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GOVERNMENT DISINVESTMENT PLAN FOR Chirag Jain PSUS Amarinder Singh Amarinder Singh

BFIA 3A

Chirag Jain BFIA 3A

Introduction
Disinvestment is selling the equity invested by the government in Public Sector Enterprises(PSU). PSUs are enterprises which are either owned completely by the government or whose shares are maximum owned by the government(51% or above).

Public Offer Transactions Involving sale of shares held by the government in CPSEs through a Public Offer CPSE to CPSE Sale Transactions involving sale of shares held by the Government in one CPSE to another CPSE . to a strategic private partner identified through a process of competitive bidding and subsequent sales to the partner through call/put options. including subsidiaries of CPSEs.Types of Disinvestment    Strategic Sale to Private Entity Transactions involving sale of shares held by the government in CPSEs. along with transfer of management control.

Types of Disinvestment    Auction to Financial Investors Transactions involving sale of shares held by the government in CPSEs through an auction to defined financial investors/investor groups like public sector financial institutions Auction to Private Entities Transactions involving sale of shares held by the Government in CPSEs through an auction to private entities Sale To Employees Transactions involving sale of shares held by the government to employees of the respective CPSEs .

now stand well defined and transparent. but also causing a big drain on the public exchequer in the form of Plan and Non-Plan support from the Government for their sustenance. It is for that reason. they feel. These PSUs are not only blocking huge public money. This is more so when a vast amount of money is already being blocked in PSUs in non.    . family welfare etc. public exchequer in lieu of funding the PSUs should better be utilised for basic education. pharma companies. of the country for which Government has at present hardly any surplus to allocate. according to them. consumer goods companies. The logic and rationale behind such disinvestment policy are therefore. consultancy companies so on and so forth.strategic sectors in the form of hotels. primary health.Why Disinvestment?  The premise accepted by most of the high-ups in the top echelon of the Central Government is that the PSUs which were once created for "Public Interest" should gradually be disinvested in the "Public Interest" only.

Objectives of Disinvestment Depoliticize Essential Services Reduce Financial Burden on Government Encourage Wide Share in Ownership Introduce Competition with Market Discipline Improve Public Finances .

education.Benefits of Disinvestment For the Government  Raising valuable resources for the government which could be used to bridge the fiscal deficit and also for various developmental projects.  The government can focus more on core activities such as infrastructure. and law and order. For the PSUs  Greater autonomy leading to higher efficiencies For the Markets and Economy  Brings greater efficiencies for the economy and markets as a whole . healthcare. defense.

Benefits of Disinvestment For the Taxpayers  Letting go of these assets is best in the long term interest of the tax payers  Unlocking of shareholder (in this case the citizens of India) value For the Employees  Greater opportunities and avenues for career growth  Monetary gains through ESOPs and preferential issue of shares  Pay rises. as has been seen in past divestments .

. As many as 11 listed PSUs currently have promoter (read Central Government) holdings of 90 per cent plus and can easily adopt this route to ‘comply' with minimum public shareholding norms.The 10% Challenge?     Corporate Restructuring at its best PSUs to have a 10 per cent non-promoter holding IPPs (Institutional Placement Programme) can be brought in to raise this float holding and are a convenient way to sell shares.

it deals with all matters relating to sale of Central Government equity through offer for sale or private placement in the erstwhile Central Public Sector Undertakings.     . the Department of Disinvestment is responsible for divesting Government of India shareholding in Central Public Sector Enterprises (CPSEs) with Government retaining at least 51% equity and management control. As per the Government of India (Allocation of Business) Rules. Public issues are governed by SEBI regulations. The entire process of disinvestment follows the procedures laid down by Regulatory authorities including SEBI. The Department is thus not involved in the delivery of any public services or has any direct interface with the citizen or public at large. "With a view to establishing a systematic policy approach to disinvestment and privatisation and to give a fresh impetus to the Government's disinvestment programme". Additionally. the Ministry of Disinvestment (MOD) was formed on 10th December. 1999. For every transaction professionals (Merchant Bankers. 1961. Legal Advisors and other intermediaries) are appointed for the “Issue” on a transparent basis and allowed to function within the concerned regulations.

are placed for consideration of the Cabinet Committee on Disinvestment (CCD). After receipt of the Expression of Interest (EOI). Bidders are invited through advertisement in newspapers / website to submit their Expression of Interest. After CCD clears the disinvestment proposal. based on the recommendations of the Disinvestment Commission or in accordance with the declared Disinvestment Policy of the Government. This is given to the short listed prospective bidders who have entered into a confidentiality agreement. selection of the Advisor is done through a competitive bidding process.Disinvestment Procedure  Proposals for disinvestments in any PSU. the advisors. The list of bidders is prepared after scrutiny of EOIs and those are shortlisted. prepare the information memorandum in consultation with the concerned PSU.    . who meet the prescribed qualification criteria. On receiving EOI from bidders. advisors are selected based on objective screening in the light of announced criteria / requirements. after due diligence of the PSU. in pursuance of Advertisement in newspapers / website.

the Share Purchase Agreement (SPA) and Shareholders Agreement (SHA) are finalised by IMG. After getting them vetted by the Ministry of Law. ‘Upset price’ determination exercise is thereafter completed by inter-ministerial ‘Evaluation Committee’ and the IMG. they are approved by the Government (CCD). the task of valuation of the PSU is undertaken in accordance standard national and international practices.Disinvestment Procedure  The draft share purchase agreement and the shareholder agreement are also prepared by the Advisor with the help of the legal Advisors. with the    Based on the feedback received from the prospective bidders. they are sent to the prospective bidders for inviting their final binding financial bids. and the final draft is prepared after detailed consultation with the bidders. The sealed bids are then opened by IMG (in presence of bidders). The material for finalising upset price is taken from the advisors after receipt of financial bids.The ‘Upset Price. The bids are not opened at this stage and are sealed after receipt. The prospective bidders undertake due diligence of the PSU and hold discussions with the Advisor/ the Government/ the representatives of the PSU for any clarifications.  . Concurrently. Thereafter. in consultation with the Inter-Ministerial Group (IMG). in presence of bidders.’ Is then compared by the IMG.

as per SEBI guidelines: Takeover Code. In the disinvestment process mentioned above. CMD / Director (Finance) of the company being disinvested. Department Of Public Enterprises. Department of Company Affairs. In case the disinvested PSU's shares are listed on the Stock Exchange. After the transaction is completed. and other related issues. all papers and documents relating to it are turned over to the CAG of India. headed by Secretary (Disinvestment) and comprising officers from the Ministry of Finance. Ministry of Disinvestment is assisted at each stage by an IMG.    . the recommendations of the Inter Ministerial Group (IMG) are placed before the Core Group of Secretaries on Disinvestment (CGD). the Administrative Ministry / Department controlling the PSU. an open offer would be required to be made by the bidder before closing the transaction.Disinvestment Procedure  After examination. signing of the Share Purchase Agreement and Shareholders Agreement. whose recommendations are placed before the Cabinet Committee on Disinvestment (CCD) for a final decision regarding selection of the strategic partner. and the Advisors and the Legal Advisors. Department of Legal Affairs. analysis and evaluation. the CAG prepares an evaluation for sending to Parliament and releasing to the public.

the Government would retain at least 51% equity and the management control All cases of disinvestment are to be decided on a case by case basis The Department of Disinvestment is to identify CPSEs in consultation with respective administrative Ministries and submit proposal to Government in cases requiring Offer for Sale of Government equity      . on a case by case basis.Approach for Disinvestment On 5th November 2009. and Government could simultaneously or independently offer a portion of its equity shareholding In all cases of disinvestment. Government approved the following action plan for disinvestment in profit making government companies:  Already listed profitable CPSEs (not meeting mandatory shareholding of 10%) are to be made compliant by ‘Offer for Sale’ by Government or by the CPSEs through issue of fresh shares or a combination of both Unlisted CPSEs with no accumulated losses and having earned net profit in three preceding consecutive years are to be listed Follow-on public offers would be considered taking into consideration the needs for capital investment of CPSE.

RECEIPTS FROM STRATEGIC SALE DURING 1999-2000 TO 2003-04 .

5. 4. NHPC LTD.LTD.No. POWER GRID CORP.THE POWER FINANCE CORP. 14. 13.. COAL INDIA LTD. NMDC LTD. 3. 11. .Recent Disinvestments (April 2009 Onwards) Sl. 7.LTD.OF INDIA LTD. 10. 12. 2. 1. 6. SHIPPING CORP. RURAL ELECTRIFICATION CORP. 8. ENGINEERS INDIA LTD. 9. Company NBCC ONGC MOIL LTD. OIL INDIA LTD. NTPC LTD.OF INDIA LTD. SJVN LTD.

4.No. RASTRIYA ISPAT NIGAM LTD. BHARAT HEAVY ELECTRICALS LIMITED . 5. 3. Company TYRE CORPORATION OF INDIA LTD HINDUSTAN COPPER LTD. 1.Forthcoming Disinvestments Sl. 2. STEEL AUTHORITY OF INDIA LTD.

000 crore in the state-owned mining company NMDC. adding that the government has lined up disinvestment in companies such as Hindustan Copper.500 crore) are on the block." a senior official of the finance ministry said.500-cr shares on the block: Govt plans to sell stake in 15 PSUs this fiscal   The government is planning disinvestment in 15 public sector enterprises in the current fiscal. including sale of shares worth ` 7. BHEL. Engineers India and NHPC. "Shares worth $6 billion (about ` 33.` 33. .

Mumtalakat. .Disinvestment Companies Sovereign wealth funds from the region. have evinced interest to invest in India through the framework. an official said. such as KIA. Saudi Arabian Bank and state pension funds.

revenue and economic affairs. Al Khonji. Dubai. banking and manufacturing firms. The disinvestment department is exploring options. The roadshows. such as Zubair group.Initiatives  The ministry is hopeful of receiving the first investment through this route within a month. included one-onone meetings with investors and officials from RBI.     . such as creation of an exchange-traded fund with PSUs. Choppy markets forced the government to defer much of its disinvestment programme in last fiscal. departments of disinvestment. when just ` 13.000 crore. and ministry of external affairs. Bahwan group and Qurum business group. which will provide the government a stable mechanism to raise large sums of money from the market with minimal disruption to the share prices of these companies. Muscat and Bahrain. held in Riyadh. Industrial groups from the region. Sebi.894 crore could be collected against a target of ` 40. showed interest in realty.

How to and how not to Disinvest .

SAIL. The ETF. Thedisinvestment department is planning to create a pool of shares of the PSUs it wants to divest and create a fund (ETF). would have an underlying benchmark which could be an index on the stock exchange. The government is seriously pursuing this concept. which would be listed on stock exchanges. These include Hindustan Copper. HAL and RINL. Oil India.” a top official in the finance ministry told PTI.     .000 crore target. The government has already identified a host of companies for disinvestment in the current fiscal. to meet the ` 30. which is an investment fund traded on stock exchanges much like stocks.000 crore in the current fiscal.Government planning ETF for PSU stake sale  The finance ministry is mulling setting up of an exchange traded fund (ETF) for selling shares of state-owned companies as part of steps to meet the disinvestment target of ` 30. “The disinvestment department is considering setting up of an exchange traded fund in the format of Hong Kong Tracker Fund and has floated a concept note for implementing it. BHEL. after the offer for sale (OFS) and institutional placement programme (IPP) model.

Funds procured – how to use   The government is likely to revert to the policy of using 25 per cent of the disinvestment proceeds for reviving sick PSUs and recapitalising the profitable ones from the next fiscal. . The earlier stated policy of the government was to utilise 75 per cent of the disinvestment proceeds for social sector programmes and the rest for recapitalisation and revival of sick and profitable units.