DISINVESTMENT IN INDIA

Investment

“The conversion of money or cash into

securities, debentures, bonds or any other
claims on money”
Disinvestment
‘‘ The conversion of money claims or securities
into money or cash”

‘‘ The action of an organisation/government

selling or liquidating an asset or subsidiary,
also known as divestment or divestiture’’
OBJECTIVES OF DISINVESTMENT
• To Reduce the financial burden on the
Government

• To Improve public finances

• To introduce the competition and market

discipline

• To fund growth of sectors

• To encourage wider share of ownership

• To depoliticise non-essential services

• To meet the budgetary needs

• To improve overall economic efficiency

• To raise funds for technological upgradation,

modernization

• To expand the PSUs.

BENEFITS OF DISINVESTMENT
For the Government

Can focus more on core activities such as

infrastructure, defense, education, healthcare,
and law & order.

For the Markets and Economy

Brings about greater efficiencies for the

economy and markets as a whole.
For the Taxpayers
Unlocking of shareholder value
For the Employees
Greater opportunities and avenues for career
growth- further employment generation
For the PSUs
Greater autonomy leading to higher
efficiencies
REASON FOR DISINVESTMENT

Divestment campaigns are based on a

fundamental misunderstanding of how stock
markets work.
TYPES OF DISINVESTMENT

• Minority Disinvestment
• Majority Disinvestment
• Complete Privatisation
Minority Disinvestment
• When the government retains a majority stake in the
company, greater than 51%, thus ensuring management
control.

• Minority stakes have been either auctioned off to

financial institutions or offloaded to the public as Offer
for Sale.

• Present governments policy - All disinvestments would

only be minority disinvestments via Public Offers
MAJORITY DISINVESTMENT
• The governments post disinvestment will retain a
minority stake in the company (it sells off a
majority stake)

• Its been made to strategic partners like

CPSE,BRPL to IOC, MRL to IOC, KRL to BPCL

• Majority stake is offloaded as an Offer for Sale

to a strategic partner.
COMPLETE PRIVATISATION
• Form of majority disinvestment wherein 100% control
of the company is passed on to a buyer

• Disinvestment and Privatisation

When the Government retains 26% of the shares

carrying voting powers while selling the remaining to a
strategic buyer, it would have disinvested, but would
not have privatised because with 26%, generally a
special resolution 3/4th majority is required.
DECISION FOR DISINVESTMENT
• Whether the objectives of the company are achieved

• Whether there is decrease in number of beneficiaries

• Whether serving the national interest will be affected

• Whether private sector can efficiently operate

• Whether the original rate of return targeted could not

be possible to achieve
MINISTRY OF DISINVESTMENT
• Set up as an independent ministry in December
1999

• Came into existence in May 2004 into a

department of the Ministry of Finance.

• Responsible for systematic policy approach to

disinvestment and privatisation of PSU
CHARGES AGAINST THE PUBLIC SECTOR FOR ITS
POOR PERFORMANCE
• Low rate of return on Investment
• Declining contribution to national savings
• Poor capacity utilization
• Overstaffing, bureaucratization leading to excessive
delays and wastage of resources.
Due to this many public sector enterprises have
become more a burden than an asset to the
government.
SALIENT FEATURES OF THE POLICY
• Citizens have every right to own part of the shares
of PSU

• PSU are the wealth of the Nation and so should

rest in the hands of the people

• While pursuing disinvestment, Government has

to retain majority shareholding(51% management
control)
FIVE- POINT AGENDA FOR POLICYMAKERS
• Trust the home grown expert
• Place administrative control in the hands of the
Finance Minister
• Hand over companies that are a burden on the
government to the employees
• Do not involve a PSU/SOE in the bidding process
• Manage revivals
DISINVESTMENT PROCESS
DISINVESTMENT METHODS IN INDIA
NET ASSET METHOD

• Indicates the net assets of the enterprise as shown in the books

of accounts(historical value of the assets)

• It is the cost price less depreciation provided so far on assets.

• It does not reflect the true position of profitability like

goodwill, brands, distribution network and customer
relationships

• This model is more suitable in case of liquidation than in case

of disinvestment.
PROFIT EARNING CAPACITY VALUE METHOD

• The profits actually earned or anticipated.

• It values a company on the basis of the

underlying assets.

• This method does not consider or project the

future cash flow.
DISCOUNTED CASH FLOW METHOD (SUPERIOR
METHOD)
• The future incremental cash flows are forecasted
and discounted into present value by applying
cost of capital rate
• The projects future cash flows takes into account
of intangibles such as
- Brand Equity
- Marketing
- Distribution Network
- Level of competition in future
- Risk Factors
DISINVESTMENT PERFORMANCE IN INDIA
TIMING OF DISINVESTMENT
RELATIVE STRENGTH INDEX (RSI)
• Developed by 'Wells Wilder‘

• To identify the inherent technical strength or weakness.

R.S.I=100-[100]
1+Rs
where, Rs = Average gain per day
Average loss per day

100 = present days share price

3 P'S OF DISINVESTMENT

• Promise

• Policy

• Performance
PROBLEMS OF PUBLIC SECTOR UNDERTAKINGS
• Price policy of public sector undertakings

• Under utilization of capacity

• Problem related to planning and construction of

projects

• Problems of labour, personnel and management

• Lack of autonomy
TOP 7 DISINVESTED COMPANIES IN INDIA
• Shipping Credit and Investment Corporation of India

• Container Corporation of India Ltd.

• Videsh Sanchar Nigam Ltd. (VSNL)

• Oil and Natural Gas Corporation (ONGC)

• Gas Authority of India Ltd. (GAIL)

• Steel Authority of India Ltd. (SAIL)

• Mahanagar Telephone Nigam Ltd. (MTNL)

BHEL

• Finance ministry decided to disinvest in BHEL and

opened the share’s to public on 03/03/2014

• A total of 11,41,00,000 shares were opened to public

• The Final offer price for shares was 165.55 rupees

• The total percentage of shares disinvested is 5%

• After disinvestment the Indian government holding in

BHEL came down from 67.72% to 62.72%
POWER GRID CORPORATION
• The shares was opened to public on
03/12/2013

• Total number of shares issued 18,51,89,014 i.e.

4% of the total shares

• Shares were issued in order to generate profit

SAIL
• Steel Authority of India Ltd is about to sell the
5% of the stake in October 2014

• Rs 58,425 crore was expected to be raised

through the stake sales

• The Government also plans to sell the shares

of COAL India.
Recent news
• Proceeds from national investment fund to be used to
recapitalise PSU banks

• The government decided to use the proceeds from

disinvestment for capitalisation of state-run banks, insurance
companies and for subscription of shares of state-owned firms
to maintain its 51% stake(a plan introduced in 2013-14)

• The decision was taken at the meeting of Cabinet Committee

of Economic Affairs (CCEA) in order to align operations of
National Investment Fund (NIF) and improve the
disinvestment policy.
SUGGESTIONS

• The government has to form a policy framework for

the entire disinvestment process.

• The government should de-link the disinvestment

process from the budgetary exercise.

• Government should stop setting up of the targets in

every year annual budget and should have a long-
term plan.
• A separate fund should be created for disinvestment
and it should be kept under the control of president
and the fund should be utilized for building
infrastructure and developing the social sector.
• Timing of disinvestment is crucial and the
government should follow a specific method or
process in order to reap more chunks.
• The entire exercise of disinvestment should be
audited by not less than two reputed auditing firms to
have a transparent process.
• The government should have an 'Yearly Action Plan‘
and at the end of the year an 'Action Taken Report'
has to be submitted.
Conclusion
• The study of disinvestment for a such a long period
has revealed that a very meager amount of
disinvestment proceeds has been realized as against the
target.
• There is no clear-cut framework or policy for
disinvestment in India.
• The government has done a little or more so failed to
attract foreign suitors for the disinvestment process in
India.
• The disinvestment process needs to be taken
up more seriously by the government with a
time bound for the programme to conduct the
process with transparency
• the need for institutional structures to insulate
the PSEs from political and bureaucratic
interference to improve their financial returns.
• Only then the real benefits can be reaped.
RERFERNCES
• 1. Government of India, Economic Survey 2001-02, 2002-03, 2003-
04, 2004-05, 2005-06, 2006-07, 2007-08 New Delhi.

• 2. Aswathappa K., Essentials of Business Environment 7th edition

2004, Himalayan Publishing House, New Delhi.

• 3. Datt Ruddar and Sundharam K.P.S., Indian Economy, S, Chand

and Company Ltd. New Delhi 2008.

• 4. Mishra and Puri, Indian Economy, Himalayan Publishing House,

New Delhi 2007.

• 5. G. S. Batra, Emerging trend in Globalisation, Liberalisation and

privatization (edited) 17-36, 2001.
Thank you