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

Industries reserved for PSU’s prior to July 1991
1. 2. 3. 4. 5. 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, 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

• 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

Industries reserved for PSU’s since July 1991

• 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

• 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

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

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

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. – Makes recommendations to the CCD on disinvestment policy matters.

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

• •

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, 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 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.

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, which is able to contain costs on all parameters.

Power & fuel /Net sales PSEs I9.5 5 Pvt. sector
Wages/Net Sales PSEs Pvt.sector Interest/Net sales PSEs Pvt. sector 23.3 6.5

11.7 4.7

Industrial Sickness in PSUs: • To save the PSUs from sickness, the government has been sanctioning restructuring packages from time to time. • As on 31.3.00 Profit & Loss A/C of 21 PSUs showed accumulated loss of 13959.57 crores. Employee issues: • Of the 1.6 million jobs added in the organized sector 1 million, or two thirds, were added in the private sector during the period 1991 to 2000. • This indicates that the private sector has become the major source for incremental employment in the organized sector of the economy over the last decade

Methods of Disinvestment

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



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

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

Offer For Sale Offer for Sale To Public to Public Through Book Particulars at Fixedbefore Building since Decided Price Optimized, the price is transaction, at a discovered discount to through a Pricing market retail and bidding process Mix of wholesale, with Essentially some reservation wholesale but Target Investor for small small investor Set investors also in the High, in the High, range of range of 2-5% depending 2-5% depending Transaction Cost on issue size on issue size Time Involved 3 - 4 months 3 - 4 months

Capital Market

Secondary Market Operation

At market prices Essentially wholesale could be retail investor also Low, in terms of brokerage Spot transactions


SEBI guidelines, SEBI guidelines, Stock Exchange Stock Exchange Stock Exchange requirements requirements requirements

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, private Investor Set for ADR)the range of 2- equity funds High, 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, 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

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, managerial, marketing inputs

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

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

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)

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 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, 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 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

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, SEBI Cash rich companies with no Buyback regulations immediate capex plans Low Companies Act
geared companies with good intrinsic value, which is not reflected in accretion to shareholder value and market price None in Public sector, Indian Rayon, Reliance Industries Limited in private sector

Suitability Precedents

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, acceptance on proportionate basis • Through book building • Buy-back through Dutch Auction route- price discovery through bidding by interested investors- and allocations made at cut-off-price • Valuation to factor in future loss of dividend to the sellers.  

Reduction In Equity
• Buy Back Of Shares   – 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 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  • Asset Sale and Winding up • Management/Employees Buyout (M/EBO) • Cross Sale • Sale through Demerger/Spinning off


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

         Disinvestment Commission's Recommendations
• 3 Methods of valuation approved by the Disinvestment Commission

4. Discounted cash flow 5. Relative valuation' approach 6. Net asset value' approach

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, discounted to the present time at an appropriate

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












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)

WACC calculation for Company X
Cost of Equity  Risk Free Rate Beta 9.00% 1.50 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. Average market return has been assumed to be 18% and beta has been assumed to be 1.5. = Risk Free Rate + (Equity Risk Premium*Beta)

Equity Risk Premium


Cost of Equity


Cost of Debt  Estimated Corporate Tax Rate 35.70% 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 16.50% Debt Comp’s After-Tax Cost of Debt 10.61% 

Target Debt equity ratio  1.00



(Debt/Total Capital)*(After-Tax Cost of Debt)+ (Equity/Total Capital)*(Cost of Equity)

Discount factor
Discount factor = Discount factor of previous year /(1 + WACC)

In year 1, the discount factor is equal to 1.Thus, the discount factor of Company X for the first year will be as follows:

Discount factor for year 1 =  Discount factor for year 2 = 0.736

1 / (1 + 0.1655) = 0.858 1 / (1 + 0.1655)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

0.858  47

0.736  44

0.632  73

0.542  92

0.465  105

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

Terminal price Formulation
Terminal Value = Terminal Cash flow (for last year of explicit period) * (1 + g) Discount Factor - g

Where; Discount Factor = Weighted Average Cost of Capital, and; g = Estimate of average long term growth

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

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

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, market or business environment

Market Multiple Method
• This method takes into account the traded or transaction value of comparable companies in the industry and benchmarks it against certain parameters, like earnings, sales, etc. Parameters used are Earnings before Amortisations Sales Interest, Taxes, Depreciation &

• • •

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 multiple
• The sales multiple techniques are based on a similar analysis of relevant acquisitions and are the ratio of Enterprise Value to the current sales (net of excise duty, sales tax and non-recurring extra- ordinary income) • Sales multiple = Enterprises Value / Net sales of the current year • If we are valuing Company X with sales of Rs. 500 million and in a similar transaction EV/Sales has been 4 (Sales multiple) then EV of Company X would be worked out as Rs. 2000 million Then debt would be deducted to arrive at the equity value of Company X

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

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,  government  loans,  current  liabilities  (trade  creditors,  non  trade creditors and statutory liabilities)    Equity value

Rs million     100  50  200     250  600    300  250  550    -250  -650 

-900 250

Case Studies

Privatization In Power Sector

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

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.

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

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

The Scope Of The Reform Program
• Unbundling and structural separation of generation, transmission, and distribution into separate services to be provided by separate companies. Private sector participation in the new hydroelectric generation and transmission utilities, 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

• • •

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. • Revenues from privatisation were not ploughed back into the sector but absorbed into the government budget for other purposes.

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. • This support would enable them to disconnect illegal consumers, 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.

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- 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


•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

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

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. They were not in favor of corporatization • June and July 2003 – The AAI board approved a modernization proposal costing Rs. 30 billion through the privatization route for Delhi and Mumbai airports. The lease agreement was signed for a minimum period of 30 years. Extendable to another
30 years

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 - achieving economic regulation of aeronautical assets that is fair, commercially and economically appropriate, transparent, predictable, 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, including preservation of accrued entitlements Diversity of ownership between Delhi and Mumbai


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. The then EGoM met on November 09, 2003. • December 2003 – The EGoM approved the appointment of ABN Amro as the financial consultants (FC) and Air Plan as the Global

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. • 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
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

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, including steps required, if any, to achieve a transparent and fair outcome • Suggestions for improving the selection procedure for Joint Venture Partners in future

• 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, resulting in the change of government to the United Progressive Alliance (UPA). The UPA coalition government was supported by the Left parties, but from outside the government. 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. • Equity participation of Indian scheduled airlines was

Time Line – Pre Bidding Process

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

Transaction Documents
Operation Management Agreement (OMDA) and Development

• Under this agreement the AAI granted the right to undertake the functions of operating, maintaining, developing, designing, constructing, upgrading, modernizing, 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, and a list of ‘reserved activities’ Non-aeronautical (being governmental sovereign functions like customs, activities restricted to immigration etc) that the JVC may not undertake. 5% of the total land in Stand alone commercial activities and 10% of totalnot also were Delhi permitted. land in Mumbai

Airport Operator Revenue Streams

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, every 10 years. The master plan was

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

Transaction Documents
Shareholders Agreement (SHA) • The AAI, GoI and PSUs would hold 26% of the total share and the private participants would hold 74%. • Foreign shareholding was restricted to 49%. • Scheduled airlines equity cap was restricted at 10% of aggregate shareholding of all scheduled airlines, while foreign airlines could not have any share holding. • The JVC was to have an authorized share capital of Rs 2.5 billion with an initial subscription of Rs 2.0 billion.

Transaction Documents
State Support Agreement (SSA)
• This document provided the details of the various rules, 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, provision of utilities, safety and security

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

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 •Development Capability, Commitment and Value Added

Assessment of Financial Commitment

with the highest financial consideration for the airport is selected as the successful bidder

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.   • 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 • 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%

Assessment of Financial Commitment
• It is necessary that the potential partners of the JV Offers which are capable to fund the required development. 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 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. • This phase is sub divided into 2 sections, which are: – Management Capability, Commitment and Value Add – Development Capability, Commitment and Value

•Experience of the nominated Airport Operator (25) •Experience of other Prime Members (12.5)

Management Capability

Experience (7.4) •Major Airport Development Experience (15) Development Commitment •Master Planning (7.4) •Major Airport Development (7.4) •Indian Infrastructure Development (7.4) Development Value •Long Term Add Vision (8.9) •Development Path (8.9) •Flexibility (8.9) •Aeronautical Operations (8.9) •Development Initiatives (8.9) Business Plan •Quality of the Business Plan (11)

Development •Master Capability Planning

Management Commitment •Commitment of Airport Operator (12.5) •Commitment of other Prime Members (12.5) Management Value Add •HR Approach (12.5) •Transition Plan (12.5) •Stakeholder Management (6.25) •Environmental Management (6.25)

Scores Received by the Bidders
Bidder Management Capability, Commitment and Value Add 80.2 84.9 72.7 57.0 39.2 Development Capability, Commitment and Value Add 81 80.1 69.9 61.9 40.3

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

80.4 84.9 72.7 57.0 37.1 75.8

80.2 92.7 54.1 55.1 28.3 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. • A minimum OMDA fee of 5% of gross revenue has been set, which will be subject to bidding. • 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.

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. • November 2005 - 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

Reply to the Objections
• “A majority of the evaluation criteria, as stipulated in the RFP documents, are necessarily subjective in nature and therefore it would have been difficult to allocate a purely objective marking across all bidders.”

• 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, 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


Management Capability, Commitment and Value Add Old New 80.2 84.9 72.7 57.0 39.2 80.9 84.7 73.1 57 37.6

Development Capability, Commitment and Value Add Old New 81 80.1 69.9 61.9 40.3 81 80.1 70.5 61.9 41.4

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

80.4 84.9 72.7 57.0 37.1 75.8

81 84.7 73.1 57 35.5 76

80.2 92.7 54.1 55.1 28.3 59.3

80.2 92.7 54.7 65.1 29.4 59.3

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, 2006 – The GETE submitted their second report. As expected, while the marks for the other bidders did change none other than GMRFraport scored more than 80%. The relative rankings based on the total of the ‘management development’ and ‘technical development’ scores remained the same.


Management Capability, Commitment and Value Add Pre GETE Post GETE 80.9 84.7 73.1 57 37.6 74.8 81.7 73.3 53.5 40.4

Developmenta Financial l Capability Bid

Delhi Airport Reliance-ASA GMR-Fraport DS Construction-Munich Sterlite-Macquarie-ADP Essel-TAV

81 80.1 70.5 61.9 41.4

45.99 43.64 40.15 37.04 Bid not opened

Mumbai Airport Reliance-ASA GMR-Fraport DS Construction-Munich Sterlite-Macquarie-ADP Essel-TAV GVK-ACSA

81 84.7 73.1 57 35.5 76

74.8 81.7 73.3 53.5 38.3 73

80.2 92.7 54.7 65.1 29.4 59.3

21.33 33.03 28.12 Bid not opened Bid not opened 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. • GMR-Fraport was selected for Delhi airport • Mumbai airport was awarded to GVK-ACSA.

February 2005 – Reliance Airport Developers Pvt. Ltd. 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

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). • 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

HUL – Modern Foods

• MFIL was incorporated as Modern Bakeries (India) limited in 1965. • It had 2042 employees as on 31.1.2000 • It went through minor restructuring during 1991-94 when its Ujjain Plant was closed, the Silchar project was abandoned and the production of Rasika drink was curtailed. • The company was referred to Disinvestment Commission in 1996. In February 1997, the Commission recommended 100% sale of the company, treating it in the non-core sector. • As per the Disinvestment Commission the major

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

The Disinvestment Process
• In a response to the advertisement 10 parties submitted Expressions of Interest • Out of these, 4 conducted the due diligence of the company, which included visits to Data Room, interaction with the management of the MFIL, and site visits. • October 1999 – Post due diligence, 2 parties remained in the field, and on the last day for submission of the financial bid (15.10.99), the only bid received was that from Hindustan Lever Limited (HLL). • January 2000 - The Government approved the selection of HLL as the strategic partner in and the deal was closed on 31.1.2000.

  PRIOR TO SALE 1 Authorised share capital . Paid up capital Losses 1998-99 Losses 1999-00 **(Inclusive of an amount of Rs. 35.19 cr. towards provisions made for previous years.) Number of employees 2 Net Worth (and total expected . realisation) as per DPE Survey 1998-99 Value of assets as per 31.3.99 accounts: Gross Net Market value of land & building as per Government valuer 3 Valuation of 100% equity by . different methods - as done by global advisors



Rs. 15.00 cr. 1. 74% of the shares sold for Rs. 13.01 cr. Rs. 105.45 cr. and further Rs. 6.87 cr Rs. 20 cr. Invested by HLL Rs. 48.23 cr ** in the company. 2042 2. Thus, the Government gained by selling Rs. 1000 shares for Rs. 11,490, i.e.more than 11 times the face value & 3.68 times the Book Value.

Rs. 28.51 cr. Rs. 38.76 cr. Rs. 18.99 cr. Rs. 109.00 cr. Rs. 30 cr. to Rs. 70 cr.

3. HLL's share value went up from Rs. 2138 on 30th Dec. (prior to sale) to Rs. 3247 on 25th Feb. (post sale).


POST SALE 4. The employees of a company incurring losses became HLL employees - an efficient company. The Shareholders’ Agreement envisages:" the parties envision that all employees of the company on the date hereof will continue in the employment of the company." 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. • As on 31.12.2000, HLL has extended secured corporate loans to MFIL to the extent of Rs. 16.5 crores for meeting the requirement of funds for working capital and capital expenditure. • HLL has provided a corporate guarantee to MFIL's banker, viz., Punjab National Bank, which has helped the Company in getting the interest rate reduced considerably to the extent of 3-4% of its earlier

Post Disinvestment Scenario
• Steps have been taken to improve the quality of bread, its packaging and marketing with tradepromotion activities, and to train the manpower in quality control systems. • November,2002 wages have increased by an average of Rs.1800 per employee. • Rs. 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.  The

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

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

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