Professional Documents
Culture Documents
Abbas Ali
Introduction
• Meaning of Privatisation
• Meaning of Disinvestment
• Policymakers dilemma
Global Perspective
• Perestroika
• Pre Independence
• Post Independence
• Return on investment
• Redistribution of income
• Employment opportunities
• Balanced development
• Atomic Energy
• Railway Transport
Primary objectives for privatising
the PSE’s
• Functions:
– To consider the advice of the Core Group of
Secretaries
– To decide the price band
• Functions:
• Inter-ministerial consultation
Ministry Of Disinvestment
• Set up in 1999
• Assisted by Advisors
3. Budget 1992-93
Employee issues:
• Disadvantages
– Time consuming
– Issues relating to management, land and labour
etc. to be resolved
Capital Market
Offer For Sale
Offer for Sale To Public Secondary
to Public Through Book Market
Particulars at Fixedbefore
Decided Price Optimized,
Building since Operation
the price is
transaction, at a discovered
discount to through a
Pricing market
Mix of retail and bidding process At market prices
wholesale, with Essentially Essentially
some reservation wholesale but wholesale could
Target Investor for small small investor be retail investor
Set investors
High, in the also in the
High, also
range of range of
2-5% depending 2-5% depending Low, in terms of
Transaction Cost on issue size on issue size brokerage
– 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
Capital Market
• Offer For Sale To Public Through Book
Building
– 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%
•
Capital Market
• Secondary Market Operation
– 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.
– 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
Capital Market
– Suitability
• Companies which have stocks listed in the
international markets or companies with
actively traded stock in domestic markets
– 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
Capital Market
– Suitability
• Unlisted companies
• Listed companies with low floating stock
and low volumes
• Companies with good intrinsic value and
good future prospects
Capital Market
• Private Placement of Equity
– 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)
Capital Market
• Private Placement of Equity
– 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
Capital Market
• Auction
– Suitability
• Companies with good intrinsic value
• Unlisted companies
• Listed companies with low floating stock
Capital Market
• Auction
– 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
Capital Market
• Auction
– 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
Strategic Sale
Parameters Explanation
Pricing Market determined price, after building
in returns to the warehouses. Profit on
sale, net of selling expenses by
warehouses shared in pre-determined
ratio
Target investor set Essentially institutional
Transaction costs Fixed return to warehouses 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
Conversion of
Reduction In Equity
Equity Into
Another
Particulars Buy Back of Shares Instrument
Book value / market
Pricing SEBI Buyback regulations price based
Target Investor Shares bought back by
Set the company Wholesale
Transaction Low- Placement
Cost Low Cost
– Advantages
• Reduces capital and thus improves EPS, Book Value
& RoE of the Company post buy-back
• Low cost transaction
• Relatively quick method
– 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
Reduction In Equity
• Conversion of Equity Into Another
Instrument
– 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
Reduction In Equity
• Conversion of Equity Into
Another Instrument
– 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
Reduction In Equity
• Conversion of Equity Into Another
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
• Relatively quick method
• No reduction in cash surplus with the Company
– Disadvantages
• More regulatory compliance requirements for
listed companies
Other Methods
• Trade Sale
• Management/Employees Buyout
(M/EBO)
• Cross Sale
• Valuation of a PSU
• Valuation is a subjective
Disinvestment
Commission's
Recommendations
• 3 Methods of valuation approved by
the Disinvestment Commission
PBDIT of Company X
150 200 300 400 500
Less: Income tax -20 -40 -60 -80 -100
(assumed)
Less: Capital expenditure -50 -50 -50 -50 -50
(assumed)
Cost of debt
• Estimated Corporate Tax Rate
• Comp’s Pre-Tax Cost of Debt
• Comp’s After-Tax Cost of Debt
• Target Debt equity ratio
Weighted Average Cost of Capital
(‘WACC’)
Discounting factor
based on WACC 0.858 0.736 0.632 0.542 0.465
Discounted cash flows
47 44 73 92 105
Primary value and Terminal Value
Where;
Discount Factor = Weighted Average Cost of Capital, and;
Enterprise value 1,311
Constituted by the
• Inter-Ministerial Group (IMG) MoCA to assist the
EGoM
– Scope:
• Bureaucratic team overseeing the transaction
• Debate key issues with representative of
various ministries
• Approve draft put up by execution team and
transaction approach
Scope of the Committees Involved in the
Bidding Process
Evaluation Committee (EC)
Constituted by the
– Scope: IMG
• Originate transaction structure
• Pre-qualification criteria
• Co-ordination with bidders
• Finalize transaction structure and invite bids
• Negotiate with bidders and finalize documents
• Move final documents for appropriate GoI
approvals
• The AAI, GoI and PSUs would hold 26% of the total
share and the private participants would hold 74%.
• Ownership Restrictions
– Cross-Ownership
– Airline Participation
– Foreign Ownership
– Lock-in
• Bid Structure
Evaluation Process of the
Bids
Assessment Any bidder not meeting
the
of Mandatory mandatory requirement
Requirement will
have its offer removed
fromand equity
Debt
Assessment further consideration
commitment is evaluated
of Financial and offers not meeting
the requirement are
Commitment excluded from further
Technical Pre
consideration
Qualification
All remaining offers are
•Management Capability, assessed on technical pre-
Commitment and Value qualification criteria and
Added only those assessed with
technical pre-qualification
•Development Capability,
on each of the two criteria
Commitment and Value of 80% or more proceed to
Added phase 4 of the bidder
The offer
Assessment with the highest financial
of Financial consideration for the
Commitment airport is selected as
the successful bidder
Assessment of Mandatory
Minimum of Rs 5
Requirement billion
• Confirmation that the net worth criteria of the
bidder as per the requirement in the ITREOI
document continues to be fulfilled.
• No consortium member is participating in more
than one consortium bidding for the same airport
• Consortium has an airport operator who has
relevant and significant experience of operating,
managing and developing airports
Mumbai Airport
Reliance-ASA 80.4 80.2
GMR-Fraport 84.9 92.7
DS Construction-Munich 72.7 54.1
Sterlite-Macquarie-ADP 57.0 55.1
Essel-TAV 37.1 28.3
GVK-ACSA 75.8 59.3
Assessment of Financial
Consideration
• Offers are sought on the basis of an annual Operation
Management and Development Agreement fee
payable as a percentage of gross revenue,
aeronautical and non-aeronautical.
• “There was also concern about the fact that one of the
bidders (DS Construction) who had selected Munich
airport as a partner was rejected, while another
(Reliance) who selected ASA, Mexico had actually
qualified …This was in spite of the fact that Munich
airport is ranked much higher than Mexico.”
Reply to the Objections
• It went on to add that the IMG had reached a
consensus on asking the GMR-Fraport consortium to
confirm the names of the people who would
undertake key management and development roles
in view of the multiple nominations in each position
for both airports.
Time Line – Post Bidding Stage
• The MoCA after considering the recommendations of the
GRC directed the EC to re evaluate the scores of the
bidders. The re evaluated scores are as under
Bidder Management Capability, Development Capability,
Commitment and Value Commitment and Value
Add Add
Old New Old New
Delhi Airport
Reliance-ASA 80.2 80.9 81 81
GMR-Fraport 84.9 84.7 80.1 80.1
DS Construction-Munich 72.7 73.1 69.9 70.5
Sterlite-Macquarie-ADP 57.0 57 61.9 61.9
Essel-TAV 39.2 37.6 40.3 41.4
Mumbai Airport
Reliance-ASA 80.4 81 80.2 80.2
GMR-Fraport 84.9 84.7 92.7 92.7
DS Construction-Munich 72.7 73.1 54.1 54.7
Sterlite-Macquarie-ADP 57.0 57 55.1 65.1
Essel-TAV 37.1 35.5 28.3 29.4
GVK-ACSA 75.8 76 59.3 59.3
Timeline – Post Bidding Stage
Mumbai Airport
Reliance-ASA 81 74.8 80.2 21.33
GMR-Fraport 84.7 81.7 92.7 33.03
DS Construction-Munich 73.1 73.3 54.7 28.12
Sterlite-Macquarie-ADP 57 53.5 65.1 Bid not
opened
Essel-TAV 35.5 38.3 29.4 Bid not
opened
GVK-ACSA 76 73 59.3 38.7
Timeline – Post Bidding Stage
January 2005 - The following decisions were made:
• GMR-Fraport chose Delhi airport and matched the
highest bid of Reliance ASA.
. 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."
5 Company referred to
BIFR, which was
inevitable. Now HLL will
pick up the bill for
restructuring.
Post Disinvestment Scenario
• The decline in the sales of Modern Bread, which
continued till the beginning of 2000, has been
arrested. Weekly sales in December 2000 were around
44 lakhs SL, which is a 100% increase over the figure
of April 2000.