DISINVESTMENT

POLICY

MADE BY : NEERAJ
GARWAL
 DEFINITION
The process of an organization or government
selling or liquidating an asset or subsidiary is called
disinvestment .
“ Disinvestment ” as per SEBI means the sale by central
government /state government ,of its shares or voting
rights and/or its control in PSUs .The disinvestment
reduces government participation in the company.
 IMPORTANCE OF DISINVESTMENT
POLICY
 Financing the increasing fiscal deficit .
 Financing large scale infrastructure development.
 For investing in the economy to encourage spending.
 For retiring government debts - Almost 40-45% of the
center’s revenue receipts go towards repaying public
debts/interest.
 For social programs like health and education
OBJECTIVES OF DISINVESTMENT POLICY

 To reduce budgetary deficit

 To overcome the problems of political involvement
in PSU’s
 Enable the government to concentrate on social
development .
 To ensure proper planning and execution .
 To overcome the problem of corruption.
THE SALIENT FEATURES OF THE POLICY ARE :

 Public Sector Undertakings are the wealth of the Nation and to ensure
this wealth rests in the hands of the people, promote public
ownership of CPSEs.

 While pursuing disinvestment through minority stake sale in listed

CPSEs, the Government will retain majority shareholding, i.e. at least
51 per cent of the shareholding and management control of the Public
Sector Undertakings.

 Strategic disinvestment by way of sale of substantial portion of

Government shareholding in identified CPSEs up to 50 per cent or
more, along with transfer of management control.
 BENEFITS OF DISINVESTMENT :

For the government

Government can focus more on activities such as
infrastructure , defense, education , healthcare ,
and law & order .
For the market and economy
Brings about greater efficiencies for the
economy and market as whole .
 DIFFERENT APPROACHES TO
DISINVESTMENT
 MINORITY DISINVESTMENT :
 A minority disinvestment is one such that ,at the end of it ,the government retains a
majority stake in the company ,typically greater than 51% thus ensuring
management control .
 Historically minority stakes have been either auctioned off to institutions(financial)
offloaded to the public by the way of an offer for sale . The present government has
made a policy statement that all the disinvestment would only be minority
disinvestment via public offer.
 Examples of minority sales via accounting to institutions to go back in early and mid
90’s . Some of them were Andrew yule & co. ltd. CMC ltd. etc. examples of minority
sale via offer for sale include recent issues of Power Grid Corporation of India ltd. ,
Rural Electrician corporation ltd., NTPC Ltd., NHPC ltd. etc.
 MAJORITY DISINVESTMENT :
 A Majority disinvestment is one in which the government post
disinvestment, retains a minority stake in the company i.e. it sells
off a majority stake .
 Historically , majority disinvestment have been typically made to
strategic partners . These partners could be other CPSEs
themselves a few examples being BRPL to IOC , MRL to IOC ,KRL to
BPCL .
 Again like in the case of minority disinvestment , the stock can
also be offloaded by way of an offer for sale strategic or
conjunction with the sale to a strategic partner .
COMPLETE DISINVESTMENT
 Complete disinvestment is a form of majority disinvestment
wherein 100% control of the company is passed onto buyer .
Examples of this include 18 hotel properties of ITDC and 3 hotel
properties of HCI.
 Disinvestment and privatization are often loosely used
interchangeably . There is however , a vital difference between
two. Disinvestment may or may not result in privatization .
When the government retains 26% shares carrying voting powers
while selling remaining to a strategic buyer , it would but it
would have not ‘privatized’ , because with 26% it can still stall
vital decisions for which a generally special resolution(three-
fourth majority) is required.
DISINVESTMENT METHODS IN INDIA
1. NET ASSETS METHOD :
 It indicates the net assets of an enterprise as shown in
the books of accounts(historical value of the assets).
 It is the cost price less depreciation provided so far on
assets.
 It reflects the true position of profitability like goodwill,
brands distribution network and customer relationship.
 This model is more suitable in case of liquidation then in
case of disinvestment.
2.PROFIT EARNING CAPACITY VALUE
METHOD
Profit actually earned or
anticipated.
It values a company on the basis of
underlying asset.
This method does not consider or
project the future cash flow.
3.DISCOUNTED CASH FLOW METHOD
(SUPERIOR METHOD):

 THE FUTURE INCREMENTAL CASH FLOWS ARE FORECASTED AND

DISCOUNTED INTO PRESENT VALUE BY APPLYING COST OF CAPITAL
RATE
 THE PROJECTS FUTURE CASH FLOWS TAKES INTO ACCOUNTS OF
TANGIBLES SUCH AS :
-BRAND EQUITY
-MARKETING
-DISTRIBUTION NETWORK
-LEVEL OF COMPETITION IN FUTURE
-RISK FACTORS
 MODALITIES OF DISINVESTMENT
In order to achieve the various objectives and goals of disinvestment many
methods have been formulated and implemented.
These includes :
(1) PublicOffer : Offering shares of public sector enterprises at a fixed
price through a prospectus ,the offer is made to the general public
through the medium recognized market intermediaries .
(2) Crossholding : In the case of cross holding , the government would
simply sell part of its share of one PSUs to one or more PSUs.
(3) Golden share : In this model , the government retains a 26% share in
the PSUs .this 26% share will continue to give the government ,the
status of majority share holder .
(4)Warehousing : Under this model the
government owned financial institutions were
expected to buy the government share in select PSUs
and holdings them until third buyer emerged
(5) Strategic sale : Under this model ,
government sells a major portion (51% and above)
of its stake to the strategic buyers and also gives
over the management control.
(6) FPO : An issuing of shares to investors by a
public company that is already listed on an
exchange .retail participation is mostly high .
THE STEP BY STEP DISINVESTMENT PROCEDURE

 Proposals for disposal of any PSU (Public Sector undertaking), based on recommendations of DC
(Disinvestment Commission) or CCD (Cabinet Committee on Disinvestment).
 After CCD clears, selection of Advisor through competitive bidding process.
 The Advisor assists GOI (Government) in the preparation and issue of EOI (Expression of Interest)
in newspapers.
 After receipt of EOI from interested parties, prospective bidders are short-listed.
 Due diligence (DD) by concerned PSU.
 Based on DD by PSU, the Advisor prepares Information Memorandum for giving it to the short-
listed bidders who has entered into a confidentially Agreement.
 Advisor, with the help of Legal Advisor, prepares Share Purchase Agreement.
 Discussions among Advisors, Govt. & representatives of PSU.
 Valuation of the PSU in accordance with the standard national practice.
 The share Purchase Agreement (SPA) is finalized based on the
 reactions received from the prospective bidders.
 These Agreements are then vetted by the Minister of Law and are
 approved by Govt.
 Thereafter these are sent to prospective bidders for inviting final
 bidding bids.
 The bids received are examined, analyzed and evaluated by the IMG
 (Inter Ministerial Group) and placed before the CCD for final approval of bids.
 After the transaction is completed, all papers and documents relating to it are too turned to the
C&AG (Controller and Auditor general of India, to enable C&AG to undertake an evaluation of the
disinvestments, for placing it in parliament and releasing it to the public.
 In the disinvestments process mentioned above, the DOD (Department of Disinvestment) is assisted at
each stage by an IMG (Inter Ministerial Group) comprising, Officers from the Ministry of Finance,
Department of Public Enterprises, and the administrative Ministry, Department of controlling PSUs
(Dep't. of (HI&PE) and Officers of Department of disinvestments & Advisors.
 MERITS OF DISINVESTMENT POLICY
 In private sector ,the decision making process is quick and decisions are linked with the competitive
market changes .
 The disinvestment process would bring in better corporate governance ,exposure to competitive
,corporate responsibility , improvement in work environment etc .
 The market participation in capital of PSUs through stock exchanges would enable the market to
discover the latent worth of PSUs .
 The loss making PSUs can be successfully revived by asking the strategic partner to infuse fresh
capital and exercising excellent management control over sick PSUs .
 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 early exit options, help establish more
accurate benchmarks for valuation and raising of funds by privatized companies for their projects and
expansion.
 Disinvestment would result in an increase in an overall economic activity that would benefit the
economy by providing higher rates of employment and greater tax revenues in the medium to long
term.
 In many areas, the end of public sector monopoly would benefit the primary consumers by way of
more choices, better quality of products and services at cheaper prices.
 DEMERITS OF DISINVESTMENT POLICY
 Selling of profit making and dividend paying PSUs would result in loss of
regular source of income to government .
 There would be chances of ‘asset stripping’ by the strategic partner . Most
of the PSUs have valuable asset in the shape of plant and machinery , land
and building etc .
 The Government policy or disinvestment include the disposable of both
profit making and ,as well potentially viable PSUs .
 Financial institutions like UTI and other mutual funds have been compelled
by the Government to purchase the equity which was being unloaded
through disinvestment. Instances of insider trading of shares by them have
also come to light. All this has led to low valuation or underpricing of equity
 PINPOINTS
 First of all disinvestment proposals of loss-making PSUs needs to seriously address the task of reviving
a survival of loss-making PSUs.
 Rather than sticking to the controversial decision of disinvestments of profit-making PSUs,
particularly Oil Companies, the Ministry of Disinvestment should take-up first the loss-making PSUs,
which have still chances of survival.
 GOI should have a clear plan and unhesitating will to cede the control and acknowledge that
employment increases with industrial and commercial health.
 There is no point in sleeping over the problem those disinvestments of oil major companies (profit
making PSUs) like HPCL/BPCL has been postponed/deferred, there are chances of survival if an
immediate step is taken by privatization of those PSUs.
 The ugly episode involving VSNL's decision to invest in Tata Teleservices is still fresh in public memory.
The best assurance would be to sell out completely and use the proceeds to invest in infrastructure or
retire costly debt.
 The transaction documents should take care of the eventualities by insertion of suitable clause in the
SPA so as to avoid the resale of PSUs within few months of take over control as happened in case of
resale of Mumbai Centaur property by the original buyer, Sahara Group, within four months of
acquiring the Hotel.
 ROLE OF RBI (Reserve bank of India)
IN DISINVESTMENT
 After the Completion of the several successful disinvestments in PSUs by GOI, RBI has issued guidelines governing
the provisions of bank finance for PSU disinvestments exempting the banks from the restrictions earlier imposed
on lending against shares and lending for acquisition of corporate control. Now a days all PSU disinvestments are
funded primarily by pledging of the shares acquired through the disinvestments with additional/third party
security of varying degrees as appropriate from bidder to bidder.

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

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

 RBI guidelines permit bank finance only for disinvestments approved by the government and therefore, bidders
for state levels PSUs are excluded from access to bank finance. RBI has also directed to banks not to lend unless
the bidder has an excellent track of record of servicing the loans from the banking systems.
 ROLE OF SEBI(Security exchange board of India )
IN DISINVESTMENT
 As per regulation 10 of the SE13I (Acquisition of Shares) Regulation, 1997 No
acquirer shall acquire shares or voting rights in a company, unless such acquirer
makes a public announcement to acquire shares of such company in accordance with
the regulations.

 Hence SEBI's Takeover Code gets triggered when a person (Strategic Partner)
acquires more than 15% of the Voting equity shares is required to make a public
offer to purchase shares not less than 20% of the equity of the company. This
provision has a great impact on the strategic sale transaction. For instance, in such
case the Strategic Partner would be required to buy another 20% of the shares from
public, which means SP, has to buy total 45% of the shares.
 Argument in favor or against
IN AGAINST
 Socialist / leftist ideology: private sector cannot
achieve equal distribution of resources for all classes.
 Private enterprises only focus on profit maximization.
They won’t cater poor people.
 Therefore Government needs to control all or some
industrial sectors.
 Government’s dividend income will decline. (Because
they’ll have less shares).
 Consequently, Fiscal deficit will increase.
 A survey indicated 0.5% retail participation (i.e.
PUBLIC investment) in equity market.
 Meaning, only Large corporates and financial
institutions will benefit from this drive.
 It’ll not help in “financial inclusion”
IN FAVOUR
 Such Government controlled units cannot compete in
free market economy due to political interference
and price control mechanisms.
 Ultimately more public money is wasted in running
these loss making entities
 Whatever “dividend” Government earned so far-
compared to that, Government has spent far more
crores rupees to revive these PSUs.
 There is no point in throwing good money after bad
money.
 Absurd logic, that just because corporates will
benefit, we shouldn’t begin disinvestment.
 Government already taken plenty of initiatives on
financial inclusion front.
 The funds received from disinvestment are used to
finance fiscal deficit.
 After disinvestment employees of PSUs will loss their
jobs
 If board of directors have many private sector
experts- they may approve plans to reduce staff
strength, to increase profitability.
 Disinvestment would lead to private monopolies
 Allegations that PSEs are sold cheap to preferred
parties e.g. BALCO
 To complete the disinvestment targets, Government
asks one PSUs to buy shares of another PSU.
e.g. ordering LIC to buy ONGC’s shares . In such cases,
disinvestment doesn’t decrease Government control over
those companies.
 Need amendments in FRBM act to ensure this
doesn’t happen.
 Overstaffing = One of the main reasons why PSUs
don’t make optimum profit. At some point we’ve to
swallow the bitter pill.
 Besides, such employees are given attractive VRS
offers.
 Dragging the logic too far. Unlikely to happen in
today’s world. CCI is always watching and punishing
the firms that try to create monopoly or oligopoly
 That used to happen in 90s era, when Government
sold shares to specific private companies at an
arbitrary price.
 Need for a clear policy on disinvestment to stop this
practice.
DISINVESTMENT OF PUBLIC SECTOR UNITS IN
INDIA
Total receipts (RS. crore)(Inflation adjusted in
YEAR 2016 prices)
1991-1992 17,313
1992-1993 9,868
1993-1994 0
1994-1995 23,387
1995-1996 362
1996-1997 1,399
1997-1998 3,143
1998-1999 16,624
1999-2000 5,512
2000-2001 5,261
2001-2002 15,131
2002-2003 8,662
2003-2004 38,611
 SUGGESTION
1. The government has to form a policy framework for the entire
disinvestment process .
2. The government should de-link the disinvestment process from the
budgetary exercise .
3. Government should stop setting up of the targets in every year annual
budget and should have a long – term plan .
4. Timing of disinvestment is crucial and the government should follow a
specific method or process in order to reap more chunks .