Disinvestment in India

Abbas Ali

• Meaning of Privatisation • Meaning of Disinvestment • Policymakers dilemma

Global Perspective
• The pendulum of political opinion • Perestroika • A new trend of global integration

Evolution of Public Sector • Pre Independence • Post Independence • Industrial Policy Resolution of 1956 .

Main objectives for setting up the Public Sector Enterprises • Rapid economic growth • Return on investment • Redistribution of income • Employment opportunities • Balanced development • Small-scale and ancillary industries • Promote import substitutions .

2. zinc. Arms and Ammunition and allied items of defence equipment Atomic energy Iron and Steel Heavy casting and forging of steel items Heavy plant and machinery required for iron and steel production.Telephones and telephone cables. 3. 6. lead. 10. chrome ore. tin molybdenum and wolfram 11. gold and diamond. 5.Rail transport 15.Aircraft 13.Mining and processing copper. Mining of iron ore. telegraph and wireless apparatus (excluding radio receiving sets) 17. sulphur. Heavy electrical plant including large hydraulic and steam turbines 7. 12.Industries reserved for PSU’s prior to July 1991 1. manganese ore. Coal and lignite 8.Air transport 14. Minerals oils 9.Ship building 16. gypsum.Generation and distribution of electricity .Minerals specified in the Schedule to the Atomic Energy (Control of Production and Use) Order 1953. for mining for machine tool manufacture and such other industries as may be specified by the Central Government. 4.

tin. manganese ore. sulphur. 1953 • Railway Transport . zinc. lead. defence aircraft and warship • Atomic Energy • Coal and Lignite • Mineral Oils • Mining of iron ore. gypsum. gold and diamond Industries reserved for PSU’s since July 1991 • Mining of copper. chrome ore. molybdenum and wolfram • Minerals specified in the schedule to Atomic Energy (Control of production and use) Order.• Arms and Ammunition and allied items of defence equipment.

Industries reserved for PSU’s since December 2002 • Atomic Energy • Minerals specified in schedule to atomic Energy (Control of Production and Use) Order. 1953 • Railway Transport .

Primary objectives for privatising the PSE’s • Releasing large amount of public resources • Reducing the public debt • Transfer of Commercial Risk • Releasing other tangible and intangible resources .

Other benefits expected from privatisation • Expose the privatised companies to market discipline • Wider distribution of wealth • Effect on the Capital Market • Increase in Economic Activity .

Privatization Process • Disinvestment commission recommendations • Consideration of the Cabinet Committee on Disinvestment (CCD) • Selection of the Advisor through a competitive bidding process • Receipt of the Expression of Interest (EOI) from advisors • Advertisement for inviting EOI from bidders • Short-listing of bidders and signing of confidentiality .

as per SEBI takeover code. SEBI. wherever applicable .Privatization Process • Finalization of shareholders’ agreement • Due diligence by prospective bidders • CCD. Regulatory approvals • Execution of legal documents and inflow of funds public offer announcement by strategic partner.

Committees involved on the Privatization Process .

Cabinet Committee on Disinvestment (CCD) • Chaired by the Prime Minister • Functions: – To consider the advice of the Core Group of Secretaries – To decide the price band – To decide the final pricing – Intervention in case of disagreement between the recommendations – To approve the three-year rolling plan and the annual programme of disinvestment .

– Makes recommendations to the CCD on disinvestment policy matters.Core Group of Secretaries on Disinvestment (CGD) • Headed by the Cabinet Secretary • Functions: – Supervises the implementation of the decisions of all strategic sales – Monitors the progress of implementation of the CCD decisions. .

Inter-Ministerial Group (IMG) • Chaired by Secretary. Ministry of Disinvestment • Inter-ministerial consultation .

Ministry Of Disinvestment • Set up in 1999 • Assisted by Advisors • Business Allocated to Ministry of Disinvestment – All matters related to disinvestment – Decisions on the recommendations of the Disinvestment Commission – Implementation of disinvestment decisions .

Evolution of the Disinvestment Policy .

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 .• • Evolution of the Disinvestment Policy Interim Budget 1991-92 Disinvestment Up to 20% of the Equity in selected PSEs undertaking was in favour of the Mutual Fund.

5.• • • Evolution of the Disinvestment Policy 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. 58 PSEs were shifted from Public offering to Strategic/ Trade sales with transfer of management . Disinvestment Commission Recommendations 1999 • • Disinvestment Commission was set up in 1996 August 1999.   The Common Minimum Programme 1996 • • • Examine the public sector non-core strategic areas. Setting up of Disinvestment Commission Transparency 6.

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.

Evolution of the Disinvestment Policy

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.

Evolution of the Disinvestment Policy
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

Major Issues In Disinvestment
Profitability: • The return on investments in PSEs, at least for the last two decades, has been quite poor. • The PSE Survey shows PSEs, as a whole, never earned post tax profits that exceeded 5% of total sales or 6% of capital employed,which is at least 3% points below the interest paid by the Government on its borrowings Recurring Budgetary support to PSEs: • 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

Cost Control: • As per NCAER Study Report the cost structure in PSEs is increasing as compared to private sector.5 11.sector Interest/Net sales PSEs Pvt. sector 23.7 . Power & fuel /Net sales PSEs I9.5 5 Pvt.3 6. which is able to contain costs on all parameters. sector Wages/Net Sales PSEs Pvt.7 4.

• As on 31.Industrial Sickness in PSUs: • To save the PSUs from sickness. or two thirds.3.00 Profit & Loss A/C of 21 PSUs showed accumulated loss of 13959. the government has been sanctioning restructuring packages from time to time. Employee issues: • Of the 1.57 crores. • 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 .6 million jobs added in the organized sector 1 million. were added in the private sector during the period 1991 to 2000.

Methods of Disinvestment .

technoInvestors commercial credentials Low 6-10 months Companies Act. PPL. BALCO. IPCL. FIPB clearance (for foreign investors) Non-strategic Companies Companies where Government is willing to give significant managementCMC. VSNL. MFIL. SEBI Take-over code. IBP. HTL. control HZL. Stock Exchange. RBI regulations. etc Suitability Precedents .Strategic Sale Parameters Pricing Target investor set Transaction costs Time involved Regulation Explanation Optimisation / maximisation through competitive tension and control premium with strategic fit .

Strategic Sale • 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 .

shareholding – Low cost and less regulation Disadvantages – Time consuming – Issues relating to management. to be resolved • .Strategic Sale • 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. land and labour etc.

in the High. in terms of brokerage Spot transactions Regulation SEBI guidelines.4 months Capital Market Secondary Market Operation At market prices Essentially wholesale could be retail investor also Low.4 months 3 .Offer For Sale Offer for Sale To Public to Public Through Book Particulars at Fixedbefore Building since Decided Price Optimized. at a discovered discount to through a Pricing market retail and bidding process Mix of wholesale. SEBI guidelines. Stock Exchange Stock Exchange Stock Exchange requirements requirements requirements . range of range of 2-5% depending 2-5% depending Transaction Cost on issue size on issue size Time Involved 3 . with Essentially some reservation wholesale but Target Investor for small small investor Set investors also in the High. the price is transaction.

Capital Market International Particulars Offering Private Placement of Equity by merchant Valuation banker and feedback from institutional investors or price discovered through Pricing Valuation by QIBs book building Essentially institutional including multilateral Target FII (Retail investor also agencies. in Transaction 5% depending on issue Cost size Time Disclosure requirements Low Involved 3-5Securities Exchange 1-2 months by months Commission (SEC) and accounting in Foreign investment accordance with US guidelines in case of Generally Accepted overseas investors.equity funds High. private Investor Set for ADR)the range of 2. Accounting Practices SEBI guidelines in case (GAAP) (for ADRs). of NASDAQ / NYSE/ LSE domestic listed Regulation listing requirements companies Auction optimised through bidding Essentially institutional Low 1-2 months SEBI Takeover code .

marketing inputs . managerial.Capital Market • Offer For Sale To Public Through Book Building – 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.

Capital Market • Offer For Sale To Public Through Book Building – 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 .

with cost of 2 .5% • .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 .

institutional and retail • . managerial. marketing inputs etc. • Through brokers • To interested buyers .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. – Methodology: sale through market operations • A secondary market sale of Equity Shares.

Capital Market • Secondary Market Operation – 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
• International Offering (ADR and GDR) – 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

Capital Market
• International Offering (ADR and GDR) – 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)

Capital Market
• International Offering (ADR and GDR) – 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 • Private Placement of Equity – 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) .

except in case of foreign investment • Low transaction cost – Disadvantages • Does not ensure widespread shareholding • May not be considered transparent .Capital Market • Private Placement of Equity – Advantages • Less time consuming • No regulatory compliance requirements.

Capital Market • Auction – Suitability • Companies with good intrinsic value • Unlisted companies • Listed companies with low floating stock .

placement of less than 15% equity to each investor to avoid .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 cutoff price in case of Dutch Auction • At the bid price in case of French Auction • Marketing through Analysts' meet and one-onone discussions • In case of listed companies.

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 Pricing Explanation Market determined price. after building in returns to the warehouses. Profit on sale. net of selling expenses by warehouses shared in pre-determined ratio Essentially institutional Fixed return to warehouses less cost of funds for GoI Target investor set Transaction costs Time involved Regulation Suitability Precedents within 1 month RBI restrictions on bank investments Listed companies with adequate liquidity Potential for growth in market prices   None .

SEBI Cash rich companies with no Buyback regulations immediate capex plans Low Companies Act geared companies with good intrinsic value.Conversion Reduction In Equity Into of Equity 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 Time Involved Regulation Within three months Up to 3 months Companies Act. Reliance Industries Limited in private sector Suitability Precedents . which is not reflected in accretion to shareholder value and market price None in Public sector. Indian Rayon.

  .and allocations made at cut-off-price • Valuation to factor in future loss of dividend to the sellers.Reduction In Equity • Buy Back Of Shares   – Methodology: Offer by company to buy-back its shares from others • Through tender route • Buy-back at fixed price • In case of over subscription.price discovery through bidding by interested investors. acceptance on proportionate basis • Through book building • Buy-back through Dutch Auction route.

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 • Buy Back Of Shares   – Advantages • Reduces capital and thus improves EPS.

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 .

preference shares with / without warrants • Preparation and circulation of an information memorandum (IM) among institutional investors Into . fully / partially convertible bonds. deep discount bonds.Reduction In Equity • Conversion of Equity Another Instrument – Methodology • Conversion of equity into an attractive and suitable capital market instrument. bonds with warrants attached. plain vanilla bonds.

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  • Asset Sale and Winding up • Management/Employees Buyout (M/EBO) • Cross Sale • Sale through Demerger/Spinning off .

Valuation .

Valuation • Introduction • Valuation of a PSU • Valuation is a subjective .

Relative valuation' approach 6. Net asset value' approach . Discounted cash flow 5.         Disinvestment Commission's Recommendations • 3 Methods of valuation approved by the Disinvestment Commission 4.

discounted to the present time at an appropriate .Discounted Cash Flows 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.

Free Cash Flow 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 .

Profit and loss account of Company X for the first year of business projections   Particulars Revenue Sales receipts  Expenses Consumption of material  Other overheads  Total expenses PBDIT Rs million      500     300  50  350 150 .

Computation Of FCF    FCF computation for  Company X Year 1   Rs  million  Year 2   Rs  million Year 3   Rs  million Year 4   Rs  million Year 5  Rs  million  PBDIT of Company X  150 Less: Income tax (assumed) Less: Capital expenditure (assumed) * Less: Incremental working capital (assumed) 200 -40 -50 300 -60 -50 400 -80 -50 500 -100 -50 -20 -50 Notice that a growth has been assumed in the PBDIT -25 -50 -75 -100 -125 FCF  55  60  115  170  225  .

Weighted Average Cost of Capital Cost of equity • Risk Free Rate • Beta • Equity Risk Premium Cost of Equity =Risk Free Rate + (Equity Risk Premium*Beta) 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’) WACC = (Debt/Total Capital)*(AfterTax Cost of Debt) + (Equity/Total Capital)* (Cost of Equity) .

50 Assumptions 10-year Treasury GoI Bond Yield Unlevered beta of industry comparables levered to Company X debt equity ratio (high risk stock!) Total Stock Returns less Treasury Bond Total Returns. Market Risk Premium is equal to the difference of average market return and risk free rate.WACC calculation for Company X Cost of Equity  Risk Free Rate Beta 9. = Risk Free Rate + (Equity Risk Premium*Beta) Equity Risk Premium 9.5. Average market return has been assumed to be 18% and beta has been assumed to be 1.00% Cost of Equity 22.50%  .00% 1.

70% Current corporate tax rate in India Cost of debt provided by the Management Pre-Tax Cost of Debt*(1-Tax Rate) Average debt equity ratio of Company X for past five years Comp’s Pre-Tax Cost of 16.55%  (Debt/Total Capital)*(After-Tax Cost of Debt)+ (Equity/Total Capital)*(Cost of Equity) .00 WACC  16.Cost of Debt  Estimated Corporate Tax Rate 35.50% Debt Comp’s After-Tax Cost of Debt 10.61%  Target Debt equity ratio  1.

the discount factor is equal to 1.858 1 / (1 + 0.1655) = 0.736 1 / (1 + 0.Discount factor Discount factor = Discount factor of previous year /(1 + WACC) In year 1. the discount factor of Company X for the first year will be as follows: Discount factor for year 1 =  Discount factor for year 2 = 0.Thus.1655)2 = .

DCF computation for Company X Year 1 Year 2 Year 3 Year 4 Year 5    FCF Discounting  factor  based on WACC  Discounted cash flows Rs  Rs  Rs  Rs  Rs  million   million   million   million   million   55 60 115 170 225 0.542  92 0.632  73 0.465  105 .736  44 0.858  47 0.

Primary value and Terminal Value • Primary 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 reflects the average business conditions of the Company that are expected to prevail over the long term in perpetuity .

g Where. and. g = Estimate of average long term growth . Discount Factor = Weighted Average Cost of Capital.Terminal price Formulation Terminal Value = Terminal Cash flow (for last year of explicit period) * (1 + g) Discount Factor .

951 million • The terminal value is further discounted to find the "Enterprise Value" .05) = Rs.Terminal price Formulation • Rate of cash flows in perpetuity assumed to be 5% • Terminal Value =  105 * (1 + 0.05) / (0.1655 .0.

Valuation of Company X based on DCF methodology   Primary value Terminal value Enterprise value  Add: Value (assumed)@ of surplus land outside factory area Rs million  361 951 1.311  200 -600 911  Less: debt (assumed) Equity value of Company X  .

DCF methodology is the most appropriate methodology in the following cases • Business is being transferred / acquired • Business possesses substantial intangibles • Business is not being valued for the substantial undisclosed assets .

Balance Sheet Method • The Balance sheet or the Net Asset Value methodology values a business on the basis of the value of its underlying assets This method is pertinent where: • • The value of intangibles is not significant • The business has been recently set .

market or business environment .Balance Sheet Method Limitations for the method • When the financial statement sheets do not reflect the true value of assets • Intangibles are major part of the value of the company • Changes in industry.

like earnings.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. Depreciation & • • • . sales. etc. Parameters used are Earnings before Amortisations Sales Interest. Taxes.

EBITDA Multiple • EBITDA multiple = Enterprise Value /EBITDA • Enterprise Value (EV) = Market value of Equity + Market value of Debt • If we are valuing Company X with EBITDA of Rs. . 150 million and in a similar transaction EV/EBIDTA has been 10 (EBIDTA then debt would be deducted to arrive at the equity value then debt would be deducted to arrive at the equity value of Company X.

sales tax and non-recurring extra.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. 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 .ordinary income) • Sales multiple = Enterprises Value / Net sales of the current year • If we are valuing Company X with sales of Rs.

Asset Valuation Methodology • Estimates the cost of replacing the tangible assets of the business • Indicator of the entry barrier that exists in a business • Useful in case of liquidation/closure of the business .

  government  loans.  non  trade creditors and statutory liabilities)    Equity value Rs million     100  50  200     250  600    300  250  550    -250  -650  -900 250 .  current  liabilities  (trade  creditors.Asset Valuation of Company X Part A: Immoveable assets (valued by Government approved valuer) Value of buildings in factory area  Value of buildings at staff colony  Value of surplus land outside factory area  Part B: Moveable assets (valued by Government approved valuer)  All moveable assets    Add: Other assets as per latest balance sheet Value of current assets as per last audited accounts  Cash balance as per last audited accounts     Less: Liabilities Estimated  Voluntary  retirement  scheme  cost  for  all  employees  Total  outstanding  borrowings  including  bank  loans.

Case Studies .

Privatization In Power Sector .

• Mounting losses of State Electricity Boards (SEB) • SEB colossal arrears to central public sector undertakings .Pre-Reform Stage • The Electricity Act 1948 • The objective of the 1948 Act • Vertically integrated electricity board .

Need for Reforms
• Most of the electric power utilities are vertically integrated monopolies with large losses and other operational shortcomings • Government's interference in the sector, makes it difficult to enforce collection and prevent theft, and increases the cost of supplying electricity to very high levels. • The resulting overall subsidies to the sector are so large that they crowd out other public expenditures.

Need for Reforms
• Low tariffs, particularly for households and farmers, leave utilities without sufficient resources to address problems of poor quality, availability, and reliability so customers are unwilling to pay the higher tariffs needed to remedy these problems. • Industrial consumers in India are made less competitive because of the large cross-subsidies and poor conditions of power supply, i.e., frequent power outages and unreliable availability.

• The reforms began 1991 although at the wrong end of generation instead of distribution of power. • The Electricity Laws (Amendment) Act, 1991-Notification. Amends the Indian Electricity Act, 1910 and the Electricity (Supply) Act, 1948. • Private Sector allowed to establish generation projects of all   types   (except nuclear). • 100% foreign investment & ownership allowed.

and distribution). . • Poor financial performance. • Inadequate accountability for various segments (generation.Background to the Reform in Orrisa • High transmission and distribution losses. poor quality of service and manpower related issues. transmission.

.1995. • To make power supply more efficient and to be able to meet the investment needs of the sector.Reform Agenda • The State Government of Orissa pioneered Reform and Restructuring in the power sector by introducing POWER SECTOR REFORM ACT. • To have privately managed utilities operating in a competitive and appropriately regulated power market.

and distribution into separate services to be provided by separate companies.The Scope Of The Reform Program • Unbundling and structural separation of generation. Private sector participation in the new hydroelectric generation and transmission utilities. transmission. the Grid Corporation of Orissa (GRIDCO) and the Orissa Hydro Power Corporation (OHPC) Privatization of thermal generation and distribution Competitive bidding for new generation Development of an autonomous power sector regulatory agency called OERC • • • • .


• Revenues from privatisation were not ploughed back into the sector but absorbed into the government budget for other purposes. .Problem with Reforms in Orissa • Generation was made more attractive by increasing the price charged to Transco who in turn was not allowed to pass on the price increase to the Distribution Companies.

• This support would enable them to disconnect illegal consumers.The Lessons From Orissa • There was need for full and sustained political administrative and financial support to the Distribution Companies in their efforts to improve and run the electricity distribution business. reduce theft and improve collection efficiency • Baseline data required to be reasonably correct • Multi-year year regulation was called for to reduce regulatory risk and uncertainty. .

about Rs 2600 Crs •Antitheft legislation to be enacted •Base line data mismatch •Difficulty in segregating losses Concept of “AT &C” losses to •Reduce scope for baseline data errors •Provide more realistic loss levels •Provide greater comfort & since approved by commission •Limited to last month’s receivables •Past receivables to the account of Holding Company.No obligation to collect ( 20% incentive on amount collected) •Level of Receivables in line with the Avg monthly billing of the last 6 months •Full involvement from the beginning •Indicated amenability to the reforms process •Policy Directives accepted in BST order •Recognition of Discom in BST order Loss Levels Receivables •Unrealistically high Regulatory Involvement •No prior involvement Asset Valuation •Assets revalued at higher •Assets valued through Business value prior to bidding Valuation based on revenue earning process potential .Issues Government Commitment Orissa Experience How  they  have  been  addressed  in  the  Delhi Model Govt Distanced itself as Govt has shown good commitment to the soon as the privatization success of the Reform Process•Clear cut policy directions for 5 years took place •Committed support.


Collection Losses .

Airport Privatization Delhi and Mumbai Airport .

Objectives of Airport Privatization • Providing world class infrastructure without the need to invest heavily on the part of the Government • Increasing airports the operational efficiency of the • Meeting the rapid growth in Passenger Numbers • Bringing International Expertise Development and Management in Airport • Increasing the capacity of the present airports .

Extendable to another 30 years . They were not in favor of corporatization • June and July 2003 – The AAI board approved a modernization proposal costing Rs. The lease agreement was signed for a minimum period of 30 years.Timeline – Pre Bidding Process • 1996 – Modernization of Delhi and Mumbai airports considered by the Airports Authority of India (AAI) • 1998 – The Prime Minister made a declaration that world class airports should be set up in the country • 1999 – A task force on infrastructure recommended that a long term lease for outsourced management should be considered. 30 billion through the privatization route for Delhi and Mumbai airports.

including preservation of accrued entitlements Diversity of ownership between Delhi and Mumbai •   • .Government Objectives and Decisions Key Transaction Objectives • • •   World Class Development and Expansion World Class Airport Management Timely completion and certainty of closure The winners would not be the same • Appropriate regulation . commercially and economically appropriate. predictable. transparent. consistent and stable while protecting the interests of users and ensuring that the airports are operated in accordance with world standards Fair and equitable treatment of AAI employees.achieving economic regulation of aeronautical assets that is fair.

The then EGoM met on November 09. 2003.Timeline – Pre Bidding Process • September 2003 – Restructuring of the Mumbai and Delhi Airport was approved by the then NDA Government and a long term lease on the basis of Joint Venture was established • November 2003 – The Ministry of Civil Aviation (MoCA) constituted the IMG in October 2003 to assist the EGoM. • December 2003 – The EGoM approved the appointment of ABN Amro as the financial consultants (FC) and Air Plan as the Global .

• Build consensus among various allies of the ruling coalition government • Inter-Ministerial Group (IMG) – Scope: • Bureaucratic team overseeing the transaction • Debate key issues with representative of various ministries • Approve draft put up by execution team and transaction approach Constituted by the MoCA to assist the EGoM .Scope of the Committees Involved in the Bidding Process • Empowered Group of Ministers (EGoM) Constituted by the NDA and – Scope: Reconstituted by the • Decisions on key issues UPA.

Scope of the Committees Involved in the Bidding Process Evaluation Committee (EC) – Scope: • 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 Constituted by the IMG The Evaluation Committee also consisted of ABN Amro as the Financial Consultant and Air .

Scope of the Committees Involved in the Bidding Process • Government Review Committee (GRC) Constituted by the – Scope: MoCA for evaluating the EC Report • Independent review of the evaluation undertaken by the EC • Committee of Secretaries (CoS) – Scope: Constituted by the MoCA for evaluating the EC Report • Recommend the selection of appropriate joint venture partners .

to achieve a transparent and fair outcome • Suggestions for improving the selection procedure for Joint Venture Partners in future . including steps required. if any.Scope of the Committees Involved in the Bidding Process Constituted by the • Group of Eminent Technical – Scope: • Overall validation of the evaluation process CoS since it did not have the technical Experts (GETE) expertise • To answer the issues raised by the Members of IMG about the evaluation process • An overall technical assessment of transparency and fairness of the evaluation process.

The UPA coalition government was supported by the Left parties. resulting in the change of government to the United Progressive Alliance (UPA). • Equity participation of Indian scheduled airlines was Time Line – Pre Bidding Process . The EGoM was reconstituted • The EGoM put a cap of 49 per cent on foreign direct investment within the 74 per cent of the private equity in the JVC.• February 2004 – An Invitation to Register an Expressions of Interest (ITREOI) for acquisition of 74 per cent equity stake in the Joint Venture Company (JVC) was issued • May 2004 – The country went for general elections in May 2004. but from outside the government.


Time Line – Pre Bidding Process • July 2004 – Ten bidders submitted EOIs by July 20. The RFP document for Delhi and Mumbai airports and the draft transaction documents were issued to nine PQBs . 2004 • April 2005 – The EGoM approved key principles of the RFP document along with the draft transaction documents.

modernizing. activities restricted to immigration etc) that the JVC may not undertake. constructing. upgrading. financing and managing the airport to the JVC • The OMDA contained a list of aeronautical and permitted non-aeronautical activities that the JVC should undertake. 5% of the total land in Stand alone commercial activities and 10% of totalnot also were Delhi permitted. developing.Transaction Documents Operation Management Agreement (OMDA) and Development • Under this agreement the AAI granted the right to undertake the functions of operating. designing. and a list of ‘reserved activities’ Non-aeronautical (being governmental sovereign functions like customs. land in Mumbai . maintaining.

Airport Operator Revenue Streams .

every 10 years. The master plan was .Transaction Documents Operation Management Agreement (OMDA) and Development • The documents provided for a period of 3 months • The current employees of AAI would be restricted for a minimum period of 3 years • The agreement prescribed objective and subjective quality standards and the time frame within which this should be achieved • The JVC was to first submit a master plan before the expiry of six months from the date of execution of the OMDA and thereafter update and resubmit the same periodically.

The government in order to facilitate the process would provide a single window scheme • In case the construction of another airport was considered within 150 kms radius of the existing airport the JVC would have the RoFR .Transaction Documents Operation Management Agreement (OMDA) and Development • It would be the responsibility of the JVC to arrange for all the clearances that were required by the applicable laws.

the land would be leased for a period of 30 years from the effective date and would. .Transaction Documents Lease Deed (LD) • According to the LD. be renewed for an additional period of 30 years. in the event the JVC renewed the term of the OMDA.

• Scheduled airlines equity cap was restricted at 10% of aggregate shareholding of all scheduled airlines. • The JVC was to have an authorized share capital of Rs 2.Transaction Documents Shareholders Agreement (SHA) • The AAI. • Foreign shareholding was restricted to 49%.5 billion with an initial subscription of Rs 2.0 billion. while foreign airlines could not have any share holding. GoI and PSUs would hold 26% of the total share and the private participants would hold 74%. .

safety and security .Transaction Documents State Support Agreement (SSA) • This document provided the details of the various rules. provision of utilities. regulations and other regulatory compliances of the JV with respect to the State. State Government Support Agreement (SGSA) • The SGSA would be between the respective state governments (Maharashtra/Delhi) and the JVC • The state governments intended to make best efforts in providing support to the company and AAI on matters relating to encroachments. additional land for airport development. surface access to airports.

List of Bidders .

Criteria for the Bidders • Consortium Related Matters – – – – Networth Lead Member of the Consortium Entities in a Disqualified Consortium Airport Operator Minimum of Rs 5 billion Atleast one Operator • Ownership Restrictions – – – – Cross-Ownership Airline Participation Foreign Ownership Lock-in • Bid Structure .

Evaluation Process of the Bids .

Commitment and Value Added •Development Capability.Assessment of Mandatory Requirement Assessment of Financial Commitment Technical Pre Qualification Any bidder not meeting the mandatory requirement will have its offer removed from Debt and equity further consideration commitment is evaluated and offers not meeting the requirement are excluded from further consideration All remaining offers are assessed on technical prequalification criteria and only those assessed with technical pre-qualification on each of the two criteria of 80% or more proceed to phase 4 The offer of the bidder •Management Capability. Commitment and Value Added Assessment of Financial Commitment with the highest financial consideration for the airport is selected as the successful bidder .

  • 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.Assessment of Mandatory Minimum of Rs 5 billion Requirement • Confirmation that the net worth criteria of the bidder as per the requirement in the ITREOI document continues to be fulfilled. managing and developing airports • Confirm that the offer commits to the mandatory capital projects and the initial development plan is in accord with the development planning principles and the traffic forecasts .

Assessment of Mandatory Requirement • Equity ownership in the joint venture company by a scheduled airline and their group entities are in accordance with the prescribed limits • FDI in the JVC does not exceed 49%   • Minimum equity ownership by Indian entities (other than AAI/GoI public sector entities) in the JVC is 25%   • Provision of suitable probity and security statements Restricted to 10% .

do not • The evidence of Capability: – The consortium members provide written commitment from their ultimate holding company that the level of equity funding required from their subsidiaries for the first seven years of the implementation of the initial development plan is guaranteed. – Each member shall separately certify its equity commitment   meet these requirements would be disqualified – Committed bank lending must be available for the level of debt required for the first seven years of the implementation of the initial .Assessment of Financial Commitment • It is necessary that the potential partners of the JV Offers which are capable to fund the required development.

• This phase is sub divided into 2 sections. Commitment and Value .Assessment of Technical PreQualification • The purpose of the technical pre-qualification phase is to ensure that only those bidders that can address the GoI’s strategic objectives are evaluated at the final phase of the evaluation process • Only bidders satisfying the benchmark of 80% under the technical pre-qualification requirements are allowed into the final phase of evaluation. which are: – Management Capability. Commitment and Value Add – Development Capability.

9) •Aeronautical Operations (8.5) •Commitment of other Prime Members (12.5) Management Value Add •HR Approach (12.4) Development Value •Long Term Add Vision (8.5) •Stakeholder Management (6.9) •Flexibility (8.25) •Environmental Management (6.4) •Major Airport Development Experience (15) Development Commitment •Master Planning (7.25) .5) •Transition Plan (12.9) •Development Path (8.9) Business Plan •Quality of the Business Plan (11) Development •Master Capability Planning Management Commitment •Commitment of Airport Operator (12.4) •Major Airport Development (7.5) Management Capability Experience (7.•Experience of the nominated Airport Operator (25) •Experience of other Prime Members (12.9) •Development Initiatives (8.4) •Indian Infrastructure Development (7.

1 55.9 61.3 Delhi Airport Reliance-ASA GMR-Fraport DS Construction-Munich Sterlite-Macquarie-ADP Essel-TAV Mumbai Airport Reliance-ASA GMR-Fraport DS Construction-Munich Sterlite-Macquarie-ADP Essel-TAV GVK-ACSA 80.8 80.0 37.2 92.Scores Received by the Bidders Bidder Management Capability.3 59.1 28. Commitment and Value Add 80.7 57.1 69.9 72.2 Development Capability.7 57.9 40.4 84.1 75.2 84.3 .9 72.7 54.0 39. Commitment and Value Add 81 80.

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. • A minimum OMDA fee of 5% of gross revenue has been set. • 2 conditions of conflict which may arise: – Where the same bidder is the highest bidder for both the airports – Where the same bidder is the highest bidder for both the airports and the margin between the first and the second offer is the same. . aeronautical and non-aeronautical. which will be subject to bidding.

Timeline – Post Bidding Stage • September 2005 – The AAI employees called for a nationwide strike. protesting against the privatization which was called off later during the day   • October 2005 – The MoCA constituted a GRC to evaluate the EC report.The EC placed its reports before the IMG. announcing the two short listed consortia as Reliance-ASA and GMR-Fraport based on the qualifying marks of 80%. • Objections were raised on the credibility of the . • November 2005 .

Mexico had actually qualified …This was in spite of the fact that Munich airport is ranked much higher than Mexico.” • The system of awarding marks should be on 'consensus opinion' rather than by working out averages of marks given by individual evaluators • The EC had deviated from the RFP documents while considering evaluation • “There was also concern about the fact that one of the bidders (DS Construction) who had selected Munich airport as a partner was rejected.Reply to the Objections • “A majority of the evaluation criteria. as stipulated in the RFP documents. while another (Reliance) who selected ASA.” . are necessarily subjective in nature and therefore it would have been difficult to allocate a purely objective marking across all bidders.

.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 .

1 28.7 54.1 55.1 70.1 69. Commitment and Value Add Old New 80.1 57 37.2 92.2 92.9 72.7 65.9 61.4 84.3 .9 40.5 76 80.7 57.1 75.9 41.9 84.1 57 35.3 81 80. Commitment and Value Add Old New 81 80.3 59.0 37.9 72.4 Delhi Airport Reliance-ASA GMR-Fraport DS Construction-Munich Sterlite-Macquarie-ADP Essel-TAV Mumbai Airport Reliance-ASA GMR-Fraport DS Construction-Munich Sterlite-Macquarie-ADP Essel-TAV GVK-ACSA 80.7 73.1 29.0 39.7 54.6 Development Capability.Bidder Management Capability.3 80.7 73.5 61.2 80.8 81 84.7 57.2 84.4 59.

2006 – The GETE submitted their second report. The relative rankings based on the total of the ‘management development’ and ‘technical development’ scores remained the same. .Timeline – Post Bidding Stage • December 2005 – Several Objections were raised in the revised scores by various political allies and bidders whose interests were affected. • January 17. while the marks for the other bidders did change none other than GMRFraport scored more than 80%. As expected.

1 70.64 40.1 57 37. Commitment and Value Add Pre GETE Post GETE 80.4 45.3 21.9 84.6 74.7 65.Bidder Management Capability.7 73.8 81.15 37.5 38.3 73 80.2 92.5 61.4 Developmenta Financial l Capability Bid Delhi Airport Reliance-ASA GMR-Fraport DS Construction-Munich Sterlite-Macquarie-ADP Essel-TAV 81 80.1 29.9 41.3 53.99 43.4 59.8 81.7 73.1 57 35.7 .03 28.5 40.5 76 74.7 73.3 53.7 73.33 33.04 Bid not opened Mumbai Airport Reliance-ASA GMR-Fraport DS Construction-Munich Sterlite-Macquarie-ADP Essel-TAV GVK-ACSA 81 84.12 Bid not opened Bid not opened 38.7 54.

Timeline – Post Bidding Stage January 2005 . Ltd. February 2005 – Reliance Airport Developers Pvt. Filed a writ petition in the High Court of Delhi making several allegations against AAI • The Court rejected this plea on the primary ground that the EGoM had absolute discretion in the matter of choosing the modalities . • GMR-Fraport was selected for Delhi airport • Mumbai airport was awarded to GVK-ACSA.The following decisions were made: • GMR-Fraport chose Delhi airport and matched the highest bid of Reliance ASA.

• Proper weightages should have been assigned to the sub factors • Norms during the bidding process need to be specified and complied with. • Committees should be given sufficient autonomy to make decesions .Lessons Learnt • A lot of thought should be given to the RFP including the bid structure. constitution of committees and contingency planning (especially if none or only one had qualified).

HUL – Modern Foods .

In February 1997. • It had 2042 employees as on 31. • As per the Disinvestment Commission the major .1. treating it in the non-core sector. the Silchar project was abandoned and the production of Rasika drink was curtailed.2000 • It went through minor restructuring during 1991-94 when its Ujjain Plant was closed. • The company was referred to Disinvestment Commission in 1996. the Commission recommended 100% sale of the company.Introduction • MFIL was incorporated as Modern Bakeries (India) limited in 1965.

The Disinvestment Process • September 1997 – The Government approved 50% disinvestment to a Strategic Partner through competitive global bidding • October 1998 – ANZ Investment bank was appointed as the Global Advisor for assisting in disinvestment • January 1999 – The Government decided to raise the disinvestment level to 74% • April 1999 – An advertisement inviting the EOI from prospective strategic partners was issued .

4 conducted the due diligence of the company. • January 2000 .10.99).2000. . and on the last day for submission of the financial bid (15.1. 2 parties remained in the field. which included visits to Data Room.The Government approved the selection of HLL as the strategic partner in and the deal was closed on 31. interaction with the management of the MFIL. the only bid received was that from Hindustan Lever Limited (HLL).The Disinvestment Process • In a response to the advertisement 10 parties submitted Expressions of Interest • Out of these. and site visits. • October 1999 – Post due diligence.

  PRIOR TO SALE 1 Authorised share capital . 48.00 cr. the Government gained by selling Rs. (prior to sale) to Rs. 30 cr.19 cr.more than 11 times the face value & 3.490. 2138 on 30th Dec.as done by global advisors   AFTER SALE Rs.00 cr.3. . Rs. Paid up capital Losses 1998-99 Losses 1999-00 **(Inclusive of an amount of Rs. 3247 on 25th Feb. 18. 3. Rs.51 cr. 35. and further Rs.e.99 cr. i. 109. Rs. 1000 shares for Rs.68 times the Book Value.01 cr. different methods . 15. Rs.45 cr.99 accounts: Gross Net Market value of land & building as per Government valuer 3 Valuation of 100% equity by . 74% of the shares sold for Rs. 6. realisation) as per DPE Survey 1998-99 Value of assets as per 31. 38. to Rs. Rs. (post sale).76 cr. Rs. 20 cr. 13. HLL's share value went up from Rs. Thus.87 cr Rs. towards provisions made for previous years.) Number of employees 2 Net Worth (and total expected . 2042 2. 70 cr. 28. 1. 105.23 cr ** in the company. Invested by HLL Rs. 11.

POST SALE 4." 5 Company referred to BIFR.   . which was inevitable. 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.an efficient company. The employees of a company incurring losses became HLL employees . Now HLL will pick up the bill for restructuring.PRIOR TO SALE .

Punjab National Bank. 16. which has helped the Company in getting the interest rate reduced considerably to the extent of 3-4% of its earlier .12. which continued till the beginning of 2000.Post Disinvestment Scenario • The decline in the sales of Modern Bread..5 crores for meeting the requirement of funds for working capital and capital expenditure. Weekly sales in December 2000 were around 44 lakhs SL.2000. which is a 100% increase over the figure of April 2000. has been arrested. HLL has extended secured corporate loans to MFIL to the extent of Rs. viz. • As on 31. • HLL has provided a corporate guarantee to MFIL's banker.

Post Disinvestment Scenario • Steps have been taken to improve the quality of bread.1800 per employee. and to train the manpower in quality control systems. 30 crore has been spent VRS Rs. 7 crore  infused for safety & hygiene purposes at various manufacturing locations   • The Government was also entitled to ‘Put’ its share of remaining equity of 26 % at Fair Market Value for 2 years from 31st  January 01 to 30th January 03.2002 wages have increased by an average of Rs. • November.  The . its packaging and marketing with tradepromotion activities. • Rs.

before interest and depreciation. Hence overall sales declined by 35% to Rs 95 crore. The company suffered as it lost some lucrative government contracts and changed its operational structure. HUL did enjoy tax benefits as MFIL was a sick industrial unit The company put MFIL on the block in 2006 but failed to • • • • • . Bread sales grew by about 7%. it did make a profit though of Rs 22 crore compared to a loss of Rs 7 crore in the previous year.Post Disinvestment Scenario • Despite HUL’s best efforts MFIL continued to make losses. However. HUL has invested 157 crore in MFIL’s equity In 2005. its losses were Rs 15 crore and accumulated losses were Rs 79 crore. At the operating profit level.

Reasons for the Failure • However. HUL still was unsuccessful in turning around the business and due to high employment costs and low margins • As per the company. – The culture of MFIL was a complete misfit with its own – The company has committed a mistake while conducting the due diligence process .

Thank You .

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