 0.72 0.61 -0.46 -64% -0.64 -89%
TABR,
M'puram 2,207 37% 1.90 0.92 -0.35 -18% -0.54 -28%
Hotel
Bodhgaya
Ashok 1,234 30% 0.76 0.54 -0.26 -34% -0.32 -42%
Hotel Madurai
Ashok 1,482 26% 1.37 1.05 -0.62 -45% -0.91 -66%
Hotel Agra
Ashok 1,052 36% 1.77 1.40 -1.36 -77% -1.55 -87%
LVPH, 2,192 26% 2.0 1.4 -0.8 -40% -1.0 -51%
Udaipur
Lodhi Hotel 1,400 36% 5.6 4.6 -1.9 -33% -2.0 -36%
Qutab Hotel 2,696 64% 7.7 3.4 0.0 1% -0.2 -3%
Hotel Manali 1,043 22% 0.35 0.3 -0.22 -62% -0.3 -88%
Ashok
KABR, 2,892 32% 10.28 6.3 -1.56 -1.9 -19%
Kovalam -15%
Aurangabad 901 17% 0.82 1.1 -1.04 -126% -1.1 -117%
Ashok
Airport 2,396 35% 6.97 5.3 -2.26 -32% -2.6 -39%
Ashok,
Kolkata
Varanasi 863 29% 1.70 2.0 -1.8 -111% -1.9 -117%
Ashok
Khajuraho 709 22% 0.38 0.7 -0.82 -0.8 -231%
Ashok -214%
Hotel 2,304 28% 11.7 10.1 -6.8 -59% -7.6 -66%
Kanishka
Hotel 649 31% 7.6 6.5 -3.0 -40% -3.4 -46%
Indraprastha
Hotel Ranjit 1078 36% 2.2 3.7 -3.2 -146% -3.2 -146%
* - The hotel project at Chandigarh is still under construction
It would be seen from the above table that all hotel properties were incurring losses
and in some properties, losses exceeded turnover.
The details of the values fetched by these properties are as follows:
First Tranche
Properties Sold
Sl Property Transaction
no. Value (Rs. cr.)
1. Agra Ashok 3.61
2. Madurai Ashok 4.97
3. Bodhgaya Ashok 1.81
4. Hassan Ashok 2.27
5. TABR,
Mamallapuram 6.13
Property Let Out on Long Term Lease cum Management Agreement
Sl Property Upfront amount Annual Lease Rent

no. (Rs. cr.) (Rs cr)
1. Hotel 39.41 (up-front ); Higher of Rs. 2.055
Ashok, * (4.11 - croreOR 16.5% of
Bangalore MGAP) Turnover
(including
Airport
Restaurant
* payment inclusive of 50% of discounted MGAP growing @ 25% every 5 years,

Business Transfer consideration for both the Hotel and Airport Restaurant, security
deposit in favour of AAI, 6 months average water and electricity charges to AAI,
security deposit equivalent to 2 years’ MGAP.
Second Tranche
Properties Sold
Sl Property Transaction Annual rentals to

no. Value (Rs. cr.) L&DO (Rs. lakhs)
1
Qutab Hotel,
New Delhi 34.46 36.62
2
Lodhi Hotel,
New Delhi 71.93 134.27
3
LVPH,
Udaipur 6.77 -
Third Tranche
Properties Sold
Sl Property Transaction Remarks

no. Value (Rs. cr.)
1 Hotel Manali ---
Ashok,
Manali 3.65
2 KABR, ---
Kovalam 40.39
3 Hotel ---
Aurangabad
Ashok, 16.50
Aurangabad
4 Land on 29 year lease from AAI.
Also includes lease for Airport
Restaurant for 5 years from AAI.
Hotel Airport Transaction value does not include
Ashok, annual lease rent for hotel and
Kolkata 19.39 airport restaurant
Fourth Tranche
Sl Property Transaction Annual rentals to

no. Value (Rs. LDO (Rs. lakhs)
cr.)
1 Hotel Varanasi Ashok, Varanasi 8.38 ---
2 Hotel Khajuraho Ashok, ---
Khajuraho 2.19
3 30.98 (Annual
rentals to
Chandigarh
Hotel project at Chandigarh 17.27 Administration)
4 Hotel Kanishka, New Delhi 92.37 156.12
5 Hotel Indraprastha, New Delhi 43.39 76.05
6 Hotel Ranjit 29.20 40.70
The process of disinvestment of 4 hotels (3rd tranche), which were advertised on

1st Jan.02, is on:
Hotel Jaipur Ashok, Jaipur
Hotel Pataliputra Ashok, Patna
Hotel Kalinga Ashok, Bhubaneshwar
Hotel Jammu Ashok, Jammu
As per the agreements and the report of the Post closing Auditor, the Purchaser is
entitled to Post Closure Adjustments which have been received in respect of a number
of hotels. No payments have been made so far and Deptt. of Tourism has sought
budgetary provision to meet requirements of Post Closure Adjustments.
16.6 Hotel Corporation of India (HCI)
Hotel Corporation of India Limited ("HCI") was incorporated on July 8, 1971 with the
objective of carrying on business of operating hotels and flight kitchens as a wholly
owned subsidiary of Air India. Air India entered the hotel business in order to
promote tourism in the country and to cater to the requirements of in-flight catering as
well as to provide quality hotel accommodation to the passengers and crew. HCI was
operating four 5-Star hotels (two in Mumbai, one in Delhi and one in Srinagar), one 4-
Star hotel at Rajgir and 2 flight-catering units in Mumbai and Delhi.
The working conditions of HCI deteriorated to an extent that very often even Air India
did not avail its services.
The Disinvestment Commission, in its 6th Report published in December 1997,

presented its recommendations in respect of disinvestment of Hotel Corporation of
India (HCI).
In accordance with the recommendations of the Disinvestment Commission, the

Ministry of Civil Aviation and Air India processed the case and it was decided that all
the businesses of HCI are to be sold on slump sale basis. Air India appointed Jardine
Fleming India Securities Limited (JP Morgan now) as Advisor for the sale of
HCI. The advertisement calling for Expressions of Interest (EOI) was issued on
12thOctober 2000.
It was decided by the Government in September 2001 that the Ministry of

Disinvestment would take over the process of disinvestment of the Hotel Corporation
of India in accordance with the established procedures. This was done on the basis of
a proposal moved by the Ministry of Civil Aviation.
After the process was taken over by the Ministry of Disinvestment, the transaction
documents for disinvestment of the business of HCI were finalised and bids in respect
of Centaur Hotel Airport Mumbai, Centaur Hotel Juhu Beach Mumbai, Centaur Hotel
Airport Delhi (including Chefair Delhi), Chefair Mumbai and Indo Hokke Hotels Ltd.
(Centaur Rajgir) were invited in November 2001. Centaur Lake View Hotel, Srinagar
has not been taken up because of certain issues raised by the Government of Jammu &
Kashmir requiring resolution.
One bid each was received for Centaur Hotel Airport Mumbai, Centaur Hotel Juhu
Beach Mumbai, Centaur Hotel Airport Delhi (including Chefair Delhi) & Indo Hokke
Hotels Ltd. (Centaur Rajgir). There was no bidder for Chefair Mumbai. The financial
bid submitted by M/s Tulip Hospitality Services Pvt. Ltd. for Centaur Hotel Juhu
Beach Mumbai for Rs.153.00 crore and the bid submitted by M/s Inpac Travels
(India) P. Ltd. for Indo Hokke Hotels Limited for Rs.6.51 crore were accepted by the
Government. Transaction documents for these two hotels were executed on 11.3.2002
and 26.3.2002 respectively.
Financial bids from the existing Qualified Interested Parties were re-invited in January
2002 for Centaur Hotel Airport Mumbai, Centaur Hotel Airport Delhi (including
Chefair Delhi) and Chefair Mumbai. There was no bidder for Centaur Hotel Airport
Delhi (including Chefair Delhi) and Chefair Mumbai. The financial bid submitted by
M/s A.L. Batra (Batra Hospitality Private Limited) for Centaur Hotel Airport Mumbai
for Rs.83.00 crore was accepted by the Government. Transaction documents for this
hotel were executed on 18.4.2002.
Since HCI is a subsidiary of Air India Limited, the proceeds from disinvestment
would accrue to Air India Limited, the holding company.
For the remaining two businesses, viz., Centaur hotel Airport Delhi (including Chefair
Delhi) and Chefair Mumbai, the process of privatisation is on.
16.7 IBP Limited
Government of India (GOI) finalised strategic sale of 33.58% of the IBP’s equity out
of Government holding of 59.58% on 5th Feb., 2002. The total paid up equity of the
company as on 31.3.2001 was Rs. 22.15 crore, out of which Government held shares
of Rs. 13.20 crore. The face value of equity sold to the strategic partner was Rs. 7.44
crore.
IBP is engaged in the retail marketing of petroleum products, manufacture and

marketing of industrial explosives and cryo-vessels for industrial and biological
applications. Unlike other oil companies in the public sector it does not own any
refining capacity. It markets products of other refineries.
Based on competitive bidding, M/s. HSBC Securities and Capital Markets (India) Ltd.
(HSBC) were appointed as Advisor for the transaction in December 2000, for a fee of
0.65% of the transaction value. M/s Amarchand Mangaldas A. Suresh Shroff and Co.
were appointed as Legal Advisors to Government of India and M/s S.K.Godbole &
Associates, Mr.A.P.Saxena, M/s Meticulous Consultants Pvt. Ltd.,
Mr.N.K.Chakravarty and M/s M.M.Kulkarni were appointed as Asset Valuers.
Interested investors submitted expression of interest (EoI) in February2001. The short

listed parties completed the due diligence exercise and agreed upon the transaction
documents, after a number of rounds of discussions with bidders. Thereafter, based on
the agreed terms, Government invited financial bids from the bidders on 31.1.2002.
Seven bidders, including PSUs, national and international bidders, submitted the bids.
Government approved the bid of Indian Oil Corporation for a price of Rs. 1153.68
crore i.e. Rs. 1551/- per share at a P.E. ratio of 63. The mandatory open offer by the
buyer for 20% shares was completed in June 2002 at the disinvestment price.
IBP was a profitable and well managed company which gave an average dividend of
Rs. 1.84 crore for the last eight years on the equity sold. Since the Government has
received Rs. 1153.68 crore from the sale of 33.58% equity, at 10% annual rate of
return the Government would get Rs. 115 crore i.e. 62 times more than in the earlier
CPSU structure.
16.8 Videsh Sanchar Nigam Limited (VSNL)
Government approved sale of 25% equity shareholding out of a total government

share holding of 52.97% in Videsh Sanchar Nigam Limited (VSNL) on 5th Feb., 2002.
The total paid-up capital of VSNL is Rs.285 crore, the Govt. holding being
Rs.151crore. Rs.71.25 crore of this equity has been sold to M/s Panatone Finvest Ltd.
(Tata Group) at a price of Rs. 1439 crore translating into a price of Rs. 202 per share.
Government had decided to disinvest in VSNL in January 2001 and the advertisement
for inviting Expression of Interest was issued in February 2001. 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. acted as the legal advisor and Pricewaterhouse
Coopers Ltd. as the asset valuer. 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.
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). Besides the Government has also taken
measures to take out surplus, yet very valuable land from VSNL, and also restrict use
/ sale of land through provisions in transaction documents.
The strategic partner has been provided a call option for the 5 th year subject to the
condition that the Government would be retaining at least one share and hence one
Board position to enforce its affirmative vote on assets. In addition, 1.97% of VSNL
equity capital has been given to employees, at concessional prices in February 2002.
The Strategic Partner in VSNL, M/s Panatone Finvest Ltd. has also made an open
offer for acquiring upto 20% of equity shares from general public at a price of Rs.
202/- per share, as required under SEBI Takeover Code.
Before disinvestment upto March 2000, VSNL gave an average dividend (on 25%
equity, which Government has disinvested now) for the last eight years of Rs. 10.4
crore annually. Now the Government has received Rs. 1439 crore as disinvestment
price and an additional Rs. 2250 crore by way of dividend and dividend tax. All this
put together can yield around Rs. 369 crore annually for the Govt. at a 10% annual
return.
The disinvestment of VSNL has also unleashed the power of a large Government
monopoly into the market thus making international call and internet rates
competitive. The customer stands to gain from this and so will VSNL as a privatised
company which may have found it difficult to survive after the International Long
Distance telephony (ILD) was opened to private players. With the help of the private
partner VSNL can now look at new products to meet the competitive edge with its
competitors.
VSNL SPECIAL DIVIDEND DETAILS DURING FINANCIAL YEAR 2001-02

2000-01 (Final) 2001-02 (Interim) Total
500% Dividend 750% Dividend (Rs. Crore)
(Rs. Crore) (Rs. Crore)

Total Dividend 1425 2137.50 3562.50
Dividend Tax 145.35 218.03 363.38
Total Outflow 1570.35 2355.53 3925.88
for company
GoI Share of 754.82 1132.23 1887.05
dividend
Dividend Tax 145.35 218.03 363.38
Total inflow for 900.17 1350.26 2250.43
GoI (including
Dividend Tax)
Payment Details Already paid in m/o Book closure dates - 29th and
October 2001 30thJanuary 2002. Payment
made in early Feb. 2002.
Post Disinvestment Scenario
At the time of disinvestment in February 2002, the demonopolisation of International

Long Distance (ILD) was announced to take place from April 2002. This would affect
VSNL’s revenues, as according to Deptt.of Telecommunications (DOT) guidelines
VSNL could not operate basic services in the same area as BSNL / MTNL. Therefore,
as per disinvestment policy VSNL was accorded the “most-favoured” customer
treatment at market rates for two years after the change of management as a result of
disinvestment.
Due to the opening of ILD competitors started quoting very low rates and
MTNL/BSNL entered into business agreements with them at the cost of VSNL’s
market share. A compromise formula was worked out after six months of
negotiations.
The new management of VSNL had planned to invest in TATA TELE in order to
enable them to provide basic services, which was objected to by DOT. This was
resolved mutually later.
16.9 Paradeep Phosphates Ltd. (PPL)
PPL incorporated in 1981 had been a loss making Company requiring frequent
restructuring. It had accumulated losses of Rs. 431.50 crore on 31 Mar 2001.It had not
paid interest or the principal amount due to the Government on loans since inception.
PPL was referred to Disinvestment Commission in July 1998. The Disinvestment

Commission classified PPL as non-core and recommended 51% sale to a strategic
partner. The Government, however, decided in November 2000 to disinvest 74%
through strategic sale.
Key financials of PPL for the last four years:
Year Sales Net Profit Dividend Earning Book Value

(Rs. Crore) Paid to GOI Per Share Per Share
(Rs. crore)
(Rs.)
1997-1998 1171.35 (-) 105.52 NIL Negative Negative
1998-1999 1005.41 (-) 57.95 NIL Negative Negative
1999-2000 890.84 23.96* NIL 109.42* Negative
2000-2001 710.87 (-) 141.02 ---- Negative Negative
(provisional)
* This was on account of financial restructuring rather than performance.

There have been three financial restructuring till date amounting to Rs.568.72 crore to
revive the Company. Even then, the Company was incurring losses @ Rs.10 – 12
crore every month.
Employees of PPL were agitating for wage revision at the time of accepting bids as
wage revision due w.e.f. 1997 had not been affected due to the health of the
company. There were four bidders in the beginning but only M/s Zuari Industries Ltd.
bid Rs. 151.7 crore for 74% of PPL’s equity at a rate of Rs. 473/- per share and
Government accepted the bid on 14.2.2002.
The new management had assured that revision of pay scales would be implemented
within 30 days of their becoming strategic partners and that they would finalise the
modalities of payment of arrears within 90 days. The new management has
implemented the revised wages w.e.f. March 2002.
The revision would mean:
· Average increase of Rs. 2789/- per month for 1140 regular employees
· Average salary to go up from Rs. 9360/- to Rs. 12419/- p.m. (increase of

about 28.74%.)
· Additional financial burden of Rs. 31.61 lakh per month (approx. Rs. 3.79
crore per annum).
Since inception, PPL’s plants had produced raw material at 40% of plant capacity
which are now working at 110% capacity. The production of fertiliser has gone up
from 20000 metric tonnes to 70000 metric tonnes in May-June 2002, which is 120%
of rate capacity.
16.10 Hindustan Zinc Limited (HZL)
The decision to disinvest 26% equity through strategic sale was taken on
29.8.2000. Following due process, price bids were invited from all the Qualified
Interested Parties, to be received on 8.11.2001. Only one QIP submitted the price bid,
which was rejected since it was lower than the reserve price fixed.
In pursuance of Government directions, a renewed exercise was undertaken involving

the original QIPs who had completed their due diligence. BNP Paribas served as the
Advisor and M/s Amarchand Mangaldas & A Shroff and Company served as the
Legal Advisor to the transaction to ensure how the value depleters in the transaction
documents and bidding conditions be modified to enhance the potential value of the
company in order to make it more attractive to the bidders. M/s URS Corporation was
appointed to conduct environmental, health and safety due diligence review of the
company. Amongst the modifications made in the transaction documents were the
sequencing of call and put options and their pricing, the provision to have the
Chairman nominated by the Strategic Partner once it acquires 51% stake, unlimited
environmental indemnity for pre-disinvestment actions, for a period of three years and
a clear road map for the Government to exit from the company. Meanwhile, on
28.2.2002 Government announced that the customs duty on import of zinc will be
reduced from 35% to 25%, which is likely to impact the profitability of the company.
Finally, price bids were invited from all the five Qualified Interested Parties (Glencore
International, Binani Industries, Indo-Gulf Corporation, Sterlite and Metdist).
Two financial bids were received from M/s Indo Gulf Corporation and M/s Sterlite
Opportunities and Ventures Limited. The reserve price fixed was Rs.32.15 per share
(Rs.353.17 crore for 26% stake). Both the price bids received were above the reserve
price. The higher bid, that of M/s Sterlite Opportunities and Ventures Limited, for
Rs.445 crore (translating to about Rs.40.50 per share) was accepted. The price offered
by M/s Sterlite Opportunities & Ventures Limited was substantially higher than the
offer made by Sterlite Industries in November 2001. The PE Ratio at which HZL was
sold is around 26. With the receipt of Rs. 445 crore the Government can earn upto Rs.
44.5 crore at 10% annual rate of return as against a dividend of Rs. 3.5 crore it got in
the last eight years on this equity (12.7 times).
The transaction was closed on 11 April 2002. The mandatory open offer by the buyer
for 20% shares was completed in July 2002 at the disinvestment price.
An attractive ESOP scheme was offered to the employees and full-time functional
directors of the Company in December 2002.
16.11 Jessop & Co Ltd.
Jessop & Co. Ltd. (JCL) was nationalised in 1973 as it was incurring losses.
Subsequent to nationalisation also, the company continued to incur losses except for a
few years. The performance of the company in the last few years is given below:
Year Profit After Tax (Rs. crore)

1998-1999 0.70*
1999-2000 (-) 43.92
2000-2001 (-) 48.77
2001-2002 (up to September 2001) (-) 21.19
*Includes adjustment relating to waiver of interest
The accumulated losses and the networth of the company as on 31.3.2001 and
30.9.2001 are:
(Rs. crore)
As on Networth Accumulated Loss

31.3.2001 (-) 270.57 351.18
30.9.2001 (-) 290.38 372.37
Government made several attempts since 1986 to revive the company through
restructuring. The details of relief and concessions given by the Government in the
past are:
(Rs. crore)
Year of financial Fund based Non-fund based

Total
restructuring restructuring restructuring
1986 - 52.39 52.39
1997 54.00 241.55 295.55
1997-98 to 2001-02
118.06 - 118.06
(January 2002)
Total 172.06 293.94 466.00
In spite of the huge infusion of funds and financial restructuring, the company could
not be revived.
Since JCL is a sick company under the purview of BIFR, BIFR also made attempts to
revive the company, but ultimately in August 2000, it declared the revival scheme as
having failed and asked the Operating Agency to explore the possibility of changing
the management. The Operating Agency issued an advertisement in September 2000.
That did not yield any proposal for reviving the company.
Therefore, as a final attempt to revive the company, Government started the process
of disinvestment in JCL. Government appointed M/s AF Ferguson and Co. as
Advisors for disinvestment in JCL. M/s Luthra and Luthra and M/s Devcon Engineers
and Valuers were appointed as Legal Advisors and Asset Valuers respectively.
Advertisements inviting EoIs were released in February 2001. The shortlisted parties
completed due diligence exercise. The transaction documents were finalised.
Government approved fresh restructuring proposal (both cash and non-cash based)
involving approximately Rs.203.82 crore. But, as per the computation made by the
Advisor, the networth of the company as on 31.3.2002 even after the financial
restructuring by Government is likely to be Rs. (-) 17.87 crore.
Government received two financial bids for 72% equity stake in JCL. The bid of M/s
Ruia Cotex Ltd. amounting to Rs.18.18 crore was more than the reserve price of Rs.12
crore for 72% equity shares.
Government decided on 27.2.2002 to accept the financial bid of M/s. Ruia Cotex Ltd.
for acquiring 72% stake in the equity of JCL for Rs.18.18 crore at Rs. 2.67 per share
for a share of Rs. 10/-. Since Jessop & Co. was under the purview of BIFR, BIFR was
approached for seeking its approval to the proposal of induction of the Strategic
Partner. In September 2002, BIFR cleared the revival scheme through induction of
strategic partner selected by the Government. However a writ petition was filed by
Jessop & Co. Ltd. Staff Association in the Kolkata High Court, the judgement for
which has been reserved by the Court on 15-11-02. Final orders have not yet been
passed (as on 20.1.2003).
16.12 Maruti Udyog Limited
Government on 14th May 02, approved disinvestment in Maruti Udyog Limited

(MUL) through a two-stage process :
(i) a rights issue by MUL in the first phase of Rs.400 crore with
Government renouncing its rights share to Suzuki. Suzuki would gain
majority control and pay Rs.1000 crore to Government as control premium.
(ii) sale of its existing shares through a public issue in the second phase ; the
issue to be underwritten by Suzuki.
HIGHLIGHTS OF THE AGREEMENT REACHED
The highlights of the agreement reached between the Negotiating Teams of GOI and
SUZUKI are summarised below:-
i. The total value of the rights issue would be Rs. 400 crore.
ii. The rights issue price would be Rs. 3280/- per share. Thus, the rights issue
would be for a total of 12,19,512 shares of Rs.100/- each.
iii. The fair value for the purpose of working out renunciation premium would
be the average of the 3 values as calculated by the three Advisors appointed for
the purpose i.e. Rs. 3280/- per share.
iv. GOI will renounce all its rights shares of 6,06,585 shares and SUZUKI will
subscribe all the rights shares so renounced by GOI at the fair market value.
v. SUZUKI would through this method and those spelt out below, enhance the
value of MUL and Suzuki will pay a control premium of Rs.1000 crore to GOI
without GOI parting with a single of its shares in MUL.
vi. SUZUKI and GOI have agreed to enter into a Revised Joint Venture
Agreement (JVA). The Revised JVA shall constitute the entire agreement
between GOI, SUZUKI and MUL and any prior understanding and agreements
between the Parties with respect to such subject matter shall be superseded.
vii. Suitable amendments in the Memorandum and Articles of Association of

MUL would be carried out to bring them in line with the decisions recorded
above and also to enable the listing of MUL shares on the stock exchange.
viii. The Revised JVA envisages that GOI would sell its existing shares in the
domestic market with participation of Indian and Global investors as permitted
by law after the completion of the rights issue transaction.
ix. SUZUKI has agreed to underwrite the first public issue of approximately
36 lakh shares held by GOI at a price of Rs.2300/- per share. For the balance
shares, GOI has a ‘put’ option at a discount of 15% and / or 10% of average
market price. GOI always has a ‘put’ option upto 30th April,2004 at the book
value now (Rs.2000/-) or then, whichever is higher.
Since the rights issue will be of a size of 12,19,512 shares, the relative shareholding of
SUZUKI and GOI after completion of the rights issue would be 54.20% and 45.54%
respectively.
ANALYSIS OF THE DEAL
The MUL disinvestment is unique in nature compared to the other strategic sale
transactions completed so far such as VSNL, BALCO, HZL, CMC, etc. Therefore,
this transaction would have to be judged using different methods as discussed below.
Comparison with other disinvestment cases: Since MUL is not a listed company,
both sides had agreed to determine the fair value of MUL shares through valuation by
three independent valuers. This average value worked out to Rs. 3280/- per share.
Therefore, the value of Government’s existing 65,80,181 shares works out to
approximately Rs. 2158 crore based on this fair value. What Government is receiving
from SUZUKI now is Rs. 1000 crore as control premium and considering the
undertaking at Rs. 2300/- per share for the 36 lakh shares and Rs.2000/- per share for
the balance approximately 29 lakh shares, it would be an additional amount of Rs.
1424 crore for the existing shares. If the existing shares could be sold at more than
the present book value, GOI’s receipt would further go up.
SUZUKI already has 50% shares in MUL and control and management rights, which
were more than equal as per earlier agreements. This was due to their being
technology suppliers. In other cases of disinvestment the strategic partner does not
have any control before acquiring GOI shares but acquires control only after the
strategic sale. Thus, the control premium presently offered by SUZUKI should be
viewed in this background.
Annual Cash inflows to Government : Currently, GOI receives dividend on its

shareholding. The dividend received by GOI in the past several years has been about
Rs.13-20 crore per annum. In the year 2000-01, MUL did not declare any
dividend. In case this transaction is completed, GOI would receive Rs.1000 crore
upfront which would yield interest of Rs.100 crore per annum at the conservative rate
of 10%. Added to this would be the dividend on the existing shares, even if
Government does not sell these shares. If it sells the shares then GOI would receive a
minimum of Rs. 142 crore per annum (at the rate of 10%) on the balance receipt of
Rs.1424 crore as indicated above. Thus, the minimum annual yield to GOI would be
Rs. 242 crore against the present dividend level of Rs. 13-20 crore per annum.
Value enhancement by SUZUKI: The Revised JVA incorporates commitment by

SUZUKI that:-
° Suzuki will endeavour to make MUL the source for some of its models
globally.
° Suzuki will assist MUL to access new export markets.
° Suzuki will give discount on certain components as previously agreed to

by it.
° Suzuki will set up a task force to explore the possibilities of further

reduction in costs at MUL.
° Suzuki will promote MUL and its products in the global market.
° Suzuki will aggressively strengthen MUL’s manufacturing and technical

capabilities so as to make MUL’s products internationally competitive in
terms of quality and cost.
In case the withdrawal of GOI results in SUZUKI undertaking the above activities, the
beneficiary would be not only SUZUKI but also the Indian automobile sector in India.
MUL today contributes nearly Rs. 2500 crore to the national exchequer
annually. Also higher growth and earnings of MUL would result in higher receipts to
GOI through taxes from MUL. Further, all the above measures by SUZUKI would
enhance the value of MUL and hence ensure the possibility of much higher receipts
than the minimum estimated above.
Price Multiple ratio analysis : One other way to look at the transaction would be to
test the P/E in this case with the P/E of earlier disinvestments. The P/E in earlier cases
have been 37(HTL), 63(IBP), 11(VSNL),19(BALCO),12(CMC) and 26(HZL). In
case we take the conservative scenario discussed above, GOI receives Rs. 2424 crore
for 49.74% holding which means an equity value of Rs.4873 crore for MUL as a
whole. The Profit earned by MUL in 2001-2002 was Rs 55 crore. This gives a P/E
ratio of about 89, which compares very well with P/E of the earlier disinvestments.
Comparable Companies: Taking the conservative scenario discussed above, the per
share value works out to about Rs 3684, which is far above the present Book Value of
about Rs. 2000 per share resulting in price to book value ratio of 1.8. Also it is higher
than the valuation made by the three valuers. This is relevant as some automobile
sector companies are currently trading at less than even their book values.
BACKGROUND TO NEGOTIATIONS
MUL, India’s dominant automobile manufacturer, is a joint venture of Government of

India (GOI) and Suzuki Motor Corporation (SUZUKI). As on year ended March 31,
2001, MUL had an equity capital of 132.30 crore and a net worth of Rs. 2642
crore. With the advent of competition, Maruti’s profitability has been under pressure.
As per the existing joint venture agreement, both GOI and SUZUKI had joint control
over the management of MUL and took turns in appointing the Chairman and
Managing Director of the company. In addition, the joint venture agreement
restrained the GOI from selling the shares of MUL to a third party without the consent
of SUZUKI.
Government had decided in February 2001 on disinvestment in MUL through the
option of MUL offering shares on a rights basis to existing shareholders with a
renunciation option. Government constituted a Negotiating Team to negotiate on
behalf of the Government with SUZUKI. The Team comprised Secretary, Ministry of
Disinvestment, Secretary, Department of Heavy Industry and Shri KV Kamath,
Managing Director and CEO, ICICI Ltd. The Committee was asked to negotiate and
finalise the modalities of disinvestment with SUZUKI.
MEETINGS WITH SUZUKI
The first round of meetings were held between the Negotiating Team of GOI and
SUZUKI between 2nd March 2001 and 12th March 2001 at New Delhi. At the
conclusion of the discussions, a record note of discussions was signed by both the
parties on 13th March, 2001. To summarise, both sides had agreed that the road-map
for disinvestment of GOI shares in MUL would comprise two phases – rights issue in
the first phase and, after the completion of the rights issue, sale of existing GOI shares
in the market in the second phase. It was acknowledged that this road map would
help in bringing in capital into MUL required for its expansion and growth and at the
same time lead to increase in the value of MUL and its share price discovery through
a transparent manner, which would help determine the benchmark for further
disinvestment. The value of the rights issue agreed upon was Rs.400 crore, which was
arrived at primarily on the basis of the estimates of capex requirements in MUL.
Regarding valuation of Maruti shares, it was agreed that GOI and SUZUKI would
jointly identify and appoint three reputed valuers to determine the value of shares and
the average of the three values accepted. KPMG, Ernst & Young and S.B. Billimoria
were appointed as Valuers and they submitted their valuation reports in January, 2002,
copies of which were also made available to SUZUKI. The fair value per share
recommended by the three valuers are Rs. 3200 by KPMG, Rs. 3142.18 by Ernst &
Young and Rs. 3500 by S.B. Billimoria. The average of the valuations made by three
different valuers works out to Rs.3280.
After receipt of the valuation report, the second round of meetings were held between
the Negotiating Teams of the GOI and SUZUKI between 12 th February 2002 and
29th April 2002 at New Delhi to arrive at an agreement on the price at which the rights
issue would be made, the portion of the GOI’s rights share to be subscribed
by SUZUKI, the renunciation premium and the control premium and modalities for
the sale of existing shares held by GOI, etc. Discussions were also held to finalise the
Revised Joint Venture Agreement. At the conclusion of the discussion a record note of
discussion was signed by both parties.
Kotak Mahindra Capital Company Limited (KMCC) acted as the financial advisor to
GOI. Dua & Associates were legal advisors to Government.
16.13 Indian Petrochemicals Corporation Ltd. (IPCL)
Government of India (GOI) approved induction of Reliance Petroinvestments Limited

(Reliance Group) as strategic partner in IPCL, a leading petrochemical PSU, through
sale of 26% equity shares at a consideration of Rs.1491 crore on 17 th May 2002.
Background
IPCL, one of the India’s leading petrochemical products company has been classified
as operating in ‘non-core’ sector. The total paid up equity of the company is Rs.
248.22 crore, out of which Government holds shares of Rs.148.80 crore. The equity
sold to the strategic partner would be of face value Rs.64.54 crore (26.6%). The
Government on 16.12.1998 had decided ‘in principle’ to the disinvestment in IPCL
through strategic sale. The Government had invited Expressions of Interest from
interested investors through a Press advertisement.
Meanwhile, in November 2000, in view of synergy of operations and interests of IOC

and IPCL Government also explored the possibility of the Vadodara Complex of
IPCL being transferred to IOC and then disinvestment of 25% equity processed in
respect of rest of the IPCL. Finally, Government decided on 12.11.2001 to no longer
pursue this route and decided instead on continuing the effort for strategic sale for
IPCL as a whole. It was decided that the equity offered for strategic sale should be
raised to 26% instead of 25% proposed earlier with the commitment of disinvesting at
least a further 25% equity.
Government was assisted by M/s. UBS Warburg as Advisor for the transaction. The
legal advisors were Pathak & Associates and the Asset Valuers were M/s. Deloitte,
Haskins & Sells. Interested investors submitted expression of interest (EOI) in
December 2001. The short listed parties completed the due diligence exercise and the
transaction documents were agreed upon, after a number of rounds of discussions with
bidders. Thereafter, based on these documents, financial bids were received from the
bidders on 29.4.2002.
Reserve Price
The Advisor (UBS Warburg) had in their report computed the valuation of shares in
IPCL by adopting four methods, namely, Discounted Cash Flow, Adjusted Balance
Sheet, Comparable Companies and Adjusted Asset Valuation. The Evaluation
Committee considered the valuation of IPCL done by the Advisor and recommended a
reserve price:
Reserve Price for 26% Approx. equivalent value of Approx. value per
equity (Rs. In crore) 100% equity (Rs. in crore) share (Rs.)
845 3252 131
The reserve price recommended by the Evaluation Committee was based on the
Discounted Cash Flow methodology, as it is the most appropriate valuation
methodology for a going concern.
Bids received
The bids submitted by the three bidders is summarized below:-
Bidder Bid value for Approx. equivalent Approx. value

26% equity (Rs. value of 100% equity per share (Rs.)
in crore) (Rs.in crore)
Reliance 1491 5735 231
Petroinvestments
Limited
Indian Oil Corporation 826 3177 128
Limited
Nirma Chemical 711 2735 110
Works Limited
The highest bid of Reliance Petroinvestments Limited for a price of Rs.1491 crore
translates into a P/E of 58 which is much higher than the P/E multiple of peer group
companies.
The mandatory open offer from the public holding, by the buyer for 20% shares was
completed in September 2002 at the disinvestment price.
The figures of Profit after Tax (PAT), rate of Dividend declared and share of GOI on
26% equity for last five years are as under:
Years Profit after Tax Dividend on 26% Government equity shares
(Rs. in crore) (Rs. in crore)

1996-1997 510 25.8
1997-1998 244 25.8
1998-1999 29 6.5
1999-2000 189 12.9
2000-2001 249 19.4
Taking into account an accrual of 10% on the sale proceeds realized from transfer of
26% Government equity stake to the Strategic Partner, an amount of Rs.149 crore
would accrue per year as compared to an average of Rs. 18 crore per year approx.
received by Government of India as dividend from IPCL.
16.13.1 Pace of Disinvestment
S.No. Month PSU/Asset Sold Total

1. Jan.,2000 Modern Food Industries (India) Limited 1
2. Jul., 2000 Lagan Jute Machinery Limited 2
3. Mar.,2001 Bharat Aluminium Company Limited 3
4. Oct.,2001 HTL ; CMC 5
5. Nov.,2001 Hotel Ashok, Bangalore; Hotel Bodhgaya 8
Ashok; Hotel hasan Ashok.
6. Jan.,2002 Hotel Ashok, Madurai 9
7. Feb.,2002 IBP ;Videsh Sanchar Nigam Limited ; Paradip 15
Phosphates Limited; Hotel TBABR
Mamallapuram; Hotel Agra Ashok; Luxmi Bilas
Hotel Udiapur.
8. Mar.,2002 Qutab Hotel, New Delhi; Lodi Hotel, New Delhi; 19
Centaur Hotel, Juhu Beach, Mumbai; Centaur
Rajgir.
9. Apr.,2002 Hindustan Zinc Limited ; Centaur Hotel Airport, 21
Mumbai.
10. May, Maruti Udyog Limited. 22
2002
11. Jun., 2002 Indian Petrochemicals Corporation Limited. 23
12. Jul.,2002 Hotel Airport Ashok Kolkata ; Kovalam Ashok 26
Beach Resort ;Hotel Manali Ashok.
13. Aug.,2002 Hotel Khajuraho Ashok ; Hotel Varanasi Ashok. 28
14. Sept.,2002 Hotel Aurangabad Ashok 29
15. Oct.,2002 Hotel Ranjit, Hotel Kanishka, Hotel Indraprastha 33
and Chandigarh Hotel Project.
1.13.2 Comparative statement of Reserve/ Bid /Market Price of Companies
sold
Sr. No. PSU Reserve Bid Price Month of Market Market Market
Price. Sale price price price as
per Per share around around on 6
share * time of one year Nov.02
(Rs.) Sale before
Sale
1. MFIL 6035 11489.55 January, N.L. N.L. N.L.
2000
2. BALCO 36.73 48.97 March N.L. N.L. N.L.
2001
3. CMC 140.92 196.73 October, 308.55 160 385.60
2001
4. HTL 350 495.50 October, N.L. N.L. N.L.
2001
5. VSNL** 171 202 February, 156 329 92.20
2002
6. IBP 507 1551 February, 573.30 210 230.20
2002
7. PPL 550 473.82 February, N.L. N.L. N.L.
2002
8. HZL 32.15 40.50 April, 32.50 17.35 15.50
2002
9. JESSOP^ 1.76 2.67 February, N.L. N.L. N.L.
2002
10. IPCL 131 231 June, 105.65 50 66.30
2002
11 Maruti I 3280 Control May, N.L. N.L. N.L.
premium of 2002
Rs. 1000 cr.
(received
without
selling
a single
share)
N.L – Not Listed ;
* without adding control premium
**High Dividend paid during this period
^Not yet closed

17. CHAPTER: PRIVATISATION IN STATES
17.1 Investment in State Level Public Enterprises
The consolidated position of the State level Public Sector Enterprises (SLPEs), as on
Mach 2001 was as under:
Name of the Approximate Estimated Net ApproximateApproximate

State number of total Accumulated number of number of
State Level investment Loss * (Rs. loss making non-working
Public in SLPEs in crore) SLPEs SLPEs
Sr. Enterprises (Rs in
No. (SLPEs) crore)
Andhra
1 Pradesh 40 4444 2894 25 14
2 Assam 42 3649 2792 28 10
3 Delhi N/A N/A N/A N/A N/A
4 Goa 12 4869 730 N/A N/A
5 Gujarat 54 23438 965 N/A N/A
6 Haryana 45 443 384 10 4
Himachal
7 Pradesh 21 3143 369 12 2
Jammu &
8 Kashmir N/A N/A N/A N/A N/A
9 Karnataka 76 19295 811 37 13
10 Kerala 109 9805 1124 52 13
Madhya
11 Pradesh 26 7923 600 8 15
12 Maharashtra 65 19186 N/A 43 17
13 Manipur 14 N/A N/A 10 N/A
14 Orissa 68 9796 1180 18 34
15 Punjab 53 12425 847 25 23
16 Rajasthan 24 11576 261 6 3
17 Tamil Nadu 59 6192 N/A 33 12
Uttar
18 Pradesh 41 17773 5327 21 19
19 West Bengal 82 18241 5068 59 6
831 172198 23352 387 185
N/A - Not available
Source: State Government, IPE, Hyderabad and other sources.
* The figures indicated are only of those SLPEs, which have finalised their accounts
(could be only 25-30% of the total companies)
Figures are approximate as they relate to States where information is available and
reported, therefore not a complete list/figures.
17.2 Disinvestment in States
A number of States have also started making privatisation / disinvestment /

restructuring of State PSEs as a fundamental part of their economic reforms. Many of
these have also set up State level Disinvestment Commissions. The following Table,
compiled on the basis of the information received from the States and other sources,
illustrates the disinvestment efforts in the States.
S. Name of the Approximate SLPEs No. of No. of No. of

No State number of identified for SLPEs in SLPEs SLPEs
State Level disinvestment / which privatised closed
Public winding up / process down
Enterprises restructuring initiated
(SLPEs)
Andhra 8 11
1 21 21
Pradesh 40
2 Assam 42 N/A N/A - -
3. Delhi N/A N/A 1 1* -
4 Goa 12 2 2 2 -
5 Gujarat 54 24 24 1 6
6 Haryana 45 22 13 1 12
Himachal 3 2
7 15 5
Pradesh 21
Jammu & - 2
8 7 2
Kashmir N/A
9 Karnataka 76 19 6 2 6
10 Kerala 109 12 - - -
Madhya 1 -
11 14 14
Pradesh 26
12 Maharashtra 65 6 - -
13 Manipur 14 10 N/A - -
14 Orissa 68 27 27 8 11
15 Punjab 53 9 5 5
16 Rajasthan 24 10 6 1 1
17 Tamil Nadu 59 13 3 - 12
18 Uttar Pradesh 41 9 9 - -
19 West Bengal 82 2 2 1 -
TOTAL 831 222 140 29 68
N/A - Not available
Source: State Government, Institute of Public Enterprises (IPE), Hyderabad.
* Delhi Vidyut Board
States have taken up the task of privatisation and found the “Policy and Procedures”
of the Ministry of Disinvestment a useful guide. Some states like Andhra Pradesh &
Orissa have even held seminars and interactions for guidance and education of all
affected parties, like employees, their families etc.
State finances have been under stress and most of the states have under taken a Public
Sector Restructing Programme, while Karnataka has set up a Department of
Disinvestment, Punjab a Directorate of Disinvestment and Uttar Pradesh has a
Disinvestment Commission in place. As part of the Reforms, they have paid special
attention to employee concerns and given VRS to as many as 37000 employees,
trained the retirees and assisted them in obtaining re-employment in many cases.
Orissa and Andhra Pradesh have made films to educate the concerned people and help
them adapt to the change.
Punjab Government has put on fast track privatisation of Punjab Communication Ltd.,
Punjab Tractors Ltd., Punjab Alkalies & Chemicals, and Punjab Tourism Corporation.
The process is likely to be completed by June 2003 in most of these cases.
Andhra Pradesh is going ahead with great speed and privatising their sugar and
spinning Cooperatives. Other neighbouring states are also seeking guidance from
Andhra Pradesh.
Delhi Government has taken their first step forward and privatised distribution of
Power. They have also expressed interest in privatising Delhi Transport Corporation.
Gujrat has privatised Gujrat Tractor Corporation Ltd. in 1999 and is in the process of
selling the remaining equity.
Karnataka and Kerala Government have taken keen interest in the process. Madhya
Pradesh has advertised Intel Telecommunications for 65% stake sale. Orissa has sold
Orissa Leather Industry Ltd., Orissa Pump, Engineering Corporation Ltd.& Orissa
Ferro Chrome and has signed an MOU with Central Government for privatising 27
Government Corporations.
A number of States have closed unviable and loss making units as it was not feasible
to keep them running.
18. CHAPTER: FUTURE DIRECTION
18.1 Primary objectives of disinvestment
Globally, the beneficial effect of privatisation on the economy has come to be widely
appreciated now and the investors are eagerly looking forward to further privatisation
in India. The recent strategic sales in CMC, HTL, VSNL, IBP, HZL and
IPCL resulted in increase in the market capitalisation / value of the Government
holdings in the listed PSEs by almost double within this year which indicates that
privatisation is not only being looked at favourably by the market but also that it is a
very strong motivator for bringing in substantial resources to the country. Moreover,
the removal of quantitative restrictions on imports, lowering of import tariffs and
removal of restrictions of other kinds on global trade, services and capital, pursuant to
our acceptance of the WTO regime and various economic reforms, have made it
imperative that the public sector is privatised at the earliest, failing which it will fall
sick and find it extremely difficult to survive in the new competitive environment.
Privatisation, in future, should be driven by the primary objectives of disinvestment,

as mentioned earlier. To re-emphasise, the corner stone for privatisation should be the
most efficient allocation of scarce resources, both monetary and non-monetary, that
meets the uppermost social objectives of the country. The concerns on the social
priorities are basic health, family welfare, primary education, development of
infrastructure and the retirement of public debt. The resources currently blocked in
non-strategic PSEs, should therefore, be released as soon as possible through sale of
Government stake in such PSEs for redeployment in the above sectors. It should also
be ensured that there is no further flow of resources to these PSEs and no new PSEs
are formed in non-strategic sectors. The mission would, therefore, be to -
· Obtain decision of Government on disinvestment / strategic sale in all non-

strategic CPSEs in the next few years.
· Complete such sales within the next few years, and wind up the Ministry of
Disinvestment.
· All loss making non-strategic CPSEs to be financially restructured, if

necessary, and privatised.
· Even with financial restructuring package, if privatisation is not possible,

such CPSEs, which are, prima-facie unviable, should be closed, to prevent
wastage of public funds in running / reviving such units.
It is often suggested that weak and sick PSEs should be privatised first, and the profit
making PSEs need not be touched. However, the logic / rationale for privatising or not
privatising a PSE is not based on whether it is making profit or loss but whether it is
in a strategic sector or in a non-strategic sector, and whether the taxpayers' money can
be saved from the commercial risks by transferring the risk to the private sector
wherever the private sector is willing to step in and assume such risks.
The objective should be not to waste too much time over this but to privatise those
PSEs first in the case of which this can be done with the least possible delay, since the
opportunity cost of letting the resources remain locked up in PSEs is too high.
However, broadly, the following criteria would be used for identifying the PSEs for
disinvestment / privatisation:
· PSEs in the sectors where adequate regulations and / or competition exist to

take care of the monopoly and consumer interest aspects;
· The unviable PSEs whose continued existence is likely to cause a drain on

exchequer;
· The PSEs that are subject to intense competition or are likely to be exposed
to competition because of the impending reforms.
PSEs providing services or goods, which, with the altered perceptions of the role of
the State, are not the ones, that Government need provide or manufacture.
19. Annexures :
19.1 Annexure-I: Agreement For Advisory Services
THIS AGREEMENT is made (on this day of ____________, 2002) BY AND

BETWEEN THE PRESIDENT OF INDIA acting through the Joint Secretary,
Ministry of Disinvestment, Government of India (hereinafter referred to
as “GoI”, which expression shall mean and include its successors and assigns) of the
ONE PART and (ADVISOR NAME--------------------), a company incorporated
under the Companies Act, 1956 and registered as a Category I Merchant Banker with
the Securities and Exchange Board of India, having its registered office at
(ADDRESS OF ADVISOR--------------------------------) (hereinafter referred to
as “(ADVISOR NAME)” which expression shall mean and include its successors
and permitted assigns and liquidators) acting through Shri ----------------, Director &
Head of Corporate Finance & Advisory and Shri ---------, Associate Director duly
appointed and authorised on its behalf of the OTHER PART.
WHEREAS
A) (CO. NAME-----------------) (hereinafter referred to as “(CO.

NAME)” or the “Company”) is a public sector company, controlled by the
Government of India and is predominantly a (NATURE AND DESCRIPTION OF
BUSINESS------------------------------------------------);
B) Government of India wishes to identify and conclude a contract with an

appropriate strategic partner (hereinafter referred to as “Strategic Partner”)
involving disinvestment of ------% (out of -----%) of the paid-up equity of (CO.
NAME) held by GoI at the best possible price;
C) (ADVISOR NAME) submitted an Expression of Interest dated ---------

--------------------to Director (Finance) (CO. NAME---------------------place) in
accordance with the instructions as contained in the advertisement dated ------------
----------------------------issued by the Government of India;
D) Further to the Expression of Interest, (ADVISOR NAME) made

presentations to the Inter Ministerial Group (hereinafter referred to as “IMG”)
constituted by the Government of India to appoint the advisor and submitted a fee
bid by letter dated ------------------------------------ addressed to the Director
(Finance), (CO. NAME) Co. Limited proposing a fee structure for (ADVISOR
NAME) to act as advisor;
E) Pursuant to the fee bid made by (ADVISOR NAME) and other
investment bankers, the GoI appointed (ADVISOR NAME) as advisor in relation
to the Transaction (as defined in Recital F below) and communicated its decision
to (ADVISOR NAME) by letter dated ------------------------------------------ as
issued by the Ministry of Disinvestment and the Parties are desirous of recording
the detailed terms of the appointment of (ADVISOR NAME) as advisor.
F) It is considered appropriate and desirable by the Parties hereto to

formalise the terms on which (ADVISOR NAME) has been engaged as the
exclusive advisor (the “Engagement”) in relation to the proposed sale by the
President of India, acting through Joint Secretary, Ministry of Disinvestment,
Government of India, of -------% shareholding along with management control (the
“Stake”) to a Strategic Partner in (CO. NAME) Co. Limited (the “Transaction”).
NOW, THEREFORE, IN CONSIDERATION OF THE PREMISES AFORESAID,

THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Role of (ADVISOR NAME)
(ADVISOR NAME) shall, in accordance with all applicable laws, provide the
following financial advice and assistance together with any additional assistance
agreed in writing between (ADVISOR NAME) and the GoI:
A. To carry out the valuation and assist in the sale of ------% shareholding
of the GoI in (CO. NAME);
B. (i) To carry out the valuation of (SUBSIDIARIES , IF ANY);
(ii) To advise on the modalities for transfer of (CO. NAME)’s stake

in (SUBSIDIARIES , IF ANY);
For the avoidance of doubt, the duties and responsibilities of (ADVISOR NAME)
shall not include other than as set out above. In particular, (ADVISOR NAME) is not
responsible for:
a) Giving tax, legal, regulatory, accountancy or other specialist or technical

advice or services; or
b) Giving general financial or other advice that is not related to the

Transaction; or
c) Valuation of assets and other intangibles of the Company
The valuation advice which (ADVISOR NAME) provides will be given on the
understanding that unless otherwise expressly agreed in writing, (ADVISOR NAME)
shall not be responsible for the accounting or other data and commercial assumptions
on which such a valuation is based, the assessment and evaluation of which shall
remain the Company’s responsibility.
In this Agreement, where any obligation is imposed on the Company, the GoI agrees
that it will ensure the Company complies with such obligation.
2. Fees and Expenses
The GoI has agreed with (ADVISOR NAME) the following fee(s);
i. Success Fee
If the Transaction is completed, a fee inclusive of all applicable taxes (the “Success
Fee”), equal to ----- percentage of the total amount of the Consideration that is paid or
is payable by the Strategic Partner to acquire the Stake from the GoI in connection
with the Transaction, whether by way of cash, equity, debt or in kind or by way of any
waiver, release or assignment of any rights or obligations (the “Consideration”). The
Success Fee will be payable 15 days from the date of full payment by the Strategic
Partner (the “Closing Date”).
ii. If, for any reason, GoI decides to terminate this Agreement and the
Engagement in accordance with clause 5 prior to completion of the Transaction or
in case the GoI decides not to go ahead with the Transaction for any reason
whatsoever, then (ADVISOR NAME) will be paid a drop-dead fee (“Drop Dead
Fee”) of Rs -------------- (Rupees --------------only).
iii. For the purposes of calculating the Success Fee, the Consideration will
be translated, if necessary, into Indian Rupees at the State Bank of India’s buying
spot rate at the close of business on the day prior to the Closing Date.
iv. No payments, other than those made by the GoI for and on behalf of
(ADVISOR NAME) in pursuance of orders / judgement of a court, to third parties
other than persons belonging to (ADVISOR NAME), shall be reduced from
amounts owed by the GoI to (ADVISOR NAME) pursuant to this Agreement.
v. The GoI will be responsible for its own legal fees and the costs of
accountants (including the cost of audit and accounting reports) and other advisors,
including technical advisors. (ADVISOR NAME) will be responsible for its own
travel and all other out-of-pocket expenses in connection with the Engagement.
vi. All fees and payments to (ADVISOR NAME) shall be subject to

deductions as per applicable laws of India.
3. Compliance
The GoI will comply with all applicable legal and regulatory provisions (including
Stock Exchange requirements).
4. Information and Announcements
i. The GoI will:
a) provide (ADVISOR NAME) and its advisors with such access to the
directors and management of, and the auditors and advisors to the Company
and its subsidiaries, if any, for the purpose of the Transaction/Engagement as
(ADVISOR NAME) may reasonably require; and
b) provide (ADVISOR NAME) with, and/or give access to, all information
which is relevant for the purposes of the Transaction/Engagement and will
ensure that, in so doing, GoI will not breach any confidentiality obligation and
that the information so supplied is and remains complete, true and accurate in
all material respects and not misleading, whether by omission or
otherwise. The GoI will immediately notify (ADVISOR NAME) if it
subsequently discovers that any information provided by it is incomplete,
untrue, inaccurate or misleading.
ii. The GoI will ensure that all announcements and documents published or
statements made by the GoI/Company or on their behalf in the course of, and
relevant to, the Transaction/Engagement will only be made or published after
consultation with (ADVISOR NAME) and will be true and accurate and not
misleading and, where appropriate, will contain all information necessary for legal
or regulatory purposes (including the Stock Exchange requirements).
iii. The GoI undertakes that it will at all times keep (ADVISOR NAME) fully
informed of all strategies, developments and discussions relevant to the
Transaction and that no initiatives relevant to the Transaction/Engagement will be
taken without prior consultation with (ADVISOR NAME).
iv. (ADVISOR NAME) represents many other companies, individuals, and other
entities. At present, there is no conflict of interest resulting from the (ADVISOR
NAME)’s representation of GoI for the disinvestment of (CO. NAME) and
(ADVISOR NAME)’s representation of its other clients. It is possible, however,
that during (ADVISOR NAME)’s representation of GoI in connection with the
disinvestment of (CO. NAME), some of (ADVISOR NAME)’s present or future
clients may have disputes or transactions with GoI/(CO. NAME). GoI agrees that
(ADVISOR NAME) may represent those clients (present or future) in any matter
that is not directly related to (ADVISOR NAME)’s work for GoI described here.
(ADVISOR NAME) agrees however, that GoI’s prospective consent to the above
shall not apply in any instance where, as a result of (ADVISOR NAME)’s
representation of GoI for the (CO. NAME) disinvestment, (ADVISOR NAME)
has obtained any proprietary or confidential information that, if known to such
other client, could be used in any such matter by such client to GoI’s material
disadvantage. It needs to be understood that, in similar engagement letters with
many of their clients, (ADVISOR NAME) is requesting similar agreements to
preserve the ability of (ADVISOR NAME) to represent other enterprises that are
or become clients of (ADVISOR NAME) in comparable situations.
v. (ADVISOR NAME) and each of its directors, officers, employees and agents
will ensure that all information, whether written or oral, acquired from the GoI or
(CO. NAME) and their respective agents and advisors in connection with the
Transaction is kept strictly confidential and used solely and exclusively for the
purposes expressly specified in this Agreement. This obligation of confidentiality
shall not apply to any information already in the public domain at the time of
disclosure other than as a result of breach of this clause by (ADVISOR NAME) or
which (ADVISOR NAME), is required to disclose by law, regulation or court
order, provided that before making such disclosure (ADVISOR NAME) will, to
the extent permitted by law, in writing advise GoI and consult with GoI about any
information that (ADVISOR NAME) proposes to disclose pursuant to this
exception.
vi. Advice (including any opinion or report) whether written or oral by (ADVISOR
NAME) to the GoI /Company, or any communications between (ADVISOR
NAME) and the GoI/Company in connection with the Transaction may only be
used and relied upon by the GoI and may not be used or relied upon by any third
party and may not be disclosed to any third party without the prior written
approval of (ADVISOR NAME).
5. Termination
This Agreement and the Engagement may be terminated with or without cause by
the GoI or by (ADVISOR NAME) by written notice at any time and without
continuing obligation.
(i) In case the GoI terminates the Agreement and the Engagement without cause
the following shall survive any termination and remain in full force and effect:
a) Success Fee provision (Clause 2 (i) – for Success Fee earned by

(ADVISOR NAME) but not yet paid by the GoI as at the date of
termination (if at the date of the termination, the Transaction has already
been completed);
b) Drop Dead Fee provision (Clause 2 (ii), if at the date of the termination,
the Transaction has not yet been completed); and
c) The conflicts of interest and indemnity provisions of this Agreement.

(ii) In case the GoI terminates the Agreement and the Engagement with cause the
following shall survive any termination and remain in full force and effect:
a) The conflicts of interest and indemnity provisions of this Agreement
(iii) Notwithstanding the foregoing, it is hereby clarified that if:
a) any order is made by any competent court or any resolution is passed for
the dissolution or winding-up of (ADVISOR NAME) or for the appointment
of a liquidator, receiver, administrator or manager of (ADVISOR NAME)
or all or a substantial part of its assets or anything analogous occurs in any
other jurisdiction to (ADVISOR NAME), other than in connection with a
solvent reorganisation, reconstruction, amalgamation or merger which does
not adversely affect the interest of (CO. NAME) or GoI; or
b) (ADVISOR NAME) is found guilty of any criminal offence in any

jurisdiction that materially adversely affects its ability to carry out the
Engagement; or
c) (ADVISOR NAME) fails to comply with any final decision reached as a

result of arbitration proceedings pursuant to para (b) and Schedule II of this
agreement; or
d) (ADVISOR NAME) is in breach of its obligation under this agreement

and has not remedied the same within 30 days (or such longer period as the
other party may have subsequently approved in writing) following the
receipt by (ADVISOR NAME) of a notice from GoI specifying the breach;
or
e) In the event of a conflict of interest during the engagement that
materially adversely affects the ability of (ADVISOR NAME) to carry out
the engagement and not remedied within 15 days of arising due to handling
of the transaction by (ADVISOR NAME) as Advisor to the GoI for
disinvestment in (CO. NAME) the GoI shall have the right to immediately
terminate this Agreement and such termination shall be deemed to be a
termination for cause.
6. Conflicts of Interest
(ADVISOR NAME) Group is involved in a wide range of commercial banking,

investment banking and other activities (including investment management,
corporate finance, securities trading, research and private equity) out of which
conflicting interests or duties may arise. GoI acknowledges and accepts that
(ADVISOR NAME) Group (other than (ADVISOR NAME)) may have interests
or duties which conflict with GoI’s interests and which would or might otherwise
conflict with the duties owed by (ADVISOR NAME) to GoI. GoI further accepts
that any other entity in the (ADVISOR NAME) Group or any other division of
(ADVISOR NAME) will not restrict its activities in any way nor have any
obligation to advice GoI of any conflict of interest, which exists or may arise. In
relation to the Engagement, information which is held elsewhere within
(ADVISOR NAME)/ (ADVISOR NAME) Group but of which none of the
individual executives in the Corporate Finance & Advisory division of
(ADVISOR NAME) having the conduct of the Engagement could reasonably have
access to shall not for any purpose be taken into account in determining
(ADVISOR NAME)’s responsibilities to the GoI or the Company and such
responsibilities shall be entirely determined by the regulatory rules and principles
and the contractual terms applicable to the Engagement.
(ADVISOR NAME)/(ADVISOR NAME) Group shall not have any duty to

disclose to the GoI /Company or utilise for the GoI /Company’s benefit any non-
public information acquired in the course of carrying on any business for, or in
connection with the provision of services to any other person.
7. Indemnity
The indemnity provision in connection with this Engagement are set out in the
attached Schedule I (the “Indemnity”) and forms a part of this Agreement
8. Disqualification
If subsequent event(s) makes (ADVISOR NAME) liable for disqualification from

engagement, then a notice of 15 days may be given by GoI to (ADVISOR NAME)
to cure the disqualification and/or eliminate the conflicts of interest and if after the
expiry of 15 days notice, the said disqualification is not cured, then GoI may, at its
option, terminate this Agreement with cost if (ADVISOR NAME) fails to
withdraw from the transaction.
9. Severability
Each provision of this Agreement and the Indemnity is severable and, if any
provision is or becomes invalid or unenforceable or contravenes any applicable
regulations or law, the remaining provisions will not be affected.
10. Amendments and Modifications

This Agreement constitutes the entire understanding between both parties relating
to the Transaction and it shall not be amended or modified except as agreed in
writing by both the GoI and (ADVISOR NAME).
11. Notice
Any notice or other communication required to be given pursuant to this

Agreement shall be in writing and shall be sufficiently given or served if delivered
by hand or by courier with acknowledgement or faxed at the numbers given below
or sent by registered post to the respective persons at the addresses given below:
Director & Head of Corporate Finance & Advisory
(ADVISOR NAME) ------------------------------------
PHONE
Fax:
Joint Secretary
Ministry of Disinvestment
II Floor, Block No.11
CGO Complex
Lodhi Road
New Delhi 110 003
Fax: (011) 436 6524

12. Dispute Resolution
Any controversy or dispute which arises between the parties to this Agreement
concerning its construction or application, or the rights, duties or obligations of any
party hereunder shall be referred to arbitration subject to procedures set out in
Schedule II attached hereto which forms integral part of this engagement Agreement.
13. Governing Law
This Agreement shall be governed by and construed in accordance with the laws of
the Republic of India. Neither the GoI nor (ADVISOR NAME) shall have the right to
transfer or assign their responsibilities resulting from the acceptance of this
Agreement.
IN WITNESS WHEREOF THE PARTIES HAVE EXECUTED AND DELIVERED
THIS AGREEMENT AS OF THE DAY AND YEAR FIRST ABOVE WRITTEN
For and on behalf of the President of India
by the Joint Secretary- Ministry of Disinvestment, Government of India
Witnesses:
(___________________) 1
2.
For and on behalf of
(ADVISOR NAME) Witnesses:
1.
(--------------------------------------------- 2.
Director & Head of Corporate Finance & Advisory
1.
(----------------------) 2.
Associate Director
Schedule I: INDEMINITY
1. GoI hereby agrees to indemnify and hold harmless each of the Indemnified
Persons as defined below from and against any and all expenses (including the fees
and expenses of its counsel), losses, claims, actions, suits, damages, of liabilities,
joint or several (including the aggregate amount paid in settlement of any action,
suit proceeding or claim that may be made against any Indemnified Person) that
any Indemnified person suffers or incurs which are determined by a judgement of
a court or an arbitration of competent jurisdiction to have resulted from any
dishonest, illegal or fraudulent act or the wilful default or negligence on the part of
any GoI indemnified Party as defined below. Subject to the foregoing, the
(ADVISOR NAME) agrees that no GoI Indemnified party shall have any liability
whatsoever (Whether in contract, tort, otherwise) to the (ADVISOR NAME) for or
in connection with things done or omitted to be done pursuant to the Engagement.
2.
(a) Each of (ADVISOR NAME) and the Indemnified Persons agree that promptly
after receiving a notice of an action, suit, proceeding or claim against any of the
Indemnified Person or receipt of a notice of the commencement of any
investigation which is based, directly or indirectly, upon any matter in respect of
which indemnification may be sought from the GoI, (ADVISOR NAME) or
Indemnified Party will notify the GoI in writing of the particulars thereof and,
will provide copies of all relevant documentation of the GoI and, unless the GoI
assumes the defence thereof, will keep the GoI informed of the progress thereof
and will discuss all significant actions proposed. The omission so to notify the
GoI shall not relieve the GoI of any liability which the GoI may have to
(ADVISOR NAME) or any Indemnified Person except only to the extent that any
such delay in or failure to give notice as herein required prejudices the defence of
such action, suit, proceeding, have under this indemnity had (ADVISOR NAME)
or any other Indemnified Persons not so delayed in or failed to give the notice
required hereunder.
(b) the GoI shall be entitled, at its own expense, to participate in and, to the extent it
may wish to do so, assume the defence of such action, suit, proceeding, claim or
investigation, provided such defence is conducted by experienced and competent
counsel. Upon the GoI notifying (ADVISOR NAME) or any Indemnified Person
in writing of its election to assume the defence and retaining counsel, the GoI
shall not be liable to (ADVISOR NAME) or any other Indemnified Person for any
legal expenses subsequently incurred by them in connection with such defence. If
such defence is assumed by the GoI, the GoI throughout the course of thereof will
provide copies of all relevant documentation to (ADVISOR NAME), will keep
(ADVISOR NAME) advised of the progress thereof and will discuss with
(ADVISOR NAME) all significant actions proposed.
(c ) No Indemnified Person shall admit any liability or settle any action, writ
proceeding, claim or investigation without the prior written consent of the GoI,
which shall not be unreasonably withheld. The GoI will not be liable for any
settlement of any action, suit, proceeding, claim or investigation that any
Indemnified Person makes without the written consent of the GoI.
(d) The GoI’s right to assume the defence set out above shall be subject to the
following conditions:
i No admission of liability or compromise whatsoever in connection with the

claim or action may take place without (ADVISOR NAME)’s prior written
consent; which shall not be unreasonably withheld.
ii Notwithstanding the foregoing, the Indemnified Person shall have the right to
employ its or their own counsel in any such case, but the fees and expenses of
such counsel shall be at the expense of such Indemnified person unless (a) the
employment of such counsel shall have been authorised in writing by the GoI in
connection with the defence of such action, and (b) the GoI have not
employed counsel to take charge of the defence of such action, within a
reasonable time after notice of commencement of the action.
3. (ADVISOR NAME) hereby assumes full and absolute responsibility for each and
every act or omission of all its directors, officers, employees and agents. Subject to
the foregoing and without prejudice to any claim the GoI may have against
(ADVISOR NAME), no proceedings may be taken against any director, officer,
employee or agent of (ADVISOR NAME) in respect of any claim the GoI may
have against (ADVISOR NAME).
3. (ADVISOR NAME) hereby agrees to indemnify and hold harmless each of the
Company, the GoI, their directors, officers and employees (collectively the “GoI
Indemnified Parties”) and (individually, a “GoI Indemnified Party”) from and
against any and all expenses (including the fees and expenses of its counsel),
losses, claims, actions, suits, damages, or liabilities, joint or several (including the
aggregate amount paid in settlement of any action, suit, proceeding or claim that
may be made against any GoI Indemnified Party) that any GoI Indemnified Party
suffers or incurs which are determined by a judgement of a court or an arbitration
of competent jurisdiction to have resulted from any dishonest, illegal or fraudulent
act or the wilful default or negligence on the part of any Indemnified Person.
Subject to the foregoing, the GoI agrees that no Indemnified Person shall have any
liability whatsoever (whether in contract, tort, or otherwise) to the GoI for or in
connection with things done or omitted to be done pursuant to the Engagement.
5. The GoI will notify (ADVISOR NAME) if the GoI becomes aware of any claim,
which may give rise to a liability pursuant to this indemnity.
6. “Indemnified Persons” means (ADVISOR NAME) and all directors, officers,

employees of (ADVISOR NAME).
Schedule II
a) Dispute Resolution
Any and all claims, disputes, questions or controversies involving the parties or any
two or more of them and arising out of or in connection with this Agreement or the
execution, interpretation, validity, performance, breach or termination hereof
(including, without limitation, the provisions of this Schedule (collectively,
hereinafter referred to as “ Disputes”) which cannot be finally resolved by such parties
within sixty (60) calendar days of the arising of a Dispute by amicable negotiation and
conciliation shall first be submitted for settlement by informal arbitration to an
arbitral panel consisting of one nominee of each of such party as applicable. If any
such panel, negotiating in good faith is unable to resolve and settle the Dispute within
sixty (60) calendar days after the Dispute is first submitted to it, then any party shall
be entitled to cause the Dispute to be submitted for arbitration pursuant to the terms of
paragraph (b) hereof.
(b) Arbitration
Any dispute which is not settled after an attempt by the parties to the Dispute at
amicable negotiations and conciliation under paragraph (a) hereof, shall be finally
resolved by final and binding arbitration under the provisions of the Arbitration and
Conciliation Act, 1996 as modified from time to time and rules framed thereunder, the
arbitration rules of Indian Council of Arbitration and by three arbitrators appointed in
accordance with the said rules. The Arbitration shall be held in New Delhi and all
arbitration proceedings shall be conducted in English.
In connection with the arbitration proceedings, the parties to the Dispute hereby agree
to co operate in good faith with each other and the arbitral tribunal and to use their
respective best efforts to respond promptly to any reasonable discovery demand made
by such party and the arbitral tribunal.
Except as otherwise required by law or any applicable stock exchange rules and
regulations, the arbitral proceedings and the arbitral award ( the “Award”) shall not be
made public without the joint consent of the parties to the Dispute and, if not a party,
(ADVISOR NAME) and each such party shall maintain the confidentiality of such
proceedings or the Award, unless otherwise permitted by other such party in writing .
The costs of the arbitration shall be borne by the parties to the Dispute in accordance
with the provisions of the Arbitration and Conciliation Act 1996 as modified from
time to time and rules framed there under and applicable provisions of the arbitration
rules of Indian Council of Arbitration. The Award may include interest from the date
of any breach or other violation of this Agreement and rate of such interest, if any,
shall be specified by the arbitral tribunal and shall be calculated from the date of any
such breach or other violation to the date when the Award is paid in full.
Each of the parties expressly understands and agrees that the Award shall be the sole,
exclusive, final and binding remedy between them regarding any and all Disputes
presented to the arbitral tribunal. Application shall be made to any court with
jurisdiction over the party ( or its assets) against whom the Award is rendered for a
judicial acceptance of the Award and an order of enforcement.
19.2 Annexure-II: Guidelines for Advisors and Bidders
No. 6/4/2001-DD-II
Government of India
Ministry of Disinvestment
Block 14, CGO Complex
New Delhi.
Dated 13th July, 2001.
OFFICE
MEMORANDUM
Sub: Guidelines for qualification of Advisors and Bidders seeking to acquire

stakes in Public Sector Enterprises through the process of disinvestment
Government has examined the issue of framing comprehensive and transparent

guidelines defining the criteria for bidders interested in PSE-disinvestment so that the
parties selected through competitive bidding could inspire public confidence. Earlier,
criteria like net worth, experience etc. used to be prescribed. Based on experience and
in consultation with concerned departments, Government has decided to prescribe the
following additional criteria for the qualification / disqualification of the parties
seeking to acquire stakes in public sector enterprises through disinvestment:
(a) In regard to matters other than the security and integrity of the country, any
conviction by a Court of Law or indictment / adverse order by a regulatory
authority that casts a doubt on the ability of the bidder to manage the public sector
unit when it is disinvested, or which relates to a grave offence would constitute
disqualification. Grave offence is defined to be of such a nature that it outrages the
moral sense of the community. The decision in regard to the nature of the offence
would be taken on case-to-case basis after considering the facts of the case and
relevant legal principles, by the Government.
(b) In regard to matters relating to the security and integrity of the country, any
charge-sheet by an agency of the Government / conviction by a Court of Law for
an offence committed by the bidding party or by any sister concern of the bidding
party would result in disqualification. The decision in regard to the relationship
between the sister concerns would be taken based on the relevant facts and after
examining whether the two concerns are substantially controlled by the same
person/persons.
(c) In both (a) and (b), disqualification shall continue for a period that Government
deems appropriate.
(d) Any entity, which is disqualified from participating in the disinvestment

process, would not be allowed to remain associated with it or get associated merely
because it has preferred an appeal against the order based on which it has been
disqualified. The mere pendency of appeal will have no effect on the
disqualification.
(e) The disqualification criteria would come into effect immediately and would
apply to all bidders for various disinvestment transactions, which have not been
completed as yet.
(f) Before disqualifying a concern, a Show Cause Notice why it should not be
disqualified would be issued to it and it would be given an opportunity to explain
its position.
(g) Henceforth, these criteria will be prescribed in the advertisements seeking
Expression of Interest (EOI) from the interested parties. The interested parties
would be required to provide the information on the above criteria, along with their
Expressions of Interest (EOI). The bidders shall be required to provide with their
EOI an undertaking to the effect that no investigation by a regulatory authority is
pending against them. In case any investigation is pending against the concern or
its sister concern or against its CEO or any of its Directors/Managers/employees,
full details of such investigation including the name of the investigating agency,
the charge/offence for which the investigation has been launched, name and
designation of persons against whom the investigation has been launched and other
relevant information should be disclosed, to the satisfaction of the
Government. For other criteria also, a similar undertaking shall be obtained along
with EOI.
-sd/-
(A.K. Tewari)
Under Secretary to the Government of India.

19.3 Annexure-III: Expression of Interest
EXPRESSION OF INTEREST
(To be forwarded on the letterhead of the interested party/lead
bidder/member of the consortium submitting the EOI)
Reference No.______________ Date

___________
To,
ADVISOR NAME
Sub: GLOBAL INVITATION OF EXPRESSIONS OF INTEREST
FOR DISINVESTMENT OF ____% STAKE IN (CO. NAME)
Sir,
This is with reference to the advertisement dated ________ inviting Expression of

Interest for (CO. NAME)
As specified in the advertisement, we have read and understood the contents of the
Preliminary Information Memorandum (PIM) and are desirous of participating in the
above disinvestment process, and for this purpose:
We propose to submit our EOI in individual capacity as __________________ (insert
name of party)
OR
We have formed/propose to form a consortium comprising of ____members as

follows:
1. ____________________________ (Insert name)
2. ____________________________ (Insert name)
3. ____________________________ (Insert name)
We understand that ____% equity stake of (CO. NAME) is proposed to be divested

and we are interested in bidding for the same. We believe that we/our
consortium/proposed consortium satisfies the eligibility criteria set out in relevant
sections of the PIM including the guidelines for qualification of bidders seeking to
acquire stakes in Public Sector Enterprises through the process of disinvestment
issued by the Government of India vide Department of Disinvestment OM
No.6/4/2001-DD-II dated 13th July 2001 and subsequent amendments/clarifications
thereto.
We certify that in regard to matters other than security and integrity of the country, we
have not been convicted by a Court of law or indicted or adverse orders passed by a
regulatory authority which would cast a doubt on our ability to manage the public
sector unit when it is disinvested or which relates to a grave offence that outrages the
moral sense of the community.
We further certify that in regard to matters relating to security and integrity of the
country, we have not been charge-sheeted by any agency of the Government or
convicted by a Court of Law for any offence committed by us or by any of our sister
concerns.
We further certify that no investigation by a regulatory authority is pending either

against us or against our sister concerns or against our CEO or any of our
Directors/Managers/ employees.
We undertake that in case due to any change in facts or circumstances during the
pendency of the disinvestment process, we are attracted by the provisions of
disqualification in terms of the subject guidelines, we would intimate the GOI of the
same immediately.
The Statement of Legal Capacity and Request for Qualification as per formats
indicated hereinafter, duly signed by us/respective members, who jointly satisfy the
eligibility criteria, are enclosed.
We shall be glad to receive further communication on the subject.
Enclosure:
Yours faithfully,
1. Statement of Legal
Capacity
2. Request for
Qualification
Authorised Signatory
For and on behalf

of the party/consortium
19.4 Annexure-IV: Statement Of Legal Capacity
(To be forwarded on the letterhead of the interested party / each member of the
consortium submitting the EOI).
Reference No.______________ Date

___________
To,
Senior Vice President & Head Regional Office
ADVISOR NAME
Sub: GLOBAL INVITATION OF EXPRESSIONS OF INTEREST
FOR DISINVESTMENT OF ____% STAKE IN
(CO. NAME)
Sir,
This is with reference to the advertisement dated ________ inviting Expression of

Interest for (CO. NAME)
We have read and understood the contents of the PIM and the advertisement and
pursuant to this hereby confirm that:
We satisfy the eligibility criteria laid out in the PIM and the advertisement.
We are a member of the consortium (constitution of which has been described in the
Expression of Interest), which jointly satisfies the eligibility criteria as detailed in the
PIM.*
We have agreed that ________(insert member’s name) will act as the lead member of
our consortium.*
We have agreed that ______________(insert individual’s name) will act as our

representative on our behalf and has been duly authorized to submit the EOI. Further,
the authorized signatory is vested with requisite powers to furnish such letter and
Request for Qualification and authenticate the same.*
We have agreed that (insert the name of the individual) chosen as representative of
our consortium and on our behalf and has been duly authorized to submit the
EOI. Further, the authorized signatory is vested with requisite powers to furnish such
letter and Request for Qualification and authenticate the same.*
Yours faithfully,
Authorised Signatory
For and on behalf of (party/member)
*Strike off whichever clause is not applicable

19.5 Annexure-V: Request For Qualification
(To be submitted in respect of interested party/each member of the consortium)
Name of the interested Party(ies)/Member(s) ___________________________
1. Constitution (Tick, wherever applicable)
i) Public Limited
Company
ii) Private Limited Company
iii) Others, if any (Please
specify)
§ If the interested party is a foreign company/ OCB, specify list of statutory

approvals from GoI/ RBI/ FIPB applied for/ obtained/ awaiting:
2. Sector (Tick, wherever applicable)
i) Public Sector
ii) Joint Sector
iii) Others, If any (Please
specify)
3. Details of Shareholding
4. Role/ Interest of each Member in the

Consortium (if applicable)
5. Nature of business/products dealt with :
6. Date & Place of :

incorporation
7. Date of commencement of business :
8. Full address including phone No./fax :

No.
i) Registered :
Office
ii) Head :
Office
9. Address for :
correspondence
10. Salient features of financial :
performance for the last three years
11. Basis of eligibility for participation in the process (Please mention details of
your eligibility) as under:
Please attach most recent Audited Statement of Accounts/Annual Report.

Additionally, please provide a chartered account/auditor certificate certifying the
Turnover and Net Worth as defined in the Eligibility criteria.
12. Please provide details of all contingent liabilities that, if materialised, that have
or would reasonably be expected to have a material adverse affect on the business,
operations (or results of operations), assets, liabilities and/or financial condition of
the Company, or other similar business combination or transaction.
13. Contact Person(s):
i) Name:
ii) Designation:
iii) Phone No.:

iv) Mobile No.:
v) Fax No.:
vi) Email:
Yours faithfully,
Authorised Signatory Authorised Signatory
For and on behalf of the (party/member) For and on behalf of the consortium
Place :
Date :
Note: Please follow the order adopted in the Format provided. If the interested party
is unable to respond to a particular question/ request, the relevant number must be
nonetheless be set out with the words “ No response given” against it.
19.6 Annexure-VI: Qualification For Bidders
QUALIFICATION FOR BIDDERS
1. Introduction
1.1 In a strategic sale, apart from Government’s interest in receiving a

good return or price for its companies, the Government is also concerned
that the company, which is taken over, should function well after
disinvestment. The strategic buyer should be able to bring in more
capital and improved technology, wherever needed, introduce better
management practices and should be in a position to take proper care of
the work force. In short, the strategic partner is expected to have a good
track record of performance so that the Government can be satisfied that
its assets are being passed on to capable hands.
1.2 In order to achieve this objective, it is important that the Government

evolves a selection procedure that ensures that only those entities get
selected as strategic partners who possess:
· The requisite managerial and financial strength.
· A proven track record of following good corporate practices.
· A good reputation as regards integrity.
1.3 To address these considerations and to ensure greater transparency of

the process, the Ministry has taken the step to publish these “Guidelines
on qualifications for Bidders” to enable the bidders to understand the
requirements expected of them.
1.4 While any company, domestic or foreign, in private or public sector,
can take part in a strategic sale process, depending on the unique
features of a case, and taking into consideration all
relevant factors including monopoly issues, Government can always
impose reasonable restrictions, in specific cases, in public interest.
1.5 The bidders are selected through a competitive bidding process but,
for Government companies to pass into private hands, there are some
critical areas which government has to ensure that the bidder is capable
of complying with. These critical areas are: -
· Financial capabilities of the bidder
· Technical and Legal capacity of the bidder
· FDI restrictions
· Integrity of the bidder
· Security considerations
1.6 The qualification/eligibility criteria for the bidders arise at two stages
of the bidding process:
· At the time of submission of Expression of Interest (EoI).
· At the time of submission of the financial bid which comes

much later and at the end of the process.
2. Financial Capacity
2.1 Since the bidder has to buy a block of shares typically involving a
substantial financial outlay, it has to be ensured that, companies which
are financially sound and capable vis-à-vis the size and business of the
CPSUs being disinvested, are only allowed to bid. The ‘open offer’
requirement of SEBI and ‘Put/Call’ option add further to the financial
strength/capacity required. Therefore, while issuing an advertisement in
the newspaper and website for inviting bidders to take part in the
disinvestment process through submission of EOI (financial bids come
much later at the end of the process) the qualifying minimum networth
criteria and/or minimum turnover required of the bidding company is
specified. This gives a fair idea of the size and financial strength of the
bidding company. Besides, relevant financial and performance details
are also sought for. For example, while seeking EOI from bidders in
MECON Ltd., the minimum annual turnover stipulation was Rs. 150
crore and networth Rs. 50 crore, whereas in VSNL minimum networth
was specified as Rs. 2500 crore as VSNL was a much bigger
company. In case of consortium bids, Government may insist on each
consortium member satisfying individually a minimum
networth/turnover criteria to be included as a member of the
consortium. In the case of VSNL, each consortium member had to
satisfy the minimum networth criteria of 10% i.e. Rs. 250 crore. In some
cases, in addition to this or in lieu thereof, Government may require
majority networth contribution from the lead bidder. For example, in the
case of Shipping Corporation of India, the networth criteria is Rs. 800
crore but it has been specified that the lead member of the consortium
must have a networth of at least Rs. 408 crore (i.e. 51%). At this stage,
those of the bidders who satisfy these criteria, get shortlisted and get on
to the next stage.
2.2 At the stage of submission of the financial bids, the prospective

bidders are required to furnish a bank guarantee which is retained only in
the case of the highest bidder. This is meant to bind him to fulfil his
commitments till the successful closing of the transaction.
2.3 Before accepting the financial bid of any party, a certificate is

required either from the banker or from an independent Chartered
Accountant that the bidder has got enough funds to complete the
transaction. In addition to that the bidder gives an undertaking that he
has not been prohibited by any agreements with others from acquiring
the equity stake from government.
2.4 These prerequisites are also a deterrent to bidders who may be having
unhealthy balance sheets. The bank guarantee is a further proof of their
financial standing and reputation in the financial world.
3. Technical and Legal capacity
3.1 Every company must provide along with the EOI a representation,
duly executed by its authorised official/ representative that it has the
requisite corporate authorization to submit the EOI and that all
information provided in the EOI is complete and accurate in all material
respects to the best of their knowledge. If, at a subsequent date, it is
discovered that the company or any consortium member did not either
possess the requisite authorization or that any part of the information
provided in the EOI was not complete or accurate in any material
respect, the Government reserves the right to disqualify such company or
consortium or member of the consortium from the process.
3.2 To access the technical capabilities of the prospective bidder, the

Government may ask them to provide a business plan so that the
Government is assured of continued services to the satisfaction of the
user. In case of Air India, the business plan was sought in advance. In
certain cases, Government may even require the bidders to satisfy a
criteria of minimum experience in a particular business/sector, say
manufacturing.
3.3 The bidder is required to submit enough information in the EOI for
Government to assess the bidding entity’s managerial, financial and
technical capability. Typically, the EOI would contain the following
details:
(i) Executive Summary: This provides a brief description of the bidding

company and (where appropriate) of each member in the consortium,
containing details like ownership structure, write up on business
history and growth, business areas / activities, respective revenue
details, etc. It includes a brief commentary on the capability of the
company / consortium, as demonstrated, inter alia, in its past track
record, to run its own business.
(ii) The Applicant: The full name, address, telephone and facsimile
numbers, e-mail address of the company or of each member of the
consortium and the names and the titles of the persons who are the
principal points of contact.
(iii) Basic Information: This contains the details of the place of

incorporation, registered office, current directors, key management
personnel and principal shareholders of the company/companies in
the consortium. It also contains a copy of its current Memorandum
and Articles of Association and copies of audited accounts for the last
three years of the company / companies in the consortium. (The latter
details help in evaluating financial capabilities as well).
(iv) Management Organization: An overview of the applicant's
senior management and organization structure and in the case of a
consortium, that of each member; summaries of the roles and
responsibilities of the directors, key management personnel of the
applicant and, in case of a consortium, those of each member.
(v) International Operations / Joint Ventures / Alliances: Brief write

up of the company's or, in the case of a consortium, of the members,
of their international operations, joint ventures / alliances (whether
international or domestic), nature and size of such operations, equity
ownership, if applicable, copies of the audited accounts for the last
one year of such companies.
(vi) Professional Advisors: The names and addresses of those

companies and the professional firms, if any, who are (or will be)
advising the applicant/consortium, together with the names of the
principal individual advisors at those companies and firms.
(vii) Outstanding Litigation: Each company, and each member of a

consortium must provide with the EOI a statement of pending
litigation.
4. Foreign Direct Investment (FDI) Restrictions
4.1 In case of foreign bidders, the prospective buyer has to comply with
the sectoral Foreign Direct Investment (FDI) caps determined by
Government of India and revised from time to time. In some cases of
disinvestment, the FDI restrictions on the bidder are more onerous than
the sectoral restrictions. These could be typically those PSUs, which are
into businesses, which are sensitive to national security. For example, in
the case of Air India, Government decision is to sell 40% stake but a
restriction of maximum 26% foreign holding was incorporated. In the
case of Shipping Corporation of India, foreign holding has been
restricted to 25% though there is no FDI restriction for the shipping
sector.
5. Integrity of the bidder
5.1 The Ministry of Disinvestment has laid down specific guidelines vide
letter no.6/4/2001/DD-II dated 13th July 2001 (Annexure – II) for
qualification in terms of integrity of bidders seeking to acquire stakes in
Public Sector Enterprises through the process of disinvestment. The
prospective bidders have to give an undertaking at the stage of
submission of Expression of Interest (EOI) that they are eligible as per
the criteria fixed by the said guidelines and the bidders also have to
make disclosures regarding pending proceedings/investigations as per
para (g) of these guidelines.
6. Security Considerations
6.1 As PSUs, the companies were wholly or substantially owned by the

Government and were operated and managed by the Board of the
company under the administrative control of the Ministry concerned. In
this arrangement, security consideration, if any, were taken care of. At
the time of transfer of these companies to private players, the
Government has to ensure that the security of the country is not
jeopardized through use / abuse of these companies.
6.2 Government has excluded the “strategic areas” from disinvestment,

(strategic areas being defence related, atomic energy with few exceptions
and railway transport). However, sectors like Airlines,
Telecommunication etc. could also be called upon to provide strategic
services in times of war or otherwise. In such cases, Government may
require a separate security clearance for each bidder. In addition, to
protect the security of the country, provisions are made in the transaction
documents to deter the purchaser from misuse of the company. In
addition, there are covenants in the Agreements, which oblige the new
management to provide emergency services to the Government in times
of need. In such cases the strategic partner may be asked to disclose his
source of funds and give an undertaking that he would ensure that no
prohibited person (‘prohibited person’ being a person who constitutes a
threat to the security requirements of the nation) gets control of the
company. If needed, restrictions in foreign shareholding can also be
imposed. For example, as referred to earlier, in the disinvestment of
Shipping Corporation of India, bidders are allowed to form Joint Venture
Companies along with a foreign partner but with a cap of 25% of foreign
partners’ holding.
6.3 Further, the companies which have been charge-sheeted or convicted

on matters relating to “national security or integrity” under the provision
of the Indian Penal Code or Official Secrets Act or other relevant
legislation, are disqualified from the bidding process. (See para (b)
Annexure II)
7. Confidentiality Undertaking
7.1 On being found suitable after submitting the EOI, the Qualified
Interested Parties are required to enter into a Confidentiality Undertaking
with the Government. Only then are they allowed to participate in the
disinvestment process.
7.2 Typically, this undertaking requires that the potential bidders do not
misuse this wealth of information. It is not uncommon for competitors to
send a bogus team to discover the trade secrets of the other parties. The
undertaking is made by the bidder in favour of President of India (acting
through Joint Secretary of the administrative ministry), the company and
advisors to treat all the confidential information in confidence and not to
disclose to any person, the fact that he has been provided the
‘Confidential Information’ or has inspected any confidential documents
or the discussion/negotiation regarding the transaction.
7.3 ‘Confidential Information’ means all information, concerning the

business, operations, prospects, finances, or other affairs of the company.
It includes, but is not limited to, documents delivered in connection with
a due diligence investigation, information concerning business activities,
products, specifications, data, know-how, compositions, designs,
sketches, photographs, graphs, drawings, research and development,
marketing or distribution methods and processes, customer lists,
customer requirements, price lists, market studies, computer software
and programs, database technologies, systems structures and
architectures, historical financial projects and budgets, historical and
projected sales, capital spending budgets and plans, current or
prospective financing sources, the names and background of personnel,
personnel training techniques and materials.
7.4 Confidentiality undertaking also provides that the bidder shall not
deal with any officer, Director or employee of the Govt. or Company,
regarding the business, operations, and prospects or financing of the
company without advisor's express written consent.
7.5 The confidentiality undertaking contains an indemnity clause,

whereby the bidder agrees to indemnify the advisor, the Govt. and the
company against any damages, loss, cost or liability arising out of any
unauthorized use or disclosure by the bidder.
7.6 The undertaking stipulates that the Strategic Partner will use the
Confidential Information only to assist the Strategic Partner in the
evaluation of the Transaction and determine whether or not to proceed
with the Transaction and the Strategic Partner will not use the
Confidential Information for any purpose other than the Transaction or
in any other manner whatsoever and shall particularly ensure that the
interests of the Company/Advisors/Government are not adversely
affected in any manner whatsoever.
7.7 The undertaking stipulates that in case the Bidder or any Consortium
Member decides not to proceed with the Transaction or if the Advisors
or the Government notifies the Bidder or any Consortium Member that
the Government does not wish the Bidder or any such Consortium
Member to consider the Transaction any further, the terms of the
Undertaking survive the date of receipt of notification of such decision
by the relevant party.
7.8 The Bidder agrees through the undertaking that after termination of
access of the bidder by the Government, all documents or other materials
furnished by such Company/Advisors/Government to the Strategic
Partner, including those constituting Confidential Information, together
with all copies and summaries thereof in the possession or under the
control of the Strategic Partner, will be destroyed.
7.9 The language of the Undertakings may vary depending on the case,
based on legal advice.
8. Qualification of Companies/Consortia
8.1 The advertisement for the transaction indicates the broad

qualifications of the prospective bidders. Based on the information
submitted in EOIs, the Ministry and the advisors carry out an evaluation
of the qualifications of the companies/consortia and subsequently notify
in writing those companies / consortia which qualify to participate in the
next stage of the process.
8.2 However, where a Consortium has submitted the EOI, it is generally

expected that there shall not be any changes in the Members of the
Consortium consequent to the submission of EOI.
8.3 If a Consortium bidder desires a change in the Consortium by

inclusion/exclusion of members or if a non-Consortium bidder desires to
form a Consortium by inducting new Member(s), it shall have to seek an
approval from GoI for such change. Such requests would be entertained
only before the financial bids are received by Government.
8.4 Where the Bidder is a Consortium, the stake in the ordinary share
capital of the company can be acquired and held either through an
investment vehicle ("Special Purpose Vehicle") or through direct holding
in the company by each Member or through any Group Company (ies).
9. Additional Information
9.1 Government reserves the right to seek any additional indemnities,

warranties, representations or performance obligations from the bidders
or any of their group companies to Government’s sole satisfaction.
10. Reasons for Disqualification
10.1 Notwithstanding anything to the contrary contained in the Request

for Proposal document and without prejudice to any of the rights or
remedies of Government, Government shall be entitled in its sole
discretion to determine that a Bidder is to be disqualified at any stage of
the process and its participation in the Strategic Sale process and/or its
Technical Proposal and/or Financial Bid dropped from further
consideration for any of the reasons including without limitation those
listed below:
(i) if a misrepresentation/false statement is made by the

bidder/Member, at any stage in the Strategic Sale process, whether in the
Technical Proposal, the Financial Bid, supporting documentation or
otherwise and whether written or oral;
(ii) if the Technical Proposal submitted by the bidder is in any

respect inconsistent with, or demonstrate any failure to comply with, the
provisions of the Request for Proposal ;
(ii) if the Financial Bids submitted by the bidder is inconsistent

with the requirements of the Request for Proposal in any respect,
including not being accompanied by an Ernest Money Guarantee of the
specified amount or the Financial Bid being conditional in any respect;
(iv) failure to comply with any other material requirement of this

Request for Proposal;
(v) Government is not satisfied with sources of funds/ownership
structure of the bidder.
(vi) failure to comply with the reasonable requests of Government

in relation to the Strategic Sale process.
(vii) Breach of Confidentiality Undertaking executed by the bidder.
(viii) if it is discovered at any time that a bidder is subject matter of

winding up/insolvency or other proceedings of a similar nature;
(ix) any information regarding the bidder which becomes known to

Government/Company/Advisor and which is detrimental to Strategic
Sale process and/or the interests of the Company.
(x) initiation or existence of any legal proceedings, by or against

the bidder in respect of Company, which proceeding may be prejudiced
by the participation of the bidder in the selection process or the
transaction, e.g. inspection by a bidder of case files of the Company of
matters filed against that bidder; and
(xi) the bidder or if the bidder is a Consortium then any member of

such Consortium not being qualified to participate in the process
pursuant to the Government of India office memorandum No. 6/4/2001-
DDII dated July 13, 2001 as amended from time to time.
10.2 If information becomes known after the bidder has been qualified, at
any stage, to proceed with the Strategic Sale process, which would have
entitled Government to reject or disqualify the relevant
bidder/Consortium, Government reserves the right to reject or disqualify
the relevant bidder/Consortium at the time, or at any time, such
information becomes known to Government. Where such party is a
Consortium, Government may disqualify the entire consortium, even if it
applied to only one member of the Consortium.
10.3. Government determination that one or more of the events specified

under paragraph 10 has occurred shall be final and conclusive.
11. Formats for submitting EOIs by interested parties

11.1 The formats for submitting Expression of Interest, statement of Legal
Capacity and Request For Qualification (RFQ) are enclosed
as Annexure III, IV, and V.
Frequently Asked Questions
Question: Does default in payment by the bidder to a financial institution

automatically disqualify the bidder?
Answer: It is clarified that Ministry of Disinvestment is guided by its guidelines

dated 13.7.2001 as mentioned earlier. It would be seen from these guidelines that if
the bidding party or its consortium members are defaulting in payment of dues to
financial institutions, they are not automatically disqualified. This is mainly because
if the bidding parties have more than one business, there may be cases where some of
the businesses may be incurring losses due to which it may not be possible for the
bidding party to honour the commitment with regard to payment of interest/repayment
of principal in that particular unit. So, any default on account of poor performance of
a unit cannot ipso facto mean that the party who is controlling the business is
incapable of running any other business.
What would be relevant here is whether there has been a wilful default on the part of
the bidding party, which could happen due to diversion of funds from one unit to
another. However, it may be difficult in such cases for Ministry of Disinvestment to
determine whether default by a particular party is a wilful one. Since the institutions,
which have lent may claim the bidder as a wilful defaulter, while the bidder may say
that he is not a wilful defaulter and that his default is due to reasons beyond his
control. This is really the task of a regulator i.e. RBI/SEBI to adjudicate on such
matters who can decide whether the default was wilful or whether the practice
adopted by the bidder is unhealthy, unethical or unscrupulous. MODI guidelines do
cover such adverse orders by regulators.
Question: In case of a consortium bid, if a consortium member is
disqualified, does the whole consortium get disqualified?
Answer: Even on default by a member of the consortium the Government reserves

the right to disqualify all members of the consortium. The other option that would be
considered is that the bidder removes the defaulting member from the consortium.
Question: In case there are no cases pending at the stage of EOI against any bidder
but this comes up later on, what is the bidder supposed to do?
Answer: The bidder is supposed to disclose all relevant material envisaged in the
Guidelines dated 13/7/2001 to the Government whenever it occurs or it comes to his
notice and Government reserves the right to disqualify the bidder on receipt of such
information at any stage of the process.
Question: Does a charge sheet by an agency such as the CBI automatically

disqualify a bidder?
Answer: No. The charge sheet by an agency like CBI would result in
disqualification if the matter relates to the security and integrity of the country. In
other cases, there has to be a conviction by a court of law.
Question: Will any indictment/adverse order by a regulatory authority disqualify a

bidder?
Answer: An indictment /adverse order by a regulatory authority will disqualify

either:-
(a) If such order casts a doubt on the ability of the bidder to manage the
public sector unit when it is disinvested or
(b) If such an order relates to a grave offence where grave offence is

defined to be an offence of such a nature that outrage the moral sense of the
community e.g. fraud. It is clarified that the decision in regard to the nature
of the offence would be taken on a case-to-case basis after considering the
facts of the case and relevant legal principles by the Government.
Question: In case an order disqualifying a bidder is passed by Government, does the

bidder remain disqualified for all times to come?
Answer: Not necessarily. Government may decide on the period for which such
disqualification shall continue.
Question: Why is there a minimum net worth requirement- is it linked to

reserves/size of the disinvesting company? Has not been seen to be linked in the
past?
Answer: The minimum net worth criteria is to ensure that the bidder has enough
financial muscle to run the PSU effectively post-disinvestment and to also be in a
position to raise enough resources in the future to enhance capacity, other capex
requirements etc. Though there is no direct proportionality between the minimum net
worth criteria fixed and the net worth of the company being disinvested, Government
does keep in mind the net worth/turnover/business potential/resource requirements of
the company getting disinvested while fixing the net worth criteria.
Question: Government of India asks bidders to submit a Technical Proposal. Is this

proposal on bidders’ plans for the company etc. given any weightage in the
process? Seems not, as all that matters is the price finally.
Answer: It is a fact that selection of the successful bidder is purely on the basis of the
price bid. Normally, the bidder who bids the highest would be selected. However, as
clarified in every advertisement soliciting EOIs, Government reserves the right always
to make any changes in the procedure as laid down in the Request for
Proposal. Moreover, the Government would like to be satisfied that the bidder has a
well thought out plan on the future of the company once he takes over. Though this
plan is not legally binding on him after take over, it is expected that, since the bidders
are very carefully chosen and would be companies of repute, they would honour the
commitment made by them in their Technical Proposal.
Question: Why does every consortium change require GOI approval?
Answer: In every case of disinvestment, there are some prequalifying criteria

stipulated as explained in the text. Therefore, Government has to be certain that the
consortium which finally gets selected satisfy these eligibility criteria. Otherwise
Bidder A, having satisfied the net worth criteria set by Government, may get
shortlisted. Thereafter, he may form a consortium with Bidder B, where Bidder B
may not be independently satisfying the net worth criteria. Bidder A+B will
obviously satisfy the criteria. Later, Bidder A may exit from this consortium and
Bidder B would be left in the fray, though originally it did not satisfy the eligibility
criteria. Secondly, since there are specific guidelines on integrity of bidders, it is
necessary that at each stage of addition of consortium members, Government satisfy
itself that the new entity also satisfies the eligibility criteria.
Question: Till what time in the process is a request for change in

consortium entertained?
Answer: Normally, a request for a change in consortium is entertained by
Government before financial bids are received. No request is entertained once the
financial bids have been received. In certain specific cases, however, Government
may require a request for such change to be filed on a date earlier than the date
financial bids are received.
Question: If a bidder wants to change the consortium, then is he permitted to add to

the consortium an entity which has not filed an EOI or a change in the consortium
can be made only by addition of bidders who have filed an EOI?
Answer: Government would entertain a request even for inclusion of a

new entity as a member of the consortium by the bidder (who was not one out of the
entities who had filed EOIs) provided all the eligibility criteria and
qualification/disqualification criteria are satisfied. Of course, the decision of whether
or not to permit a change in the consortium would finally rest with the Government.
CHAPTER: Abbreviations
Abbreviations used
ADR /
1. American Depository Receipt / Global Depository Receipt
GDR
BSE / NSE Bombay Stock Exchange / National Stock Exchange / London Stock
2.
/ LSE Exchange
3. CAPM Capital Asset Pricing Model
CCD / Cabinet Committee On Disinvestment / Core Group Of Secretaries On
4.
CGD Disinvestment
5. DCF Discounted Cash Flow
6. DPE Department Of Public Enterprise
7. EBITDA Earnings Before Interest, Taxes, Depreciation & Amortisations
8. EOI Expression Of Interest
9. FDI Foreign Direct Investment
10. FIPB Foreign Investment Promotion Board
11. GAAP Generally Accepted Accounting Principles
12. GOI Government Of India
13. IMG Inter-Ministerial Group
14. IPO Initial Public Offering
15. MODI Ministry Of Disinvestment
16. NAV Net Asset Value
17. NCAER National Council For Applied Economic Research
18. NEP New Economic Policy
19. NRI Non Resident Indian
20. NSSO National Sample Survey Organisation
NASDAQ/ National Association Of Securities Dealers Automated Quotations/
21.
NYSE New York Stock Exchange
22. PAT Profit After Tax
23. PE Price Earning Ratio
RATIO
24. PIM Preliminary Information Memorandum
25. PSE / PSU Public Sector Enterprise / Public Sector Undertaking
26. QIB/QIP Qualified Institutional Buyer/Qualified Interested Party
RFP /
27. Request For Proposal / Request For Qualification
RFQ
28. SEBI Securities and Exchange Board of India
29. SEC Securities Exchange Commission
SHA /
30. Shareholders' Agreement / Share Purchase Agreement
SPA
31. SIA Secretariat for Industrial Approvals
32. SLPE State Level Public Enterprise
33. SP Strategic Partner
34. VRS/VSS Voluntary Retirement Scheme/Voluntary Separation Scheme
35. WACC Weighted Average Cost Of Capital

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Disinvestment Manual - February 2003

Privatisation has different nomenclature in different countries like ‘disinvestment’,

1.1 Why this Compilation?

Policymakers, be it in the administrative Ministries or in the State Governments,

1.2 Who will benefit?

· Provide overall understanding of the privatisation process.

· Assist in planning the logistics to implement the privatisation decision.

· Enable to implement the privatisation transactions.

· Guide the supervision of consultants (financial advisors) recruited to

· Improve design of privatisation policies by painting a realistic picture of the

· Understanding the benefits of the privatisations completed.

1.3 What kinds of Privatisation Transactions will benefit from this

This compilation is intended to be useful for a wide variety of privatisation

3.1 Industrial Policy Resolution 1956

-Industrial Policy Resolution 1956.

3.2 Main objectives for setting up the Public Sector Enterprises

· To help in the rapid economic growth and industrialisation of the country

· To earn return on investment and thus generate resources for development;

· To promote redistribution of income and wealth;

· To create employment opportunities;

· To promote balanced regional development;

· To assist in the development of small-scale and ancillary industries; and

3.1.3 Growth of Investment

Investment in Public Sector Enterprises

Particulars Total Investment Enterprises

Source: Public Enterprises Survey, 2000-2001

Amartya Sen and Jean Dreze

1. Arms and Ammunition and allied items of defence equipment.

3. Iron and steel.

4. Heavy castings and forgings of iron and steel.

6. Heavy electrical plant including large hydraulic and steam turbines.

7. Coal and lignite.

11. Minerals specified in the Schedule to the Atomic Energy (Control of

13. Air transport.

14. Rail transport.

15. Ship building.

17. Generation and distribution of electricity.

4.1.2 Industries reserved for PSUs since July 1991:

1. Arms and Ammunition and allied items of defence equipment, defence

2. Minerals specified in schedule to atomic Energy (Control of Production

4.2 Primary objectives for privatising the PSEs

· Releasing large amount of public resources locked up in non-strategic PSEs,

· Stemming further outflow of scarce public resources for sustaining the

· Reducing the public debt that is threatening to assume unmanageable

· Transferring the commercial risk, to which the taxpayers’ money locked up

The other benefits expected to be derived from privatisation are:

· Disinvestment would expose the privatised companies to market discipline,

· Disinvestment should result in wider distribution of wealth through offering

· Disinvestment would have a beneficial effect on the capital market; the

· Opening up the public sector to appropriate private investment would

5.1 The Initial Phase

5.1.1 Interim Budget 1991-92 (Chandrashekhar Government)

5.1.2 Industrial Policy Statement of 24th July, 1991

5.1.3 Budget speech: 1991-92

5.1.4 Report of the Committee on the Disinvestment of Shares in PSEs

The Rangarajan Committee recommendations emphasised the need for substantial

i. Coal and lignite

5.1.6 The Common Minimum Programme of the United Front Government:

· To carefully examine the public sector non-core strategic areas;

· To set up a Disinvestment Commission for advising on the disinvestment

· To take and implement decisions to disinvest in a transparent manner;

· Job security, opportunities for retraining and redeployment to be assured.