PROJECT ON DISINVESTMENT IN INDIA A FAILURE STORY

Submitted To

Submitted By

MR.G.S.KHERA

JUBIN ANAND (FM-B-06) NAVEEN RAMNANI (FM-B-06)

Acknowledgement
Intuition and concepts constitute ...the elements of all our knowledge, so that neither concepts without an intuition in some way corresponding to them, nor intuition without concepts, can yield knowledge. In a similar way the credit of developing this project goes to many others who helped us in building both our concepts and intuitions. We are indebted to our project guide Mr.G.S.Khera for providing us with a challenging & interesting project. We owe the credit of developing this project to him. Without his guidance realization of this project would not have been possible. We would also like to thank our batch mates for the discussions that we had with them. All these have resulted in the enrichment of our knowledge and their inputs have helped us to incorporate relevant issues into our project. Regards NAVEEN RAMNANI (FM-B-06) JUBIN ANAND (FM-B-07)

Executive Summary
Privatization, a key component of economic liberalization remained dormant for the nearly the entire first decade of significant economic reforms in India. The usual explanations have been that weak governments could not overcome the many vested interests or that there has been ideological resistance to economic reforms among India’s elites. Indian privatization came out of the shadows, however, when the former Indian President Dr. A.P.J.Abdul Kalam stated, “It is evident that disinvestment in public sector enterprises is no longer a matter of choice but an imperative … The prolonged fiscal haemorrhage from the majority of these enterprises cannot be sustained any longer,"in his opening address to Parliament in the 2002 budget session. How does one explain both the gradualism during the 1990s and the recent episodic acceleration of privatization in India and what does it reveal both about state capabilities and the strength of societal actors? This report argues that it was not “vested interests” alone, but institutional structures, in particular those embedded in the judiciary, parliament and India’s financial institutions, that account for the lag between the onset of economic liberalization and privatization and its episodic nature. Changes in the perceived costs of the status quo of state-owned enterprises also played a role in the timing of reforms. Just as the external debt crisis forced the initial round of economic reforms, the growing internal debt problem and the fiscal crisis of the Indian state has increased the opportunity cost of state-owned enterprises (SOEs). The passage of time has also resulted in significant changes in Indian

” .policymakers and citizens’ attitudes regarding the relative effectiveness of state and markets in commercial activities. as well as their assumptions about the Indian state being a “guardian of the public interest.

Baijal Brief Introduction Chapter 2 – Public Sector in India Evolution of Public sector Objective of formation of PSU’s Problem of Public sector undertakings Growth in Public sector Chapter 3 – Disinvestment-Definition.TABLE OF CONTENT Chapter 1 – A background Objective Relevance of study Methodology Literature review Public sector performance since 1950 by R Nagaraj Disinvestment in India” by Sudhir Nair Disinvestment in India. procedure and proceeds Background Timeline Phase 1 (1991 – 92 to 1995 – 96) Industrial reforms .Disinvestment in India-Policies. I loose and you gain by P. Methods and Processes Definition Indian scenario Types of disinvestment Objectives Disinvestment process Methods adopted in India Legal issues Chapter 4 .

1996 Review of recommendations given by Disinvestment commission Year wise disinvestment Phase 3 (1998 – 99 to 2007 – 08) Year wise disinvestment National investment fund Phase 4 (2008 – 09 to present) Year wise disinvestment The line up for disinvestment National Investment Fund.Case studies Modern food industries (India) Ltd BALCO VSNL Chapter 6 – Critical Analysis Review of Disinvestment in Privatisation Performance of PSUs after Privatisation Problems of Corporate governance Disinvestment – Not a great piece of reform Comparative experience Chapter 7 – Suggestions Bibliography .1993Yearwise disinvestment Phase 2 (1996 – 97 to 1997 – 98) Disinvestment commission. 2005 Summary of disinvestment Chapter 5.Rangarajan committee.

but also to be able to critically evaluate the strategy and its several implementations till date. we are in a position to say that though disinvestment in India had several bounding objectives. To study the disinvestment done was a Success or a Failure for the Indian Economy. it has been a failure story and much has to be done to realize the benefits. To Analyze the Disinvestment process in Indian Public Sector. After such an insightful analysis. stated by the government way back in 1991have failed miserably. not only understand the need and the procedure of the same. 2. The group could even come up with some solutions and alterations that can be implemented to help the citizens of India reap the benefits of the strategy of disinvestment to a greater extent. We also conclude that the objectives behind disinvestment. . The project enables us to discover and highlight several instances and facts and conclude that the disinvestment was not efficiently conducted.Background OBJECTIVE: 1. RELEVANCE OF STUDY: The report aims to study the evolution of disinvestment in India from the scratch and in thorough detail so as to.

PUBLIC SECTOR PERFORMANCE SINCE 1950. NAGARAJ The paper elicits that since the mid-1980s. Maruti Udyog Ltd. VSNL. 2008 onwards. the disinvestment was not carried out the way it must have been nor have the funds realized been used for the purposes intended. then pin-pointing the loop holes and the consequent shortcomings of this strategy.e. the public sector’s share in domestic investment has been nearly halved. but its output share . dividing this entire span into three phases. This study has helped us to cortically evaluate the disinvestment in several sectors and comment on the current situation i. We begin studying the post independence era. We further study the objectives of disinvestment and the process followed for the same. A FRESH LOOK -BY: R. Several legendary cases of disinvestment like the MFIL.. A detail study over a timeline of eighteen years is done. LITERATURE REVIEW 1. This has enabled us to study the situation then and comment upon their worthiness. BALCO. We have gone one step ahead to state several in depth facts and conclude that neither. Lagan Jute Mill etc have been developed to sheer details.METHODOLOGY: The report tries to study and analyze the disinvestment in India from its very scratch. understanding the strategy of Public Sector Units used by the government for common good. thus identifying an emergent need for disinvestment.

but widespread disagreement about its pace and the sharing of its benefits. the public sector price deflator declined by 17 percentage points. over the last 40 years. passenger road transport and railways the revenue-cost ratio is less than one. and triggered fierce political debates. suggesting a sustained rise in productivity over nearly two decades. and has declined since the early 1990s. 2.has remained roughly constant at about a quarter of GDP. A basic aspect of the withdrawal of the state from the economic sphere has been the divestment to private parties of the shares (and in some cases control) of public sector enterprises (PSUs) or state-owned enterprises (SOEs)]. Hence. This has affected thousands of Indians. The paper defines three major evidences for the improvement in performance. relative to the GDP deflator. Moreover. DISINVESTMENT IN INDIA BY: SUDHIR NAIB The liberalization of the Indian economy remains an ideological and operational battleground. There is mainstream national consensus on the need and irreversibility of reforms. In electricity. the author concludes that correct pricing and collecting user charges are probably key to setting public sector finances right. . • a rise in physical efficiency in electricity generation • a fall in public sector employment growth • an increase in central public sector enterprises’ profitability (even after excluding the petroleum sector) The author then goes ahead to question why then the public sector finances remained adverse.

privatization was widely advocated as a quick and sure means of restoring budgetary balance. and encourage public participation in domestic stock market – all of which is believed to promote ‘popular’ capitalism that rewards risk taking and private initiative. Administrative departments (including defence) account for about 2/5th of it. hence efficiency. Public Sector currently contributes about a quarter of India’s measured domestic output. the rest comes from a few departmental enterprises (like . I LOSE AND YOU GAINBY: PRADIP BAIJAL The process of disinvestment in India has been fraught with challenges and controversies. It underlines the most compelling rationales behind privatization: relief to the taxpayer and the simultaneous need for funds for infrastructure development and Social-sector investment. It discusses the impact of privatization and disinvestment on companies. especially after the Latin American debt and inflationary crisis in the 1980s. economies and other stakeholders. At the micro level. DISINVESTMENT IN INDIA. brings to light the facts that surround the disinvestment story.3. Disinvestment in India: I lose and You Gain. and serves to initiate a healthy and well informed debate on the basis of facts. written by one who has been at the centre of all privatization debates and controversies. to revive growth on a sustainable basis. that is expected to yield superior economic outcomes. INTRODUCTION In macroeconomics. Employing about 19 million persons. the change in ownership is often advocated to increase domestic competition.

and a large number of varied nondepartmental enterprises producing a range of goods and services.railways and postal services). In 1991. While there have been instances of sale of publicly owned enterprises as running concerns on pragmatic considerations. a small fraction of the equity in selected central PSEs was sold to raise resources to bridge the fiscal deficit. it is only in the last decade that such sales (and sale of limited equity) acquired the status of public policy. These include. Though quantitatively modest (as will be seen later). The contribution of varied publicly owned and managed entities to national development is widely acknowledged. mostly in industry and services (excluding the commercial banks and financial institutions). for the first time. their poor financial return has been a matter of enduring concern – especially since the mid-1980s when. the ‘disinvestment’ signaled a major departure in India’s economic policy. the central government’s revenue account turned negative – an imbalance that has persisted ever since. close to 250 public sector enterprises (PSEs) owned and managed by the central government. .

the Posts and Telegraphs. 1977. All India Radio. The new strategies for the public sector were later outlined in the policy statements in the years 1973. heralding liberalization of the Indian economy. which were departmentally managed. 1980 and 1991. In early years of independence. Hence. the vital ingredient for success of any enterprise. low level of savings. etc.PUBLIC SECTOR IN INDIA EVOLUTION OF PUBLIC SECTOR: Prior to Independence. the Ordinance Factories. our visionary leaders drew up a roadmap for the development of Public Sector as an instrument for self-reliant economic growth. the Port Trusts. The year 1991 can be termed as the watershed year. public or private. there were few ‘Public Sector’ Enterprises in the country. capital was scarce and the base of entrepreneurship was also not strong enough. The public sector provided the required thrust to the economy and developed and nurtured the human resources. In view of this type of socio-economic set up. inadequate investments and infrastructure facilities. Quinine Factories. . the 1956 Industrial Policy Resolution gave primacy to the role of the State which was directly responsible for industrial development. few enterprises like the Government Salt Factories. India at that time was predominantly an agrarian economy with a weak industrial base. These included the Railways. Consequently the planning process (5 year Plans) was initiated taking into account the needs of the country.

Problems of labour. 2. the following are particularly important: 1. Of the various factors responsible for low profits in the public sector undertakings. personnel and management 5.OBJECTIVES FOR THE FORMATION OF PSUS The main objectives for setting up the Public Sector Enterprises as stated in the Industrial Policy Resolution of 1956 were: To help in the rapid economic growth and industrialization of the country and create the necessary infrastructure for economic development • To earn return on investment and thus generate resources for development • To promote redistribution of income and wealth • To create employment opportunities. 3. • PROBLEMS OF PUBLIC SECTOR UNDERTAKINGS The most important criticism levied against public sector undertakings has been that in relation to the capital employed. Lack of autonomy . the level of profits has been too low. Price policy of the Public Sector undertakings. Problem related to planning and construction of projects 4. Underutilization of capacity. • To promote balanced regional development • To assist the development of small-scale and ancillary industries • To promote import substitutions. save and earn foreign exchange for the economy. Even the government has criticised the public sector undertakings on this count.

Some of the salient features of disinvestment are: • Disinvestment involves sale of only part of equity holdings held by the government to private investors. the government holds the sale of the equity shares to the public at large at a pre determined price. HZL. Examples:-MFIL. Some of them are as follows: 1. OFFER FOR SALE TO PUBLIC AT FIXED PRICE: In this type of disinvestment. . CMC. TYPES OF DISINVESTMENT There are various types of disinvestment. • Disinvestment is called as ‘Partial Privatization’. privatization refers to the transfer of ownership from government to private investors.DISINVESTMENT: DEFINITION. IBP. In simple words. • Disinvestment process leads only to dilution of ownership and not transfer of full ownership. HTL. While. PPL. METHODS DEFINITION: Disinvestment refers to the action of an organization or the government in selling or liquidating an asset or subsidiary. and IPCL. disinvestment is the withdrawal of capital from a country or corporation. BALCO.

listing of ONGC IPO. Examples: -Offer of 1 million shares of VSNL. This is done by the process of auction or tender. OBJECTIVES OF DISINVESTMENT: Privatization intended to achieve the following: • • • • • • • • Releasing large amount of public resources Reducing the public debt Transfer of Commercial Risk Releasing other tangible and intangible resources Expose the privatised companies to market discipline Wider distribution of wealth Effect on the Capital Market Increase in Economic Activity.2. significant management rights are transferred to the investor i. 3. Ex:-GDR of VSNL. 4. INTERNATIONAL OFFERING: This is essentially targeted at the FII (foreign institutional investors). . MTNL etc. Ex:-Auction of sick PSU’s. ASSET SALE AND WINDING UP: This is normally resorted to in companies that are either sick or facing closure. majority of equity holdings is divested.e. STRATEGIC SALE: In this type.

It does not reflect the true position of profitability of the firm as it overlooks the value of intangibles such as goodwill. NET ASSET METHOD: This will indicate the net assets of the enterprise as shown in the books of accounts. It shows the historical value of the assets. PROFIT EARNING CAPACITY VALUE METHOD: The profit earning capacity is generally based on the profits actually earned or anticipated. It is the cost price less depreciation provided so far on assets. marketing & distribution network. It values a company on the basis of the underlying assets. The method indicates the intrinsic value of the firm and this method is considered as superior than other methods as it projects future cash flows and the earning potential of the firm.METHODS ADOPTED IN INDIA: There are three broad methods involved. 1. 2. This method does not consider or project the future cash flow. which are used in valuation of shares. takes into account intangibles such as brand equity. brands. risk . This model is more suitable in case of liquidation than in case of disinvestment. 3. distribution network and customer relationships which are important to determine the intrinsic value of the enterprise. the level of competition likely to be faced in future. DISCOUNTED CASH FLOW METHOD: In this method the future incremental cash flows are forecasted and discounted into present value by applying cost of capital rate.

LEGAL ISSUES IN THE DISINVESTMENT PROCESS: Legality of the disinvestment process has been challenged on a variety of grounds that slowed the sale of public assets. 2. . However. Maruti. as government was unsure of getting the laws amended in the parliament. prerogative of the executive branch of the state. Privatisation of the PSE created by an act of parliament would have to get the parliamentary approval. the second ruling stalled the privatisation of the petroleum companies. and VSNL etc. Privatisation is a policy decision. there were two significant judicial rulings that broadly set the boundaries of the D-P process. courts would not interfere in it. These are: 1. since 2000.factors to which enterprises are exposed as well as value of its core assets. While the first ruling gave impetus for strategic sale of many enterprises like Hindustan Zinc.

7 18.7 24.7 22.8 10.6 22. %GDP) Domestic Savings (Current Prices.7 21.7 16.1 14.2 21.1 18.DISINVESTMENT IN INDIA – POLICY.% GDP) Investment (Constant 1980-81 prices. LOW PRODUCTIVITY OF INVESTMENT From 1950-51 to 1980-81.7 21. India’s growth rate was roughly constant but savings and investment rate more than doubled.2 15. %GDP) 1950-51 1960-61 1970-71 1980-81 1989-90 10. From the table it can be seen that it was because of low productivity that India’s growth was slow.7 . Year Investment (Current Prices. PROCEDURE AND PROCEEDS The basic objective of starting Public Sector in India was to build infrastructure and rapid economic growth.7 15. However. over-manning and other economic compulsions like deterioration of balance of payment position and increasing fiscal deficit led to the adoption of new approach toward the public sector in 1991. a number of problems such as low productivity. BACKGROUND: 1.4 12.

6 2.1 Primary Deficit 2.7 1.7 4. • There were huge net outflows of NRI deposits from October 1990 and continued till mid 1991.8 4.4 2 1.9 1.7 2.4 2.9 2.5 Monetised Deficit 0 2.7 1.2 0. Fiscal Deficit of Government 1975-76 to 1990-91 Year 1975-76 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 Fiscal Deficit 4.5 0.6 3.1 1.8 7.6 3. FISCAL DEFICIT OF THE CENTRAL GOVERNMENT The fiscal deficit of the central govt rose consistently from 4% in mid – 1970’s to 8% of GDP in 1985-86.9 0.3 3.7 2.1 7.5 1.5 4.2 5.8 8.2 1.3 9 8.6 2 2.9 0.3 7.7 2.4 Budget Deficit 0.2. • Foreign Exchange Reserves were reduces $ 1 Billion which could support only two weeks imports.5 8.6 2 1. • Again the gulf war of 1990 brought the nation to the brink of international debt.9 4.8 4 5 5.4 6 6.4 2.8 2.8 1.5 5.7 1.1 2.8 0.8 • A significant factor was government’s non-plan expenditure and an inefficient interest payment system.2 2.3 2.1 6.4 Revenue Deficit 1.2 3.4 3. .

RECL and NMDCL. • The first phase being 1991-92 to 1995-96 where partial disinvestment was taken in piecemeal manner. the Current one where government is planning to sell its stake in NTPCL. an effort to institutionalize the disinvestment process was undertaken on a firm footing by constituting the Disinvestment Commission. 1991 during the interim budget session for 1991-92 under the Chandrashekhar government. London. SJVNL. • • • . The third Phase 198-98-99 to 2007-08 where Department of Disinvestment (Now a Ministry) and National investment fund was formed to look after the disinvestment process and the funds generated from it. Already 20 tons of gold were sold in International market through State Bank of India. TIMELINE: The disinvestment announcement was made on 4March.• Inflation was staring at 14% • On July6. The Policy of disinvestment has evolved over the years. Fourth phase. This period can be broadly divided into 4 phases. 1991 47 tons of gold were transferred from RBI to Bank of England. Second Phase 1996-97 to 1997-98.

13. Heavy plant and machinery required for iron and steel production. 2. Telephones. 16. zinc. Heavy castings and forgings of iron and steel. lead. 4. enhance availability of resources for these PSEs and yield resources for exchequer. Coal and lignite. Heavy electrical plants. chrome ore. Ship building. 6. while presenting the interim budget for the year 1991-92 declared disinvestment up to 20%. INDUSTRIES RESERVED FOR PUBLIC SECTOR PRIOR TO 1991 1.PHASE 1 (1991-92 TO 1995-96): Phase one Started when Chandrashekhar government. Rail transport. for mining.The objective was to broad-base equity. 15. Air transport. gypsum. Telephone cables. 12. 14. 8. Atomic energy. 11. Mining of iron ore. Iron and steel. Aircraft. Minerals oils. Telegraph and Wireless apparatus (excluding radio receiving sets). 3. Arms and Ammunition and allied items of defence equipment. manganese ore. improve management. 5. Minerals specified in the Schedule to the Atomic Energy. 9. tin. 7. . 10. Mining and processing copper.

The Highlights of the committee report are as follows: 1. zinc. gypsum. Minerals specified in the schedule to Atomic Energy Order. 4. Atomic Energy. 1991 1. The committee gave its report on April. In exceptional cases the public ownership level could be kept at26%. Mining of copper. 6. Railway Transport. 3. 49% of equity could be divested for industries explicitly reserved for the public sector 2. 5. manganese ore.INDUSTRIES RESERVED FOR PUBLIC SECTOR AFTER JULY. RANGARAJAN COMMITTEE 1992-1993 The committee included Dr. Y. the then Member Planning commission as chairman and Dr. Mining of iron ore. Holding 51% or more equity by the Government was recommended only for six Schedule industries. gold and diamond. Arms and Ammunition and allied items of defence equipment. lead. Mineral Oils. 2. Venugopal Reddy as Member Secretary. Coal and Lignite. Rangarajan. tin. namely: • Coal and lignite • Mineral oils . 1993. 1953. 7. 3. molybdenum and wolfram. sulphur. C. chrome ore. aircraft and warship. 8.

Bids were invited from 10 financial institutions/ mutual funds which consisted of 825 bundles each consisting of 9 PSEs. 1991): Out of 244 public enterprises 41 were selected. A total of 710 bids for 533 bundles were received from 9 mutual funds/ institutions and 406 bundles for a total value of Rs14. the reserve price fixed per bundle was Rs10.1611 crore were realised with Unit Trust of India again being the major purchaser.2billion were sold.• • • • Arms.75 billion of the sale. 1992): In second tranche. Unit Trust of India was the major purchaser accounting for Rs. . 7. Bids were invited from 36 institutions and banks. A total of Rs. negative asset value or they incurred losses in previous financial year.08 crore. The Shares of Metal Scrap Trading Corporation remained unsold. B) SECOND TRANCHE OF DISINVESTMENT (FEBRUARY. but 10 were dropped on the grounds of being consultancy firms. ammunition and defence equipment Atomic energy Radioactive minerals Railway transport DISINVESTMENT IN 1991-92: A) FIRST TRANCHE OF DISINVESTMENT (DECEMBER.

44 1.5232 0.27 20 20 20 0. (BEML) Bharat Electronic Limited (BEL) Bharat Heavy Electricals Limited (BHEL) Bharat Petroleum Corporation Limited (BPCL) Bongaigaon Refinery and Petrochemicals Ltd. Ltd. (DCI) Fertilizers and Chemicals Ltd.54 5.6 1.1669 3.0402 0. (IRCON) Indian Telephone Industries Ltd. (MMTC) National Aluminium co.919 8. Ltd. (CRL) Computer Maintenance Corporation (CMC) Dredging Corporation of India Ltd. Ltd. (HOCL) Hindustan Petroleum Corp. (ITI) Madras Refineries Ltd.0334 3. Ltd.67 2.0746 0. % of Disinvestment 9.7538 1.2768 1.72 .43 20 20 16. Co.01 16.9961 0.Details of the PSEs Divested in 1991-92 No. (HPCL) Hindustan Photo Films Mfg. Of Shares(in crore) 0.72 0. (MRL) Mahanagar Telephone Nigam Ltd.8952 1 3.9316 12 0.51 Name of the Enterprise Andrew Yule (AY) Bharat Earth Movers Ltd.6 4.64 20 20 0. (FACT) Hindustan Machine Tools Ltd.05 20 3. Co. (BRPL) Cochin Refineries Ltd.6 20 20 20 20 20 10.1015 0. (HPF) Hindustan Zinc Ltd.4268 0. Ltd.69 1. (HCL) Indian Petrochemical Corp.0013 1.72 3. (HMT) Hindustan Organic Chemicals Ltd.2528 0. (IPCL) Indian Railway Construction.4219 0. (NALCO) National Fertilizers Ltd. (MTNL) Minerals & Metals Trading Corp.987 1. (HZL) Hindustan Cables Ltd.

Out of this Rs. (RCFL) Shipping Corp.Neyveli Lignite Corp.87 crore shares were sold for a value of Rs 681.98 124.9075 2. (STC) Steel Authority of India Ltd.58 5 5 Amount of Sale(in Rs Crore) 169. Ltd.64 20 7. (HMT) National Aluminium co. A) FIRST TRANCHE OF DISINVESTMENT (OCTOBER. 3500 crore were to be raised by disinvestment during the year.3928 6. The minimum bid limit was set at Rs. Ltd. (VSNL) 1. Ltd.2393 19.95 crore with 286 bids being received Details of the PSEs Divested in October. Of Shares Sold(in crore) 0.2246 0. 1992): In this phase auctioning of shares on individual PSE basis was done.98 5 DISINVESTMENT IN 1992-93: As per the budget of 1992-93 Rs. Of India Ltd. 1992 to protect the interest of workers and provide a social safety net for labour. (NLC) Rashtriya Chemicals and Fertilizers Ltd.1791 3.1136 5.5 crore. A total of 12. Of India Ltd.53 178. 2.0416 0.28 5 5. 1000 crore was meant for National Renewal Fund (NRF) which was set up in February.1163 7.25 0. (SAIL) Videsh Sanchar Nigam Ltd. (NALCO) .13 Name of the Enterprise Bharat Petroleum Corporation Limited (BPCL) Hindustan Petroleum Corp.33 21.1 44.4431 % of Total number of shares of the PSE 5 5 2. (HPCL) Hindustan Zinc Ltd. (HZL) Hindustan Machine Tools Ltd. Tenders were invited for a total of 8 PSEs. 1992 No. (SCI) State Trading Corp.3192 1.

A total of 225 bids were received and 31. (HZL) Indian Telephone Industries Ltd. (STC) Steel Authority of India Ltd.1 6.47 10.83 .15 5 2.95 B) SECOND TRANCHE OF DISINVESTMENT (DECEMBER. (NALCO) National Fertilizers Ltd.6 1183. (FACT) Hindustan Petroleum Corp. The minimum bid limit was reduced to Rs1crore from Rs2. (NLC) Rashtriya Chemicals & Fertilizers Ltd.27crore shares of 14 PSEs. Of Shares Sold(in crore) 0.72 34.73 0.54 1. (BRPL) Fertilizers and Chemicals Ltd.3 153.78 118.18 1. (ITI) National Aluminium co. Details of the PSEs Divested in October.4969 0.94 4 2.25 617. 1992): In November. 1992 Name of the Enterprise Bharat Petroleum Corporation Limited (BPCL) Bongaigaon Refinery & Petrochemicals Ltd.Neyveli Lignite Corp. (RCFL) Steel Authority of India Ltd.03 26.03 19.25 1 0.32 1. Of India Ltd. Ltd. Ltd. (RCFL) State Trading Corp.06 1.75 36.2 0.0567 12.19 0. 1992 the government invited bids for the purchase of 46.36 681.04 1.06 % of Total number of shares of the PSE 5 5 0.1 5 Amount of Sale(in Rs Crore) 161.03 1.52 35. (SAIL) TOATAL No.14 5 0.57 0.15 0. The criterion was kept same as in first tranche.28 0.8688 1. (HPCL) Hindustan Zinc Ltd. Neyveli Lignite Corp. Ltd.06 crore shares of 12 PSEs were sold at a total amount of Rs 1183. Ltd.65 42. (SAIL) TOTAL 1.03 0.5 crore.05 0.93 31.36 26.8685 2. (NLC) Rashtriya Chemicals & Fertilizers Ltd.83 crore.44 0.

03 0. Of Shares Sold(in crore) 0.3411 0.73crore was realised through sale of 1.22 8.46 46.88 0. 1993 Name of the Enterprise Bharat Petroleum Corporation Limited (BPCL) Bongaigaon Refinery & Petrochemicals Ltd. Ltd Neyveli Lignite Corp. PSE Disinvested in March.4 1.07 0. (BRPL) Hindustan Copper Ltd Hindustan Zinc Ltd. 1993): Shares of 15 PSEs were offered for sale thorough auction.34 0.85 1.1023 0. 57 bids emerged successful on the basis of the reserve prices fixed by the core group based on the recommendations of the merchant bankers. . (HZL) Hindustan Machine Tools Ltd Indian Telephone Industries Ltd.79 0.21 3. Out of 192 bids which were received.02 Amount of Sale(in Rs Crore) 8. A total amount of Rs46. Ltd.51crore was realised during 1992-93 against the target of Rs2500crore.0096crore shares of 9 PSEs.41 4.75 1.214 0. (NALCO) National Mineral Development Corp.88 17.0096 % of Total number of shares of the PSE 0.73 Thus a total of 1912.45 0.12 0.1117 0.07 0. (ITI) National Aluminium co.59 0.0305 1. Ltd. (NLC) TOATAL No.08 0.B) THIRD TRANCHE OF DISINVESTMENT (MARCH.08 1.03 0.07 0.

FIRST TRANCHE OF DISINVESTMENT (MARCH – APRIL 1994): PSE Divested in March/April.15 2. Changes effected in the procedure to encourage divestment are: • Bidding amount was lowered from Rs 1.331 0.34 563. A).82 0. 1994 Name of the Enterprise Bharat Electronics Limited Bharat Earth Movers Ltd Bharat Heavy Electricals Ltd Hindustan Petroleum Corp Ltd Mahanagar Telephone Nigam Ltd National Aluminium co. (NALCO) TOTAL No.317 % of Total number of shares of the PSE 4.04 Amount of Sale(in Rs Crore) 47.14 4.27 301. Ltd.156 Out of these 7 PSE. .11 1322.003 11.447 7. Of Shares Sold(in crore) 0.00.17 0.692 0.000 or value of 100 shares(whichever higher) • Registered FII’s were permitted for auction of PSE shares.07 11.096 2282.74 7 12.17 48.694 0. only 1 PSE was not sold as no bid had been received.000 to Rs 25. DISINVESTMENT IN 1994-95: Actual realisation of funds took place from this round of Disinvestment took place in 1994-95.DISINVESTMENT IN 1993-94: DISINVESTMENT IN 1993-94: The target during this fiscal year was kept at Rs 3500 crore but the government could not go in for further sale of shares due to unfavourable stock market conditions through 1993-94.

1994 Name of the Enterprise Container Corporation of India Indian Oil Corporation National Fertilizers Ltd.194 % of Total number of shares of the PSE 20 3.37 Amount of Sale(in Rs Crore) 99.41 1.08 2230. Out of 556 bids received. Oil and Natural Gas Co Ltd Steel Authority of India Shipping Corporation of India Ltd. Of Shares Sold(in crore) 1.36 C) THIRD TRANCHE OF DISINVESTMENT (JANUARY 1995): In January 1995 shares of 6 PSEs were offered for sale.372 0. PSE Divested in October.01 2 0.77 0.B) SECOND TRANCHE OF DISINVESTMENT (OCTOBER 1994): Non-Resident Indians (NRIs) and Overseas Corporate Bodies (OCBs) were permitted to bid for the shares for the first time.11 0.52 22.443 0.686 0.299 1.66 28.28 1051.71 1028.387 4.007 0. . TOTAL No. 209 were accepted in respect to 5 companies and government decided not to sell shares in VSNL.

675 0. 1995 Name of the Enterprise Engineers India Ltd Gas Authority of India Ltd ITDC Indian Oil Corporation Limited Kudremukh Iron Ore Company Ltd TOTAL No. Of Shares Sold(in crore) 0.3 14.538 11.02 1.26 % of Total number of shares of the PSE 5.PSE Divested in January.399 330.008 0.853 0.99 Amount of Sale(in Rs Crore) 67.985 5.9 13. 1995 No of shares sold (In crore) 0.12 5.16 168. SAIL. CONCOR and ONGC in October 1995.87 0.2 0.53 Amount realised (in crore) 135.616 4. the government decided to disinvest from only 4 PSEs – MTNL.108 2.44 0.48 Name of the enterprise Mahanagar Telephone Nigam Ltd (MTNL) Steel Authority of India Ltd (SAIL) Container Corp of India Ltd (CONCOR) Oil & Natural Gas Corporation Ltd (ONGC) TOTAL . Details are: PSE Divested in October.526 194.568 DISINVESTMENT IN 1995 – 1996: Against the target of Rs 7000 crore.12 51.

power. In order to do this. mode of disinvestment etc. . The main terms of reference were: • • • A comprehensive overall long-term disinvestment programme (extent of disinvestment. petroleum etc that are capital-intensive and where the market structure could be an oligopoly The commission also showed concern about slow progress in implementation of its recommendations and it was particularly critical of government’s going ahead with strategic sales leading to joint ventures in some PSEs not referred to the commission. companies from petroleum and communication sectors were chosen namely IOC and VSNL. V. 1996 for a period of 3 years with the objective of preparing an over-all long term disinvestment programme for public sector undertakings. But due to unfavorable market conditions the GDR of only VSNL could be issued. DISINVESTMENT IN 1996-97 In 1996-97 a target of Rs. 39lakh shares of VSNL were disinvested resulting in an amount of Rs 380crore.PHASE II (1996-97 TO 1997-98): The government constituted Public Sector Disinvestment Commission under G. 5000 crore was fixed for mobilization of resources through disinvestment of PSE shares. The “core” group industries-telecommunications. Ramakrishna on 23 August. In the GDR.) within 5-10 years for the PSUs referred to it by the Core Group To select the financial advisors for specified PSUs to facilitate the disinvestment process.

1997. In 1999 – 2000 government state that its policy would be to strengthen strategic PSEs privatise nonstrategic PSEs through disinvestment and for the first time the term ‘privatisation’ were used instead of disinvestment. A GDR of 40 million shares held by the government in MTNL was offered in international market in November. and IOC was deferred. GAIL. A total of Rs. The government later formed the Department of Disinvestment on 10 December 1999. This was supposed to be achieved by the disinvestment of MTNL. CONCOR and IOC. CONCOR. 902 crore was collected but due to highly unfavourable market conditions the GDR issue of GAIL. The following criteria were observed for prioritization for disinvestment: .DISINVESTMENT IN 1997-98 The budget for 1997-98 had taken a credit for an amount of Rs 4800 crore to be realised from disinvestment of government held equity in PSEs. PHASE III (1998-99 TO 2007-2008) First in the 1998 – 99 budgets BJP government decided to bring down the government shareholding in the PSEs to 26 %to facilitate ownership changes which were recommended by Disinvestment Commission.

VSNL. This was the first time government had sold more than 50 % holding. The budget for 1998 – 99 had taken a credit for Rs 5. The details are: .000 crore.000 crore to be realised through disinvestment. CONCOR. IOC and ONGC. DIVESTMENT IN 1998 – 99: The government decided to disinvest through offer of shares in GAIL.• Where disinvestments in PSEs would lead to large revenues to the government • Where disinvestment can be implemented with minimum impediments and in relatively shorter time span. 45 crore for a 74 % equity stake. DISINVESTMENT IN 2000 -2001: Against a target of 10. DISINVESTMENT IN 1999 -2000: The budget for 1999 – 2000 had taken a credit for Rs 10.73 crore. The government disinvested from Modern Foods India Ltd and did a strategic sale to their strategic partner – HLL for Rs 105. the government realised Rs 1868.000crore to be realised through disinvestment. and • Where continued bleeding of government resources can be stopped earlier.

7 179. VSNL and PPL. The details are: Disinvestment in 2001 – 2002 Name of the enterprise CMC HTL IBP VSNL PPL ITDC TOTAL Mode of Disinvestment Strategic sale of 51 % Strategic sale of 74% Strategic sale of 33.73 DISINVESTMENT IN 2001 – 2002: Against a target of 12.68 1439 151.58% Strategic sale of 25% Strategic sale of 74% Sale of 8 hotels and long term lease of one hotel Receipts (in crore) 152 55 1153.5 658.56 3130.94 .94 crore during the year. the government realised Rs 3130. IBP. The highlight of this disinvestment was that strategic sales were affected in CMC. HTL.000 crore.Disinvestment in 2000 – 2001 Name of the enterprise BALCO BRPL and Chennai Refineries Kochi Refinery TOTAL Mode of Disinvestment Strategic sale of 51% Taken over by IOC Taken over by BPCL Receipts (in crore) 551.1 1868.13 659.

585) to Suzuki. The issue was oversubscribed by over 10 times. The second stage government offloaded its holding in two tranches – first where government sold 27. The strategic sale of JCL. IPCL. IPCL. Later keeping in view the overwhelming response from sale of Maruti. 741. DCI.000crore.547. Out of this Rs12.DISINVESTMENT IN 2002 – 2003: Target of the government for disinvestment in the year was Rs 12.62crore .5 % of its equity through IPO in June 2003. The major highlight was the two-stage sell off in Maruti Udyog Ltd with a Rs 400 crore right issue at a price of Rs 3280 per share of Rs 100 each in which the government renounced whole of its rights share (6. IBP. The decision to disinvest IPCL was although taken in December 1998. GAIL and ONGC has exceeded the target fixed by the government to a total receipt of Rs15.08: The government had fixed a high target for the year 2003 – 04 as 14. government sold its remaining shares in the privatised companies of VSNL.41crore . CMC. it took three and half years to finalise the deal. for a control premium of Rs 1000 crore.54 % respectively. Relative share holding of Suzuki and government after completion of the rights issue was 54.500crore. Reliance Petroindustries Ltd (Reliance group) was finally inducted as a strategic partner with a 26 % sale in IPCL.20 % and 45. and offer sales of many PSEs like MUL. DISINVESTMENT FROM 2003 – 2004 TO 2007 .06. BALCO and IBP to public through IPO’s. Strategic sale of IPCL was also finalised in May 2002. CMC.

SALIENT FEATURES OF THE N. (ii) The corpus of the National Investment Fund will be of a . health care and employment. The income from the Fund would be used for the following Broad investment objectives: (a) Investment in social sector projects which promote education. the Government had decided to constitute a “National Investment Fund” (NIF) into which the realization from sale of minority shareholding of the Government In profitable CPSEs would be channelised.87 crore.764. (b) Capital investment in selected profitable and revivable Public Sector Enterprises that yield adequate returns in order to enlarge their capital base to finance expansion/ Diversification. NATIONAL INVESTMENT FUND On 27 January 2005.I.F (i) The proceeds from disinvestment of Central Public Sector Enterprises will be channelised into the National Investment Fund which is to be maintained outside the Consolidated Fund of India. The Fund would be maintained outside the Consolidated Fund of India. In the other 3 years of this phase – from 2005 – 06 till 2007 – 2008 the government fixed no targets and the total receipts were very less to with the year 2006 – 07 yielding no receipts at all.receipts through sale of minority shareholding in CPSEs. In 2004 – 05 the target was reduced to Rs 4.000 crore and share sales of NTPC. ONGC spillovers and IPCL shares to employees pushed the total receipts to Rs 2.

The residual 25 per cent of the annual income of the Fund will be used to meet the capital investment requirements of profitable and revivable CPSEs that yield adequate returns. which promote education.permanent nature.I. ii) SBI Funds Management Company (Pvt.) Ltd. i) UTI Assets Management Company Ltd. in order to enlarge their capital base to finance expansion/diversification.1814. iii) Jeevan Bima Sahayog. without depleting the corpus. Selected Public Sector Mutual Funds will be entrusted with the management of the corpus of the Fund. Asset Management Company Ltd. FUND MANAGERS OF THE N. CORPUS OF NIF: The corpus of The Fund is Rs. (iv) 75 per cent of the annual income of the Fund will be used to finance selected social sector schemes.F The following Public Sector Mutual Funds have been appointed initially as Fund Managers to manage the funds of NIF under the ‘discretionary mode’ of the Portfolio Management Scheme which is governed by SEBI guidelines. health and employment.45crore being the proceeds from the disinvestment in Power Grid Corporation and Rural . (iii) The Fund will be professionally managed to provide sustainable returns to the Government.

I. Average income of first year was 8. The payout received in the second year was Rs. Government has approved (on 5TH November 2009) one-time exemption permitting full utilization of disinvestment proceeds deposited in the National Investment Fund.81crores in the first year.209. RESTRUCTURING OF THE N.F In view of the deceleration of GDP growth due to global economic downturn coupled with unprecedented drought this summer.47%. Average income of second year was 10. over this and the next two Financial Years.02%.245% against the hurdle rate of 9.25%. The pay out on NIF was Rs.84. The status quo ante will be restored from April 2012. we are facing a reduced budgetary resource generation possibility.24crores. .Electrification Corporation. in meeting the capital expenditure requirements of selected social sector programs decided by the Planning Commission/Department of Expenditure. the average income was 9. Thus. To ensure that this does not negatively impact the growth of economy.

engineering and project management services. The earnings per share (EPS) for the FY09 is Rs 1. development and implementation of hydroelectric projects. Which companies are likely candidates? Here’s a line-up: The IPOs that may flag off the divestment process may well be NHPC. RITES: RITES. engaged in planning. The company comes under Ministry of Petroleum and Natural Gas.PHASE IV (Current Scenario) THE LINE UP FOR DISINVESTMENT It is quite clear that the Government does have divestment of its stakes in PSUs high on its agenda for the near future. The Center’s stake will fall to 89 per cent post-issue. bundled with an offer for sale that may bring down the Government’s stake to 72 per cent. The PSU plans a fresh issue. which have already filed their respective draft prospectuses with SEBI over the past two years. development. The offer . OIL India: Oil India is engaged in the exploration. Based on the offer document. the government stake will come down to 86.3 per cent post-issue. production and transportation of crude oil and natural gas onshore.01. The book value/share and EPS for the year ended FY07 were Rs 133 and Rs 30 respectively. RITES and Oil India. provides transport infrastructure consultancy. NHPC: NHPC is the country’s largest hydro power generator. under the Ministry of Railways.

Telecom major. In case of Neyveli Lignite. RCF are likely follow-on offer candidates.168crore. which comes under strategic area). A 5-10 per cent stake sale in these companies will bring huge gains for the government. NMDC.321crore. . the receipts would be around Rs 1. a 5 per cent stake sale in NTPC would fetch the government around Rs 8. even without losing the management control. BHEL. Rs6. Cochin Shipyard. At current market prices. Stake dilution is also possible in listed PSUs with a high proportion of government holdings. It is expected to hit the IPO market in near future. the following PSUs are possible candidates which may seek listing through an IPO/offer for sale route.864crore. MMTC. Coal India is among the largest coal-producing companies in the world and is the only un-listed navaratna PSU (except for HAL. 800crore and Rs8. These entities have been on the divestment shortlist for quite a while. 900crore respectively.6 for the last financial year. Neyveli Lignite. Rs 3.document mentions an EPS of Rs 73. RINL (Vizag steel). SAIL. NTPC. BHEL. MMTC and NMDC. CIL had a turnover of Rs38631crore in 2007-08. SAIL.570crore. Telecommunications Consultants India and Manganese Ore are the other likely candidates that may tap the market. Long on the stake sale shortlist. BSNL and steel maker. Rs 5.

2 1996-97 104 62. in 1965.BREAD ENERGY FOOD/ NON-BAKERY OPERATIONS TOTAL NET PROFIT/LOSS 1995-96 95 45. the Commission recommended 100% sale of the company. treating it in the non-core sector. As per the Disinvestment Commission the major problems at MFIL were under-utilization of the production facilities. large work force. the Silchar project was abandoned and the production of Rasika drink was curtailed.CASE STUDY MODERN FOOD INDIA: Modern Food Industries was incorporated as Modern Bakeries (India) Ltd.52 166.65 160 (7) 149 (48) .5 78 1998-99 89 71 1999-00 78 71 140.8 1997-98 103.8 16. It had 2042 employees as on31 January. PRE DISINVESTMENT SCENARIO: MFIL: Pre-Disinvestment Performance DETAILS SALES .45 181. 2000. It went through minor restructuring when its Ujjain plant was closed.2 11. low productivity and limited flexibility in decision-making. In February 1997. The company was referred to Disinvestment Commission in 1996.5 7.

99). 1999. ANZ investment Bank was appointed as the global advisor for assisting in disinvestment. 2000. which included visits to Data Room. interaction with the management of the MFIL. the only bid received was that from Hindustan Lever Limited (HLL). DISINVESTMENT PROCESS:In a response to the advertisement 10 parties submitted Expressions of Interest. 2 parties remained in the field. 1999 post due diligence. In October 1998.90 per loaf added to the problem. and site visits.1. In October. Finally in January. Out of these. 1997 the government approved 50% disinvestment of MFIL to strategic partner through competitive global bidding. 4 conducted the due diligence of the company.90 per loaf against the industry norm of Rs. In September. 1999 the government decided to raise the disinvestment level to 74 % and an advertisement inviting expression of interest from perspective strategic partners was issued in April.0.During 1995-96 to 1997-98 MFIL recorded profits as wheat was provided to it at a subsidised rate but once that was withdrawn it started making losses as the increased costs could not be passed on the consumers. Also the high overhead cost of Rs 1. In January. . the Government approved the selection of HLL as the strategic partner in and the deal was closed on 31.2000.10. and on the last day for submission of the financial bid (15.

45crore.11 Sales realization for 74% equity was Rs.55 28.51 crore for 74% equity.VALUATION OF MFIL The 100% value of MFIL by different methodologies is give below: VALUTION Transaction Multiple Balance Sheet Asset Valuation Market Value of Land & Buildings Discounted cash flow ASSUMPTION Sales Multiple Net Worth Liquidation Unrestricted use Growth in market share VALUE (IN RS.51 68.18 109 32.10. The net realisation was Rs. the government paid back Rs.94crore.50crore for sale of 100% equity. . The agreement with HLL provided for post-closing adjustments – difference between net working capital as on 31st March 1999 and net working capital on closing date 31st January 1999 and increase in debt amount on closing date 31st January 1999. This corresponds to Rs. CR. Due to reduced working capital and increase in debt amount.94.105.142.) 78.

Steps were taken to improve the quality of bread.HLL has provided a corporate guarantee to MFIL’s banker. Again Rs.1800 per employee.. and to train the manpower in quality control systems. HLL has extended secured corporate loans to MFIL to the extent of Rs. viz. 2002 wages have increased by an average of Rs. Rs.POST DISINVESTMENT PROCESS MFIL: Post Disinvestment Performance Details Pre.16.12. 7 crore were infused for safety & hygiene purposes at various manufacturing locations.5crore for meeting the requirement of funds for working capital and capital expenditure. its packaging and marketing with trade-promotion activities. which has helped the Company in getting the interest rate reduced considerably to the extent of 3-4% of its earlier borrowing cost.2000. which continued till the beginning of 2000. Punjab National Bank. In November.Disinvestment Post-Disinvestment YEAR SALES . was arrested. Government of India • The decline in the sales of Modern Bread. .30crore was spent for VRS.BREAD ENERGY FOOD TOTAL 1988-1989 89 71 160 1999-2000 78 71 149 2000-2001 102 66 168 Source: Ministry of Disinvestment. Weekly sales in December 2000 were around 44lakh SL. which is a 100% increase over the figure of April 2000. • As on 31.

before interest and depreciation. However. The company suffered as it lost some lucrative government contracts and changed its operational structure. HUL had invested 157 crore in MFIL’s equity. However.07crore on 28th November 02. it did make a profit though of Rs22crore compared to a loss of Rs 7 crore in the previous year. HUL did enjoy tax benefits as MFIL was a sick industrial unit. As per the company. The Government exercised this option and thereby received Rs. . Bread sales grew by about 7%. The company has committed a mistake while conducting the due diligence process. THE FAILURE:Despite HUL’s best efforts MFIL continued to make losses. Hence overall sales declined by 35% to Rs95crore. its losses were Rs 15 crore and accumulated losses were Rs 79 crore. HUL still was unsuccessful in turning around the business and due to high employment costs and low margins.The Government was also entitled to ‘Put’ its share of remaining equity of 26 % at Fair Market Value for 2 years from 31 January 01 to 30 January 03. In 2005.44. the culture of MFIL was a complete misfit with its own. The company put MFIL on the block in 2006 but failed to clinch a deal. At the operating profit level.

Bharat Aluminium Company Limited .

The refining capacity of BALCO is 2.000 tonnes per year.000 tonnes per year and its smelting capacity is 1. The Cabinet accepted the recommendation of the Disinvestment Commission for divestment of 40% stake through a strategic sale and further divestment through the capital market. which was accepted by the Cabinet. and reduction of the Government stake to 26% within 2 years through a domestic public offering It further recommended divestment of the entire remaining stake at an appropriate time thereafter.00.Company profile Bharat Aluminium Company Limited. an alumina refinery. Its main plant and facilities are situated in Korba(Chhattisgarh). set up in 1965 at Korba in Madhya Pradesh to manufacture aluminium rods and semi-fabricated products. a smelter and a fabrication unit.00. Later. BALCO has its corporate office in New Delhi. The Government . besides a 270 MW power plant which meets a substantial part of the unit's power requirements. in 1998 the Disinvestment Commission revised its recommendation and advised the Government to consider 51% divestment in favour of a strategic buyer along with transfer of Management. It also has another fabrication unit in Bidhanbagh (West Bengal). which includes bauxite mines. In 1997. is today the third largest player in the Indian aluminium industry. the Disinvestment Commission classified BALCO as non-core for the purpose of disinvestment and recommended immediate divestment of 40% of the Government stake to a strategic partner. THE DISINVESTMENT DECISION The Government of India had 100% stake in BALCO Prior to disinvestment.

This was followed by BALCO's equity being reduced by 50% thereby reducing the subscribed share capital to Rs. and finally came to end in 2nd March 2001.44 141.10 896. The strategic sale process for BALCO started in late 1997. As a result. PRE DISINVESTMENT PERFORMENCE DETAILS Sales Other income Total income(1+2) Total expenditure PBDIT(profit before interest depreciation and taxes) PBIT(profit before interest and tax) PBT(profit before tax) PAT(profit 1997-98 848. and fetched the Government Rs.50 crore.01 116.84 939.61 714. The 51% stake was sold to Sterlite Industries.28 160. 31 crore as tax on this amount. 551.80 758.50 crore from this privatization.08 182.32 122.53 134. prior to disinvestment.87 79. the highest bidder.244 crore from Rs. 244 crore from the capital restructuring of BALCO and another Rs.90 68.64 134.72 806.488 crore. the Government received Rs.84 140. The government thus recovered Rs 827. after the first decision of the Government.89 .24 181.51 48.64 70.19 55.34 76.thereupon appointed M/s Jardine Fleming as Advisor to assist in the sale of its 51% stake in BALCO to a strategic buyer.56 1999-2000 896.08 966.53 1998-99 870.

2 The valuation was applied by the official valuer J P Morgan.00 VALUATION OF 51% STAKE: There were three bidders viz the US-based Alcoa and Indian market leader Hindalco and Sterlite.after tax) Dividend 20.00 23.0 TO 681. .9 TO 1072.40 crore was reached by marking up the valuation.9 1054. Sterlite’s financial bid was the highest among the bidders.0 TO 909.0 597. by 25 per cent. according to an official release by the government. CR.) 651.7 587. The reserve price of Rs 514. used as the control premium.00 18. The company was valued by three different methods: Discounted cash flow Comparative valuation Balance sheet and asset valuation VALUATION METHOD DISCOUNTED CASH FLOW COMPARABLES BALANCE SHEET ASSET VALUATION VALUE (IN RS.2 TO 994. arrived at by using the discounted cash flow(DCF) technique.

01 to 16. The opposition raised eyebrows. It seemed as if the Sterlite management had to sweat a lot before it actually got the right over the catch it craved for. 981 applications (151 executives and 830 workers) were received. 694 old VRS applications were pending. especially with regard to · Transparency · Valuation · Protection of employees’ interests No sooner was the BALCO deal announced than it created a furor within and outside Parliament.e. · In spite of losses of Rs.08. Voluntary Retirement Scheme from 31.POST SALE SCENARIO Post sale.01. · An Increase in allowances was also announced: . some of which are: · The new management had introduced VRS i.07. Several new steps were Undertaken. This finally came to an end when the new management stroke a deal with the employees. · Workmen get a guaranteed benefit @ 20% of basic pay. A total of 956 applications were accepted mostly where units were lying closed. There was distrust from state government and the workers of BALCO went on a 67 days strike. a number of doubts have been raised by various quarters on the disinvestment of BALCO. 200 crore due to the strike. an exgratia payment of Rs. 5000 was made to all employees.

○ Night shift allowance: Rs.240 to Rs. 400 to Rs.m. ○ Leave Travel Assistance of around Rs. Few were: ○ Job rotation ○ Appraisal system The new management is proposing an investment of Rs. Moped users Rs. 50 to Rs. THE REAL PICTURE: The disinvestment of 51% stake in BALCO by the government of India towards a strategic partner was backed by two justifications: · From a market share of around 17 per cent in 1995-96 in the primary aluminum Business.150 to Rs.200 per month ○ Scholarship amount to meritorious children doubled.400 p. Several reasons were mentioned that were responsible for hindering its growth. 500 pm. They were: . (instead of subsidised canteen facilities) ○ Education allowance: Rs. ○ Conveyance allowance: Scooter users Rs.10 to Rs. 75 per month ○ Hostel allowance: Rs. 6000 crore which will increase production 4 times. 350 pm · Several new practices introduced.20 per shift. BALCO’s share had dropped to 14 per cent in 1998-99. ○ Canteen allowance: Rs. 6000 as cash every year.

The following tries to uncover some of them: Government had no modernisation and expansion under consideration for the aluminium giant: To quote the Disinvestment Commission: "BALCO as a PSU has suffered from procedural bottlenecks and lack of managerial autonomy. there are certain facts from the other angle that demand attention. the company had to depend on high cost power from the State Electricity Board which resulted in avoidable cost increases.○ Lack of economies of scale ○ Old age technology ○ Overstaffing ○ Operational bottlenecks ○ Lack of managerial autonomy Thus. a complete review and restructuring was urgent to enable the company to stand a better chance to stake its claim in the globally competitive Indian aluminium Industry. The CRM project at Korba Has been cleared after eight years with near-doubling of the capital outlay. However. The delays and the lack of autonomy have certainly . Sterlite’s financial bid was the highest among the bidders. Intact. As a result. · Although there were three bidders. government claimed that it was getting a price greater than expected. according to an official release by the government. The company was not able to get clearance from the government for setting up 100% captive power generation.

This amounts to squeezing the profits of a public sector unit and then using that to undervalue the firm. ○ BALCO’s assets were undervalued: . the then profit performance of the unit cannot be the basis on which the future profile of profits could be estimated. What was required instead was a reorganisation aimed at allowing BALCO the freedom to use its own capacity to mobilise resources to modernise.163 crore in 1996-97 to Rs. consciously or otherwise. as a prelude to the privatisation process. in March 2000 the subscribed share capital of BALCO was brought down to Rs. expand its captive power facility and raise its profitability. Hence.25 crore in 2000-01 suggests that this stream of profits has entered into assessments of the future profile of profits that have been discounted to value the worth of the company. However. the Minister for Disinvestment. to emphasize repeatedly that profits earned by BALCO had fallen from Rs. In practice. by appropriating part of the Rs. the tendency for Arun Shourie.488 crore.affected its operating profits which would have been much higher had it been able to implement these projects earlier." Thus even the Disinvestment Commission's recommendation that the government should resort to a strategic sale of 40 per cent of BALCO equity can be seen as misplaced. was valued at what is considered a throwaway price: Cash flows determined by undermining profitability: This also implies that BALCO's profitability has been undermined by the government's own role in stalling modernization and expansion at Korba. This was a clear indication that modernisation and expansion was not even under consideration. • BALCO.437 crores into the government's account.244 crore from Rs. a profit making PSU.

The project was to include the setting up of a cold rolling mill. for the value of the plant at Korba (set up in 1988-89) is still substantial. 000 crore) without recourse to budgetary funds. • No transparency in the deal: The valuation procedure that yielded the undeclared reserve price below which the government was not willing to sell has neither been transparent nor undertaken by qualified valuers capable of valuing the plant and machinery of the company and the bauxite mines that it has on lease. a senior official held that if Sterlite were to invest in a captive power plant of the kind owned by BALCO. According to reports. This would have allowed the corporation to improve its profitability and increase the dividend it pays to the exchequer. officials from the power sector have Argued that the captive power plant alone would cost more than the sum being paid by Sterlite. • BALCO was self-sufficient to fund its projects: Since BALCO was a profitable and cash-rich public sector corporation with an extremely low debt to equity ratio. Leaked evidence of undue haste has .1. the setting of the reserve price and the acceptance of Sterlite's bid were all allegedly done within the span of a month.It is still being argued that a direct valuation of BALCO’s assets was worth around 10 times the value paid by Sterlite.1. the valuation of the firm. it would have been possible for it to finance its proposed modernisation plan (estimated to cost Rs. Even though the bids had been invited some time back. the expansion of captive power generation and modernisation of existing facilities. 215 crore and this figure matters. since a thermal power plant has a lifespan of around 35 years. it could cost Rs. In fact. The whole procedure had been gone through in haste.

. did not bring the profits to the extent possible. December 28.accumulated and this further puts a question mark over the government's claims of transparency in the execution of the deal. BALCO marks the first ever disinvestment deal in the history of India and is stained with several question marks and pointing fingers.52 bn. the Central Information Commission (CIC) observed that the tender documents and minutes pertaining to the Rs 551. in response to an RTI query filed by advocate Arjun Harkauli. There was an opposition from the state government to the extent of throwing an offer to buy the Centre’s 51 % stake at Rs 5.5-crore divestment of Bharat Aluminium Company (BALCO) in Chhattisgarh’s Korba district eight years ago could not be traced by the ministries concerned. 2009. CONCLUSION:A combination of inappropriate procedure.This was followed by a roar and strike amongst the company workers. As stated by The Times of India. Corruption and lack of accountability still remain the two worms eating away the Indian economy. The deal certainly did not occur the way it was meant to. nor was it intended towards any social cause. undue haste and unwarranted secrecy had created a veritable mess. The claims on the lack of transparency are being continued till date.

VIDESH SANCHAR NIGAM LTD. .

7 . It was envisaged that this would also enable greater freedom to managers to plan.245 VSNL WORLD 54. Table 1 gives some comparative figures of VSNL’s performance over the years.972 1.6 71. the Overseas Communication Service (OCS) was established in the Department of Telecommunications (DoT). The government felt that corporatization would enable it to raise financial resources. VSNL offered voice telephone.147 1. Videsh Sanchar Nigam Ltd (VSNL) was created from the OCS as a government owned corporate in 1986.9 132. television. Efforts had started to increase India’s connectivity through investments in projects like submarine cables. develop and accelerate the international telecommunication services.6 61. YEAR 1994 1995 1996 1997 1998 1999 2000 0.ABOUT VSNL In 1947.384 1. bureaufax etc.5 93 108. telex.7 82.742 0. in 1986-7 the figure was 0.935 2.684 1. telegraph. an activity that would not have been possible under the government framework.69 billion telephone minutes in 2000-1. operate. In the initial years. Compared with 2.13 billion minutes.

The ratio of inbound to outbound calls had been 4:1 in 2001. One important reason for this is the discriminatory pricing by VSNL. Another factor is that India is a much poorer than the typical countries to which it connects (U.S., Europe and Gulf), so that inbound calls are bound to be more than outbound calls. For the year 2000-1, the total revenue for VSNL was Rs 6,430.7 crore. The profit after tax stood at Rs 1,778.8 crore. This resulted in earnings per share of Rs 62.41 out of which Rs 50.00 was declared as the dividend per share. VSNL had no debt. Its P/E ratio of each VSNL share was 4.68. It is seen that a large part of the costs is the network and transmission charge. Much of this was charges paid out to the DOT as traffic costs. In this fixed revenue agreement, VSNL paid Rs 2,734 crore to DOT and Rs 1,386 crore to foreign operators during 2000-1 [VSNL Annual Report, 2000-1].

DISINVESTMENT IN VIDESH SANCHAR NIGAM LIMITED
1. Government had approved sale of 25% equity share holding out of a total government share holding of 52.97% in Videsh Sanchar Nigam Limited (VSNL) on 5.02.2002. The total paid-up capital of VSNL is Rs.285 crore, the Govt. holding being Rs.151crore. Rs.71.25crore of this equity is being sold to M/s Panatone (Tata Group) at a price of Rs. 1439 crore.

2. Government had decided to disinvest in VSNL in January 2001 and the advertisement for inviting Expression of Interest was issued in February 2001. Several interested parties had submitted their Expression of Interest. After the process of due diligence was completed and the transaction documents frozen, financial bids were invited from the bidders on 1.2.2002. Two bids were received. 3. SBI Capital Markets Ltd. and CSFB were appointed as the advisors at a fee of 0.19% of the transaction value. M/s Crawford Bayley & Co. is the legal advisor and the asset valuer is Price Waterhouse Coopers Ltd. After considering the Advisor's report, the Evaluation Committee/IMG/CGD submitted their recommendations regarding acceptance of the higher bid to the CCD. 4. The Government has in the process of disinvestment in VSNL received approximately Rs.3689 crore, Rs. 1439 crore as the bid price, Rs. 1887 crore as dividend and Rs. 363 crore as dividend tax (table attached). Thus, the Government has sold its shares at a price of Rs. 202 per share, taken additional amount as dividend, special dividend and dividend tax. Besides the Government has also taken measures to take out surplus, yet very valuable land (value Rs.778 crore) from VSNL, and also restrict use/sale of land through provisions in transaction documents. 5. The market price of VSNL shares as on 1.2.2002 was Rs.158/-. The Government had earned Rs.10.4 crore per year on 25% of its equity in the last eight years. This year the Government has earned Rs. 3689 crore from sale of VSNL and if this money is kept in the bank it would earn an interest of 368.9 crore, i.e. the Government would gain more than Rs. 350 crore every year.

6. The strategic partner has been provided a call option for the 5th year subject to the condition that the Government would be retaining at least one share and hence one vote position to enforce its affirmative vote on assets. In addition, 1.97% share were given to employees, at confessional rates. After partial disinvestments through sale of shares, Videsh Sanchar Nigam Limited (VSNL) underwent a strategic sale to the Tata Group in April 2002. Subsequent to the sale, the government holding became 26% and the Tata Group's 45%. The sale was followed by VSNL's decision (taken by its new owners the Tata’s) to invest Rs 1,200 crore in Tata Teleservices Limited (TTL), a wholly owned subsidiary of the Tata group. This led to concerns regarding the appropriateness of the decision, since it involved a cash outflow of Rs 1200 crore to a fledging private company in the telecom sector.

REASONS FOR DISINVESTMENT
The Ministry of Disinvestment cited the non availability of funds for critical areas like education, health and social infrastructure because of fiscal burden in the flow of government funds into PSUs, as a strong argument for the disinvestment. There was also a need to stem further outflow of resources into unviable, nonstrategic PSUs. The divestment was also expected to reduce the unmanageable public debt.

PRIOR TO DIVESTMENT:
When the privatization process of VSNL began in 1991-2, there was no blueprint for the same. In retrospect, there have been three phases. The offloading of shares to domestic investors; The offloading of shares in the international market;

Priced at US$ 9. it was the largest GDR issue from India. 682 and a 10% discount to the ten-day average GDR price of US$ 10.25 it was at a 15% premium on the last closing domestic price of Rs. It involved a divestment of 10 million shares by the government of India to international investors. the Government of India (GoI) held 85% and financial institutions. 2001.97% (including the 1. GDR ISSUES The Global Depository Receipt (GDR) issue for VSNL was the first of its kind by the GOI.6 million in the market. During the process of the second GDR issue. mutual funds and banks. Delhi and Chennai. The organizational problems in VSNL around the time of the second GDR issue could have been one of the factors that led to lower valuations. Kolkata. As of 1995. VSNL disinvested equity of the face value of Rs. drawing 662 investors from 28 countries. This accompanied the transfer of shares from the GOI as a bonus offer. The shares were listed in the stock exchanges of Mumbai.5% in 1999-0 which came down to 9. out of a paid up equity capital of Rs 80 crore. The offer was oversubscribed. At that time. In 1991-2. The government realized US$ 185 million from the sale of 20 million GDRs with each GDR being equivalent to half a share.96% held by employees) as on March 31. It fetched US$ 526. the VSNL staff had threatened a walkout owing to the pending issue of . The second GDR issue was completed in February 1999.Strategic sale. The first GDR issue (listed on the London Stock Exchange) was offered in 1996-97.02%. the share of the GOI had come down to 82. As of March 1993. 12 crore in favour of various financial institutions.275. It helped VSNL to raise a substantial surplus that was earmarked for investments for its growth. banks and the public held another 15%. The Indian investor’s share holding remained around 16.

real estate value that would accompany VSNL was around Rs 1. and a nationwide ISP license. Among the concerns were the loss of monopoly and the uncertainty of the loyalty of BSNL and MTNL to continue to use VSNL for their international traffic. Even so. VSNL possessed prime real estate in Mumbai and Delhi and also cable capacities to facilitate international traffic.182 crore which was considerable even after disbursement of the special dividends. Due to delays in the government processes. In addition.375 crore for its 25% stake in VSNL. The government owned MTNL and BSNL would have to use VSNL as their ILD carrier for two years on the condition that it would offer the most competitive terms in the market. THE VALUATION The government had fixed a reserve price of Rs 1. One of the major issues involved during the valuation process included the management of real estate owned by VSNL. the dipping share prices of VSNL and the falling accounting rates that could lead to lower revenues. The first GDR’s Investment promises were not fulfilled and a promised domestic offering had not been made.allotting shares to employees.200 crore . the GOI intended to compensate the loss of monopoly through special concessions. The disinvestment process stipulated that at least four VSNL surplus properties valued at Rs 778 crore would not be available and were to be disassociated from VSNL after the disinvestment. In an effort to bolster the VSNL valuation. VSNL did not have a chief executive and many other crucial director level posts were vacant. One of the major assets was the cash stockpile of Rs 5. VSNL would also get a free license to provide NLD.218.

had the company been correctly `prepared' for privatisation. that the disinvestment policies adopted in India have been a failure so far. This case on VSNL further corroborates to the fact. It also leads to an appreciation of the remaining shares that are held by the government. disinvestment of VSNL was clouded with controversies and speculations and this fact further indicates the failure of the disinvestment policy adopted in the case of VSNL. Public flotation of stock might have led to better values for VSNL's stock. and also highlights the wrong reasons for which the disinvestment of VSNL took place and its ultimate failure to match the required expectation of such a step. Thus.CONCLUSION: The privatisation of VSNL is seen as leading to public expenditure accountability through a realisation of higher return on the government’s asset formation. the process is a step towards the provision of better quality communication services at the most competitive prices. . To the citizen.

The new government that came to power in 1998 preferred to sell large chunks of equity in selected enterprises to “strategic” partners – a euphemism for transfer of managerial control to . The change of government at the Centre in 1996 led to some rethinking about the policy. recommended (Disinvestment Commission. A Disinvestment Commission was constituted to advise the government on whether to disinvest in a particular enterprise. but not a reversal. among other things. its modalities and the utilization of the proceeds. The process however came to an abrupt halt when the market collapsed in the aftermath of Harshad Mehta led scam. and • To utilize the disinvestment proceeds to create a fund for restructuring of PSEs. The commission. as the asking prices plummeted below the reserve prices. which were free to dispose of these shares in the booming secondary stock market. • Strengthening of the well-functioning enterprises. 1997): • Restructuring and reorganization of PSEs before disinvestment.CRITICAL ANALYSIS REVIEW OF DISINVESTMENT AND PRIVATIZATION Disinvestment was initiated by selling undisclosed bundles of equity shares of selected central PSEs to public investment institutions (like the UTI). Since the stock market remained subdued for much of the 1990s. the disinvestment targets remained largely unmet.

Strategic sale in many countries have been controversial as it is said to give rise to a lot of corruption. efforts were made to be transparent in all the stages of the process: selection of consultants to advice on the sale. it would be difficult . Instances of under pricing of assets. opening of tenders and so on.private enterprises. The sales were organized through auctions or by inviting bids. A separate ministry was created to speed up the process. justified on the grounds of better price realization. favoring preferred buyers. PERFORMANCE OF PSES AFTER DISINVESTMENT & PRIVATIZATION: In principle. Between 1999 and 2003. and assets have been widely reported. invitation of bids. much greater quantum of public assets were sold in this manner. whose conduct is unlikely to be influenced by share prices movements (or return on equity). as it was widely believed that the operating ministries are often reluctant to part with PSEs for disinvestments as it means loss of power for the concerned ministers and civil servants. compared to the earlier process. Privatization can be expected to influence economic outcome provided the firm operates in a competitive environment. if not. disinvestment is unlikely to affect economic performance since the state continues to be the dominant shareholder. discrediting the policy process. Not withstanding the serious discussion on the utilization of disinvestment proceeds. Aware of such pitfalls. non-compliance of agreement with respect to Employment and retrenchment. by passing the stock market (which continued to be sluggish). There are series of allegations of corruption and malpractice in many of these deals that have been widely discussed in the press and the parliament. they continued to be used only to bridge the fiscal deficit. and many incomplete contracts with respect to sale of land. though the realized amounts were consistently less than the targets – except in 2003.

Various institutional and contractual mechanisms have evolved in the last century to grapple with this Problem.to attribute changes performance sole or mainly to the change in ownership. Managers’ efficiency objectives may come in conflict with dysfunctional political interference in operational matters (at the . public auditors and so on. In the context of efficiency of resource use in a socialist economy. firms do not go bankrupt or managers do not lose their jobs for their poor performance. Firms can always renegotiate their contracts with the planners to hide their inefficiency. and multiple owners or monitors – central government. Managers may not necessarily maximise profits as they could always highlight a particular achievement to suit their convenience. it has been argued that they were unlikely to be efficient because of the soft budget constraint: that is. agency problem arises: how to ensure that the managers (“promoter” in Indian parlance) work to maximize return on shareholders’ capital. legislators. managers could pursue their private goal disregarding the shareholders’ interests. In India public sector firms are often face with multiple objectives. with separation of ownership from control as firms grow in size and complexity. PROBLEM OF CORPORATE GOVERNANCE: In the evolution of modern capitalism. looking at the microeconomics of firms in a socialist economy. However. Given the information asymmetry. Managers may be risk averse as they face constitutionally mandated procedural audit by the CAG if an enterprise is majority government owned. to solve the problem of how to ensure that managers of public firms maximized efficiency consistent with the goals set by the central planners. state governments. This is at the heart of the problem of modern literature on corporate governance.

Moreover. budgetary support. The other set of arguments of disinvestment has to do with efficiency. poor performance by managers does not involve any punishment as they can re-negotiate the output prices. One has to do with the money that flows into the government’s coffers as a result of the stake sale. the agency problem is endemic to all economic systems. Both benefits are exaggerated. though perhaps too much lesser extent. thereby. or have access to soft and/or government guaranteed loans. Thus. reducing the fiscal deficit. Disinvestment would bring in shareholders who would. Such support is more common in financial sector. in other wards they do not face a hard budget Constraint. Look at the reduction in the government’s fiscal deficit brought about by disinvestment. it is hoped. However. where failure of firms can have significant systemic risk. at the same time. problem of soft budget constraint is not restricted to socialist economies but evident in market economies as well when the firm is question is large and considered of strategic importance for the economy. question arbitrary decisions by the government that harm the finances of these public enterprises. augmenting the government’s nonborrowed receipts and.expense of policy issues) to meet narrow political goals. as far as the quantity of the public’s savings mopped up by the government is concerned. The effect of selling shares to the public is not materially different from the effect of selling government bonds. the private sector would feel squeezed for funds exactly as it would if the government were to raise the same amount by issuing bonds. The public ends up holding shares. In the year in which the disinvestment takes place. . DISINVESTMENT IS NOT A GREAT PIECE OF REFORM Disinvestment is considered desirable for two sets of reasons. Rescue of Chrysler Corporation – the third largest automotive firm in the US – in the late 1970s and United Airlines after “9/11” in the US are clear instances of state support for failing companies.

year after year. efficiency arguments for disinvestment would lose steam. Many other public enterprises were set up at a time when the private sector was too weak to . than the bonds sold to fill the Fiscal gap. in terms of asset price per rupee of income accruing from that asset. the government takes on the obligation to pay interest. This is because these shares would be valued significantly higher. By issuing bonds. That said. However. rather than to the private sector looking for funds to invest. given the political culture that treats public enterprises as sources of revenue for the minister (and officials) in charge of the controlling ministry. the companies in question sub serve public goals outside the calculus of commercial profit and loss. If this goal is realised. or if it wants to own the Food Corporation of India to ensure food security. from a budgetary point of view. Both widen the fiscal deficit in the subsequent years. If it wants to own nuclear power companies because of the risks involved. What about the efficiency gains at the enterprise level by inducting non-government shareholders into the ownership structure. and bonds. whether the state or private shareholders. the government forgoes dividend receipts on the shares sold.in one case. More germane is to what end the government keeps some enterprises under its ownership and control. the public’s savings stand transferred to the government. to the future effect of issuing bonds. By selling shares. the interest payment obligation taken on to get one rupee from selling bonds would be significantly higher than the dividend forgone per rupee received from selling shares in public enterprises. the overall reform project entails improving corporate governance across the board to a level where the running of any company seeks to maximise the returns to shareholders regardless of who the shareholders are. and possibly onto the board of directors? There is likely to be some additional benefits. In either case. It does not make sense to privatize such public enterprises. in the other. the future effect of selling shares would prove superior. However.

of the highest quality and lots of it. with time. What are strategic sectors would change. every Punj. anymore than is served by keeping hotels and banquet halls in the public sector? Satellite. The government should ideally exit from areas that are no longer strategic. are still beyond the Indian private sector’s capacity. for example. . Is there any strategic goal being served by retaining steel production in the public sector. in contrast.create production capacity in areas considered vital for the economy’s long-term dynamism. It might arguably make sense for the government to own enterprises in these sectors. disinvestment is not any key reform. Now. Mittal and Jindal makes steel. aero plane and rocket manufacture. but these companies are professionally run as commercial enterprises. and use the re-sources to build new strategic capability. we don’t live in an ideal world. Steel. However. Even if the government continues to own some companies in non-strategic sectors. there would be little efficiency loss to the economy as a whole. or machine tools. Therefore.

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