INTRODUCTION

Disinvestment:-The withdrawal of capital from a country

or corporation.

 Disinvestment involves sale of only part of equity

holdings held by the government to private investors.
Disinvestment process leads only to dilution of
ownership and not transfer of full ownership.

 Privatization refers to the transfer of ownership from

government to private investors. Disinvestment is
called “partial privatization”.
 DEFINITION

Disinvestment is a process of transferring property from public
ownership. (By Wordnet Dictionary)


Capital investment shrinkage caused by a firm's failure to
maintain or replace capital assets being used up or by the
firm's sale of capital goods such as equipment.


The term also refers to the reduction of investment in firms,
industries or countries for reasons of political or social policy.
 PROBLEM FACED BY PSU's

Low Productivity. Low capacity utilization and
low efficiency.

Low rate of return on capital. Large number of
loss making firms.

Poor work ethics and quality of services.

Over capitalization due to substantial time and
cost overruns.

Bureaucratic controls.

Most of the PSU’s were monopolies in their
industries due to tight governmental controls,
and hence they were not very efficient.
 Evolution of the Disinvestment
Policy
1. Interim Budget 1991-92
Disinvestment Up to 20% of the Equity in selected PSEs
undertaking was in favour of the Mutual Fund, Financial and
Institutional Investor in

2. Industrial Policy Statement of 24th July 1991

Government didn’t place restriction in class of investor nor the
equity share capital

3. Budget 1992-93
Cap of 20% for disinvestment was reinstated and eligible investor
modified to Institutional Investor, Mutual Fund and Workers
in these Firms
4. Rangarajan Committee April 1993

• It recommended 49% of PSEs Equity to be disinvested for

industries explicitly reserved for the public sector
• Holding of 51% was recommended for only six industries.

5.   The Common Minimum Programme 1996

• Examine the public sector non-core strategic areas.

• Setting up of Disinvestment Commission
• Transparency

6. Disinvestment Commission Recommendations 1999

• Disinvestment Commission was set up in 1996

• August 1999, 58 PSEs were shifted from Public offering to
Strategic/ Trade sales with transfer of management
7. Strategic & Non-strategic Classification March 1999

• 3 industries were strategic industries and rest all the industries

were non strategic.
• Percentage of disinvestment change in government stake going
down to less 51% or up to 26% would be case to case.

8. Budget 2000 - 2001

• First time government was ready to reduce the stake below

26% in a Non Strategic PSEs.

9. Budget 2001 - 2002

• Credit receipt of 12000 crore from disinvestment next year.

10. Suo – Moto Statement of Shri Arun Shourie ,2002

• Specific aim of Disinvestment Policy

• Disinvestment does not result in alienation of national
assets
• Disinvestment Proceeds Fund
 TYPES OF DISINVESTMENT
Offer for sale to Public at fixed price:
The government holds the sale of the equity shares to the public at
large at a pre determined price.
Examples:-MFIL, BALCO, CMC, HTL,IBP, HZL, PPL, IPCL.

Strategic sale:
In this type significant management rights are transferred to the
investor i.e. majority of equity holdings are divested.
Examples: -Offer of 1 million shares of VSNL, listing of ONGC IPO.
International offering:
This is essentially targeted at the FII (foreign institutional
investors).
Ex:-GDR of VSNL,MTNL etc.

Asset Sale and Winding up:

This is normally resorted to in companies that are either
sick or facing closure. This is done by the process of
auction or tender.
Ex:-Auction of sick PSU’s.
 Objectives of disinvestment

Redeploying resources locked up in non-strategic PSEs in
areas that are much higher on the social welfare priority.

Stewing further flow of resources for the non-strategic
activities.

Ensuring that the taxpayers’ money is not subjected to the
volatility of the market.

Converting PSEs into strong private commercial
enterprises.

Reducing public debt and pressure on government
resources.

Providing vibrant, large and deeper capital market with
investment alternatives to investors as well as assuring
them easy exit options.
continued...

Disinvestment would result in wider distribution of wealth through
offering of shares of privatized companies to small investors and
employees.


In many areas, e.g., the telecom sector, the end of public sector
monopoly would bring relief to consumers by way of more choices,
and cheaper and better quality of products and services, as has
already started happening.
 Industries reserved for PSU’s prior to July
1991
1. Arms and Ammunition and allied items of defence equipment
2. Atomic energy
3. Iron and Steel
4. Heavy casting and forging of steel items
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
 Industries reserved for PSU’s since July 1991

 Arms and Ammunition and allied items of defence equipment,

defence aircraft and warship
 Atomic Energy
 Coal and Lignite
 Mineral Oils
 Mining of iron ore, manganese ore, chrome ore, gypsum,
sulphur, gold and diamond
 Mining of copper, lead, zinc, tin, molybdenum and wolfram
 Minerals specified in the schedule to Atomic Energy (Control of
production and use) Order, 1953
 Railway Transport
 Industries reserved for PSU’s since December
2002

 Atomic Energy

• Arms and ammunition used in defence.

• Railway Transport
         VALUATION OF PSU's

The guidelines on valuation in the PSUs, are prescribed in

Chapter 18 of the manual titled "DISINVESTMENT: POLICY &
PROCEDURES", published by the Ministry of Disinvestment in
2001. The disinvestment Commission has prescribed four
approaches to valuation of PSUs.

These are:
The Discounted Cash Flow method
The Balance Sheet method
The Net Asset Value method
 Discounted Cash Flows
The Discounted Cash Flow (DCF) methodology
expresses the present value of a business as a
function of its future cash earnin gs 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.
 The 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.
 The Net Asset Value method
The asset valuation methodology essentially estimates the
cost of replicating 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.
 Utilisation of money from
Disinvestment
 Mainly to fill fiscal deficits of the government.

 Generated capital has not been utilized for the benefit

of the disinvested PSU.

 Goverments have used disinvestment merely as a tool

to raise resource to satisfy interim needs rather than
with a long vision to restructure Indian industry.
 Even though NIF was created by the present UPA
Govt, till date the money raised through only one
disinvestment process has been transferred to its
account.E.g.: sale of Government equity in PGCIL
 Improper Implementation
 Inadequate Information about PSUs has resulted in
lack of free,competitive and efficient bidding of
shares,and a free trading of those shares.
 PSUs do not benefit much monetarily from
disinvestment and hence they have been reluctant to
prepare and distribute prospectuses.
 This has prevented the disinvestment process from
being completely open and transparent.
 Under - Valued shares
 E.g.: Centaur Airport hotel in Mumbai was sold to A
L Batra for Rs 830 million against the reserve price of
Rs 780 million but A L Batra later sold it to Tulip Star
at a much higher price.
 Sale to foreign companies
 In the sale of government equity in PSUs to the
Indian private sector, there is no decline in national
wealth
 But the sale of such equity to foreign companies has
far more serious implications relating to national
wealth, control and power, particularly if the equity is
sold below the actual price.
 Increase the dependence of Indian economy on the
international fluctuations.
 Strategic Mistakes

 Monopolies created by privatization(?).

E.g.: Selling of IPCL to reliance despite the fact that it
held 60% of market share already.

 Possibility of concentration of shares in few hands:

E.g.: ONGC disinvestment, Claim by left party activist
that large number of shares were being bought over
by Canadian firm.
 CONCLUSION
Disinvestment in India has never been an attractive idea
simply because successive governments have treated
disinvestment merely as a tool to raise resources rather
than as one designed to restructure the massive
public sector.
Red Tapism and administrative loopholes have led to
many controversies regarding disinvestment leading to
many legal hassles and creating a negative image
regarding DISINVESTMENT.
Its time a proper consensus is arrived through
discussions on disinvestment aimed at restructuring
Indian industry to make true the lofty visions of
Jawaharlal Nehru and to continue growing.