DISINVESTMENT

POLICY, PROCEDURES
and
PROGRESS

MINISTRY OF DISINVESTMENT
GOVERNMENT OF''INDIA
 7

DISINVESTMENT
POLICY, PROCEDURES
and
PROGRESS

MINISTRY OF DISINVESTMENT
GOVERNMENT OF INDIA
February 2003
2nd Edition
. «
PREFACE

The Ministry of Disinvestment had published a compilation

on 'Disinvestment Policy and Procedures' in April 2001. It
has proved to be a useful guide for all those taking up
disinvestment, including the States and helped in making
the entire process transparent. In this Second Edition
(February, 2003), the Ministry has attempted updation of
the compilation by incorporating subsequent policy
announcements, the guidelines issued, the experience
gained and the status of disinvestment cases. The
guidelines on 'Valuation' and 'Qualification for Bidders'
have been particularly amplified.

The Ministry of Disinvestment welcomes suggestions to

further improve this compilation so that it continues to be a
useful guide to the users and to the public at large. This
compilation is 'also available on the Ministry's website:
www .divest.nic.in
 CONTENTS
1. CHAPTER: INTRODUCTION 1
1.1 Why this Compilation? !
1.2 Who will benefit? 2
1.3 What kinds of Privatisation Transactions will benefit from this
Compilation? 2

PART A: POLICY
2. CHAPTER: 'a-LOBAL PERSPECTIVE 3
3. CHAPTER: EVOLUTION OF PUBLIC SECTOR IN INDIA , 5
3.1 Industrial Policy Resolution 1956 5
3.2 Main objectives for setting up the Public Sector Enterprises 5
3.3 Growth of Investment. : 6
4. CHAPTER: GENESIS AND RATIONALE FOR DISINVESTMENT IN INDIA 8
4.2 Primary objectives for privatising the PSEs 10
4.3 Other benefits expected from privatisation 10
5. CHAPTER: DISINVESTMENT POLICY 12
5.1 The Initial Phase 12
5.2 The Second Phase 14
6. CHAPTER: MAJOR ISSUES IN DISINVESTMENT 20
6.1 Performance of PSEs 20
6.2 Employee issues 25
6.3 Mode of Disinvestment and advantages of Strategic Sale 27
6.4 Disinvestment and Stock Markets 29
6.5 Legal Issues 30
6.6 Disinvestment Fund 32
7. CHAPTER: THE LESSON OF EXPERIENCE 34

PART B: PROCEDURE
CHAPTER: DISINVESTMENT COMMISSION 35
8.
8.1 Modified Terms Of Reference 36
8.2 New Disinvestment Commission 36
CHAPTER: OVERVIEW OF THE PRIVATISATION PROCESS 41
9.
9.1 Overview of procedure 41
9 .2 Disinvestment - Process Flow Chart 43
CHAPTER: SYSTEMS AND PROCEDURES OF DISINVESTMENT 45
10.
10.1 Cabinet Committee on Disinvestment.. 45
10.2 Core Group of Secretaries on Disinvestment.. .45
10.3 Inter-Ministerial Group 46
10.4 Ministry of Disinvesnnent.. 46
CHAPTER: VARIOUS METHODOLOGIES FOR DISINVESTMENT 51
11.
11.1 StrategicSale 51
11.2 Capital Market 52
11.3 Warehousing 57
11.4 Reduction in Equity 58
 11.5 Trade Sale 60
11.6 Asset Sale and Winding up 60 ·"
11.7 Management/Employees Buyout (MIEBO) 60
11.8 CrossSale 61
11.9 Sale Through Demerger/Spinning off 61
12.
CHAPTER: STRATEGIC SALE 62
12.1 Stage I: Inviting Expression of Interest and Qualification of Bidders 62
12.2 Stage II : Request for Proposal (RFP) & Submission of Bids 66
12.3 Stage III : Completion 77
12.4 Post Closure 78
13.
CHAPTER: VALUATION 80
13.1 Disinvestment Commission's Recommendations 80
13.2 Valuation Methodologies being followed 82
13.3 Standardising The Valuation Approach &-Methodologies 94
14.
CHAPTER: EMPLOYEES' ISSUES 96
14.1 Applicability of Industrial Disputes Act 1947 96
14.2 Provisions governing service conditions 97
14.3 Protection against arbitrary closure of an undertaking 99
14.4 Functional Directors l 00
14.5 Provisions in the Shareholders' Agreement 101
14.6 Labour Related Issues In PSUs Under Disinvestment: 102
PART C: PROGRESS

15. CHAPTER: DISINVESTMENT TILL NOW 103

16. CHAPTER: SUCCESSFUL PRIVATISATIONS IN INDIA 107
16.1 Modem Food Industries (India) Limited (MFIL) 107
16.2 Bharat Aluminium Company Ltd. (BALCO) 109
16.3 Computer Maintenance Corporation Ltd. (CMC Ltd.) 111
16.4 HTL Limited 112
16.5 Indian Tourism Development Corporation (ITDC) 113
Properties Sold 117
16.6 Hotel Corporation of India (HCI) 118
16.7 IBPLi-mited 119
16.8 Videsh Sanchar Nigam Limited (VSNL) 120
16.9 Paradeep Phosphates Ltd. (PPL) 122
16.10 Hindustan Zinc Limited (HZL) 123
16.11 Jessop & Co Ltd 124
16.12 Maruti Udyog Limited 125
16.13 Indian Petrochemicals Corporation Ltd. (IPCL) 129
17. CHAPTER: PRIVATISATION IN STATES 134
17.1 Investment in State Level Public Enterprises 134
17.2 Disinvestment in States 135
18. CHAPTER: FUTURE DIRECTION : 137
18.l Primary objectives of disinvestment 137
19. Annexures : 139
19.1 Annexure-1: Agreement For Advisory Services 139
19.2 Annexure-11: Guidelines for Advisors and Bidders 145
 19 .3 Annexure-III: Expression of Interest.. 146
19.4 Annexure-IV: Statement Of Legal Capacity 147
r_
19.5 Annexure-V: Request For Qualification 148
19.6 Annexure-VI: Qualification For Bidders 150
20. CHAPTER: Abbreviations 157
, 1. CHAPTER: INTRODUCTION

This compilation, in three parts deals with the issues of "Why to Privatise", "How to Privatise",
and what has been done in this regard. Part A deals with the rationale, Part B with the procedure
and Part C with the progress made so far in privatisation.

Privatisation has different nomenclature in different countries like 'disinvestment',

'peopalisation', 'popular capitalism', 'denationalisation', 'prioritisation', 'industrial transition',
'economic democratisation', 'partners in development,' 'dis-incorporation', 'transformation and
restructuring'. The words privatisation and disinvestment are often used interchangeably.
Disinvestment leads to privatisation when the Government held equity is reduced to a level when
the company no longer remains a Government company.

1.1 Why this Compilation?

Policymakers, be it in the administrative Ministries or in the State Governments, occasionally

face a dilemma. They are often convinced about the merits of Privatisation, but do not know how
to implement it. The enormous outpouring of literature on Privatisation, the dramatic success of
privatisation in a large number of diverse countries, and the economic realities of excessive
burden of overstretched public sector in their States, have convinced them to try privatisation.
Yet to most of them, the process of implementing privatisation is often shrouded in mystery.
This fear of the unknown often discourages them from taking the first step.

They are often confronted with a number of questions like which Public Sector Enterprises
should be taken up for disinvestment, which method of disinvestment should be followed, how to
disinvest to get the best realization and optimise on the objectives, how to prepare documents
etc. This seems difficult, particularly because of the diverse nature of PSEs.

Though a group of international practitioners and advisors in the art and science of privatisation
have developed in the West ie. lawyers, bankers, accountants, business consultants,
communicators and the like, with their large body of accumulated experience and expertise,
which is largely .related to the Western economies, not much is available to guide the policy
makers and practitioners, in the developing economies. Thus, while one would do well to learn
from the successful experience, one would have to be careful of the pitfalls as well. In the final
analysis, while experience of other countries is available by way of guidance, one would have to
evolve one's own techniques, best suited to the level of development of the country. It makes a
..
' difference whether or not there already exist fully functioning markets, which could integrate or
assimilate the former PSEs. The historic, cultural and institutional context influences the way in
which and the pace at which privatisation is implemented. Where market economy is not fully
developed, ways would have to be found to safeguard the interests of consumers and investors,
which would ensure a fuller play to the wealth-creating role of the entrepreneurs. The main
purpose of this manual is to demystify this process and to share with policymakers and
practitioners the national experience on implementation of privatisation.

94 M. of Disinvestment/NO/2002-2.
 1.2 Who will benefit?

This compilation is primarily meant for public policy makers entrusted with the job of
implementing privatisation decisions. It will be useful to them in the following ways:

• Provide overall understanding of the privatisation process.

• Assist in planning the logistics to implement the privatisation decision.
• Enable to implement the privatisation transactions.
• Guide the supervision of consultants (financial advisors) recruited to implement the
privatisation transactions.
• Improve design of privatisation policies by painting a realistic picture of the
implementation phase.
• Understanding the benefits of the privatisations completed.

1.3 What kinds of Privatisation Transactions wiJI benefit from this Compilation?

This compilation is intended to be useful for a wide variety of privatisation transactions, for
example, the sale of a bulk of shares in a public enterprise to a strategic investor, and quasi-
privatisation transactions such as management contracts, leases and concessions to the private
sector for operating a public utility. Much of the material in the compilation is relevant to almost
any kind of privatisation transaction that involves competitive bidding. However, the base case is
a common form of privatisation transaction: the sale of a bulk of shares in a state-owned
enterprise to a strategic partner. Deviations from this base case and their implications on
implementation have also been discussed.

While it is not necessary and probably not possible to plan every detail in advance, certain
principles and basic modus operandi need to be agreed upon, different objectives prioritised, the
trade-off identified and a commitment made to drive the programme through, despite the
opposition that might develop from those in favour of maintaining the status quo.

The issues relating to disinvestment/privatisation which have been discussed and the
possible solutions provided thereto, which may be adopted for specific disinvestment/
privatisations are only illustrative and not exhaustive.

2
PART A: POLICY
2. CHAPTER: GLOBAL PERSPECTIVE
Globally, the root of the State intervention in economic activities in the previous century can
perhaps be traced back to early 30s when, in the wake of the Great Depression, Roosevelt tried to
rein in the dubious behaviour of the wayward private enterprises in the US through the New
Deal, which witnessed the setting up of the regulatory agencies like the Securities and Exchange
Commission (SEC) and the onset of large federal deficits, public works expenditure and cheap
money. The US Government's intervention involved support to markets when they failed to
generate socially desirable outcomes and a check on the power of private monopolies. State
intervention in commercial activities seemed to have got a further fillip with the perceived
success of the Soviet industrialisation. This was followed by the large-scale state intervention /
nationalisation during late 40s and 50s, all over the world. driven by the pressure / resource
requirements of rebuilding the post War and postcolonial economies. There appeared to be an
economic consensus around the world accepting public enterprises as an inevitable part of the
economy, especially to manage natural monopolies and the core industries. The lack of
entrepreneurship, security of the country, concern for balanced regional development.
employment generation etc., were some of the other major motivators for encouraging the public
sector trend.

Thus, Britain nationalised its core industries. such as coalmines, iron and steel, electricity, gas.
ports and shipbuilding. In post war France. the economy was divided into three segments - the
private, the controlled and the nationalised. Public utilities, core and strategic sectors.
telecommunications, airlines, automobiles were all either nationalised or brought under majority
ownership and control. In the developing countries too. public sector came to acquire a major
role. Here, the state intervention was fuelled by other considerations also. It was thought that the
social welfare objectives could be best achieved through comprehensive state intervention. This
trend continued throughout 60s and 70s, in several countries.

The reversal of the trend, pursuant to disenchantment with public sector started in I 970s. It was
observed in many countries that the performance of the public enterprises v. as far below the
expectations and often worse than that of the private sector. The public sector seemed to perform
well only when protected through Government created monopolies, entry reservations, high
tariffs and quotas etc. The problems got further accentuated due to pre-emption of massive
resources by the under performing public sector which left little money for more urgent social
needs and public welfare. These problems were brought in sharp focus after the second oil shock
of 1979, when it became clear that the experimeRts with Government ownership of commercial
activities were not succeeding.

In the 1980s, around the globe, the pendulum of political opiruon was swinging decisively
towards the view that the proportion of the GNP due to Government economic activity should be
reduced to the extent possible. This coincided with the belief that even for natural monopolies.
effective regulatory sun-agates for competition could be devised that would protect the
consumers from the abuse of the monopoly or dominance power of these companies.

Many eminent economists have argued that Government must not venture into those areas where
the private sector can undertrke the job efficiently. Lot or emphasis wos.Iaid on market driver-

3
 economies, rather than state administered economies. The collapse of socialist economy of the
Soviet block convinced the policy planners, around the world, that role of the state should be that
of a regulator and a facilitator rather than of the producer. The resources deployed by the
Government for undertaking commercial activities should be unlocked and deployed in social
acti vi ti es.

During the 1980s, the disillusionment witnessed in the socialist economies added to the
disenchantment with the public sector in the mixed economies in the world. USSR started the
economic reforms under Perestroika, which swept the economies of Eastern Europe. China also
introduced far reaching economic reforms and it was recognized that public sector did not
optimise efficiency and productivity of capital. It was realized that the large number of public
enterprises working under mixed economies were plagued by over-centralization in decision-
making and excessive bureaucratisation.

A new trend of global integration began to emerge and countries all over the world, whether
developed or developing, capitalist or socialist, started undergoing vast economic changes,
witnessed by the decline in the role of the State in commercial activities and increasing
privatisation of state owned enterprises. In 1980s, privatisation had started in real earnest in
several parts of the world. This was facilitated by the gradual integration of the world economies,
which ensured that capital and goods flowed more freely to countries suffering from lack of
resources. Foreign capital became freely available to finance large infrastructure projects, for
want of which the domestic private parties were hitherto unable to come forward, and State
support was necessary. Acceptance of the WTO regime by most of the countries has since led to
gradual abolition of quantitative restrictions and reduction in duties and removal of restrictions
on inter country trade. As a result, the relevance of the State in providing resources for various
commercial activities and protecting the interests of consumers has considerably reduced.

It became increasingly evident that to maximize choice before the consumers, all bureaucratic
shackle and controls over business activities should be removed. Business and private
entrepreneurship are to be encouraged to face competition for optimal utilization of capital and
resources - leading to greater consumer choice and enhanced efficiency of production and
services.

-'

4
3. CHAPTER: EVOLUTION OF PUBLIC SECTOR IN
INDIA

3.1 Industrial Policv Resolution 1956

"The State will progressively assume predominance and direct responsibility

for setting up new industrial undertakings and for developing transport
facilities."

-Industrial Policy Resolution 1956.

Before independence, there was almost no 'Public Sector' in the Indian economy. The only
instances worthy of mention were the Railways. the Posts and Telegraphs. the Port Trust, the
Ordnance and the Aircraft factories and few Government managed undertakings like the
Government salt factories, quinine factories etc. After independence and with the advent of
planning, India opted for the dominance of the public sector, firmly believing that political
independence without economic self-reliance was not good for the country. The passage of
Industrial Policy Resolution of 1956 and adoption of the socialist pattern of society led to a
deliberate enlargement of our public sector. It was believed that a dominant public sector would
reduce the inequality of income and wealth, and advance the general prosperity of the nation.
The planners also seemed to believe that by placing the management and workers in public
enterprises in a position of responsibility and trust, they would be so imbued with a sense of the
public good that their actions and aspirations would naturally reflect what was best for the
country.

3.2 Main objectives for setting up the Public Sector Enterprises

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 industrialisation 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;
• To promote balanced regional development;
• To assist in the development of small-scale and ancillary industries; and
• To promote import substitutions, save and earn foreign exchange for the economy.
 In tune with the widespread belief at that time, the 2nd Five Year Plan stated very clearly that
'the adoption of socialist pattern of society as the national objective, as welJ as the need for
planned and rapid development, require that all industries of basic and strategic
importance, or in the nature of public utility services, should be in the public sector. Other
industries, which are essential and require investment on a scale, which only the state, in
the present circumstances, could provide, have also to be in the public sector. The state has,
therefore, to assume direct responsibility for the future development of' industries over a
wider area '.

The Second Plan further emphasized that ' the public sector has to expand rapidly. It has not only
to initiate developments which the private sector is either unwilling or unable to undertake, it has
to play the dominant role in shaping the entire pattern of investment in the economy, whether it
makes the investments directly or whether these are made by the private sector. The private
sector has to play its part within the framework of the comprehensive plan accepted by the
community.'

3.3 Growth of Investment

The investment in public sector enterprises has thus grown enormously from Rs.29 crore as on
1.4.1951 to Rs.2,74,114 crore as on 31.3.2001. The growth of investment in the central public
sector enterprises, including those enterprises that are under construction, over the years, is given
below:

Investment in Public Sector Enterprises

Particulars I Total Investment

I
I
Enterprises
I (Crore) (Numbers)
At the commencement of the I st 5- Year Plan
(1.4.1951) 29 5
At the commencement of the 2nd 5-Year Plan
(1.4.1956) 81 21
At the commencement of the 3rd 5- Year Plan
(1.4.1961) 948 47

At the end of the 3rd 5- Year Plan (31.3.1966) 2,410 73

At the commencement of the 4th 5- Year Plan
(I.Li I 0~0\ 3,897 84
At the commencement of the 5th 5-Year Plan
(1.4.1974) 6,237 122
At the end of 5th 5-Year Plan (31.3.1979) 15.534 169
At the commencement of the 6th 5-Year Plan
(1.4.1980) 18,150 179

6
 At the commencement of the 7th 5-Year Plan 42,673 215
(1.4.1985)
At the end of 7th 5-Year Plan (31.3.1990) 99,329 244

At the commencement of the 8th 5- Year Plan 1,35,445 246

(1.4.1992)
At the end of 8th 5-Year Plan (3 l :3.1997) 2,13,610 242
2,31,024 240
As on 31.3.1998
2,39,167 240
As on 31.3.1999
As on 31.3.2000 2,52,554 240
2,74,114 242
As on 31.03.2001
Source: Public Enterprises Survey, 2000-2001

7
94 M. of Disinvestment/ND/2002-3.
 4. CHAPTER: GENESIS AND RA TIO NALE FOR
DISINVESTMENT IN INDIA

" While the case for economic reforms may take good note of the diagnosis that
India has too much government interference in some fields, it ignores the fact that
India also has insufficient and ineffective government activity in many other fields,
including basic education, health care, social security, land reforms and the
promotion of social change. This inertia, too, contributes to the persistence of
widespread deprivation, economic stagnation and social inequality."

Amartya Sen and Jean Dreze

In India for almost four decades the country was pursuing a path of development in which public
sector was expected to be the engine of growth. However, the public sector had overgrown itself
and their shortcomings started manifesting in the shape of low capacity utilization and low
efficiency due to over manning and poor work ethics, over capitalisation due to substantial time
and cost overruns, inability to innovate, take quick and timely decisions, large interference in
decision making process etc.

The Government started to deregulate the areas of its operation and subsequently, the
disinvestment. in Public Sector Enterprises was announced. The process of deregulation was
aimed at enlarging competition and allowing new firms to enter the markets. The market was
thus opened up to domestic entrepreneurs / industrialists and norms for entry of foreign capital
were liberalised.

· Prior to 1991, a large number of industries were reserved for the public sector:

4.1.1 Industries reserved for PSUs prior to July 1991

1. Arms and Ammunition and allied items of defence equipment.

2. Atomic energy.
3. Iron and steel.
4. Heavy castings and forgings of iron and steel.
5. Heavy plant and machinery required for iron and steel production, for mining, for
machine tool manufacture and such other industries as may be specified by the Central
Government.
6. Heavy electrical plant including large hydraulic and steam turbines.
7. Coal and lignite.
8. Minerals oils.
9. Mining of iron ore, manganese ore, chrome ore, gypsum, sulphur, gold and diamond.
10. Mining and processing copper, lead, zinc, tin molybdenum and wolfram.

8
 11. Minerals specified in the Schedule to the Atomic Energy (Control of Production and
Use) Order 1953.
12. Aircraft.
13. Air transport.
14. Rail transport.
15. Ship building.
16. Telephones and telephone cables, telegraph and wireless apparatus (excluding radio
receiving sets).
17. Generation and distribution of electricity.

Through Notification No. 477(E) dated 25.7.1991, the industries reserved for PSUs were reduced
to eight areas from the previous list of seventeen.

4.1.2 Industries reserved for PSUs since July 1991:

1. Arms and Ammunition and allied items of defence equipment, defence aircraft and
warship.
2. Atomic Energy.
3. Coal and Lignite.
• 4 . Mineral Oils.
5. Mining of iron ore, manganese ore, chrome ore, gypsum, sulphur, gold and diamond.
6. Mining of copper, lead, zinc, tin, molybdenum and wolfram.
7. Minerals specified in the schedule to Atomic Energy (Control of production and use)
Order, 1953.
8. Railway Transport.

This list by December 2002 includes only three areas reserved for PSUs:

1. Atomic Energy.
2. Minerals specified in schedule to atomic Energy (Control of Production and Use)
Order, 1953.
3. Railway Transport.

Because of the current revenue expenditure on items such as interest payments, wages and
salaries of Government employees and subsidies, the Government is left with hardly any surplus
for capital expenditure on social and physical infrastructure. While the Government would like to
spend on basic education, primary health and family welfare, large amount of resources are
blocked in several non-strategic sectors such as hotels, trading companies, consultancy
companies, textile companies, chemical and pharmaceuticals companies, consumer goods

9
 companies etc. Not only this - the continued existence of the PSEs is forcing the Government to
commit further resources for the sustenance of many non-viable PSEs. The Government ..
continues to expose the taxpayers' money to risk, which it can readily avoid. To top it all, there is
a huge amount of debt overhang, which needs to be serviced and reduced before money is
available to invest in infrastructure. All this makes disinvestment of the Government stake in the
PSEs absolutely imperative.

4.2 Primary objectives for privatising the PSEs

The primary objectives for privatising the PSEs are, therefore, as follows:

• Releasing large amount of public resources locked up in non-strategic PSEs, for

redeployment in areas that are much higher on the social priority, such as, basic health,
family welfare, primary education and social and essential infrastructure;
• Stemming further outflow of scarce public resources for sustaining the unviable non-
strategic PSEs;
• Reducing the public debt that is· threatening to assume unmanageable proportions;
• Transferring the commercial risk, to which the taxpayers' money locked up in the public
sector is exposed, to the private sector wherever the private sector is willing and able to
step in - the money that is deployed in the PSEs is really the public money and is exposed
to an entirely avoidable and needless risk, in most cases;
• Releasing other tangible and intangible resources, such as, large manpower currently
locked up in managing the PSEs, and their time and energy, for redeployment in high
priority social sectors that are short of such resources.

4.3 Other benefits expected from privatisation

The other benefits expected to be derived from privatisation are:

• Disinvestment would expose the privatised companies to market discipline, thereby

forcing them to become more efficient and survive or cease on their own financial and
economic strength. They would be able to respond to the market forces much faster and
cater to their business needs in a more professional manner. It would also facilitate in
freeing such companies from Government control and introduce corporate governance in
the privatised companies.
• Disinvestment should result in wider distribution of wealth through offering of shares of
privatised companies to small irrvestors and employees. }'

• Disinvestment would have a beneficial effect on the capital market; the increase in
floating stock would give the market more depth and liquidity, give investors easier exit
options, help in establishing more accurate benchmarks for valuation and pricing, and
facilitate raising of funds by the privatised companies for their projects or expansion, in
future.

10
• Opening up the public sector to appropriate private investment would increase economic
activity and have an overall beneficial effect on the economy, employment and tax
revenues in the medium to long term.
• In many areas, e.g., the telecom and civil aviation sector, the end of public sector
monopoly and privatisation has brought to consumers greater satisfaction by way of more
choices, as well as cheaper and better quality of products and services.
• With the quantitative restrictions removed and tariff levels revised owing to opening of
world markets/WfO agreements, domestic industry has to compete with cheaper
imported goods. In the bargain, the common man now has access to a whole range of
cheap and quality goods. This would require Indian industries to become more
competitive and such restructuring would be easier in a privatised environment.

11
 5. CHAPTER: DISINVESTMENT POLICY
5.1 The Initial Phase

The policy of the Government on disinvestment has evolved over a period and it can be briefly
stated in the form of following policy statements made in chronological order:

5.1.1 Interim Budget 1991-92 (Chandrashekhar Government)

The policy, as enunciated by the Government, under the Prime Minister Shri Chandrashekhar
was to divest up to 20% of the Government equity in selected PSEs in favour of public sector
institutional investors. The objective of the policy was stated to be to broad-base equity, improve
management, enhance availability of resources for these PSEs and yield resources for the
exchequer.

" It has been decided that Government would disinvest up to 20 per cent of
its equity in selected public sector undertakings, in favour of mutual funds
and financial or investment institutions in the public sector. The
disinvestment, which would broad base the equity, improve management and
enhance the availability of resources for these enterprises, is also expected to
yield Rs. 2,500 crore to the exchequer in 1991-92. The modalities and details
of implementing this decision, which are being worked out, would be
announced separately."

5.1.2 Industrial Policy Statement of 24th July, 1991

The Industrial Policy Statement of 24th July 1991 stated that the government would divest part
of its holdings in selected PSEs, but did not place any cap on the extent of disinvestment. Nor did
it restrict disinvestment in favour of any particular class of investors. The objective for
disinvestment was stated to be to provide further market discipline to the performance of public
enterprises.

" In the case of selected enterprises, part of Government holdings in the equity share capital of
these enterprises will be disinvested in order to provide further market discipline to the
performance of public enterprises ".

5.1.3 Budget speech: 1991-92

In this pronouncement, the cap of 20% for disinvestment was reinstated and the eligible
investors' universe was again modified to consist of mutual funds and investment institutions in
the public sector and the workers in these firms. The objectives too were modified; the modified

12
 objectives being: "to raise resources, encourage wider public participation and promote greater
accountability".

"In order to raise resources, encourage wider public participation and promote greater
accountability, up to 20 per cent of Government equity in selected public sector undertakings
would be offered to mutual funds and investment institutions in the public sector, as also to
workers in these firms".

5.1.4 Report of the Committee on the Disinvestment of Shares in PSEs (Rangarajan

Committee): April 1993

The Rangarajan Committee recommendations emphasised the need for substantial disinvestment.
It stated that the percentage of equity to be' divested could be up to 49% for industries explicitly
reserved for the public sector. It recommended that in exceptional cases, such as the enterprises,
which had a dominant market share or where separate identity had to _be maintained for strategic
reasons, the target public ownership level could be kept at 26%, that is, disinvestment could take
place to the extent of 74%. In all other cases, it recommended 100% divestment of Government
stake. Holding of 51 % or more equity by the Government was recommended only for 6 Schedule
industries, namely:

1. Coal and lignite

11. Mineral oils
iii. Arms, ammunition and defence equipment
iv. Atomic energy
v. Radioactive minerals, &
v1. Railway transport

5.1.5 However, the Government did not take any decision on the recommendations of the
Rangarajan Committee.

5.1.6 The Common Minimum PrograIJJPm df the United Front Government: 1996
The highlights of the policy formulated by the United Front Government were, as follows:

• To carefully examine the public sector non-core strategic areas;

• To set up a Disinvestment Commission for advising on the disinvestment related matters;
• To take and implement decisions to disinvest in a transparent manner;
.. • Job security, opportunities for retraining and redeployment to be assured .

No disinvestment objective was, however, mentioned in the policy statement.

13
 " The question of withdrawing the public sector from non-core strategic areas
will be carefully examined subject, however, to assuring the workers and
employees of job security or, in the alternative, opportunities for retraining and
redeploym ent. The United Front Government will establish a Disinvestment
Commi ssion to advise the government on these steps. Any decision to disinvest
will be taken and implemented in a transparent manner ".

5.1.7 Disinvestment Commission Recommendations: Feb.1997- Oct. 1999

Pursuant to the above policy of the United Front Government, a Disinvestment Commission was
set up in 1996. By August 1999, it made recommendations on 58 PSEs. The recommendations
indicated a shift from public offerings to strategic/ trade sales, with transfer of management.

5.2 The Second Phase

5.2.1 Budget Speech: 1998-99

In its first budgetary pronouncement, the new Government decided to bring down Government
shareholding in the PSUs to 26% in the generality of cases, (thus facilitating ownership changes,
as was recommended by the Disinvestment Commission). It however, stated that the
Government would retain majority holdings in PSEs involving strategic considerations and that
the interests of the workers would be protected in all cases.

"Government has also decided that in the generality of cases, the

Government shareholding in public sector enterprises will be brought down
to 26 per cent. In cases of public sector enterprises involving strategic
considerations, government will continue to retain majority holding. The
interest of workers shall be protected in all cases".

5.2.2 Budget Speech: 1999-2000

The policy for 1999 - 2000, as enunciated by the Government, was to strengthen strategic PSUs,
privatise non-strategic PSUs through gradual disinvestment or strategic sale and devise viable
rehabilitation strategies for weak units. One highlight of the policy was that the expression
'privatisation' was used for the first time.

"Government's strategy towards public sector enterprises will continue to

encompass a judicious mix of strengthening strategic units, privatising non-
strategic ones through gradual disinvestment or strategic sale and devising
viable rehabilitation strategies for weak units".

14
5.2.3 Strategic & Non-strategic Classification

On 16th March 1999, the Government classified the Public Sector Enterprises into strategic and
non-strategic areas for the purpose of disinvestment. lt was decided that the Strategic Public
Sector Enterprises would be those in the areas of:

• Arms and ammunitions and the allied items of defence equipment, defence air-crafts
and warships;
• Atomic energy (except in the areas related ~o the generation of nuclear power and
applications of radiation and radio-isotopes to agriculture, medicine and non-strategic
industries);
• Railway transport.

All other Public Sector Enterprises were to be considered non-strategic. For the non-strategic
Public Sector Enterprises, it was decided that the reduction of Government stake to 26% would
not be automatic and the manner and pace of doing so would be worked out on a case-to-case
basis. A decision in regard to the percentage of disinvestment i.e., Government stake going down
to less than 51 % or to 26%, would be taken on the following considerations:

• Whether the industrial sector requires the presence of the public sector as a
countervailing force to prevent concentration of power in private hands, and
• Whether the industrial sector requires a proper regulatory mechanism to protect the
consumer interests before Public Sector Enterprises are privatised.

5.2.4 Budget Speech: 2000 - 2001

The highlights of the policy for the year 2000 - 0 l were that for the first time the Government
made the statement that it was prepared to reduce its stake in the non-strategic PSEs even below
26% if necessary, that there would be increasing emphasis on strategic sales and that the entire
proceeds from disinvestment/ privatisation would be deployed in social sectors, restructuring of
PS Es and retirement of public debt. The main elements of the policy are reiterated as follows:

• To restructure and revive potentially viable PSEs;

• To close down PSEs which cannot be revived;
• To bring down Government equity in all non-strategic PSEs to 26% or lower, if
necessary;
• To fully protect the interests of workers;
• To put in place mechanisms to raise resources from the market against the security of
PSEs' assets for providing an adequate safety-net to workers and employees;
• To establish a systematic policy approach to disinvestment and privatisation -and to
give a fresh impetus to this programme, by setting up a new Department of
aisinvestment;
• To emphasize increasingly on strategic sales of identified PSEs;
• To use the entire receipt from disinvestment and privatisation for meeting expenditure
in social sectors. restructuring of PSEs and retiring public debt.

15
94 M. of Dlsinvestment/ND/2002-4.
 "Government's policy towards the public sector is clear and unambiguous.
Its main elements are: -

• Restructure and revive potentially viable PSUs;

• Close down PSUs which cannot be revived;
• Bring down Government equity in all non-strategic PSUs to 26% or
lower, if necessary; and
• Fully protect the interests of workers.

In line with this policy during the last two years financial restructuring of
20 PSUs has been approved by the Government. As a result, many PSUs
have been able to restructure their operations, improve productivity and
achieve a turn around in performance. Hon'ble members are aware that
Government has recently approved a comprehensive package for
restructuring of SAIL, one of our Navaratna PSUs.

There are many PSUs, which are sick and not capable of being revived.
The only remaining option is to close down these undertakings after
providing an acceptable safety net for the employees and workers.
Resources under the National Renewal Fund have not been sufficient to
meet the cost of Voluntary Separation Scheme (VSS) for such PSUs. At
the same time, these PSUs have assets, which if unbundled and realised,
can be used for funding VSS. Government will put in place mechanisms to
raise resources from the market against the security of these assets and use
these funds to provide an adequate safety-net to workers and employees.

Government have recently established a new Department for

Disinvestment to establish a systematic policy approach to disinvestment
and privatisation and to give a fresh impetus to this programme, which will
emphasize increasingly on strategic sales of identified PSUs. Government
equity in all non-strategic PSUs will be reduced to 26% or less and the
interests of the workers will be fully protected. The entire receipt from
disinvestment and privatisation will be used for meeting expenditure in
social sectors, restructuring of PSUs and retiring public debt."

5.2.5 Excerpts from the Address by the President to the Joint Session of Parliament
(February, 2001)

"The public sector has played a vital role in the development of our economy. However, the
nature of this role cannot remain frozen to what it was conceived fifty years ago - a time when
the technological landscape, and the national and international economic environment were so
very different. The private sector in India has come of age, contributing substantially to our
nation-building process. Therefore, both the public sector and private sector need to be viewed as
mutually complementary parts of the national sector. The private sector must assume greater
public responsibilities just as the public sector needs to focus more on achieving results in a
i:.'.· •••

16
highly competitive market. While some public enterprises are making profits, quite a few have
accumulated huge losses. With public finances under intense pressure, Governments are just not
able to sustain them much longer. Accordingly, the Centre as well as several State Governments
are compelled to embark on a programme of disinvestment.

The Government's approach to PSUs has a three-fold objective: revival of potentially viable
enterprises; closing down of those PSUs that cannot be revived; and bringing down Government
equity in non-strategic PSUs to 26 percent or lower. Interests of workers will be fully protected
through attractive YRS and other measures. This programme has already achieved some initial
successes. The Government has decided to disinvest a substantial part of its equity in enterprises
such as Indian Airlines, Air India, ITDC, IPCL, YSNL , CMC, BALCO, Hindustan Zinc, and
Maruti Udyog. Where necessary, strategic partners would be selected through a transparent
process".

5.2.6 Budget Speech: 2001 - 2002

To use the proceeds for providing -

• Restructuring assistance to PSUs

• Safety net to workers
• Reduction of debt burden
• Additional budgetary support for the Plan, primarily in the social and infrastructure
sectors (contingent upon realisation of the anticipated receipt.)

"Given the advanced stage of the process of disinvestment in many of these

companies, I am emboldened to take credit for a receipt of Rs 12000 crore
from disinvestment during the next year. An amount of Rs 7000 crore out of
this will be used for providing restructuring assistance to PSUs, safety net to
workers and reduction of debt burden. A sum of Rs 5000 crore will be used to
provide additional budgetary support for the Plan primarily in the social and
infrastructure sectors. This additional allocation for the plan will be contingent
upon realisation of the anticipated receipts. In consultation with Planning
Commission I shall come up with sectoral allocation proposals during the
course of the year."

5.2.7 Excerpts from the Address by the President to the Joint Session of Parliament
(February, 2002)
"The Public sector has played a laudable role in enabling our country to achieve the national
objective of self-reliance. However, the significantly changed economic environment that now
prevails both in India and globally makes it imperative for both the public sector and the private
sector to become competitive. Learning from our experience, especially over the last decade,
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

17
 cannot be sustained any longer. The disinvestment policy and the transparent procedures adopted
for disinvestment have now been widely accepted and the shift in emphasis from disinvestment
of minority shares to strategic sale has yielded excellent results. The Government has taken two
major initiatives to improve the safety net for the workers of PSUs. The first enhanced VRS
benefits in those PSUs where wage revision had not taken place in 1992 or 1997. The second
increased training opportunities for self-employment for workers retiring under VRS."

5.2.8 Excerpts from the Budget Speech for 2002-03 of the Finance Minister
Privatisation:

"With the streamlined procedure for disinvestment and privatisation, I am happy to report that
the Government has now completed strategic sales in 7 public sector companies and some hotels
properties of the Hotel Corporation of India (HCI) and the India Tourism Development
Corporation (!TDC). The change in .approach from the disinvestment of small lots of shares to
strategic sales of blocks of 'shares to strategic investors has improved the price earning ratios
obtained. We expect to complete the disinvestment in another 6 companies and the remaining
hotels in HCI and !TDC this year. Disinvestment receipts for the present year are estimated -at
Rs. 5,000 crore excluding the special dividend from VSNL of Rs. 1,887 crore. Encouraged by
these results, I am once again taking credit for a receipt of Rs. 12,000 crore from
disinvestment next year."

5.2.9 Suo - Moto Statement of Shri Arun Shourie, Minister of Disinvestment, made in
both Houses of Parliament on 9th December, 2002
Review of policy and new directions

The main objective of disinvestment is to put national resources and assets to optimal use and in
particular to unleash the productive potential inherent in our public sector enterprises. The policy
of disinvestment specifically aims at:

• Modernization and upgradation of Public Sector Enterprises;

• Creation of new assets;
• Generating of employment; and
• Retiring of public debt.

Government would continue to ensure that disinvestment does not result in alienation of national
assets, which, through the process of disinvestment, remain where they are. It will also ensure
that disinvestment does not result in private monopolies.

In order to provide complete visibility to the Government's continued commitment of utilisation

of disinvestment proceeds for social and infrastructure sectors, the Government would set up a
Disinvestment Proceeds Fund. This Fund will be used for financing fresh employment
opportunities and investment, and for retirerrient of public debt.

For the disinvestment of natural asset companies, the Ministry of Finance and the Ministry of
Disinvestment will work out guidelines.

18
The Ministry of Finance will also prepare for consideration of the Cabinet Committee on
Disinvestment a paper on the feasibility and modalities of setting up an Asset Management
Company to hold, manage and dispose the residual holding of the Government in the companies
in which Government equity has been disinvested to a strategic partner.

On 27th December 2002, the CCD decided that Multi State Cooperative Societies under the
Deptt. Of Fertilizers be allowed to participate in the disinvestment of fertilizer PSUs including
National Fertilizers Ltd. (NFL).

19
./
 6. CHAPTER: MAJOR ISSUES IN DISINVESTMENT
6.1 Performance of PSEs

6.1.1 Profitability

If one examines the achievements of the PSEs by the yardstick of objectives they were expected
to achieve, one would observe that many of these objectives have, at best, met with limited
success. The return on investments in PSEs, at least for the last two decades, has been quite poor,
and the PSEs have not been able to generate resources for development. The PSE Survey shows
that between 1986-87 & 1997-98, the Central Government owned PSEs, as a whole, never
earned post tax profits that exceeded 5% of total sales or 6% of capital employed. Thus, the
return earned by the public sector was significantly lower than the rate of return for a time
deposit of one year in commercial banks. Also, the PSEs' highest return on Capital Employed
(6% in 1995-96 and 1997-98) is at least 3% points below the interest paid by the Government on
its borrowings. Thus, adjusted for the effective interest rate, they had actually been giving
negative return on capital. Besides, huge relief had to be given to the loss making PSEs, to help
them survive, as shown later in this chapter.

PSE Profitability Compared to the Private Sector

If the profits of the PSEs working in the monopoly environment are excluded, the picture
becomes even worse. A study shows that, for the period 1990-91 to 1997-98, the unit gross
profits and post tax profits of a sample of ~SEs in the manufacturing sector were significantly
lower than those for the private sector companies (when measured as a proportion of sales
revenue net of indirect taxes). The following Table demonstrates the above point:

{ Profit After Tax (PAT) / Net Sales ( % ) }

As on 3 I 90-91 91-92 92-93 93-94 94-95 95-96 96-97
March 97-98
Pure
manufacturing -4.50 -5.30 -5.40 -6.90 -2.30 -2.40 -4.30
CPSUs -3.90
Manufacturing 5.70 4.90 4.90 6.60 9.10 9.00 '7.00
Private Sector 6.20
Source: NCAER Study Report. "The Lost Decade. '

20
 6.1.2 Cost Control:

The table which follows shows a comparison between the PSEs and the private sector companies
and reveals how the cost structure in PSEs is increasing as compared to private sector, which is
able to contain costs on all parameters. The table shows that whereas the private manufacturing
industry was able to take measures to cut costs, the public sector could not take such measures,
perhaps owing to the nature and compulsions of its ownership. With the advent of WTO, all the
manufactured items being on OGL and in a falling tariff protection regime, the private sectorhas
been taking measures to cut costs. Public Sector Enterprises have not been successful in this
regard. PSEs' performance with regard to manpower costs has also been disappointing. A study
commissioned by NCAER has pointed out that between 1984-85 and 1997-98, whereas the per
capita emoluments of the PSE employees have risen at a compound annual rate of 3.95% in real
terms, the rerl value of sales was 3.51 %, which indicates, "that the PSE Labour force has
appropriated disproportionately large factor payments at the expense of sales".

Comparison of Cost Structure (As Percentage of Sales)

92-93 93-94 94-95 95-96 96-97 97-98

As on 31 March 90-91 91-92

Power & fuel /Net sales 19.5

10.9 12.7 13.5 12.9 13.3 14.9
PSEs minus petro 10.3
6.9 6.6 6.2 6.5 6.6 5.0
Pvt. sector mfa. 6.8 7.0

Wages/Net Sales 19.1 23.3

18.6 17.3 18.1 17.7 17.6 19.2
PSEs minus petro 7.9 8.2 6.5
8.9 8.8 8.6 8.1 7.9
Pvt. sector mfg.

Interest / Net sales 9.8 11.7

9.9 11.3 11.5 9.0 9.1
PSEs minus pctro 8.8
5.2 S.2 5.8 5.9 4.7
Pvt. sector mfg. 6.0 6.7 6.0

22.8 20.2 21.4 23.1 38.1

Total 16.0 15.6 20.6
Wages+
Interest+
Power differential
Source: NCAER Study Report. "The Lost Decade"

'

21
 6.1.3 Recurring Budgetary support to PSEs

The next two tables show that despite huge investment in the public sector, the Government is
required to provide more funds every year that go into maintaining of the unviable / weak PSEs
and the extent of drain that the PSEs continue to cause on the exchequer.

(1) (2) (Rs. in crore)

(3) (4) (5) (6)
Year Total investment in Dividend (7)
Budgetary Guarantees Waiver of
CPSUs Total liability
declared support {RE) for loans loans, intt, on Govt. on
/LCs/ other penal intt account of
payments CPSUs
Eauity Loans Equity Loans
1997-98 76591 154433 3609 (4+5+6)
3004 4133 5372 556 13065
1998-99 80313 158854 4932 3215 4015 4059 1769 13058
1999-00 84436 168309 5455 4378 4028 6094 6191 20691
2000-01 89337 184777 8260 4742 4154 14651 1830 25377
..
~ : Fmance Ministry (Budget document), CAG Report, DPE Survey

The Hidden Subsidies

Cost of Revival/ Restructuring of Sick PSEs

(Rupees m crore

Since 1992-93 Proposals= approved in the last 3 Total

years upto March2000
• (23 new proposals aooroved)

Fresh infusion of funds 3190 2053 5243

Loans converted into 7630 2720

equity 10350

Loans written off 10126 8285 18411

Total amount involved 20,946 13,058 34,104

Plus: Waiver of guarantee fee, freezing of loan / interest payments, moratorium on repayment, exemption from
payment of taxes, etc. ·

22
 6.1.4 Industrial Sickness in CPSUs

To save the PSUs from sickness, the government has been sanctioning restructuring packages
from time to time. The table below is only an illustrative list of the losses which the PSEs have
accumulated in spite of several restructuring packages:

ILLUSTRATIONS OF PSEs: RESTRUCTURING /REHABILITATION UNDERTAKEN

(Rs. in crore)

Approx. amount of Paid up Net Worth P.&L.A/C

No PSE No. of rehabilitation/
Capital (31.3.00) accumulated
restructuring attempts made waiver/ fresh funds
infused* losses (31.3.00)
for revival
Project never got
1040.49 520.9
l Haldia Fertiliser Project k:ommissioned.
568.72 432.65 1.15 -431.5
2 Paradeep Phosohates Ltd. 1994,2000,2001
901.44 8 -806.52 -873.99
3 EPIL -------
Hindustan Paper Corp. 102.28 -595
1994, 1996 136.68 69 l.41
4 ltd. -301.93
347.09 130.5 24.1
5 HMT 2000
72.15 65.06 -18.8 -124.3
6 NEPA 1999
81.06 15.73 -148.88 -185.05
7 Praza Tools Ltd. 1999
661.8 38.38 40.08 NA
8 Scooters India Ltd. 1996
117.74 21.02 -99.59 -120.61
9 Triveni Structural 1977& 1986
Tungbhadra Steel Product 7.47 -2.11
1986 1437.87 7.09
10 Ltd. -342.6
762.16 531.61 5.53
11 Hindustan Couper 1998
1640.34 448.12 -695.07 -1152.41
12 Heavv Engineering Coro. 1972, 75,81,89,97, 1999
Bharat_Refractories !Two revival packages
approved (July 96 and Jan.99) 103.9 -66.19 -169.06
61.64
13

432.78 411.41 -93.03 -559.74

14 Hindustan Cables Jan-99
Hindustan Shipyard Two attempts since 1995
96.81 -969.58 -I 071.49
1470.9
15
Hind.Steel Works Const. 1997-99 -414.43 -531.55
1469.96 20
16 Ltd.
1993-2002 630.58
Indian Drugs & -1425.21
116.88 -1095.72
17 !Pharma.Ltd.
133.98 24.05 -26.76 -101.3
Referred to BIFR in 1993
18 Instrumentations -211.2 -302.41
1986, 1997, 2002 ~66 ~9.16
19 Jessop & Co.
Mining and Allied (1973, 76, 1980,86 etc)
Machinery Corporation 39.19 -1060 -1053.8
134.5
20

[Rashtriya Ispat Nigam lJuly 93 & May 98 -4615.51

4509.79 7827.32 3197.97
21 Ltd. -2327.19 -13959.57
15077.67 11599.19
TOTAL . .
Source: BIFR, CAG Report, administrative rmmstry of the PSU concerned .
* indicates only one part of rehabilitation packages, which included many other concessions as follows:

23

94 M. of Dlslnvestment/ND/2002-5.
 The revival packages include a combination of some or all of the following:

I. Conversion of cash losses to interest free loans or equity

2. Moratorium on payment of all loans
3. Interest holiday on outstanding government loans
4. Write off of outstanding non-plan loans
5. Write off interest on government loans
6. Conversion of loans into equity, etc.
8. Conversion of outstanding cash credit into working capital term loan
9. Concession on existing power tariff (by State Government)
l 0. Release of fresh loans
11. Conversion of loans into equity, etc.

Despite huge investments shown above the Government has not even been able to achieve
turnaround in any of the sick companies shown in the Table.

Of the total operating CPS Us as on 31.3.0 I, which are 234, 111 were loss-making and 66 were
registered with the BIFR.

Status of 66 PSUs registered with BIFR (as on 31.12.2001)

Sr. No. Status

No. of Com_.E>_anies
1. Declared No Lon__g_er Sick 3
2. Dismissed As Non Maintainable 2
3. Draft Scheme Circulated 13
4. Failed and Reo_Qened 5
5. Revival Scheme Sanctioned 10
6. Under En_quiry 9
7. Winding U_Q Notice 6
8. Winding UJJ Recommended 18
9. TOTAL 66

The Public Enterprises Survey 2000-01 shows that out of the equity invested in the Central
Government PSEs (Rs.86152 crore.), the Central Government, State Government, holding
companies and foreign investors held as much as Rs. 83725 crore. Of the remaining equity (Rs.
2427 crore), a substantial chunk was held by financial institutions and banks. Thus, there has
been little redistribution of wealth to the small investor/ public at large either.

24
As regards the objective of balanced regional development, despite five decades of attempted
industrialisation through the PSEs, there are still many pockets, especially in the eastern and
northeastern parts of the country, which woefully lack in industrial growth and infrastructure.
Commendable growth has, no doubt, taken place as far as the small scale and ancillary industries
are concerned. However, most of these have not been able to keep pace with the times and the
changing scenario and suffer from lack of economies of scale, obsolete technologies and many
other ills.

The objectives of import substitution, saving and earning foreign exchange through the PSEs too,
have met with only limited success.

It has been widely observed that the PSEs have no commercial motivation. Their financial needs
have often to be subordinated to other macro-economic considerations and they often face
shortage of funds. They generally survive on monopolistic profits. Apart from all this, the
increasing integration of the Indian financial, capital and foreign exchange markets with global
markets, starting with the economic reforms of July 1991 and the recent WTO Agreements, have
exposed the public sector to market forces, as a result of which it now finds itself unable to stand
on its own feet without State support.

6.2 Employee issues

The table below illustrates that barring the organized private sector, employment levels were
stagnant in the 1990's. Of the 1.6 million jobs added in the organized sector 1 million, or two
thirds, were added in the private sector during the period 1991 to 2000. This indicates that the
private sector has become the major source for incremental employment in the organized sector
of the economy over the last decade.

Employment in organized sectors (million nos.)

State Municipalities Quasi- Private Total

001
Government government
7.0 2.2 I 6.2 7.6 26.4
1990 3.4
7.5 2.3 6.3 8.6 28.0
2000 3.3
Source: Economic Survey 2001-02

According to NSSO statistics, the total workforce in India during 1997 was about 355 million.
Out of this, the organized sector accounted for 27 million workers, of which the Central and
State Governments and the Central and the State PSEs employed only 2 million workers.

25
 NSSO Statistics

l. Total workforce in India Rural: 269 million

(Source NSSO 1997) Urban: 86 million
Total: 355 million

2. Total workforce in organised sector Government: 20 million*

Private: 7 million
Total: 27 million
3. Total workforce in CPSEs About 2 million

4. Investment supporting retention

of this workforce (as on 31.3.01) Rs. 274,114 er.

(*Includes Central I State I Semi Government, Central I State I Semi Public Sector)

Despite these investments, and no privatisation until 1999, the CPSEs workforce is declining;

It is worth noting that even before privatisation, the PSEs workforce has been consistently going
down - at least during the last ten years - due to economic pressures. The total work· force in
Central PSEs has come down i.e. from 2.18 million as on 31st March 1992 to 1.74 million as on
31st March 2001.

Protection of Workers' Interests

CPSE Emplgxment
No. of employees

(millions)
1991-92 2.18
1992-93 2.15
1993-94 2.07
1994-95 2.06
1995-96 2.05
1996-97 2.00
1997-98 1.96
1998-99 1.90
1999-00 1.80
2000-01 1.74
(Source: Public Enterprises Survey)

26
However, in the companies privatised till now, no labour retrenchment has taken place.
Whenever, rationalization has been undertaken, a YRS package at least equal to that offered by
the PSU before privatisation is offered. As a policy, employees are given shares at discounted
rates, even at lower of 113rd of the strategic sale price or market price. At the time of
privatisation, suitable provisions are made in the Share Holders' Agreement (SHA) to protect
employee interest. "Best efforts" clause is also incorporated in SHA mentioning the benefits
given by the Government to the members of SC/ST, physically challenged person and other
socially disadvantaged categories of the society stating that the Strategic Partner shall use its best
efforts to cause the company to provide adequate job opportunities to such persons.

In most of the privatised companies better working conditions have been provided. Training, use
of computers and other employee welfare measures have been introduced.

If the funds invested in the PSEs' shares were to be deployed in areas such as infrastructure that
would have perhaps generated more employment and ensured better redistribution of wealth.

The DPE Survey points out that large scale employment by public sector enterprises has, over
the years, led to a situation where some of the enterprises are saddled with over employment or
excess manpower resulting in low level of per capita productivity. If the privatised companies
grow rapidly, no· labour restructuring may be required. In some companies where strategic sale
has taken place, employees have often been rewarded with better pay scales and allowances,
details of which can be seen in other Chapters.

6.3 Mode of Disinvestment and advantages of Strategic Sale

Before the year 2000, the Government had primarily sold minority shares in public sector
companies. The price realized through the sale of shares, even in blue chip companies like IOC,
BPCL, HPCL, GAIL & VSNL was low as the following table indicating Price to Earning Ratios
would indicate. On the other hand, the prices realized through strategic disinvestment have been
very much higher.

27
 SALE OF SHARES Vs.STRATEGIC DISINVESTMENT
PRICE EARNING RATIOS

Sale of Shares Strategic Disinvestment

1991-99 2000-2002
1. IOC 4.9 BALCO 19**
2. BPCL 5.7 CMC 12
3. HPCL 5.9 HTL 37
4. GAIL 4.4 IBP 63
5. VSNL 6.0 VSNL 11 **
(in monopoly days) (after the end of
monopoly)
6. HZL 26
7. MFIL Very high*
8. LJMC - do- l
9 PPL - do-
10 JESSOP - do-
11 MARUTI 89
12 IPCL 58
*As earning per share was negative.
**Inclusive of income from special dividend prior to disinvestment etc.

During the period 1991-2000, the sale of minority share of public sector undertakings had led to
an income of about Rs. 19,000 crore. Most of the shares during this period were picked up by
financial institutions. Unit Trust of India was one such institution, which had picked up sizeable
number of shares. Since the public perception of public sector companies is that they would not
be paying good dividends, the prices of shares fell in a number of cases, with the result that UTI
lost Rs. 5056 crore over an investment of Rs. 6403 crore made by them. However, with the
market prices of PSU shares picking up after a few major disinvestments, the loss to UTI on PSU
portfolio has decreased to Rs. 4284 crore as shown in the table below:

Sale to UTI

(Rs. in Crore)
As on As on
4.09.01 19.08.02
1. Payment for PSUs shares divested from 1991-92 6403 6403
to 1994-95 by UTI.
2. Value of investment as on date would have been 13109 14185
@ 9% p.a. compounded annually.
3. Notional 2rofit on deposit. 6706 7782 -,
4. UTI earned net profit on this investment * 1650 3498
5. Net loss as compared to bank deposit
• Notional, at market price. * 5056 4284

The experience so far has shown the distinct advantage of strategic sale option over
other modes of disinvestments.

28
 6.4 Disinvestment and Stock Markets
,
Bombay Stock Exchange has established a PSU index comprising 34 listed Public Sector
Undertakings (PSUs) in June 2001. The value of PSU index and their market capitalisation this
year have been tracked and it can be observed that market value of listed PSU shares have
responded to Government's disinvestment decisions.

While the share prices in the year have seen many highs and lows due to attack on WTC in New
York on September 11, 2001 and the attack on Parliament in New Delhi on December 13, 2001,
1h
it may be observed from the table that on 2nd April, 2001 and 8 Jan 2002, the percent of PSU
market cap to total BSE market cap and the BSEPSU index was almost the same. However,
February 2002 onwards has seen a rise in market cap of PSU shares (big disinvestments like
VSNL, IBP, HZL, Maruti and IPCL have established Govt.'s earnestness in the process).

However, due to uncertainties in government decisions regarding certain disinvestments, the

index and the market cap. of BSEPSU and total BSE has reduced drastically and was at its
lowest on 1st October 2002.

PERFORMANCE OF LISTED PSUs: MARKET CAPITALISATION·

Date BSE-PSU TOTAL Market Capital (Rs. Crs.)

INDEX PSU Total-BSE %

PSU/f otal BSE

April 2, 2001 934.09 97501.33 560617.39 17.39

Jan. 8, 2002 932.32 96062.63 556551.62 17.26

July 15, 2002 1699.74 170375.17 645774.25 26.38%

Between Increase 77.3 % 16 %

8/ l/02-15/07/02 (Rs. 74312.54 er.) (Rs. 89222.63 er.)

Oct. 1, 2002 1370.98 137421.11 . 565778.89 24.29%

Between Decrease 19.3 % 12 %

15/7/02-1 / l 0/02 (Rs.32954.06 er.) (Rs.79995.36 er.)

Source: BSE

29
 The PSUs t1 ·t were under disinvestment have also shown particular increase in their share prices
during this period.

Company Name Market share price as Market share price as % Increase

on January 8, 2002 on July 15, 2002
(Rs. per share) (Rs. per share)
Madras Fertiliser Ltd. 3.5 13.20 277
Enzz. India Ltd. 80.15 374.55 367
Balmer Lawrie Ltd. 23.85 97.90 310
Hindustan Organics 7.25 22.45 209
Chemicals Ltd.
Sh!I)2ing Corpn. Oflndia 31.55 86.20 173
Hindustan Machine Tools 4.50 28.40 531
Total 150.80 622.70 313
Source: BSE

The companies in which disinvestment decision was deferred show specifically high percent of
decli nem
. th err
. s h are _IJnces
. as s h own b eow:
1
Company Market price as on Market price as on
t
Name 1/04/02 (Rs. per share) 1/10/02 (Rs. per share) % Decrease
BPCL 338.5 175.95 48
HPCL 312.95 172.45 44.89
Source: BSE

6.5 Legal Issues

Since the Ministry of Disinvestment came into being in December 1999, there have been a large
number of lawsuits filed against the process for various reasons.

SUMMARY OF DISINVSTMENT RELATED COURT CASES

(AS ON 31.12.002)

1. Total number of cases filed· up to 30.11.2002- 40

2. !TDC related cases 23

3. Total cases out of 40 dismissed 21

4. Number of pending cases 19

!
5. Out of pending cases related tolTDC cases
transferred to Supreme Court 7

Note: The above table does not include cases where the challenge is not to disinvestment but to
other aspects like pay revision etc.

30
 th
Out of the cases indicated above, there has been a landm ark judgement delivered on 10
December 2001 validating the disinvestment by the Government in BALCO.

LANDMARK JUDGEMENT IN BALCO DISINVESTMENT

51 % of Government held equity in Bharat Aluminium Company Ltd. (BALCO) was disinvested
on 2nd March 2001 in favour of Sterlite Industries (India) Ltd. for Rs. 551.50 crore. In protest,
the workers went on a 67-day strike. Three writ petitions - two in Delhi High Court and one in
Chhattisgarh High Court were filed against disinvestment in BALCO in February 2001. Since
the issues involved in all three cases were similar, a transfer petition was filed by the Ministry of
Disinvestment in the Supreme Court. Supreme Court considered the petition, stayed the
proceedings in the High Courts and transferred all the three petitions for hearing to itself. A
three-judge bench in the Supreme Court heard the case.

Concluding Summary of the Judgement

"In a democracy, it is the prerogative of each elected Government to follow it's own policy.
Often a change in Government may result in the shift in focus or change in economic policies.
Any such change may result in adversely affecting some vested interests. Unless any illegality is
committed in the execution of the policy or the same is contrary to law or mala fide, a decision
bringing about change cannot per se be interfered with by the Court.

Wisdom and advisability of economic policies are ordinarily not amenable to judicial review
unless it can be demonstrated that the policy is contrary to any statutory provision or the
Constitution. In other words, it is not for the Courts to consider relative merits of different
economic policies and consider whether a wiser or better one can be evolved. For testing the
correctness of a policy, the appropriate forum is the Parliament and not the Courts. Here the
policy was tested and the Motion defeated in the Lok Sabha on 1st March 2001.

Thus, apart from the fact that the policy of disinvestment cannot be questioned as such, the facts
herein show that fair, just and equitable procedure has been followed in carrying out this
disinvestment. The allegations of lack of transparency or that the decision was taken in a hurry or
there has been an arbitrary exercise of power is without any basis. It is a matter of regret that on
behalf of State of Chhattisgarh such allegations against the Union of India have been made
without any basis. We strongly deprecate such unfounded averments, which have been made by
an officer of the said State.

The offer of the highest bidder has been accepted. This was more than the reserve price, which
was arrived at by a method, which is well recognized, and, therefore, we have not examined the
details in the matter of arriving at the valuation figure. Moreover, valuation is question of fact
and the Court will not interfere in matters of valuation unless the methodology adopted is
arbitrary [see Duncans Industries Ltd. vs. State of U.P. and Others, (2000) 1 SCC 633].

31
94 M. of Oislnvestment/NO/2002-6.
The ratio of the decision in Samatha's case (supra) is inapplicable here as the legal provisions
here are different. The land was validly given to BACLO a number of years ago and today it is
not open to the State of Chhattisgarh to take a summersault and challenge the correctness of it's
own action. Furthermore even with the change in management the land remains with BALCO to
whom it had been validly given on lease.

Judicial interference by way of PIL is available if there is injury to public because of dereliction
of Constitutional or statutory obligations on the part of the government. Here it is not so and in
the sphere of economic policy or reform the Court is not the appropriate forum. Every matter of
public interest or curiosity cannot be the subject matter of PlL. Courts.are not intended to and nor
should they conduct the administration of the country. Courts will interfere only if there is a clear
violation of Constitutional or statutory provisions or non-compliance by the State with it's
Constitutional or statutory duties. None of these contingencies arise in this present case.
In the case of a policy decision on economic matters, the Courts should be very circumspect in
conducting any enquiry or investigation and must be most reluctant to impugn the judgement of
the experts who may have arrived at a conclusion unless the Court is satisfied that there is
illegality in the decision itself.

Lastly, no ex-parte relief by way of injunction or stay especially with respect to public projects
and schemes or economic policies or schemes should be granted. It is only when the Court is
satisfied for good and valid reasons, that there will be irreparable and irretrievable damage, can
an injunction be issued after hearing all the parties. Even then the Petitioner should be put on
appropriate terms such as providing an indemnity or an adequate undertaking to make good the
loss or damage in the event the PIL filed is dismissed.
It is in public interest that there should be early disposal of cases. Public Interest Litigation
should, therefore, be disposed of at the earliest as any delay will be contrary to public interest
and thus become counter-productive.
For the aforesaid reasons stated in this judgment, we hold that the disinvestment by the
Government in BALCO was not invalid."

6.6 Disinvestment Fund

The proposal to set up a Fund with the proceeds from disinvestment has been raised from time to
time. Disinvestment Commission in its First Report submitted in February 1997 recommended
"The proceeds of disinvestment be placed separately in a Disinvestment Fund (DF) and not be
fungible with other government receipts ... The resources in the Disinvestment Fund may be used
for temporarily meeting the losses of some PSUs before disinvestment, where required, for a
limited period during the process of short term restructuring or closure, for strengthenisg
marginally loss making PSUs in preparation for disinvestment and for providing benefits to
workforce found to be surplus during restructuring or closure. The savings to the Budget on
account of such recurring budgetary support to loss making PSUs could be diverted for
investment in sectors like infrastructure, education and health and retirement of public debt. In

32
addition, it is proposed that the funds for conducting the publicity campaign for the
disinvestment of PSU shares be drawn from the Disinvestment Fund. Since the PSUs come
under various administrative Ministries, it is proposed that the Disinvestment Fund be
administered by the Ministry of Finance in order to facilitate better co-ordination and smoother
administration."

The setting up of a Disinvestment Proceeds Fund has recently been announced by the
Government and its structure/ modalities will be notified shortly.

,,, .. _ .

33
7. CHAPTER: THE LESSON OF EXPERIENCE
In "Privatisation: The lesson of Experience", the authors Sunita Kikeri, John Nellis & Mary
Shirley of the World Bank, make the point that governments intent on privatising, face a
challenge: the benefits of efficiency and innovation only materialize if privatisation is done
correctly. The following checklist provides some basic guidelines.

• The more market-friendly a country's policy framework - and appropriate policy is

corrected with capacity to regulate - the less difficulty it will have in privatising on State
Owned Enterprises (SOE), and the higher the likelihood that the sale will turn out
positively.
• SOEs functioning in competitive markets, or in markets easily made competitive, are
prime candidates for privatisation. Their sale is simple compared with that of public
monopolies, and they require little or no regulation.
• An appropriate regulatory framework must be in place before monopolies are privatised.
Failure to regulate properly can hurt consumers and reduce public support for
privatisation.
• Countries can benefit from privatising management through management contracts,
leases, contracting out, or concessions.
• The primary objective of privatisation should be to increase efficiency, not to maximize
revenue (for example, by selling into protected markets) or even to distribute ownership
widely at the expense of managerial efficiency.
• Rather than restrict the market by excluding foreign investors and favouring certain
ethnic groups, governments should experiment with "golden shares" (devices that prevent
complete takeover by non-government interests without retaining management control by
government) and partial share offerings. These could help to win acceptance for foreign
and other buyers.
• A void large new investments in privatisation candidates; the risks usually outweigh the
rewards. Rather prepare for sale by carrying out legal, managerial and organisational
changes.
• Experience shows that labour does not. and need not, lose in privatisation, if governments
pay attention to easing the social cost of unemployment through adequate severance pay,
unemployment benefits, retraining and job search assistance.
• Ideally, let the market set the price, and sell for cash. Realistically, though, negotiated
settlements and financing arrangements or debt-equity swaps may be unavoidable.
• In all privatisations, in all countries, the transaction must be transparent.

34
8. CHAPTER: DISINVESTMENT COMMISSION
The Disinvestment Commission was set up on 23.8.1996 for a period of 3 years with the
following terms of reference:

1. "To draw a comprehensive overall long-term disinvestment programme within 5-10 years
for the PSUs referred to it by the Core Group.
2. To determine the extent of disinvestment (total/partial indicating percentage) in each of
the PSU.
3. To prioritise the PSUs referred to it by the Core Group in terms of the overall
disinvestment programme.
4. To recommend the preferred mode(s) of disinvestment (domestic capital
markets/international capital markets / auction / private sale to identified investors / any
other) for each of the identified PSUs. Also to suggest an appropriate mix of the various
alternatives taking into account the market conditions.
5. To recommend a mix between primary and secondary disinvestments taking into account
Government's objective, the relevant PSU's funding requirement and the market
conditions.
6. To supervise the overall sale process and take decisions on instrument, pricing, timing
etc. as appropriate.
7. To select the financial advisors for the specified PSUs to facilitate the disinvestment
. process.
8. To ensure that appropriate measures are taken during the disinvestment process to protect
the interests of the affected employees including encouraging employees' participation in
the sale process. '
9. To monitor the progress of disinvestment process and take necessary measures and report
periodically to the Government on such progress.
10. To assist the Government to create public awareness of the Government's disinvestment
policies and programmes with a view to developing a commitment by the people.
11. To give wide publicity to the disinvestment proposals so as to ensure larger public
participation in the shareholding of the enterprises.
12. To advice the Government on possible capital restructuring of the enterprises by marginal
investments, if required, so as to ensure enhanced realization through disinvestment.

The Disinvestment Commission will be an advisory body and the Government will take a final
decision on the companies to be disinvested and mode of disinvestment on the basis of advice
given by the Disinvestment Commission. The PSUs would implement the decision of the
Government under the overall supervision of the Disinvestment Commission.

The Commission, while advising the Government on the above matters, will also take into
consideration the interests of stakeholders, workers, consumers and others having a stake in the
relevant public sector undertakings."

35
 PARTB:
PROCEDURE
 8.1 Modified Terms Of Reference

The terms of reference of Disinvestment Commission were modified on 12.1.1998. The modified
terms of reference were as follows:

1. "Disinvestment Commission shall be an advisory body and its role and function would be
to advise the Government on disinvestment in those public sector units that are referred to
it by the Government.
2. The Commission shall also advise the Government on any other matter relating to
disinvestment as may be specifically referred to it by the Government, and also carry out
my other activities relating to disinvestment as may be assigned to it by the Government.

3. In making its recommendations, the Commission will also take into consideration the
interests of workers, employees and others stakeholders, in the public sector unit(s).

4. The final decision on the recommendations of the Disinvestment Commission will vest
with the Government."

The Commission gave recommendations on 58 PSEs out of the 72 PSEs referred to it as per
details given below: -

Mode of disinvestment recommended ,

• ~ Number of PSEs
A. Involving change in ownership /'managefuerit
1. Strategic sale 31
2. Trade sale . . ~ 08
3. Employee buy out/strategic sale , ' "
-·
. .
<
. 02
B. Involving no change in ownership/ management· ·-" ~
1. Offer of shares 05
C. No change
1. No disinvestment 08
D. Closure/ sale of assets 04
GRAND TOTAL 58

Action on all of these has been taken.

8.2 New Disinvestment Commission

As the term of the first Disinvestment Commission expired in the year 1999, a new
Disinvestment Commission was constituted in the month of July 2001 on the same 'Terms of

36
Reference' as were modified for the pervious Commission. The Composition of the
Disinvestment Commission is as follows:

1. Dr. R.H. Patil Chairman

2. Shri N.V. Iyer Member
3. Shri T.L. Shankar Member
4. Dr. V.V. Desai Member
5. Prof. K.S.R. Murthy Member
6. Shri A. Bhattacharya Member Secretary (since
April 2002)

8.2.1 Reference of all Non-Strategic PSEs including their subsidiaries to Disinvestment

Commission

As per the earlier practice the Government referred specific CPSUs to the Disinvestment
Commission. The Government has now decided to refer to the Disinvestment-Commission all
"non-strategic" Public Sector Enterprises (PSEs) including their subsidiaries, excluding IOC,
ONGC & GAIL, for prioritisation and make recommendations.

Since such PSEs would be quite large in number, the Commission would prioritise the cases and
th
make recommendations to the Government on the basis of 16 March 1999 and subsequent
cabinet decisions:

1. PSE where disinvestment would lead to large revenues to the Government,

2. Where disinvestment can be implemented with minimum impediments and in a relatively
shorter time span, and
3. Where continued bleeding of Government resources can be stopped earlier.

While prioritising the cases, the Commission will not examine cases, which have been referred to
BIFR.

Cases where a decision for disinvestment or for location of a joint venture partner has already
been taken by the Government and some progress achieved, a decision would be taken by the
Ministry of Disinvestment in consultation with the Administrative Ministry concerned whether
such cases should be referred to the Disinvestment Commission.

8.2.2 Recommendations of the Disinvestment Commission

The reports recently received from the Disinvestment Commission are being examined. Report
XIII contains reports on PSEs, which had been referred to the earlier Commission. The
recommendations in Report XIII are:

1. Neyveli Lignite Corporation Ltd. (NLC). " .. .In case there is no legal hurdle to a power
manufacturing company from becoming a strategic partner in NLC, Government could consider

37
94 M. of Di91nvestment/ND/2002-7.
 selling up to 51 % of its equity Lo a strategic partner after the bidders have been suitably
prequalified. If there is a legal hurdle, then at least 49% of the equity could be disinvested in the
first instance."

2. Manganese Ore (India) Ltd. " ... a minimum of 51 % of Government equity in MOIL
should be disinvested to a strategic buyer."

3. Rail India Technical and Economic Services Ltd. (RITES). " ... a minimum of 51 % of
Government equity may be given to the employees (both present and past) of RITES while
Government should retain 25% of the equity. The balance equity may be distributed among
reputed infrastructure consultancy organisations and infrastructure leasing and financing
organisations after suitable prequalification."

4. Projects & Equipment Corporation Ltd. (PEC). " ... Government should divest 100%
of its shareholding ... Since the assets of the company are mainly knowledge-based, Government
could consider a management-employee buy-out in PEC. If this is not found feasible,
Government could consider a strategic sale of 100% to any reputed international trading
organisation. In case there is no investor interest in the company, there would be no option but to
close the company after liquidating its assets."

Recommendations in Report XIV are as follows:

1. IR CON International Ltd. " .. .In order to bring in efficiencies by way of greater focus
on value drivers, strategic sale of 51 % stake and transfer of management control in the company
through a competitive bidding process is recommended, after having withdrawn necessary
surplus from IRCON ..... With a view to ensuring the retention of the employees on deputation
from Indian Railways as well as other key employees of IRCON, suitable schemes of
incentivisation of employees such as Employee Stock Option Plan (ESOP) I Employees Stock
Purchase Scheme should be explored ..... The government should undertake a phased dilution of
equity, having ensured that the government's stake does not fall below 26% at least for 3-5
years."

2. Central Inland Water Transport Corporation Ltd. " ... in view of the potential of
Inland Weter Transport that can be harnessed by private sector participants, the Commission
recommends that the first option of selling entire equity of GoI to a strategic buyer may be
pursued together with necessary capital restructuring. The restructuring package is to be finalised
in consultation with prospective buyers. If, however, no buyer shows interest, assets of CIWTC
may be sold and the company may be wound up following the prescribed procedure."

3. Cochin Shipyard Limited. " ... the Commission recommends that at least 51 % control in
CSL should be sold to a strategic partner who can bring in the required efficiencies as well as
capital, to the extent needed. Given the upward potential of CSL, it would be desirable for GoI to
retain some share for some more time."

4. Hindustan Shipyard Limited. " ... recommends disinvestment of the entire Gol
shareholding in HSL to a strategic buyer. The restructuring package, formulated in consultation

38
with prospective buyers, should be concurrent with the disinvestment programme. This would
help in bringing in productivity improvements and marketing ability needed to tum around HSL.
In case the process of disinvestment does not succeed, owing to lack of interest from prospective
buyers, closure of HSL may be inevitable."

Recomm endations in Report XV are as follows:

1. DREDGING CORPORATION OF INDIA LTD. (DCI). " ... recommends that Gol
should disinvest at least '51 % shareholding in DCI to a strategic partner after withdrawal of
necessary cash surplus. Gol should hold at least 26% share for a minimum period of 5 years."

2. NATIONAL PROJECTS CONSTRUCTION CORPORATION LTD (NPCC).

" recommends that a restructuring package, in consultation with prospective buyers, be
formulated and the entire Gol stake disinvested in favour of a strategic buyer. The restructuring
of NPCC and its total disinvestment should be concurrent. In case no strategic buyer shows
interest, or in the event the cost of closure turns out to be much cheaper compared to the cost of
revival and disinvestment, the option of closure has to be pursued."

3. SEMICONDUCTOR COMPLEX LIMITED (SCL). Due to " the strategic nature of

business of SCL may need to be sustained in the national interest, the Commission recommends
that SCL could be merged with a Public Sector company in a related line of business, like BEL.
.... .In case merger with BEL is not considered feasible, Government could explore the
possibility of integration of Very Large Scale Integrated Circuits (VLSI) facilities of Bangalore
(Society for Integrated Circuits Technology & Applied Research) and Gallium Arsenide
Enabling Technology Centre (GAETEC), Hyderabad with SCL to achieve synergy and
optimisation of resources as well as to strengthen the national capability in the field of
semiconductor/ micro-electronics."

4. TELECOMMUNICATIONS CONSULTANTS INDIA LTD. (TCIL).

" ... recommends that a minimum of 51 % of TCIL' s equity, held by Government of India, be
disinvested in favour of a strategic partner, after withdrawal of surplus cash reserves.
Government should retain at least 26% equity for a period of 3-5 years ..... Continuation of
technical workforce of TCIL on deputation from the Department of Telecommunications /
BSNL, post privatisation, may be needed for a few years till the company builds up its own high-
tech human resources and becomes an international major on its own."

Report (XVI) contains recommendations in respect of the following companies:

1. Cotton Corporation of India Ltd. (CCI). " .. .If MSP continues, it is recommended that.
the Gol disinvests initially 51 % of its shareholding in CCI in favour of a strategic partner,
retaining the balance 49% for a minimum period of 3 years. .. If MSP is
discontinued, 100% disinvestment of CCI in favour of a strategic buyer is recommended."

2. Indian Medicines Pharmaceuticals Ltd (IMPCL). " ... Government of India holds 51 %
share and the balance is held by Kumaon Mandal Vikas Nigam Limited (KMVNL), a profit-

39
making undertaking of the Government of Uttaranchal. first offer to sell its equity to
KMVNL at a negotiated price. In case KMVNL is not interested, Gol should sell its entire equity
in IMPCL in favour of a strategic partner through a competitive bidding route. Should KM VNL
be also interested to simultaneously exit from IMPCL, 100% equity of IMPCL may be
disinvested in favour of a strategic buyer."
3. Jute Corporation of India Ltd. (JCI). " .. .In case Government continues the price •
support operations for jute, the Commission recommends that JCI should not be disinvested
now In the event of MSP policy for jute being discontinued. the Commission
recommends that the entire equity of JCI be disinvested in favour of a strategic buyer, together
with organisational and financial restructuring. In case disinvesment of JCI is not possible,
owing to lack of interest of buyers or any other reason, closure/winding up of JCI should be
pursued."
4. National Buildings Construction Corpn. Ltd. (NBCC). " ... recommends that upto 74%
equity in NBCC, held by Government of India, be sold to a strategic partner through the
competitive bidding route. The Commission further recommends that a financial and
organisational restructuring package for NBCC be formulated in consultation with the
prospective bidders and implemented at the time of disinvestment. At least 26% shares should be
retained with the Government for a minimum period of 3 years."

All these recommendations are being examined for action now.

The complete reports can be accessed through the Ministry's website and the website of the
Disinvestment Commission at www.disinvest.gov.in

40
9. CHAPTER: OVERVIEW OF THE PRIVATISATION
PROCESS

9.1 Overview of procedure

The procedure followed by Government of India for disinvestment seeks to promote

administrative simplicity and speed of decision-making without compromising on transparency
and fair play. The process is as follows: ·

• · Proposals for disinvestments in any PSU, based on the recommendations of the

Disinvestment Commission or in accordance with the declared Disinvestment Policy of the
Government, are placed for consideration of the Cabinet Committee on Disinvestment
(CCD).

• After CCD clears the disinvestment proposal, selection of the Advisor is done through a
competitive bidding process.

• After receipt of the Expression of Interest (EOI), in pursuance of Advertisement in

newspapers / website, advisors are selected based on objective screening in the light of
announced criteria/ requirements.

• Bidders are invited through advertisement in newspapers / website to submit their Expression
of Interest. On receiving EOI from bidders, the advisors, after due diligence of the PSU,
prepare the information memorandum in consultation with the concerned PSU. This is given
to the short listed prospective bidders who have entered into a confidentiality agreement. The
list of bidders is prepared after scrutiny of EOls and those are shortlisted, who meet the
prescribed qualification criteria.

• The draft share purchase agreement and the shareholder agreement are also prepared by the
Advisor with the help of the legal Advisors, and the final draft is prepared after detailed
consultation with the bidders, in consultation with the Inter-Ministerial Group (IMO).

• 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, the task of valuation of .the PSU is undertaken in accordance with the
standard national and international practices.

• Based on the feedback received from the prospective bidders, the Share Purchase Agreement
(SPA) and Shareholders Agreement (SHA) are finalised by IMO. After getting them vetted

41
 by the Ministry of Law, they are approved by the Government (CCD). Thereafter, they are
sent to the prospective bidders for inviting their final binding financial bids.
• The material for finalising upset price is taken from the advisors after receipt of financial
bids. The bids are not opened at this stage and are sealed after receipt, in presence of bidders.
'Upset price' determination exercise is thereafter completed by inter-ministerial 'Evaluation
Committee' and the IMG. The sealed bids are then opened by IMG (in presence of
bidders).The 'Upset Price.' Is then compared by the IMG.
• After examination, analysis and evaluation, the recommendations of the Inter Ministerial
Group (IMG) are placed before the Core Group of Secretaries on Disinvestment (CGD),
whose recommendations are placed before the Cabinet Committee on Disinvestment (CCD)
for a final decision regarding selection of the strategic partner, signing of the Share Purchase
Agreement and Shareholders Agreement, and other related issues.
• In case the disinvested PSU's shares are listed on the Stock Exchange, an open offer would
be required to be made by the bidder before closing the transaction, as per SEBI guidelines:
Takeover Code.
• In the disinvestment process mentioned above, Ministry of Disinvestment is assisted at each
stage by an IMG, headed by Secretary (Disinvestment) and comprising officers from the
Ministry of Finance, Department Of Public Enterprises, the Administrative Ministry /
Department controlling the PSU, Department of Company Affairs, Department of Legal
Affairs, CMD I Director (Finance) of the company being disinvested, and the Advisors and
the Legal Advisors.
• After the transaction is completed, all papers and documents relating to it are turned over to
the CAG of India; the CAG prepares an evaluation for sending to Parliament and releasing to
the public.
The process flow chart on the next page shows the various stages of a typical privatisation
transaction through strategic sale route.

42
9.2 Disinvestment - Process Flow Chart

Disinvestment Commission/other Recommendations

Administrative Ministry's Comments

Consideration by Core Group of Secretaries

Approval of CCD

Advertisement for appointment of Advisors

Receipt of Expressions of Interests (Eol) from Advisors

Presentations by Advisors

Selection of Advisor

Appointment of Advisor

Appointment of Legal Advisor/ Fixed Asset Valuers/ other advisers

I Process finalisation & due diligence by Advisors

l
Advertisement for inviting expressions of-interest from bidders
(This is sometimes done after approval of CCD along with EOI for advisors)

43
 Receiving Eol from bidders

Short-listing of bidders on the basis of prescribed/ announced

qualification criteria & signing of confidentiality undertaking

Finalisation & distribution of information package etc.

Data Room visits/Due diligence, etc., by short-listed bidders

Financial/capital/business restructuring, etc.

Finalisation of shareholders'/ share purchase/ other agreements, etc. in consultation with the bidders

Receipt of final bids and resealing of bids in presence of bidders

& receipt of evaluation papers from advisors

Finalisation of upset price by evaluation committee/IMO

Reopenin_g of financial bids in presence of bidders and their comparison with upset price by IMG

IMG/CGD/CCD Approvals (and other regulatory approvals, as needed)

Execution of legal documents and inflow of funds [Public offer announcement by the
Strategic Partner, as per SEBI Takeover Code, wherever applicable].

Documents Submitted to CAG's Office for Assessment

44
10. CHAPTER: SYSTEMS AND PROCEDURES OF
DISINVESTME:N"T

For decision-making and implementation of disinvestment there is a three-tier mechanis~n in

Government of India:

l. Cabinet Committee on Disinvestment (CCD)

2. Core Group of Secretaries on Disinvestment (COD)
3.lnter-Ministerial Group (IMO)

10.1 Cabinet Committee on Disinvestment

The Cabinet Committee on Disinvestment (CCD) is chaired by the Prime Minister and
comprises of the Deputy Prime Minister, Minister of Power, Minister of Law & Justice, Minister
of Commerce and Industry, Minister of External Affairs, Minister of Finance & Company
Affairs, Minister of Petroleum and Natural Gas, Minister of Civil Aviation, Deputy Chairnrnn of
Planning Commission, Minister of Disinvestment and the Minister concerned with the CPSU
under disinvestment.

The functions of the Committee are as follows:

1. To consider the advice of the Core Group of Secretaries regarding policy issues relating to
the disinvestment programme.
2. To decide the price band for the sale of Government shares through international/domestic
capital market route prior to the book building exercise, and t<;r decide the final price of sale
in all cases.
3. To decide the final pricing of the transaction and the strategic partner in case of strategic
sales.
4. To decide on cases where there is disagreement between the recommendations of the
Disinvestment Commission and the views of the Ministry of Disinvestment.
5. To approve the three-year rolling plan and the annual progr~me of disinvestment every
year.

10.2 Core Group of Secretaries on Disinvestment

The Core Group of Secretaries is headed by the Cabinet Secretary and comprises Secretaries
from Ministries of Finance, Industry, Disinvestment, Planning Commission and Administrative
Ministry and any other Department as may be required, like Departments of Legal Affairs,
Company Affairs etc.

The Core Group directly supervises the implementation of the decisions of all strategic sales.

45
94 M. of Disinvestment/ND/2002-8.
 The Core Group monitors the progress of implementation of the CCD decisions.

The Core Group makes recommendations to the CCD on disinvestment policy matters.

10.3 Inter-Ministerial Group

The Inter-Ministerial Group is chaired by Secretary, Ministry of Disinvestment and comprises

officers of Ministry of Finance, Department of Public Enterprises. Deptt. of Legal Affairs, Deptt.
of Company Affairs, Administrative Ministry, the CMD and the Director (Finance) of the Public
Sector Enterpri se concerned.

The Inter-Ministerial Group is the forum where inter-ministerial consultation takes place at the
primary level.

10.4 Ministry of Disinvestment

The Department of Disinvestment was set up vide Notification No.CD-551/99 dated the 10th
December 1999. Yide Notification No. CD-442/200 I dated 61h September 200 I, the Department
of Disinvestment was renamed as Ministry of Disinvestment.

Business Allocated to Ministry of Disinvestment:

I .All matters related to disinvestment of Central Government equity from Central Public Sector
Undertakings.

2.Decisions on the recommendations of the Disinvestment Commission on the modalities of

disinvestment, including restructuring.

3.Implementation of disinvestment decisions, including appointment of advisors, pricing of

shares, and other terms and conditions of disinvestment.

4.Disinvestment Commission.

5.Central Public Sector Undertakings for purposes of disinvestment of Government equity only.

In the above process, the Ministry of Disinvestment is assisted by Advisors for different
purposes.

Normally the disinvestment process is carried out with the assistance of an Advisor (known as
Global Advisor or Financial Advisor). They could be Merchant Bankers or Consultancy /
Advisory firms, but in addition legal advisors, chartered accounts, asset valuers and other valuers
are also required for specific services.

46
\

10.4.1 Advisor

Advisors assist Government in all aspec'ts of privatisation transactions. In addition to

implementing the basic steps mentioned earlier, advisors also counsel Government on the
strategic options open to it for privatisation. The responsibilities of the Advisor, would inter-alia,
cover rendering of advice and assisting government in the disinvestment of the PSU, suggesting
measures to enhance sale value, preparing a detailed information memorandum, marketing of the
offer, inviting and evaluating the bids, assisting during negotiations with prospective buyers,
drawing up the sale/other agreements and advising on post-sale matters.

Advisors are appointed by a competitive bidding procedure. The Ministry of Disinvestment, in

consultation with the CPSU and Administrative Ministry concerned, prepares a brief Terms of
Reference (TOR) for the Advisors and invites expression of interest from them to submit
proposals. They are asked to make a presentation before the Inter Ministerial Group. The
Advisors offering the best technical and financial terms are hired to implement the privatisation
transaction. Advisors are selected on the basis of the following parameters for:

A. Strategic sale.

S.No Criteria ..
L Strategic sale experience
2. Sector expertise and experience
3. Local presence and level of commitment to India
4. Understanding of the PSE
5. Deal team and manpower commitment
6. Research capability
7. Global presence

B. Public offer

S.No Criteria
1. Experience and capabilities in handling simila~ transactions as
Advisors/Global Coordinators
2. Sector expertise and experience
3. Understanding of the PSE
4. Deal team qualification and Manpower commitment to the Deal
5. Marketing stratezv & after market support
6. Local presence and commitment to India
7. Global presence and distribution capabilities
8. Research capabilities

A typical letter of mandate to be signed between the Advisor and the Government is enclosed at
Annexure - I. This may require some modifications depending on the nature of transaction.

47
 Government has also issued guidelines for qualifications 'of Advisors as· enclosed at Annexure -
II.

For strategic sale the fees payable to the Advisors is generally of two types. The first -type is
called 'success fee' which is a fixed percentage of the gross proceeds t0 be received by the
Government from the disinvestment. Since it is directly linked with the amount of money
realizable from disinvestment, it serves as an incentive to the Advisor to get the best price from
disinvestment.

The other type of fee is called 'drop dead fee' which is a I-amp sum amount payable to the
Advisor only in the event of the transaction being called off by the Government. ·

The fees for specific transactions vary from transaction to transaction depending- on various
factors like mode of disinvestment, total realizable value, quantum of work requiredto complete
the transaction, degree of difficulty and chances of success of the transaction etc. Consultants
appointed for disinvestment in certain cases are also given flat / fixed / lump sum fee / asset
valuation fee/ out of pocket expenditure depending on different criteria.

10.4.2 Legal Advisor · ~-

For each privatisation, it is-considered necessary to involve legal advisors who look into the legal
issues and adyise the government with respect to documentation etc. on contractual terms. They
are invited on the basis of their work experience and are selected through a process of limited
competitive bidding by an Inter-department Committee,"from a panel suggested/ recommended
by the Advisors, and are paid a lump sum amount as fees. They help the Government in drafting
and finalising various agreements.

Legal advisors examine the following documents and advise the Government on

1. Material contracts and agreements.

2. Loan and lease agreements to ensure that there are no unduly onerous conditions.
3. Title deeds to ensure that there are no defects of title or onerous conditions.
4. The adequacy of insurance cover and compliance with any lega_t or other requirement.

10.4.3 Accounting Advisors

The Accounting Advisors review the financial, accounting, reporting and planning systems.

They help the government in analysing the balance sheet of the company, its assets and liabilities
and contingent liabilities.

The Accounting Advisors are required to re-cast the final Accounts of the PSU as per the
Accounting standards acceptable to the bidding parties, if necessary.

48
The Accounting Advisors pay particular attention to the way the following items have been
treated:

1. Extraordinary and exceptional items

2. Amortisation and depreciation
3. Capitalisation of expenditure·
4. Recognition of revenue and expenditure items
5. Basis of consolidation of subsidiaries, if any
6. Deferred taxation, and
7. Revaluation of assets.

The task includes:

• Strategic evaluation of operating capability finances and post privatisation prospects of

the state enterprise.
• Evaluation of capital structure .
·• A calculation of the impact of taxation on the privatised enterprise.

The accounting advisor is appointed through a process of limited competitive bidding and is paid
a-lump sum fees.

10.4.4 Asset Valuer

The asset valuation is conducted by well-established government-approved valuers. Normally,

the vafoer is selected by an inter-departmental committee, consisting of representatives from the,
Ministry of Disinvestment / administrative Ministry and the CMD of the company, from out of a
panel suggested/ recommended by the Advisor.

While assessing the fair value of the property, the valuer takes into consideration the following:

1. The status of the title of the company over land and building.
2. Any restrictive covenants incorporated in the title documents imposing limitations on the use
or transfer of the property or any other restrictions.
J. Any restrictions pertaining to the use or transferability of the property or other restrictions
arising from any civic regulations or Master Plan or other reasons.
4. The values at' which transactions have taken place in the recent past for properties of
comparable nature, in terms of use, size, location and other parameters. ·
5. Valuation parameters currently in use by Authorities for determination of stamp duty and
other taxes.
6. Assessment of demand and supply of comparable properties at given locations.
7. The state of maintenance and depreciation of the property, and evaluation of expenditure, if
any, required repairing and renovating the property to suit the intended use. .
8. Terms and conditions of the proposed new lease agreements to be entered into with the
lessors for the purpose of disinvestment.

49
The valuation of the property is done by the asset valuation methodology taking into
consideration the above factors.

Valuation is done for:

• . Plant and Machinery

• Land and Building
• Mines, if any.
• Intangibles, if required.
• Other assets.

Environmental Auditors and Public Relations firms have also been appointed for some CPSUs
under divestment. ·

50
11. CHAPTER: VARIOUS METHODOLOGIES FOR
DISINVESTMENT
The various methodologies include:

1. STRATEGIC SALE
2. CAPITAL MARKET
a. Offer for sale to public at a fixed price
b. Offer for sale to public through book building
c. Secondary market operation
d. International offering
e. Private placement
f. Auction
3. WAREHOUSING
4. REDUCTION IN EQUITY
a. Buy-back of equity
b. Conversion of equity into debt exchangeable into capital market instruments
5. TRADE SALE
6. ASSET SALE/ WINDING UP
7. MANAGEMENT/ EMPLOYEE BUY OUT (M/EBO)
8. CROSS SALE
9. SALE THROUGH DEMERGER / SPINNING OFF

11.1 Strategic Sale

• Pricing: Optimisation/ maximisation through competitive tension and control

premium
• Target investor set: Investors with strategic fit - techno-commercial credentials
• Transaction costs: Low
• Time involved: 6-10 months
• R¢gulation: Companies Act, SEBI Take-over code, Stock Exchange, RBI regulations,
FfPB clearance (for foreign investors).
• Suitability

- Non-strategic Companies
- Companies where Government is willing to give significant management control

• Precedents: MFIL, BALCO, CMC, HTL, VSNL, IBP, HZL, PPL, IPCL etc.
• Methodology: Structuring the transaction in terms of:

- Extent of stake to be divested

- Extent of management rights
- Decisions on pre qualification criteria, bid evaluation criteria and bidding
process

51
 Preparation and circulation of information memorandum to pre-qualified
buyers
Due diligence and preparation of transaction documents
Valuation of Assets/shares
Receiving of bids
Evaluation of bids
Signing of Sale Agreement

• Advantages

Maximises price because of transfer of management rights

Brings technical /marketing/ financial / managerial expertise of the buyer to the
company
Increased value of residual Govt. shareholding
Low cost and less regulation

• Disadvantages

Time consuming
Issues relating to management, land and labour etc. to be resolved

11.2 Capital Market

(a) Offer For Sale To Public At Fixed Price

• Pricing: Decided bdfore the transaction; at a discount to market to ensure success and
immediate capital appreciation for investors
• Target investor set: Mix of retail and wholesale, with some reservation for small
investors
• Transaction costs: High, in the range of 2-5% depending on issue size
• Time involved: 3 - 4 months
·• Regulation: SEBI guidelines, Stock Exchange requirements
• Suitability

Companies for which small investor interest is expected to be substantial

Profit making companies with good future prospects
Companies not in need of significant technical, managerial and marketing inputs

• Precedents: Offer of 1 million shares of VSNL @ Rs.750 per share.

• Methodology: Offer for sale

An issue of ~uity Shares held by Gol to the public at large at a pre-determined

price
Through an Offer Document
Equity Shares can be accompanied by sweeteners such as warrants

52
 Issue amount is thus automatically obtained (No. of securities multiplied by price)
Issue underwritten by the Syndicate Members (may or may not be)

• Advantages

- Ensures broad-based shareholding

- Sets valuation benchmarks for further fund raising/ offer for sale
- Relatively quick method
- Transparent method

• Disadvantages

- Dependent on capital market conditions

Price at a discount to market/ intrinsic price to ensure good response
Process expensive - cost approx. 2- 5 %
Regulatory compliances: SEBI and Stock Exchanges

b) Offer For Sale To Public Through Book Building

• Pricing: Optimised, since price is discovered through a bidding process

• Target investor set: Essentially wholesale but small investor also
• Transaction costs: High, in the range of 2 - 5% depending on issue size
• Time involved: 3-4 months
• Regulation: SEBI guidelines, Stock Exchange requirements
• Suitability:

Companies for which institutional interest is expected to be substantial

Profit making companies with good intrinsic value and future prospects
Companies not in need of significant technical, managerial, marketing inputs

• Precedents: none among PSEs - Hughes. Software Ltd., HCL Technologies Ltd. and
Bharati Televentures in the private sector.
• Methodology: Offer for sale
Issue of Equity Shares to the public at large
Number of securities to be pre-determined and disclosed
Price discovery through bidding by interested investors
Issue amount is thus automatically obtained (No. of securities multiplied by
price)
Issue underwritten by the Syndicate Members (may or may not be)
Offer made through an Offer Document

53
94 M. of Disinvestment/ND/2002-9.
 • Advantages
Optimises price
Ensures broad based shareholding
Sets valuation benchmarks for further fund raising/ offer for sale for IPOs
Relatively quick method - Transparent method
• Disadvantages
Expensive - with cost of 2 - 5%
Regulatory compliances - SEBI Regulations & Stock Exchange

(c) Secondary Market Operation

• Pricing: at market prices

• Target investor set: Essentially wholesale could be retail investor also
• Transaction costs: Low, in terms of brokerage
• Time involved: spot transactions
• Regulation: Stock Exchange requirements
• Suitability:

Companies which have a sizeable floating stock with good intrinsic value and
good future prospects
Companies not in need of significant technical, managerial, marketing inputs etc.

• Precedents: none
• Methodology: sale through market operations

A secondary market sale of Equity Shares.

Through brokers
To interested buyers - institutional and retail
At trading market prices

• Advantages
Low costs - only brokerage to be paid

• Disadvantages

Unsuitable for Companies with low floating stock

Interest may be low
Price dependent on day to day market conditions
Amount of proceeds uncertain - Possibility of price rigging
Highly dependent on the day-to-day demand for the shares
Method may not be considered transparent

54
(d) International Offering [Global Depository Receipts (GDR) / American Depository
Receipts (ADR)]

• Pricing: valuation by International Qualified Institutional Buyers (QIBs) (through

book building) and related to domestic market prices
• Target investor set: Essentially foreign institutional investors, (retail investor also for
ADR)
• Transaction costs: High, in the range of 2-5% depending on issue size (cost of ADR is
higher)
• Time involved: 3-5 months
• Regulation: Disclosure requirements by Securities Exchange Commission (SEC) and
accounting in accordance with US Generally Accepted Accounting Practices (GAAP)
(for ADRs), NASDAQ/ NYSFJ LSE listing requirements
• Suitability

Companies which have stocks listed in the international markets or companies

with actively traded stock in domestic markets
- Companies with good intrinsic value, good future prospects and of international
repute

• Precedents: VSNL, MTNL, GAIL

• Methodology: offer for sale in the international markets

An offer to international investors through issue of Depository Receipts, which

represent underlying shares (ADRs in the USA market and GDRs in markets
other than the USA)
Recasting of accounts as per US GAAP for issue of ADRs and consolidation of
accounts for issue of GD Rs
Preparation of red herring (Offer Document) and road shows
- Price discovery through bidding and allocations made at cut-off price (Dutch
Auction) or at bid price (French Auction)
- The issue is usually fully underwritten
Offer through an offering document

• Advantages

Access to deeper international markets and capital, sometimes at better price.

Creates price tension between the overseas and home market
- Enhances visibility

• Disadvantages

- Time consuming process

Stringent regulatory requirements
Accounting norms and disclosures and regular reporting to SEC in case of ADRs
High cost about 4-5% for AD Rs and about 3% for GDRs

55
 (e) Private Placement of Equity
7

• Pricing: valuation by merchant banker. and feedback from institutional investors or

price discovered through book building
• Target investor set: Essentially institutional including multilateral agencies, private
equity funds
• Transaction costs: low
• Time involved: 1-2 months
• Regulation: Foreign investment guidelines in case of overseas investors, SEBI
guidelines in case of domestic listed companies
• Suitability

Unlisted companies
Listed companies with low floating stock and low volumes
Companies with good intrinsic value and good future prospects

• Precedents: CONCOR, GAIL (Domestic issue with Fils participation)

• Methodology: placement of equity

To a set of institutional investors

At a negotiated price arrived at through valuation or price discovery through book
building -
With issues of management rights and exit option resolved
Through an information memorandum circulated among institutional investors
and due-diligence
In case of listed companies as placement of less than 15% equity to investors does
not trigger Take-over code (as per SEBI guidelines)

• Advantages

Less time consuming

No regulatory compliance requirements, except in case of foreign-investment
Low transaction cost

• Disadvantages

Does not ensure widespread shareholding

May not be considered transparent

(t) Auction

• Pricing: optimised through bidding. In case of Dutch Auction, allotments made at

single price. In case of French Auction, allotments made at bid price
• Target investor set: Essentially institutional

56
 • Transaction costs: Low
• Time involved: 1-2 months
• Regulation: SEBI Take-over code
• Suitability

Companies with good intrinsic value

• Unlisted companies
• Listed companies with low floating stock

• Precedents: Initial rounds of disinvestment in CPSUs.

• Methodology: Auction through the Dutch / French Auction

To a set of institutional investors

At a price discovered through the bidding process
For a pre-determ ined number of Equity Shares
Allocations made

• At a cut-off price to all investors above the cut-off price in case of Dutch
Auction
• At the bid price in case of French Auction

Marketing through Analysts' meet and one-on-one discussions

In case of listed companies, placement of less than 15% equity to each investor to
avoid trigger of Take-over code (or as per SEBI guidelines)

• Advantages

Optimises receipts to the Gol (amount higher in case of French Auction)

Transparent mechanism
Less time consuming with no regulatory compliance requirements
Low transaction cost

• Disadvantages

Does not ensure broad based shareholding

11.3 Warehousing

• Pricing: Market determined price, after building in returns to the warehouser. Profit
on sale, net of selling expenses by warehouser shared in pre-determined ratio
• Target investor set: Essentially institutional
• Transaction costs: Fixed return to warehouser less cost of funds for Gol
• Time involved: within I month
• Regulation: RBI restrictions on bank investments

57
 • Suitability:

Listed companies with adequate liquidity

Potential for growth in market prices

• Precedents: None
• Disadvantages

Wh o will buy shares from the Gol

At a discount to the market price
To sell the shares at a later date in the market, within a specified time frame

11.4 Reduction in Equity

(a) Buy Back Of Shares

• Pricing: In accordance with SEBI Buyback regulations

• Target investor set: Shares bought back by the company
• Transaction cost: Low
• Time involved: Within three months
• Regulations: Companies Act, SEBI Buyback regulations
• Suitability:

Cash rich companies with no immediate capex plans

Low geared companies with good intrinsic value, which is not reflected in
accretion to shareholder value and market price

• Precedents: None in Public sector, Indian Rayon, Reliance Industries Limited in

private sector
• Methodology: Offer by company to buy-back its shares from others
Through tender route

• Buy-back at fixed price

• In case of over subscription, acceptance on proportionate basis

Through book building

• Buy-back through Dutch Auction route- price discovery through bidding by

interested investors- and allocations made at cut-off-price

Valuation to factor in future loss of dividend to the sellers.

58
 • Advantages

Reduces capital and thus improves EPS, Book Value & RoE of the Company post
buy-back
Low cost transaction
Relatively quick method

• Disadvantages

Regulatory requirements .
Post buy-back debt equity ratio not to exceed 2: 1
Maximum number of Equity Shares to be bought back should not exceed 25% of
the existing paid-up capital
The maximum amount that can be expected on a buy-back should not exceed 25%
of the Company's paid- up capital and free reserves

• Reduces cash surplus with the company

(b) Conversion of Equity Into Another Instrument

• Pricing: Book value/ market price based

• Target investor set: Wholesale
• Transaction costs: Low - Placement costs
• Time involved: Up to 3 months
• Regulation: Companies Act
• Suitability:

Cash rich companies with no immediate capex plans

Low geared companies with good intrinsic value which is not reflected in
accretion to shareholder value and market price

• Precedents: NALCO
• Methodology

Conversion of equity into an attractive and suitable capital market instrument,

plain vanilla bonds, deep discount bonds, fully / partially convertible bonds,
bonds with warrants attached, preference shares with/ without warrants
Preparation and circulation of an information memorandum (IM) among
institutional investors
Placement of the instrument

• Advantages
Results in improvement in the capital structure of the Company combined with
funds inflow to seller
Reduces capital & thus improves EPS, Book Value & RoE of the Company
Low cost of transaction
59
 Relatively quick method
No reduction in cash surplus with the Company
• Disadvantages
More regulatory compliance requirements for listed companies
•
11.5 Trade Sale

Trade Sale-means sale of a business or a division or a non-core activity. In addition to price, the
auction to take into account factors such as capital investment to which the bidder is willing to
commit and guarantees the bidder makes to employees and customers.

Though-the total-amount offered is an important factor in the auction, there is also a trade-off for
the seller.between

(1) obtaining the maximum amount of sale proceeds and

(2) ensuring that charges to the customers remain at affordable prices.

For this reason, the seller generally develops a number of selection criteria e.g.

• Indicative bids
• Strengths and capabilities of prospective operators
• Financial strength and credentials of bidders
• Any special conditions/assumptions attached to the bids such as spelling out in advance
the extent to which rate increase will be permitted over a transition period.

A Trade Sale is generally regarded as a quicker option to execute. Public offerings make more
sense when the company to be sold has a reasonable strong skill base and capital markets are
liquid. In UK, Trade sales have generally been used with smaller industries or enterprises.

11.6 Asset Sale and Winding up

This is normally resorted to in companies that are either sick or facing closure. The Asset Sale is
normally done either by open auction or by tender method. Sick companies under SICA are
wound up on the findings of BIFR and orders of the concerned High Court and handed over to
the official liquidator for realisation of dues through liquidation.

11.7 Management/Employees Buyout {M/EBO)

For smaller companies, particularly those that are highly dependent on their personnel,
management/employee buyouts may be suitable privatisation techniques. Although most buyouts
are led by management, active participation by the workforce is a pre-requisite for success. The
workforces are to be necessarily taken along, contributing some of their own money towards the
enterprise. London's Bus service was reorganized into companies, which were purchased by their
managers and employees. Other than National Freight Corporation of UK, which is often cited as
the classic case of 100% employee buyout, there are not well-known examples of such cases in

60
large companies with huge manpower. Perhaps such option is suitable in highly profit-making,
low asset based companies with small and highly motivated manpower.

11.8 Cross Sale

Cross sale is not an option for privatisation. However, Governments seeking to sell enterprises
via Trade Sales should decide at the outset what their policy would be with regard to bids from
Government owned enterprises and spell out such policies in their initial request for
qualifications from potential bidders.

11.9 Sale Through Demerger/Spinning off

Sections 391-394 of the Companies Act 1956 govern demerger. The basic concept of demerger
requires transfer of an undertaking from an existing company ("Transferor Company") to another
existing company (Transferee Company"). The demerged companies have a shadow
shareholding as that of the Transferor Company. For a government Company, the scheme of
demerger has to be approved by Department of Company Affairs. To minimize time, new
transferee companies can be incorporated as shell companies in which the properties of
transferor _company can be hived off i.e. demerged. Such new companies remain as "shell"
companies until the -properties are transferred to them as per the order of DCA. These new
companies continue as Government Companies under Section 617 of the Companies Act and are
formed for the limited purpose of facilitating the demerger on transfer of shares to successful
bidders, whereupon they cease to be Government Companies. Successful sale of a few hotels of
ITDC and HCI (a subsidiary of Indian Airlines) has taken place through this method.

61
94 M. of Dlslnvestment/ND/2002-10.
 12. CHAPTER: STRATEGIC SALE

Government have recently established a new Department for Disinvestment to

establish a systematic policy approach to disinvestment and privatisation and to give a
fresh impetus to this programme, which will emphasize increasingly on strategic sales
of identified PSUs. Government equity in all non-strategic PSUs will be reduced to
26% or less and the interests of the workers will be fully protected. The entire receipt
from disinvestment and privatisation will be used for meeting expenditure in social
sectors, restructuring of PSUs and retiring public debt.
Extracts from Budget Speech of Finance Minister (2000-2001)

With the streamlined procedure for disinvestment and privatisation, I am

happy to report that the Government has now completed strategic sales in 7 public
sector companies and some hotel properties of the Hotel Corporation of India (HCI)
and the India Tourism Development Corporation (ITDC). The change in approach
from the disinvestments of small lots of shares to strategic sales of blocks of shares to
strategic ·investors has improved the price earning ratios obtained. . Encouraged by
these results, I am once again taking credit for a receipt of Rs. 12,000 crore from
disinvestment next year.
Extracts from Budget Speech of Finance Minister (2002-2003)

The strategic sale method was the preferred option by the Rangarajan Committee, as early as
1993 and also recommended by the Disinvestment Commission. Presently, the Finance
Minister's Budget Speeches also spell out the advantages of this method.

The Ministry's website can be accessed for its publication 'Understanding the Strategic Sale
Agreements'. The various stages of a strategic sale have been spelt out below.

A typical three-stage strategic sale process is as follows:

12.1 Stage I : Inviting Expression of Interest and Qualification of Bidders

12.1.1 Issue of Advertisement inviting Expression of Interest (Eol)

A public announcement of a privatisation transaction assures the people of the transparency of

the transaction. A typical advertisement in this category provides a short profile of the enterprise
being privatised, the bidding procedure, deadline for submission of expression of interest or bids,
and the address for further information. Advertisement is normally given in three major national
newspapers and one international newspaper besides an industry/trade journal to which the
enterprise being disinvested belongs, if necessary. A copy of the advertisement along with

62
details of EOI, and PIM are placed on the websites of the PSU, administrative ministry and
Ministry of Disinvestment.

Submission of Preliminary Information Memorandum (PIM) & Supporting Documents to

interested parties.

Preliminary Information Memorandum (PIM)

Before submitting their expression of interest, the prospective investors would be interested in
knowing details about the company. The purpose of Preliminary Information Memorandum is to
assist the investors in deciding whether they should proceed with the proposed disinvestment.

Structure Of PIM

A typical Preliminary Information Memorandum includes the following information:

a. Introduction

This gives a brief of the government decision regarding disinvestment in the company, the extent
of equity held by the Government, the extent of equity to be the disinvested, 'the contact person,
the relevant telephone numbers and fax nos. and email addresses.

b. Information About The Company

This contains information about the company, its history, its activities, the location,
management, human resources, quality control, markets and marketing arrangements, capital
structure, various assets and other details about the company. It also gives the strengths and
opportunities of the company.

c. Financial Details

The Preliminary Information Memorandum gives the profit and loss account and balance sheet
of the company for the last five year.

12.1.2 Submission of Expression of Interest

Any company / consortium, participating in a privatisation transaction has to submit an

Expression of Interest. It is normally submitted along with a statement of legal capacity and a
litigation impact statement. It is the responsibility of the applicant to ensure that EOI is delivered
at the prescribed address by the stated deadline. The covering envelope of all EOis submitted
should be clearly marked "Private and Confidential - Expression of Interest for the Strategic
Sale". Responses received after the deadline or not accompanied by the required documentation
are not considered. A company /consortium may be disqualified for any misrepresentation,
failure to provide· the required information or if any member has already submitted a separate
Eol.

63
 Formats

The preliminary information memorandum contains the conditions for (a) qualification of
bidders and (b) formats for submitting (i) Expression of Interest (ii) statement of legal capacity
and (iii) Request for Qualification (RFQ). Standard formats used for the purpose are enclosed at
Annexure II, III, IV and V.

Detailed contents of EOis

All EOis generally include the following information:

1. Executive Summary

This provides a brief description of the company and (where appropriate) of each member in the
consortium, containing details like ownership structure, write up on business history and growth,
business areas I activities, respective revenue details, etc. It includes a brief commentary on the
capability of the company/ consortium, as demonstrated, inter alia, in its past track record, to run
its own business.

2. Background Information

a) The Applicant

The full name, address, telephone and facsimile numbers, e-mail address of the company or of
each member of the consortium and the names and the titles of the persons who are the principal
points of contact.

b) Basic Information

This contains the details of the place of incorporation, registered office, current directors, key
management personnel and principal shareholders of the company / companies in the
consortium. It also contains a copy of its current Memorandum and Articles of Association and
copies of audited accounts for the last three years of the company/ companies in the consortium.

3. Management Organization

i) An overview of the applicant's senior management and organisation structure and in the case
of a consortium, that of each member; and

ii) Summaries of the roles and responsibilities of the directors, key management personnel of the
applicant and, in case of a consortium, those of each member.

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4.International Operations/ Joint Ventures/ Alliances

Brief write up of the company's or, in the case of a consortium, of the members, of their
international operations, joint ventures/ alliances (whether international or domestic), nature and
size of such operations, equity ownership. if applicable, copies of the audited accounts for the
last one year of such companies.

5. Professional Advisors

The names and addresses of those companies and the professional firms, if any, who are (or will
be) advising the applicant/consortium, together with the names of the principal individual
advisors at those companies and firms.

6.Legal Capacity of the Company / Accuracy of Information

Every company and each member of a consortium must provide with the EOI a representation,
duly executed by its authorised official/ representative that it has the requisite corporate
authorisation to submit the EOI and that all information provided in the EOI is complete and
accurate in all material respects to the best of their knowledge. If, at a subsequent date, it is
discovered that the company or any consortium member did not either possess the requisite
authorisation or that any part of the information provided in the EOI was not complete or
accurate in any material respect, the Government reserves the right to disqualify such company
or consortium or member of the consortium from the process.

7. Outstanding Litigation

Each company, and each member of a consortium must provide with the EOI a statement of
pending litigation.

12.1.3 Guidelines for Appointment of Bidders

On the basis of the criteria decided for the qualification of bidders for acquiring stakes in any
Public Sector Undertaking slated for disinvestment, any company, in private or public sector, can
take part in a competitive bidding process. However, depending on the unique features of a case,
and taking into consideration all relevant factors, Government can always impose reasonable
restrictions in specific cases, in public interest and in the interest of privatisation of "non-
strategic" PSUs.
The Ministry of Disinvestment has laid down guidelines for qualification of bidders seeking to
acquire stakes in Public Sector Enterprises through the process of disinvestment. The
prospective Bidders have to give an undertaking at this stage of submission of EOI that they are
eligible as per the criteria fixed by the said guidelines and that they have not been facing
proceedings by any Regulatory Authority against any "Grave Offence" or "fraud" or have not
been convicted by any Court of law. It had been clarified vide O.M. NO.4/20/2001-DD II dated 9
January 2002 that an offence will be treated as grave when "grave offence" is:

65
 a. ( J11ly those orJers of SEBI are to be treated as coming under the category of "grave
offences" which directly relate to "fraud" as defined in the SEBI Act and / or
regulations.
b. Only those orders of SEBI that cast a doubt on the ability of the bidder to manage the
public sector unit when it is disinvested, are to be treated as adverse.
c. Any conviction by Court of Law.
d. In cases in which SEBI also passes a prosecution order, disqualification of the bidder
should arise only on conviction by the Court of Law.

A detailed book on "Guidelines on Qualification for Bidders" has also been published by the
Ministry of Disinvestment for reference of prospective bidders that is enclosed as Annexure VI.
These can also be accessed from the website of the Ministry.

On receiving the details through the above process, the interested parties are requested to submit
their EOI to the Advisors/Ministry of Disinvestment by a fixed time and date.

12.1.4 Qualification of Companies/Consortia

Based on the information submitted in EOis, the Ministry and the advisors will carry out an
evaluation of the qualifications of the companies / consortia and subsequently notify in writing
those companies I consortia which qualify to participate in the next stage of the process.

12.2 Stage II : Request for Proposal (RFP) & Submission of Bids

12.2.1 Request for Proposal & Bid Process

The proposed Strategic Sale process, consequent to the submission of EOI, involves a detailed
due diligence exercise to be undertaken by the Bidder followed by submission of a Financial Bid.

The due diligence phase involves providing a Bid Pack containing various documents to the
Bidder. Besides, visits to the Data Room, including site visits to the units of the company form a
part of the due diligence phase. At the end of this phase, the Bidder is expected to submit his
Financial Bid. Details of form and content of the Bids and the proposed due diligence process are
given in RFP.

Notification to qualified/ short listed parties & issue of Bid Packs

-A Bid Pack containing the following documents is made available to the qualified/ shortlisted
bidders, along with RFP after getting a confidentiality undertaking signed by them:

i) Confidential Information Memorandum (CIM)

ii) Previous 3 years' audited annual accounts of the company, and
iii) Data Room Rules.

66
The following documents (which may or may not form a part of the Bid Pack) are also made
available to the qualified/ shortlisted bidders in due course:

i) Draft Share Purchase Agreement;

ii) Draft Shareholders' Agreement, and
iii) Provisional results for the current Financial year

Where the EOI has been submitted by a Consortium, it is expected that there shall not be any
changes in the Members of the Consortium consequent to the submission of EOI.

However, if a change is desired by some or all the Members prior to the submission of the
Financial Bid, such change shall have to be approved by Gol. Similarly, consequent to the
submission of EOI, if the Bidder desires to form a Consortium by inducting new Member(s), it
shall have to seek an approval from Gol.

Where the Bidder is a Consortium, the stake in the ordinary share capital of the company can be
acquired and held either through an investment vehicle ("Consortium Vehicle") or through direct
holding in the company by each Member or through any Group Company (ies).

12.2.2 Confidentiality Undertaking

The CIM being a much more detailed document, it is customary to send it only to those who
have given a Confidentiality Undertaking. Typically, this undertaking requires that the potential
bidders do not misuse this wealth of information. It is not uncommon for competitors to send a
bogus team to discover the trade secrets of the other parties.

It is an undertaking made by the bidder in favour of President of India (acting through Joint
Secretary of the administrative ministry), the company and advisors to treat all the confidential
information in Confidence and not to disclose to any person, the fact that he has been provided
the Confidential information or has inspected any confidential documents or the
discussion/negotiation regarding the transaction.

Confidential information means all information, concerning the business, operations, prospects,
finances, or other affairs of the company. It includes documents delivered in connection with a
due diligence investigation, information concerning business activities, products, specifications,
data know-how, compositions, designs, sketches, photographs, graphs, drawings, research and
development, marketing or distribution methods and processes, customer lists, customer
requirements, price lists, market studies, computer software and programs, database
technologies, systems structures and architectures, historical financial projects and budgets,
historical and projected sales, capital spending budgets and plans, current or prospective
financing sources, the names and background of personnel, personnel training techniques and
materials.

67
 It also includes information memorandum, request for proposal. draft of shareholders and share
purchase agreements or other materials prepared in connection with the transaction.

Confidentiality undertaking also provides that the bidder shall not deal with any officer, Director
or employee of the Govt. or Company, regarding the business, operations, prospects or financing
of the company without advisor's express written consent.

The confidentiality undertaking contains an indemnity clause, whereby the bidder agrees to
indemnify the advisor, the Govt. and the company any damages, loss, cost or liability arising out
of any unauthorised use or disclosure by the bidder.

Request For Proposals (RFP) :

A typical RFP consists of the following three main sections:

1. Background and General Information:

This section describes the goals of the privatisation transaction and provides information on the
company that is being privatised.

2. Conditions of Agreement:

In this section of the RFP, a summary of contractual obligations is provided in simple, non-
legalistic language.

3. Proposals and Selection Process:

This section describes the entire privatisation procedure including the process of evaluation of
bids.

12.2.3 Confidential Information Memorandum (CIM)

As mentioned earlier, after obtaining the confidentiality undertaking, Advisors send out a
Confidential Information Memorandum (CIM) along with the RFP. The Confidential
Information Memorandum (CIM) Memorandum is a much more in-depth description of the
company to be privatised than provided in the PIM.

This reduces the cost of preliminary due diligence for all potential bidders, thereby increasing the
chances of attracting quality players who are in great demand.

A typical confidential information memorandum usually has the following sections:

1. Executive Summary: This is a brief chapter containing introduction of the company,

investment considerations, business overview, objectives of Government of India and the role of
the strategic partner. Business overview will include information on business activities,
infrastructure, marketing and distribution, land and summary financial performance.

68
2. General Information on India includes introduction about India, its institutional framework,
demography, language and literacy, international relations, economic and financial indicators,
foreign trade, balance of payments, economic indicators and PSU reforms, if relevant for that
particular PSU.

3. Sector Scenario generally contains an overview of the industry, its segmentation, regulatory
environment governing the sector in India, and policy initiatives in the sector. Industry
segmentation would include various segments of the industry in India. Regulatory environment
governing the sector in India would include compulsory legislation, voluntary standards, policy
relating to small scale undertakings, policy related to foreign investments in the sector and laws
pertaining to employer - employee relations. Policy initiatives would include regulation and
control, fiscal policy and taxation. ·

4. Business Review contains introduction of the company, chronology of its growth, overview of
its business, its operations. Operations include facilities, land, marketing and distribution,
manufacturing plants and process, raw materials and research and development (R & D).

5. Structure, Responsibilities and Systems contains structure of the company, structure of the
manufacturing units and financial and management information systems. Structure of the
company means finance, marketing, operations, human resources development and
administration. Financial and management information systems contains financial accounting,
management accounting and budgeting.

6. Directors, Management and Employees contain description of the Directors, Senior

Management and Employees. It contains information on the remuneration, employee
entitlements, recruitment, retirement and dismissal, training and development, pension and
welfare obligations and industrial relations. Employee entitlements generally means basic salary,
dearness allowance (DA), residential accommodation I house rent allowance (HRA),
conveyance, provident fund (PF) and gratuity, bonus, productivity linked scheme, overtime,
annual increments, accident insurance, medical reimbursement scheme, health scheme, loans I
advances, other benefits and perquisites, leave, holidays and leave travel concession benefits.

7. Financial Statements of the company include profit and loss data, balance sheet data and
operational results normally for the last 5 years.

12.2.4 Share Purchase Agreement

The bidders put in their bid based on the last audited balance sheet information made available to
them. However, the company is transferred to them at a later stage. There could be either an
increase or decrease in working capital and debt during this period. Share Purchase Agreement
fixes the closing date on which the company is handed over to the buyer so that the difference
between the closing date and the date of last audited balance sheet can be arrived at and
accounted for. It describes the purchase price, the mode of payment and the actions at closing
time. It also lays down representations and warranties given by both the parties.

69
94 M. of Disinvestment/ND/2002-11.
 Share Purchase Agreement is entered into among the President of India (acting through the Joint
Secretary of the Administrative Ministry), the company, the strategic partner and other principals
as applicable.

It contains the following sections:

1. Definitions and principles of interpretation: This section deals with the definitions
contained in the agreement, certain rules of implementation and the summary of the entire
agreement along with the schedules.

2. Purchase and sale: It describes the actions at closing time, other actions and the place of
closing along with other documents relevant for the above transaction.

3. Purchase price: It describes the purchase price and the mode of payment.

4. Representations and Warranties of the Government: It describes the right to sell, due
authorization, enforceability of obligations, regulatory approvals, incorporation, due
authorization, enforceability of obligations, absence of conflicting agreements, litigation,
regulatory approvals, foreign participation, strategic partner review; access to information,
investment intent, source of funds, technical proposals and shareholding structure.

5. Agreements on Representations and Warranties: It describes the various representations

and warranties given by both the parties.

6. Covenants of the parties: It describes the actions to satisfy closing conditions, the
requirements of preservation of records and of making public announcements.

7. Conditions precedent: It lays down that the representations at the closing time be true and
accurate. It also lays down the performance of obligations, receipt of closing documentation,
consents, authorisations and registrations.

8. Indemnification: It lays down the conditions for the indemnification by the strategic partner.

9. Termination: It lays down the conditions for termination of the contract and effect of this
termination.

10. Waiver/Survival: The waiver/survival clause is added at the end of the agreement.

11. General: The general section includes the various provisions regarding expenses, notices,
assignment, further assurances, dispute resolution/submission to jurisdiction, amendments,
governing law, appointment of agent and severability.

12.2.5 Shareholders' Agreement

Shareholders' Agreement is a very important agreement. It defines the rights and obligations of
both the parties. Concerns of Government on protection of employees' rights, future investment/

70
business plans and the precautions against assets stripping are generally reflected in it. It lays
down the survival period after which the claims become time baiTed and the indemnification
limit tu which a purchaser can be indemnified. It also lays down the term s and conditions of
indemnification for any disputed tax liabilities, litigation liabilities and environmental liabilities.
It lays down the procedure for management of the company after disinvestm ent. It also includes
vari ous representations and warr anties given by both the parties. It lays down the dispute
resolution mechanism for both the part ies.

Shareholders' Agreement is entered into among the President of India (acting through the Joint
Secretary of the Administrative Ministry ), the company, the strategic partner and other principals
as applicable.

It contains the following sections:

1. Definitions and principles of interpretation: It contains the various definitions and

rules of interpretation given in the agreement.
2. Purpose and scope: It defines the purpose and the scope of the agreement. It also lays
down the conditions for compliance with the agreement.
3. Equity participation, financial support: It lays down the conditions for equity
participation, additional capital and dilution of Government Equity Interest.
4. Management of the company: It describes the constitution of the Board of Directors,
procedure for removal and replacement of nominees, procedure for calling meetings of
Board, quorum, procedure for approval of matters, deemed consent, casual vacancies and
filling the post of alternate Director and Managing Director.
5. Shareholder meetings: It describes the procedure for general meeting of shareholders,
notice of shareholder meetings, quorum and voting requirements.
6. Transfer of equity shares: It lays down the conditions for general restriction on transfer,
rights of first refusal, change in control, event of default, government's right to sell,
Strategic Partner's right to buy, determination of fair market value, procedure for call and
put options, permitted transfers and compliance with legal requirements.
7. Representations and Warranties: It describes the various representations and
warranties given by the company, the strategic partner and the government. It also
includes a survival clause.
8. Indemnification and confidentiality: It lays down the various indemnifications given
by all the parties in case of breach of contract. It also includes a confidentiality clause. It
lays down the various equitable remedies and costs in the event of a_breach of contract.
9. Miscellaneous: It includes clauses on arbitration, application of this agreement,
assurances, benefit of the agreement, amendments and waivers, assignment, severability,
notices, governing law and expenses.

The Ministry has placed on its website 'Sample Transaction Document' which can be a
useful guide for preparing SHA and SPA.

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 12.2.6 Due Diligence

The purpose of the due diligence programme is to provide the Bidder an overview of the
Strategic Sale programme and a detailed information on the company's businesses. In order to
enable the Bidder to obtain the required information, the programme provides data room visit.
The data room is created by the Company containing all information required by the prospective
bidder followed by site visit.

The following is a summarised, indicative list of types of documents and information required.

• Financial Documents
o All annual reports.
o Quarterly reports.
o All accountant and auditor's reports and opinions.
o Management financial reports, capital expenditure budgets, projections and reports for
last five years.
o Operating budgets, projections, and reports for last five years.
o Any financial information presented to Gol in last five years.
o Operating revenue accounts for last five years.
o Operations and maintenance accounts for last five years.
• Accounts and Investments
o List of all bank accounts and investments, including account balances and value of
investments.
• Loan Documents
o A chart setting forth loan amortisation and interest payments (with the company both as
borrower and, if applicable, lender).
o A chart showing other debt-like obligations of the company (letter of credit repayment
obligations, instalment sales obligations, capitalised lease obligations).
o All loan agreement in which the company is a borrower (together with related promissory
notes, security documents, and ancillary agreements).
o All loan agreements in which the company is a lender (together with related promissory
note, security documents and ancillary agreements).
o All documents relating to debt-like obligations of the company (letter of credit repayment
obligations, installment sales obligations, capitalised lease obligations).
• Equity Documents
o A chart setting forth all capital contributions of the company and share issuances by the
company; share issuance and transfer ledger.
o All equity subscription agreements, option agreements, etc.
• Corporate Documents
o Memorandum and articles of association.
o Bylaws.
o Minutes of shareholder and board meetings for last five years.
• Licenses and Permits
o List of all required licenses and permits.
..
o All licenses/permits.

72
 o All correspondence relating to revocation, modification, or non-issuance of any license or
permit.
o All laws and regulations applicable to the company (including any laws relating to
environmental and safety matters).
o All environmental and safety permits.
o All tariffs applicable to the company in last five years.
o All environmental and safety reports prepared in last five years.
• Litigation
o Status report of all litigation, disputes, etc., pending or concluded in last five years.
o Litigation files relating to pending matters.
• Employee Matters
o List of all employees indicating name, years of service, position, and salary (employees
below a particular grade could be classified in groupsj.i,
o List of all welfare, pension, and health plans, together with a brief description of each and
a financial surrimary relating to each (i.e., the company's assets and liabilities).
o List of unionised workers and unions. All unions and collective bargaining agreements.
o Employment agreements.
o Description of bonus and profit sharing arrangements, together with any related
documents.
• Tax Matters (including income tax, sales tax, excise duty, and other taxes)
o List of tax liabilities and payments during last five years.
o Tax filings and notices for last five years.
o All disputes relating to tax matters.
• Real Estate
o List of all owned and leased real property, together with schedule of annual lease
payments and lease expiry dates.
o Title documents relating to owned real property.
o Leases relating to leased real property.
• Property, Plant and Equipment
o List of all owned/ leased tangible property (if appropriate by class) and inventory,
together with schedule of annual lease payments and lease expiry dates.
o All purchase and services contracts under which equipment and services are to be
provided to the company.
o Plant accounts.
• Intellectual Property
o List of all intellectual property owned or used by the company.
o All intellectual property ownership, license, royalty and similar documents.
o De~cription of computer systems and hardware.
• Customer Documents
o Standard forms. if any, of customer contracts, billing documents, etc.
o Customer service policies and records of service.
o Copies of material customer complaints.
o Customer statistics for each class of customer.
• Technical Data
o System maps.
o Technical assessments and reports prepared in last five years.

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12.2.7 Negotiations & Finalisation Of Contractual Documents

During the course of due diligence, and thereafter, the qualified bidders are also invited to offer
their comments on the contracted documents (i.e. the draft Share Purchase and the Shareholders
Agreement) provided to them, with a view to finalising those and making terms and conditions
thereof uniform, so that the bids are submitted by all bidders on same terms and conditions.

12.2.8 Submission of final bid

Details of Financial Bids

Form and Content of the Financial Bid

The Financial Bid must be: -

(i) In the form to be provided by Gol;
(ii) Expressed in Indian Rupees;
(iii) Made on the basis of the terms of the revised final drafts of the Contractual Documentation
as may be circulated to the Bidder
(iv) Unconditional and open for acceptance for a.period of 180 days from the stipulated deadline;
(v) Must be signed by the Bidder or, where the Bidder is a Consortium by all the Members of the
Consortium, and
(vi) Submitted to Gol on or prior to the stipulated deadline.
The Bidder submits to GoI one copy of its Financial Bid, contained in a separate sealed package.
The covering envelope on the package containing the financial Bid must be clearly marked
'Private and Confidential - Financial Bid for Strategic Sale' and include on the envelope the name
of the contact person and address of the Bidder (to whom any unopened Financial Bid should be
returned).

12.2.9 Earnest Money Guarantee

The Bidder or in the case of Consortium any of the Members of that Consortium, singly or
jointly, shall be required to enter into an Earnest Money Guarantee agreement for a stipulated
amount. The draft of the Earnest Money Guarantee agreement is also provided to the Bidder at
the time of providing all other draft documents.

All the bids have to be submitted before a stipulated deadline.

The selection of Purchaser is based on an evaluation of the Financial Bid.

12.2.lOBIDDING PROCEDURE BEING FOLLOWED BY MINISTRY OF

DISINVESTMENT FOR STRATEGIC SALE IN PSUs

Ministry of Disinvestment, with a view to maintaining absolute transparency and

ensuring a foolproof process removing all possibilities of tampering, has evolved-a bidding
procedure, which is explained below. The criteria that need to be satisfied are: -

74
 1. Reserve Price should not be fixed by the Government before the bidders submit their
financial bids, so that there is no chance of the bidders knowing the Reserve Price
fixed by Government.
2. The Government, while fixing the Reserve Price, should not have knowledge of the
price bids submitted so that the fixing of the Reserve Price is not influenced by such
knowledge.
3. The Advisors do not finalise Reserve Price, as a conflict o interest may arise with
them try ing to keep a low Reserve Price.
4. The bidders are provided full comfort that their bids, once submitted, can in no way
be tampered with by any agency.

It would be noticed that the bidding procedure, which has now been adopted by the
Ministry of Disinvestment and which is explained below, satisfies all the foregoing criteria.

Activity I- Receiving the bids and Valuation Reports

Bids are received in two separate sealed envelopes from the bidders on a specified date, time and
venue.

1. One envelope contains only the price bids (first envelope)

2. The other envelope (second envelope) contains other documents: -

• Bank Guarantee by the bidder

• Board Authorisations
• Section 108A(Companies Act) application, if required
• FIPB I SIA application, if required
• Copy of the SHA/ SPA authenticated by the bidder, based on which the bid has
been made
• Other documents, if necessary, on a case-to-case basis.

Secretary, Ministry of Disinvestment and Secretary of the Administrative Ministry receive the
bids. The Global Advisors and Legal Advisors are present.
• The second envelope is opened and the Global Advisors and the Legal Advisors
scrutinise these documents and certify that they are in order.
• Both the Secretaries then authenticate each financial bid envelope without
opening it by signing on the envelopes. Thereafter the signature of each bidder is
also obtained on these envelopes. Any bidder, who has come to attend this
meeting but does not submit a financial bid, is also permitted to be present and his
signature may also be obtained on these envelopes.
• The sealed envelopes containing the financial bids thus authenticated by the
Secretaries and the bidders are then put in a third envelope, sealed and
authentication of both the Secretaries and all the bidders obtained on the third
envelope, thus ensuring that no tampering can take place. (In case of hotel
properties of ITDC/HCI, since there are common bidders in several hotels, in
order that the bank guarantee of the losing bidders could be immediately returned
to them, the Secretaries open the financial bid envelopes at this stage itself and

75
 announce the highest bidder to all but the highest bid amount is not disclosed at
this stage. Signature of Secretaries and the bidders are obtained on the reverse of
the price bids and these are then kept in a separate sealed envelope.)
• In the same meeting the Global Advisors submit in a sealed cover the business
valuation report prepared by them and the asset valuers report. Secretary
(Disinvestment) authenticates these envelopes by putting his signature on the
sealed envelopes.
• These sealed envelopes containing the business valuation report and asset valuers
report are then handed over to the Chairman of the Evaluation Committee.

Activity-II- Proceedings of the Evaluation Committee

1. The Evaluation Committee typically commences business immediately after Activity-I

and the envelope containing the business valuation report and asset valuers report are
opened by the Chairman of the Committee.
2. The Global Advisors make a detailed presentation before the Evaluation Committee on
the business valuation and the asset valuation as also their recommendation of what
should be the reserve price.
3. At this stage, the Global Advisors withdraw from the meeting and the Evaluation
Committee thereafter deliberates on the issue, if necessary in more than one session
sometimes spreading over more than one day, and recommends a reserve price.
4. The Global Advisors are not involved in the process of making the final
recommendation of the reserve price by the Evaluation Committee. Their contribution is
only to provide the business valuation/asset valuation report, making a presentation and
furnishing any further details/clarification that the Evaluation Committee may seek.
Thus, the Global Advisors are not a member of the Evaluation Committee but attend its
meetings as special invitees.

Activity-III- Meeting of the Inter-Ministerial Group (IMO) to consider Reserve Price and
Bids.
1. At the meeting of the IMO, the IMO first deliberates on the report of the Evaluation
Committee and the Reserve Price recommended by the Evaluation Committee. 1B this
process the Global Advisors also make a presentation before the IMO.
2. At this stage the Global Advisors withdraw and the IMO then recommends a Reserve
Price, which could be different from that recommended by the Evaluation Committee.
In case of a difference of opinion, detailed reasons are recorded in the minutes.
3. After the Reserve Price is decided upon by the IMO, the third envelope containing the
sealed envelopes containing price bids (on which signatures of both the Secretaries and
the bidders had been obtained during Activity-I) is scrutinised by both the Secretaries
and the bidders (the Global Advisors and the bidders are invited to be present at this
point of time) to ensure that they have not been tampered with.
4. The third envelope is then opened and the sealed envelopes containing price bids are
scrutinised by both the Secretaries and the bidders to ensure that they have not been
tampered with.

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 5. Then the sealed envelopes containing the price bids (on which signatures of both the
Secretaries and the bidders had been obtained during Activity-I) are opened and
signature of the Secretaries and the bidders obtained on the reverse of the price bids. The
signatures of the bidders are obtained to give comfort to the bidders that no tampering
could take place even after this stage in the bids submitted by them. Their signatures are
obtained on the reverse to ensure that none of the bidders come to know what bid the
others have submitted. (The above procedure in Activity III is different in the case of
ITDC/HCI hotels. In those cases, after the Reserve Price is decided by the IMO, the
sealed envelopes containing the authenticated price bids of the bidders are opened by the
Secretaries.) ·
6. Thereafter, the bidders and Global Advisors withdraw from the meeting and the IMO
makes its recommendations on whether or not to accept the highest bid in view of the
Reserve Price.

Activity-IV- Consideration of the bid by the Core Group of Secretaries for Disinvestment

The recommendations of the IMO, including the recommendations of the Evaluation Committee
are thereafter placed before the COD for making recommendations to the CCD.

Activity-V Consideration and Approval of the bid by the Cabinet Committee on

Disinvestment

Recommendations of the COD are thereafter placed before the CCD for final approval.

Note: -Time frame for Activity-I to Activity-Vis about a week to ten days.

12.3 Stage III : Completion

a) Govt. approval /regulatory approvals.

The necessary approvals from RBI, Department of Company Affairs, FIPB (wherever necessary)
are applied for and obtained at this stage.

b) Signing of contractual documents

The Share Purchase Agreement is signed and on receipt of the bid money from the purchaser i.e.
strategic partner, the Share Holders Agreement is also signed.

c) Completion/closure of strategic sale

In case a listed PSU is being sold to a strategic partner (SP) and if the acquiring company is
purchasing more than 15% of share of the PSU the SP is required to make an open offer to buy
back 20% of the shares from the floating stock of the PSU as per SEBI guidelines under the

77
94 M. of Disinvestment/ND/2002-12.
 Takeover Code. This offer is to be made within 4 working days of the date of signing of Share
Purchase Agreement (SPA) and only then will the transaction be deemed to be closed.

The other conditions precedent to Closing are also spelt out in the SPA.

12.4 Post Closure

12.4.1 Post Closing Adjustments

The bidder submits his bid based on information supplied to him in the data room. This
information is the last audited balance sheet. However, from the date of the last audited balance
sheet, till the date of handing over (called the closing date), there may be accretion or depletion
in the current assets, current liabilities resulting in the change in Net working Capital and the
debt position. The difference between these figures between the date of the last audited balance
sheet and the closing date is called post closing adjustment and depending on whether there is an
accretion or depletion of the current assets and debts, this amount is paid by the
government/purchaser to the other party, if decided as per the Share Purchase Agreement.

Within 90 days following the closing date, an accounting firm is jointly selected by the
Government and the purchaser, from the CAG's approved panel or otherwise as mutually agreed.
The firm finalises the "Closing Date Net working Capital Amount" and the "Closing Date Debt
Amount". These computations fire final and binding on both the parties. ·

If there is accretion in the Net working capital on the closing date, the purchaser would pay the
differences to the government. Conversely, if the working capital decreases on the closing date,
the government would pay the difference to the purchaser.

Similarly if the closing date debt amount exceeds the amount given in the last balance sheet
(which was the basis of the bid), then the government would pay the difference to the purchaser.
Conversely if the closing date debt amount is less than the debt amount given in the last balance
sheet, the purchaser would pay the difference to the government.

All payments are normally settled within 45 days of the date of handing over the closing date
accounts by the auditors.

No provision of post-closing adjustment is made for listed companies.

12.4.2 Indemnification by the Government

The Government indemnifies the purchaser from any actual losses, liabilities, damages,
judgments, settlements and expenses arising out of any breach by the government of any
representations and warranties contained in the agreement.

For calculations of Purchase Losses in individual events, a figure (say Rs.I lakh or Rs.IO lakh in
each incident) is agreed to, which is called De-Minimis Purchaser loss. All individual amounts
less than this De-Minirnis figure are ignored in calculating the purchaser loss. This mutually

78
decided threshold is normally 3-4% of the total Purchase Price. If the losses are more than this
threshold level, and arise out of some breach or violation by the government, then the purchaser
is indemnified these losses by the government. A cumulative aggregate amount of losses (called
the Aggregate Liability threshold) is also decided. This total amount indemnified by the
government is limited to an agreed limiting percentage of the purchase price. Normally,
irrespective of the loss, the indemnified amount would be around 50-70% of the total purchase
price. All the claims of indemnity are to be preferred within the survival period (normally 24 or
36 months) after which they become time-barred. In certain cases, complete indemnity is
provided against environmental liability. However, these details vary from case to case, and
depend, inter alia, upon the nature of the company being disinvested.

12.4.3 Tax-liabilities

If there is any liability of sales tax, income tax or excise duty at closing time, which is disputed,
the company pays that under protest. If that dispute is resolved unfavourably against the
company, the government would indemnify that amount to the company, provided the purchaser
has informed the government within the stipulated period and provided that the purchaser has not
been compensated for this liability earlier.

12.4.4 Litigation

If there are certain litigations, which are listed in the schedule of agreement, the government may
retain all or some liabilities in their respect, subject to the clauses of the agreement and would
make all efforts to resolve them. Also, subject to the conditions of agreement the government
would indemnify all or some liabilities arising out of these litigations to the purchaser.

12.4.5 Environmental Liabilities

If there are any claims regarding environmental damages ansing out of the acts of
commission/omission on the part of government during the period prior to disinvestment, and the
claim has been preferred during the survival period, then subject to the clauses of the agreement,
the government would indemnity the liabilities arising out of these claims to the purchaser. It is
advisable to have an environmental audit done prior to the disinvestment to benchmark the extent
of such liabilities. An environmental due diligence/audit was conducted by an international
agency prior to the strategic sale of Bharat Aluminium and Co. (BALCO) and Hindustan Zinc
Ltd. which facilitated their smooth sale and good price to the Government.

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13. CHAPTER: VALUATION
In any sale process, the sale will materialise only when the seller is satisfied that the price given
by the buyer is not less than the value of the object being sold. Determination of that threshold
amount, which the seller considers adequate, therefore, is the first pre-requisite for conducting
any sale. This threshold amount is called the Reserve Price. Thus Reserve Price is the threshold
amount below which the seller generally perceives any offer or bid inadequate. Reserve Price in
case of sale of a company is determined by carrying out valuation of the company. In companies
that are listed on the Stock Exchanges, market price of the shares serves as a good benchmark for
assessing the fair value of the company, though the market price is usually characterized with
significant short-term variance due to investor sentiments being influenced by short-term events
and environmental aspects. More importantly, most of the PSUs are either not listed on the Stock
Exchanges or command extremely limited traded float. They are, therefore, not correctly valued.
Thus, deciding the worth of a PSU is indeed a challenging task.

Valuation of a PSU is different from establishing the price for which it can be sold. While the
fair value of an asset is based on the assessment of intrinsic value accruing from fundamentals on
a stand-alone basis, varying return expectation and underlying strategic aspects for different
bidders could influence the price. A purchase and sale would be possible only when two parties
while forming different views as to the value of an asset, are eventually able to reach agreement
on the same price. It would be better appreciated by recognition of the fact that Government can
only realise what a buyer is willing to pay for the PSU, as the purchase price ultimately agreed
reflects its value to the buyer.

Another notable point is that valuation is a subjective figure arrived at by the bidder by
leveraging his strengths with the potential of the company. Depending on the level of business
synergy with the target company, perception of specific value realization and varying assessment
regarding productivity, capex, etc., this figure may vary from bidder to bidder.

13.1 Disinvestment Commission's Recommendations

Keeping in view the above problems regarding valuation specific to a PSU, the issue was
discussed in detail by the Disinvestment Commission in its First Report. Underlining the
importance of valuation, the Commission felt that the valuation of equity of a firm gains
importance in case of disinvestment of companies which are not listed or in cases where capital
markets may not fully reflect the intrinsic worth of a share disinvested earlier.

Disinvestment Commission, in its Discussion Paper while emphasizing that valuation should be
independent, transparent and free from bias, has discussed three methods of valuation:

(i) The 'Discounted cash flow' (DCF) approach relates the value of an asset to the present value
of expected future cash flows of the asset.

80
 (ii) The 'Relative valuation' approach is used to estimate the value of an asset by looking at the
pricing of comparable assets relative to a common variable like earnings, cash flows, book
value or sales.

(iii)The 'Net asset value' approach provides another basis for valuation.

Regarding the application of Valuation Methods, Disinvestment Commission felt that the use of
a particular method of valuation will depend on the health of the company being evaluated, the
nature of industry in which it operates and the company's intrinsic strengths. The depth of capital
markets will also have an impact on the valuation. For example, in the United Kingdom, the
London Stock Exchange has helped in creating markets by enabling credible price discovery for
the shares of privatised companies listed on the exchange. Although valuation methods will
indicate a range of valuations, Disinvestment Commission felt that some discounts might need to
be applied for arriving at the final value depending on the liquidity of the stock and the extent of
disinvestment:

a) 'Lack of marketability' discount takes into account the degree of marketability (or the lack of
it) of the stocks being valued. This is applicable especially to cases, which had been
disinvested earlier and have been referred for disinvestment again. Discount on this
consideration stems from the fact that an investor will probably pay more for a liquid stock
than for a less liquid one. However, the concern of an overhang of supply may adversely
affect valuation even for liquid stocks.

b) Disinvestment Commission felt that the extent of disinvestment in core, non-strategic & non-
core PSUs would have a bearing on the valuation process. The transfer of a controlling block
may help to reduce the discount that has to be applied, as the prospective investor would be
willing to pay a certain 'control premium' towards enhanced management participation, board
control and majority shareholder rights.

c) If all the businesses of a PSU are not equally profitable, it mav be necessary to restructure the
business before disinvestment. However, if this is not possible, a minority discount may have
to be applied.

Disinvestment Commission also sought to correct some erroneous perceptions about valuation.
There is a general perception that since valuation models are quantitative, valuation is objective.
The Commission felt that though it is true that valuation does make use of quantitative models,
the assumptions made as inputs to the model leave plenty of room for subjective judgments. At
the same time, there may be no such thing as a precise estimate of a value. Even at the end of the
most careful and detailed valuation of a company, there could be uncertainty about the final
numbers, as they are shaped by assumptions about the future of the company's operations.

Another wrong perception sought to be corrected by the Commission was the relationship
attributed between valuation and market price. The benchmark for most valuations remains the
• market price (either its own price, if it is listed or that of a comparable company). When the
value from a valuation analysis is significantly different from the market price, the two
possibilities are that either one of the valuations could be incorrect. The Commission felt that the

81
valuation done before listing takes into account anticipated factors. whereas market price 1\:I kL·1s
realized events that are influenced by unanticipated factors. However, a specific valuation itself
may not be valid over a period of time. It is a function of the competitive position of the
company, the nature of market in which it operates and Government policies. Therefore, it may
be appropriate to update or revise valuations.

In cases where strategic sale is done with transfer of management control, the Commission felt
that asset valuation should also be done. The views of the Commission in this regard are as
follows:

"Strategic sale implies sale of a substantial block of Government holdings to a single party which
would not only acquire substantial equity holdings of upto 50% but also bring in the necessary
technology for making the PSU viable and competitive in the global market. It should be noted
that the valuation of the share would depend on the extent of disinvestment and the nature of
shareholder interest in the management of the company. Where Government continues to hold
51 % or more of the share holding, the valuation will relate mainly to the shares of the
companies and not to the assets of the company. On the other hand, where shares are sold
through strategic sale and management is transferred to the strategic partner, the valuation of the
enterprise would be different, as the strategic partner will have control of the management. In
such cases, the valuation of land and other physical assets should also be computed at current
market values in order to fix the reserve price for the strategic sale.

To get best value through strategic sales, it would be necessary to have a transparent and
competitive procedure and encourage enough competition among viable parties."

13.2 Valuation Methodologies being followed

Making a valuation requires an examination of several aspects of a company's activities, such as

analysing its historical performance, analysing its competitive positioning in the industry,
analysing inherent strengths/weaknesses of the business and the opportunities/threats presented
by the environment, forecasting operating performance, estimating the cost of capital, estimating
the continuing value, calculating and interpreting results, analysing the impact of prevailing
regulatory frame work, the global industry outlook, impact of technology and several other
environmental factors.

Based on the recommendations of the Disinvestment Commission and in keeping with the best
market practices the following four methodologies are being used for valuation of PSUs: -

a) Discounted Cash Flow (DCF) Method.

b) Balance Sheet Method.
c) Transaction Multiple Method.
d) Asset Valuation Method.

While the first three are business valuation methodologies generally used for valuation of a going
concern, the last methodology would be relevant only for valuation of assets in case of

82
liquidation of a company. In addition, in case of listed companies, the market value of shares
during the last six months is also used as an indicator. However, most PSU stocks suffer from
low liquidity and the price determination may not be always efficient. Moreover, there could be
increased trading activity after announcement of the disinvestment, which could be on account of
high market expectation of the bid price and even based on malafide intent. This could lead to
the price being traded up to unsustainable levels, which is not desirable.

13.2.1 Discounted Cash Flow (DCF) method

The Discounted Cash Flow (DCF) methodology expresses the present value of a business as a
function of its future cash earnings capacity. This methodology works on the premise that the
value of a business is measured in terms of future cash flow streams, discounted to the present
time at an appropriate discount rate.

This method is used to determine the present value of a business on a going concern assumption.
Jt recognises that money has a time value by discounting future cash flows at an appropriate
discount factor. The DCF methodology depends on the projection of the future cash flows and
the selection of an appropriate discount factor.

When valuing a business on a DCF basis, the objective is to determine a net present value of the
free cash flows ("FCF") arising from the business over a future period of time (say 5 years),
which period is called the explicit forecast period. Free cash flows are defined to include all
inflows and outflows associated with the project prior to debt service, such as taxes, amount
invested in working capital and capital expenditure. Under the DCF methodology, value must be
placed both on the explicit cash flows as stated above, and the ongoing cash flows a company
will generate after the explicit forecast period. The latter value, also known as terminal value,
is also to be estimated.

The further the cash flows can be projected, the less sensitive the valuation is to inaccuracies in
the assumed terminal value. Therefore, the longer the period covered by the projection, the less
reliable the projections are likely to be. For this reason, the approach is used to value businesses,
where the future cash flows can be projected with a reasonable degree of reliability. For
example, in a fast changing market like telecom or even automobile, the explicit period typically
cannot be more than at least 5 years. Any projection beyond that would be mostly speculation.

The discount rate applied to estimate the present value of explicit forecast period free cash flows
as also continuing value, is taken at the "Weighted Average Cost of Capital" (WACC). One of
the advantages of the DCF approach is that it permits the various elements that make up the
discount factor to be considered separately, and thus, the effect of the variations in the
assumptions can be modelled more easily. The principal elements of W ACC are cost of equity
(which is the desired rate of return for an equity investor given the risk profile of the company
and associated cash flows), the post-tax cost of debt and the target capital structure of the
company (a function of debt to equity ratio). In turn, cost of equity is derived, on the basis of
capital asset pricing model (CAPM), as a function of risk-free rate, Beta (an estimate of risk
profile of the company relative to equity market) and equity risk premium assigned to the subject
equity market.

83
For example. the following profit and loss account shows the computation of the Profit Before
Depreciatio .iterest and Tax (PBDIT) of Company X for the first year of business projections:

Figure I: Profit and loss account of Company X Rs million

Revenue
Sales receipts 500

Expenses
Consumption of material 300
Other overheads 50
Total expenses 350

PBDIT 1S0

Computation of Free Cash Flow to Firm ('FCF'): Free cash flow (FCF) for a year is derived by
deducting the total of annual tax outflow inclusive of tax shield enjoyed on account of debt
service, incremental amount invested in working capital and capital expenditure from the
respective year's profit before depreciation interest and tax ("PBDIT") for the explicit period.

Therefore, for Company X, the computation of FCF would look like the following:

Figure 2: FCF computation for Company X Rs million

Year 1 Year 2 Year3 Year4 Years

PBDIT of Company X * 150 200 300 400 500

Less: Income tax (assumed) -20 -40 -60 -80 -100
Less: Capital expenditure (assumed) -50 -50 -50 -50 -50
Less: Incremental working capital -25 -50 -75 -100 -125
(assumed)

FCF 5S 60 ll5 170 225

• Notice that a growth has been assumed In the PBDIT

84
 Weighted Average Cost of Capital ('W ACC')

The FCF is then discounted at a discount rate, which represents the W ACC. The computation of
the WACC is set out below:

Figure 3: WACC parameters

Cost of equity Assumption

Risk Free Rate Yield to maturity on Government of India Securities based on current
traded value (preferably these should be of a long-Lenn tenor beyond the
forecast period i.e. minimum 10 years)
Beta For the purpose of analysis. average unlevered beta of listed industry
comparables is computed. which is then levered to the Company's own
target debt equity ratio
The levered (equity) Beta of a scrip is a measure of relative risk to market,
arithmetically computed as covariance of equity and market return divided
by variance of market return (over a long historical data run) followed with
certain adjustments
Equity Risk Premium = Beta * (Market Risk Premium)
Market Risk Premium is equal to the difference of average market return
and risk free rate #
Cost of Equity =Risk Free Rate+ (Equity Risk Premium*Beta)

Cost of debt
Estimated Corporate Tax Rate
Cornp's Pre-Tax Cost of Debt
Cornps After-Tax Cost of Debt
Target Debt equity ratio
Current corporate lax rate in India
Cost of debt provided by the Management
Pre-Tax Cost of Debt*( I-Tax Rate) @
Average debt equity ratio of the Company

WACC (Deht/fotal C.:apital)*(After-Tax Cost of Debt)+(Equityffotal

Capital)*(Cost of Equity)

@ This is the tax shield referred to earlier.

# Higher the beta means more riskier the stock, beta = 1 means the stock of the company is in perfect synchronise with the
sensex (average market return). Higher than one means the stock is more volatile (and hence more risky) than the senscx and lower than
one means the stock is less volatile (and hence less risky),

To illustrate, for Company X, the computation of WACC typically could be as follows:

igure4 : WACC ca cu Ia f100 tor C ompany X

Cost of Equity
·- Risk Free Rate
Assumptions
9.00% 10-yearTreasury Gol Bond Yield
Beta !.50 Unlevered beta of industry comparables. levered to
Company X debt equity ratio (high risk stock!)
Equity Risk Premium 9.00% Total Stock Returns less Treasury Bond Total
Returns. Market Risk Premium is equal LO the
difference of average market return and risk free rate.
Average market return has been assumed to be I 8'7t

85
94 M. of Dlsinvestment/ND/2002-13.
 and beta has been assumed to be 1.5.
Cost of Equity 22.50% = Risk Free Rate+ (Equity Risk Premium*Beta)

Cost of Debt
Estimated Corporate Tax Rate 35.70% Current corporate tax rate in India
Comp's Pre-Tax Cost of Debt 16.50% Cost of debt provided by the Management
Comp's After-Tax Cost of Debt 10.61% Pre-Tax Cost of Debt*( I-Tax Rate)

Target Debt equity ratio 1.00 Average debt equity ratio of Company X for past five
years

WACC 16.55% (Debt.lTotal Capital)*(After-Tax Cost of

Debt)+(Equityffotal Capital)*(Cost of Equity)

Based on the WACC, arrived as above, the FCF of each year is discounted to the present period.
This factor is known as the discounting factor.

Discount factor= Discount factor of previous year

(1 + WACC)

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

Discount factor for year 1 = l / (1 + 0.1655) = 0.858

Discount factor for year 2 = l / (1 + 0.1655)2 = 0.736, and so on for year 3 etc.

Therefore, for Company X, the computation of discounted cash flow (DCF) is as follows:

Fiaure 5: DCF computation for Company X Rs million

Year 1 Year2 Year3 Year4 Years

FCF 55 60 115 170 225

Discounting factor based on WACC 0.858 0.736 0.632 0.542 0.465

Discounted cash flows 47 44 73 92 105

The value arrived through the submission of the DCF of the explicit period is known as the
primary value. The primary value of the business of Company X as computed above is Rs 361
million.

86
Terminal Value

This value reflects the average business conditions of the Company that are expected to prevail
over the long term in perpetuity i.e. beyond the explicit period. The DCF approach assumes that
by the terminal date, the business will have achieved a steady state and will be growing at a
constant rate.

At the end of the explicit period the terminal value is calculated as follows:

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

Where; Discount Factor = Weighted Average Cost'of Capital, and;

g = Estimate of average long term growth

rate of cash flows in perpetuity assumed to be 5%

Therefore, for Company X, the computation of terminal value is as follows:

Terminal Value= 105 * (1 + 0.05) I (0.1655 - 0.05) = Rs. 951 million

This is further discounted to the valuation date to provide the contribution of continuing cash
flows in the total net present value. This net present value is commonly known as the
"Enterprise Value" (EV) which is the sum of value of debt as well as equity. To arrive at the
Equity value, the outstanding net debt as on the valuation date is deducted from the Enterprise
value.

Flaure 6: Valuation of Comnanv X based on DCF methodolozv Rs million

Rs million
Primary value 361
Terminal value 951

Enterprise value 1,311

Add: Value of surplus land outside factory area (assumed)@ 200

Less: debt (assumed) -600

Equity value of Company X 911

@ This is being shown to illustrate that DCF captures only cash flows from core business. Therefore, the non-core
asset value should be added to arrive at EV.

87
 The DCF methodology is the most appropriate methodology in the following cases:

• Where the business is being transferred/ acquired on a going concern basis;

• Where the business possesses substantial intangibles like brand, goodwill, marketing and
distribution network, etc;
• Where the business is not being valued for the substantial undisclosed assets it possesses.

The DCF methodology is considered to be the best methodology for valuation the world over
because it takes into account all the factors relevant for valuation. It takes into consideration all
the cash flows available to stakeholders of a firm and the necessary outflows, as estimated for the
future. Further, the net present value takes into account the cost of debt, cost of equity and target
capital structure. It also takes into account the risks to which the enterprise is exposed. The
discount rate (i.e. the average expected return on capital employed) is based on the overall risk
perception of the business. It also takes into account the value of the non-core assets of the
company. Any business has two kinds of assets - core assets that are a part of the business and
non-core assets that are not directly utilized as part of core operations and hence can be treated as
surplus assets. The asset value of core assets is reflected in the cash flows of the company and,
therefore, should not be added separately to it. However non-core assets are not reflected in the
cash flows. Therefore, asset valuation of non-core assets should be done separately and should be
added to DCF valuation.

Being fundamentally driven by future business plan of the company and associated cash flows, a
prudent DCF valuation should be able to capture the capital costs for renovation and
modernization of plant and machinery. The age and condition of assets like plant and
machinery and their replacement value would be relevant for estimating expenditure on their
replacement whenever necessary. This expenditure will reduce cash flows and DCF value.
Valuation of plant and machinery would be a relevant item that would influence the DCF
valuation. For example, a person acquiring a company operating a fleet of taxis would examine
the conditions of vehicles for valuation of the company. If the vehicles need replacement of a
low cost item like hub caps, the impact on DCF will be less than if they need to replace gear
boxes in a high proportion of vehicles. The person would also calculate DCF with reference to
the demand for taxis, the average mileage, cost of maintenance etc. Valuation of plant and
machinery is not a·simple addition to DCF, but a factor to be taken into account while calculating
DCF. In such calculation, plant and machinery may be a net negative factor in the DCF if
replacement costs are high. Where surplus land would be sold this would be a positive factor. If
the sale of land can cover the cost of plant replacement the net effect would be neutral on DCF.

For a going concern, various intangibles like brand equity, market share, competition, etc have a
significant bearing on the valuation of the company. One cannot place a money value for these
factors. They have no financial value of their own that can be measured in money terms. Hence,
there is no way of evaluating them in any other methodology. DCF is the only methodology,
which takes into account these factors by incorporating them intrinsically in estimated cash
flows. In calculating DCF, different assumptions will be made of market share, competition from
imports etc, which are translated into financial terms. Sensitivity analysis can also be made for
different assumptions. The Financial Advisor and the Seller should exercise the judgment on the
most likely financial impact of the intangible assets the company possesses, on cash flows and

88
t also on the discount rate to be applied while arriving at the optimum DCF value, as strong
intangible assets would help reduce the overall risk perception_ of the company.

In a_ strategic sale, the bidders take into account not only DCF valuaf'ton, but also a premium for
ma't'\'lgement control. Premium for management control would be a subjective item for each
bidder and will be reflected in the competitive bids. Therefore, the seller, while calculating the
Reserve Price, should. not incorporate this premium in the valuation amount separately. Since
there is no scientific method to quantify the control premium, it may be arbitrary to add control
premium while arriving at the Reserve Price. In the book, "Corporate Valuation: Tools for
Effective Appraisal and Decision Making" by Bradford Cornell, it is stated "Without knowing
why premiums are paid it is impossible to determine whether it is reasonable to apply a premium
(or the associated discount) to the appraiser target. In this respect both research and common
sense support the proposition that a buyer is willing to pay more than the market price for a
controlling interest in a company only when the buyer believes that the future cash flow of the
company, and thereby the. value of the company, can be increased once it is under his/her
control." Further, it states, " ... if the appraiser cannot identify what a buyer of the appraiser
target would change to increase cash flow, then there is no reason to assume that a control
premium exists."

In the broad conclusions, of the Proceedings of the Seminar on Disinvestment in Public Sector
held by Comptroller and Auditor General oflndia in New Delhi on ll th/12'h October, 2001,
it was clearly indicted that "Reserve Price ·should not include Control Premium." The following
conclusions were made:

• There were considerable discussions on issues relating to valuation and the fixation of.
reserve price. Valuation was an essential exercise for the Vendor and the Purchaser but a firm
or fixed price was impossible to get. Two independent valuations often gave widely different
values. Valuation was more an art than a science. Regarding Reserve Price, it was generally
felt that a Reserve Price should be fixed, as it is essential that any seller established a
benchmark value for the company to be sold. In any case it should be more than the
liquidation value.
• It was widely accepted that the most effective method of obtaining the best price possible
would be to have bids from a large fleet of competitors rather than pegging reserve price at
artificially inflated levels.
• It was also recognized that valuation would be quite subjective and that it was possible that
different valuations could yield widely varying figures.

13.2.2 Balance Sheet method

The Balance sheet or the Net Asset Value (NAY) methodology values a business on the basis of
the value of its underlying assets. This is relevant where the value of the business is fairly
represented by its underlying assets. The NAV method is normally used to determine the
minimum price a seller would be willing to accept and, thus serves to establish the floor for the
value of the business. This method is pertinent where:

• The value of intangibles is not significant;

89
• The business has been recently set up.

This method takes into account the net value of the assets of a business or the capital employed
as represented in the financial statements. Hence, this method takes into account the amount that
is historically spent and earn ed from the business. This method does not, however, consider the
earnings potential of the assets and is, therefore, seldom used for valuing a going concern. The
above method is not considered appropriate, particularly in the following cases:

• When the financial statement sheets do not reflect the true value of assets, being either too
high on account of possible losses not reflected in the balance sheet or .too low because of
initial losses which may not continue in future;
• Where intangibles such as brand, goodwill, m, rketing infrastructure, and product
development capabilities, etc., form a major part of the value of the company;
• Wh ere due to the changes in industry, market or business environment, the assets of the
company have become redundant and their ability to create net positive cash flows in future
is limited.

13.2.3 Market Multiple method

This method takes into account the traded or transaction value of comparable companies in the
industry and benchmarks it against certain parameters, like earnings, sales, etc. Two of such
commonly used parameters are:

• Earnings before Interest, Taxes, Depreciation & Amortisations (EBITDA).

• Sales

Although the Market Multiples method captures most value elements of a business, it is based on
the past/current transaction or traded values and does not reflect the possible changes in future of
the trend of cash flows being generated by a business, neither takes into account the time value
of money adequately. At the same time it is a reflection of the current view of the market and
hence is considered as a useful rule of thumb, providing reasonableness checks to valuations
arrived at from other approaches. Accordingly, one may have to review a series of comparable
transactions to determine a range of appropriate capitalisation factors to value a company as per
this methodology.

i) EBITDA multiple

The EBITDA multiple or the earnings method is based on the premise that the value of a
business is directly related to the quantum of its gross profits. The net profits are adjusted to
reflect the operating recurring profits of the business on a standalone basis (i.e. after deducting
extraordinary or unusual items, or items of a non-recurring nature). Further, the profits are
adjusted for non-cash items (including depreciation and amortisation) and other factors, such as
interest and taxation (which vary from business to business) to derive EBITDA (Earnings Before
Interest, Taxation, Depreciation and Amortisations).

90
 The EBITDA multiple method takes into account the value or consideration paid by acquirers of
similar businesses, and is computed by dividing the total consideration paid (after adjusting for
any debt assumed) by the EBITDA to derive a multiple, which can be applied to the EBITDA
figure of the business being valued. i.e. adjusted maintainable EBITDA are capitalised by an
appropriate factor ("capitalisation factor") to arrive at the business value.

EBITDA multiple= Enterprise Value/ EBITDA

Wh ere:

Enterprise Value (EV)= Market value of Equity+ Market value of Debt

EBITDA = Earnings Before Interest, Tax, Depreciation and Amortization

To illustrate, if we' are valuing Company X with EBITDA of Rs. 150 million and in a similar
transaction EV/EBID TA has been 10 (EBID TA multiple) then EV of Company X would be
worked out as Rs. 1500 million and then debt would be deducted to arrive at the equity value of
Company X.

ii) Sales multiple

The sales multiple techniques are based on a similar analysis of relevant acquisitions and are the
ratio of Enterprise Value to the current sales (net of excise duty, sales tax and non-recurring
extra-ordinary income). It is calculated as follows:

• Sales multiple= Enterprises Value/ Net sales of the current year

To illustrate, if we are valuing Company X with sales of Rs. 500 million and in a similar
transaction EV /Sales has been 4 (Sales multiple) then EV of Company X would be worked out as
Rs. 2000 million. Then debt would be deducted to arrive at the equity value of Company X.

The Transaction Multiple methodology suffers from the following drawbacks:

• Actual money required to earn the maintainable profits/ sales of the business as a going
concern (for instance, future capital expenditure) are not considered.
• This methodology does not take into account the time value of money.

Notwithstanding these limitations, these multiples are widely used by investors to arrive at
benchmark values for a company.

13.2.4 Asset Valuation Methodology

The asset valuation methodology essentially estimates the cost of replacing the tangible assets of
the business. The replacement cost takes into account the market value of various assets or the
expenditure required to create the infrastructure exactly similar to that of a company being

91
f
r
 valued. Since the replacement methodology assumes the value of business as if we were setting a
new business, this methodology may not be relevant in a going concern. Instead it will be more
realistic if asset valuation is done on the basis of the new book value of the assets. The asset
valuation is a good indicator of the entry barrier that exists in a business. Alternatively, this
methodology can also assume the amount which can be realized by liquidating the business by
selling off all the tangible assets of a company and paying off the liabilities.

The asset valuation methodology is useful in case of liquidation/closure of the business. In this
case certain adjustments may have to be made to the equity value arrived at by this method
including settlement of all borrowings on the company's balance sheet on the date of valuation
and settlement of employee dues. These adjustments should include all the process related cost
involved in closure and liquidation. For example, in the case of the settlement of the employee
dues, the assumed severance packages may have to be calculated based on the latest available
VRS schemes for the PSU or other such modes that help in determining the most appropriate
amount of settlement that the employees will have to be paid in the event the PSU shuts down its
operations. The following example demonstrates the value of Company X based on asset
valuation methodology:

Figure I: Asset Valuation of Company X

Rs million

Part A: Immoveable assets (valued by Government approved valuer)

Value of buildings in factory area
100
Value of buildings at staff colony
50
Value of surplus land outside factory area
200

Part B: Moveable assets (valued by Government approved valuer)

All moveable assets
250

600
Add: Other assets as per latest balance sheet
Value of current assets as per last audited accounts
300
Cash balance as per last audited accounts
250

550
Less: Liabilities
Estimated Voluntary retirement scheme cost for all employees
-250
Total outstanding borrowings including bank loans, government loans, current liabilities -650
(trade creditors, non trade creditors and statutory liabilities)

. -900

Equity value
250

In a strategic sale process, however, the proposal is normally to transfer management control of a
going concern to a strategic partner. These concerns may contain surplus assets as land and
building which may not form part of the core assets required for operations and hence their fair
value may not be captured if the valuation of subject entity is based on DCF or Market Multiples
92 )
1
approaches. To protect this, certain restrictions are imposed on the strategic partner on usage and
disposal of such surplus assets e.g. the land and property of the business cannot be sold or put to
alternate use by the strategic partner. However, certain economic benefits from such assets
would still accrue to an extent to the strategic partner as the owner of majority interest in the
company. Accordingly, while the asset valuation method may not provide the best estimate of
the value of the enterprise, application of this approach to surplus assets would help provide a
better assessment of the Reserve Price. In practice, it has been used so far for valuing the CPS Us
under disinvestment because the Disinvestment Commission had recommended that this method
should also be followed for valuation in the case of strategic sale.

The Asset Valuation approach suffers from certain very serious limitations. These are detailed
below:

(i) Practically, it is extremely difficult to determine the exact replacement cost of the assets
owned by a company. This is so on account of number of reasons, such as

(a) changes in technology over a period of time (resulting in certain products not being
produced at all or being produced with far more efficiencies than earlier)

(b) absence of a marketplace where such assets are or can be traded

(c) inability of the seller to be able to actually realise the value of assets in one go should the
company be liquidated

(d) changes in the duty structure (like excise, import duties, etc which may impact the value
of the asset over different periods of time) etc.

(ii) The Asset Valuation approach also does not take into account the very purpose for which a
company acquired the assets, i.e .. for future economic benefits. Hence, the historical or
replacement cost of a particular asset may tend to convey a wrong picture of the value that
the buyer may perceive in the asset. These factors often tend to result in a higher value being
attributed to the assets and the companies, if the asset valuation approach is followed. Assets
are bought and sold for their future economic benefits, and for established and running
businesses; the economic benefits of owning the assets are far more relevant than the
historical cost or replacement cost of the assets.
(iii) The Asset Valuation approach also tends to overlook the intangible assets that a company,
over a period of its existence tends to build, such as goodwill, brands, distribution network,
customer relationships, etc, all of which are very important to determine its true intrinsic
value.

(iv)ln the case of a majority of the PSUs it may be found that the replacement cost or liquidation
value is higher than the intrinsic value of the company, if determined on the basis of the
company's future profitability (cash flows). As against this, a company, which has been
generating very healthy returns and has built strong brand equity, goodwill etc., will tend to
command a value that is far higher than the value of its tangible assets.

93
94 M. of Oislnvestment/NO/2002-14.
 The abovernenuoned limirauons of the asset valuation approach have been highlighted very
clearly in the valuation reports submitted by the Advisors in different cases of valuation so far. In
case of strategic sales, the Advisors have expressed that the Discounted Cash Flow approach
may be the most appropriate methodology to be relied upon for valuing businesses on a going
concern basis.

It should be noted that the DCF methodology expresses the present value of the business as a
function of its future cash earning capacity. This methodology works on the premise that the
value of a business is measured in terms of future cash flows, discounted to the present time at an
appropriate discount rate. The methodology is able to capture the value of all the tangible and
intangible assets of the Company based on the possible future cash flows. The value of all the
intangibles of a company such as brand, marketing and distribution network and goodwill get
captured either in the form of higher sales or as higher profits of the company in comparison to
its competitors who may not have as strong or similar brand or distribution network. Hence, the
asset valuation approach may be useful only for a limited purpose of valuing the non-core assets
where it is felt that DCF approach (or market multiples or book value/ balance sheet approach) is
not able to capture the fair value of such assets.

13.3 Standardising The Valuation Approach & Methodologies

Although the aforesaid valuation methodologies being followed are broadly based on the
Discussion Paper of the Disinvestment Commission and the best market practices, it is necessary
to standardize the valuation methodology for all PSU disinvestments so that there are no
variations from case to case.· Therefore, all the four methodologies for valuation should be
followed for all PSU disinvestments, with further improvements in respect of DCF Method and
Asset Valuation Method as detailed below, for arriving at a range of valuation figures, to arrive
at the indicative Benchmark or Reserve Price.

DCFMethod
In the DCF method, while computing the cash flows, cash out flows for renovation and
modernization of plant and machinery should also be discounted for arriving at realistic figures.
Since non-core assets are not reflected in the cash flows, the Asset Valuation Method should
separately value the non-core assets and they should invariably be added to the valuation figure
arrived at by the DCF method.

Asset Valuation
In general, the approach should be used primarily to value the non-core or surplus fixed assets,
whose value are not appropriately accounted for in the valuation by DCF or other approaches.
However, in cases, where the entity has significant non-core assets and where the application of
Asset Valuation approach to the enterprise is deemed necessary, following should be noted:

• The Asset Valuation would be more realistic, if we compute the value of only the
realizable amount, after discounting the non-realizable portions. The realizable market
value of all real estate assets, either owned by the company as freehold properties or on a
lease/rental basis will be determined, assuming a non-distress sale scenario. The value

94
 would be assessed after taking into accoum any defects/restrictions/encumbrances on the
use/lease/sublease/sale etc. of the properties or in the title deeds etc.

• Since Asset Valuation normally reflects the amount which may need to be spent to create
a similar infrastructure as that of a business to be valued or the value which may be
realised by liquidation of a company through the sale of all its tangible assets and
repayment of all liabilities, adjustments for an assumed capital gains tax consequent to
the (hypothetical) outright sale of these assets as also adjustments to reflect realization of
working capital. settlement of all liabilities including YRS to all the employees will have
to be made.

95
 14. CHAPTER: EMPLOYEES' ISSUES
A general fear among the employees at the time of disinvestment is that they may be retrenched
or their pay scales and services conditions may be adversely affected. Global experience shows
that if the privatised companies grow rapidly, labour restructuring may not be required. A
number of protections are available to the employees under various labour laws. These labour
laws are applicable to the company irrespective of whether it is in the Public Sector or in the
Private Sector. Besides this, employee protection is ensured by incorporating suitable clauses in
the Shareholders' Agreement,

14.1 Applicability of Industrial Disputes Act 1947

The provisions of Industrial Disputes Act, 1947 are applicable to the company even after
disinvestment. Under the Industrial Disputes Act, "Industrial establishment or undertaking" has
been defined under Section 2(Ka). The Section reads as follows:

2(Ka) ''Industrial establishment or undertaking" means an establishment or undertaking in which

any industry is carried on:

Provided that where several activities are carried on in an establishment or undertaking and only
one or some of such activities is or are an industry or industries, then,

a) if any unit of such establishment or undertaking carrying on any activity, being an industry,
is severable from the other unit or units of such establishment or undertaking such, unit
shall be deemed to be a separate industrial establishment or undertaking;

b) if the predominant activity or each of the predominant activity carried on in such

establishment or undertaking or any unit thereof is an industry and the other activity or
each of the other activities carried on in such establishment or undertaking or unit thereof is
not severable from and is, for the purpose of carrying on, or aiding the carrying on of, such
predominant activity or activities, the entire establishment or undertaking or, as the case
may be, unit thereof shall be deemed to be an industrial establishment or undertaking.

In view of the above definition the company will remain an industrial establishment even after
the disinvestment and all the provisions of Industrial Disputes Act will autornaticaJly apply to the
company. The trade unions may have an apprehension that workers of a PSU enjoy more
protection under the law of the land than those in the private sector. As a matter of fact, as long
as venture is "industrial establishment", the provisions of Industrial Disputes Act are applicable
to that venture, irrespective of it being in public sector or private sector.
.....

96

I,
14.2 Provisions governing service conditions

The companies normally have "Certified Standing Orders" for their workmen. The Standing
Orders have been certified under the Industrial Employment (Standing Orders) Act, 1946. The
service conditions of the workmen of the company are normally governed by the said "Certified
Standing Orders". If. after disinvestment, the prospective buyer proposes to make any change in
the service conditions applicable to the workmen, he has to give a notice in the prescribed
manner under Section 9-A of the Industrial Disputes Act which reads as fol low:

SECTION 9-A

NOTICE OF CHANGE

No employer, who proposes to affect any change in the conditions of service applicable to any
workman in respect of any matter specified in the Fourth Schedule, shall affect such change-

(a) without giving to the workmen likely to be affected by such change a notice in the
prescribed manner of the nature of change proposed to be affected; or

(b) within twenty-one days of giving such notice

Provided that no notice shall be required for affecting any such change-

(a) where the change is affected in pursuance of any settlement or award; or

(b) where the workmen likely to be affected by the change are persons to whom the
Fundamental and supplementary Rules, Civil Services (Classification, Control and
Appeal) Rules, Civil Service (Temporary Service) Rules, Revised Leave Rules, Civil
Service Regulations, Civilians in Defence Services (Classification, Control and Appeal)
Rules, or the Indian Railway Establishment Code or any other rules or regulations that
may be notified in this behaif by the appropriate Government in the official Gazette,
apply.

The Fourth Schedule as mentioned in the above definition is being reproduced below: -

THE FOURTH SCHEDULE (See Section 9-A)

Condition Of Service For Change Of Which Notice Is Given

1. Wages, including the period and mode of payment;

2. Contribution paid, or payable, by the employer to any provident fund or pension fund or for
the benefit of the workmen under any law for the time being in force;
3. Compensatory and other allowance;
4. Hours of work and rest intervals;
5. Leave with wages and holidays;

97
 6. Starting, alteration or discontinuance of shift working otherwise than in accordance with
standing orders;
7. Classification by grades;
8. Withdrawal of any customary concession or privilege or change in usage;
9. Introduction of new rules of discipline, or alteration in existing rules, except in so far as
they are provided in standing orders;
I 0. Rationalisation, standardisation or improvement of plant or technique, which is likely to
lead to retrenchment of workmen;
11. Any increase or reduction (other than casual) in the number of persons employed or to be
employed in any occupation or processes or department of shift (not occasioned by
circumstances over which the employer has no control).

Thus under the provisions of Industrial Disputes Act, 1947, read with the provisions of Industrial
Employment (Standing Orders) Act, 1946. any change in the service conditions of the workmen
will be governed by the provisions of the law of the land as applicable in the company prior to
the disinvestment. This is not to say that Certified Standing Orders cannot be changed even prior
to the disinvestment by the company management. But as law prescribes, a notice has to be given
by the management to the workmen which does not necessarily mean that just ~y giving a notice,
service conditions may be changed in a manner detrimental to the interest of the workers. If the
workers find that notice envisages change in working conditions detrimental to their interests,
they can immediately raise an "Industrial Dispute" before the Appropriate Authorities defined
under the Act. The "Industrial Dispute" has been defined under Section 2K of the Industrial
Disputes Act, which reads as follows:

"Industrial Dispute" means any dispute or difference between employers and employees, or
between employers and workmen, or between workmen and workmen, which is connected with
the employment or non-employment or the terms of employment or with the conditions of labour
of any person;"

Chapter II of the Industrial Disputes Act deals with Authorities under the Act and subsequent
chapters lay down procedures etc. with regard to the redressal of Industrial Disputes. Hence,
under the existing provisions of Industrial Disputes Act, 1947, the interests of the workmen will
remain protected as much as these are protected now under the present dispensation.

In an organised sector, the issues of job security, wage structure, perks, welfare facilities, etc. of
the workers are governed by bipartite/tripartite agreements. These agreements are in the nature of
"settlement" as defined under Section 2p and as protected under various provisions of the Act.
Even after the disinvestment, the company management will be required to enter into
bipartite/tripartite agreements with the workmen through Unions, and the terms and conditions in
the agreement would be always governed by the practices and procedures applicable under
· collective bargaining. It is a fact that any agreement between two or more parties is based on the
principles of mutual consent. Hence, the consent of the management to better service conditions,
etc. would certainly depend on the achievement of the productivity and production targets by the
workers from time to time.

98
 14.3 Protection against arbitrary closure of an undertaking

. ' Regarding protection against arbitrary closure of any establishment of the Company, it is to be
noted that the "Closure" of an Industrial Establishment is governed by Section 25(0) of the
Industrial Dispute Act. Section 25(0) reads as follows:

l. An employer who intends to close down an undertaking of an industrial establishment to

which this chapter applies shall, in the prescribed manner, apply, for prior permission at least
ninety days before the date on which the intended closure is to become effective, to the
appropriate Government, stating clearly the reasons for the intended closure of the
undertaking and a copy of such application shall also be served simultaneously on the
representatives of the workmen in the prescribed manner:

provided that nothing in this sub-section shall apply to an undertaking set up for the construction
of buildings, bridges, roads, canals, dams or for other construction work.

2. Where an application for permission has been made under sub-section (1), the appropriate
Government, after making such enquiry as it thinks fit and after giving a reasonable
opportunity of being heard, to the employer, the workmen and the person interested in such
closure may, having regard to the genuineness and adequacy of the reasons stated by the
employer, the interests of the general public and all other relevant factors, by order and for
reasons to be recorded in writing, grant or refuse to grant such permission and a copy of such
other order shall be communicated to the employer and the workmen.

3. Where an application has been made under sub-section (1) and the appropriate Government
does not communicate the order granting or refusing to grant permission to the employer
within a period of sixty days from the date on which such application is made, the permission
applied for, shall be deemed to have been granted on the expiration of the said period of sixty
days.

4. An order of the appropriate Government granting or refusing to grant permission shall,

subject to the provision of sub-section (5), be final and binding on all the parties and shall
remain in force for one year from the date of such order.

5. The appropriate Government may, either on its own motion or on the application made by the
.employer, or any workman, review its order granting or refusing to grant permission under
sub-section (2) or refer the matter to a Tribunal for adjudication: Provided that where a
reference has been made to a Tribunal under this sub-section, it shall pass an award within a
period of thirty days from the date of such reference.

6. Where no application for permission under sub-section( l) is made within a period specified
therein, or where the permission for closure has been refused, the closure of the undertaking
shall be deemed to be illegal from the date of closure and the workmen shall be entitled to all

99
 the benefits under any law for the time being in force as if the undertaking had not been
closed down.

7. Notwithstanding anything contained in the foregoing provisions of this section, the

appropriate Government may, if it is satisfied that owing to such exceptional circumstances
as accident in the undertaking or death of the employer or the like, it is necessary so to do, by
order. direct that the provisions of sub-section (l) shall not apply in relation to such
undertaking for such period as may be specified in the order.

8. Where an undertaking is permitted to be closed down under sub section(2) or where

permission for closure is deemed to be granted under sub-section(3) every workman who is
employed in that undertaking immediately before the date of application for permission
under this section, shall be entitled to receive compensation which shall be equivalent to
fifteen days' average pay for every completed year of continuous service or any part thereof
in excess of six months.

From the above definition it is clear that the company management before or after disinvestment
is not free to close down any part of the company at their sweet will. The closure is governed by
the law of land and as far as the existing provisions of Industrial Disputes Act are concerned,
"genuineness and adequacy of the reasons stated by the employer" and "the interests of the
general public and all other relevant factors", have to be examined by the appropriate
Government and for doing that the Government has to give a reasonable opportunity of hearing
to the employer and workmen and the persons interested in such closure. It means that unless and
until the appropriate Government grants permission, the company management will not be
competent to close down any undertaking of the company even after disinvestment. So there are
protections available under the Act against arbitrary closure of any undertaking of the company
after di sin vestment.

At times, some trade unions demand assurances regarding peripheral development after the
disinvestment of the company, which are being enjoyed by the villages adjoining the plant.
Contract labourers also demand regularisation of their jobs before the disinvestment. Under the
law, no employer can be forced to make investment in the peripheral development. However. as
a prudent management practice, bigger companies invest substantially in the development of the
areas around them. It is expected that the successor management will consider this issue
favourably. So far the regularisation of contract labour is concerned, PSU or no PSU, an
industrial undertaking in this regard is governed by the provisions of Contract Labour
(Regulation and Prohibition) Act, 1970 and Rules made thereunder. Hence, the contract labour
and unions representing their interest may take recourse to the said Act and Rules after
disinvestment and may pursue the matter in furtherance of their demands.

14.4 Functional Directors

Regarding functional Directors. it is required that they resign along with the complete Board as
per requirements of Closing of the transaction of Strategic Sale. These whole-time Directors
may, however be renominated by the Strategic Partner and such provisions are made in the Share

100
Purchase Agreement. However, if any whole-time director(s), whose resignation is accepted at
the Closing Board Meeting, is not nominated to the Board by the Purchaser or is not re-employed
by the Company on terms and conditions mutually acceptable to the Purchaser and such whole
time director(s), which are no less favourable than the terms and conditions of employment of
such whole time director(s) before the closing date, then such whole-time director(s) shall be
entitled to compensation from the company that is the equivalent to amounts that are the higher
of:

(i) remuneration for the balance period remaining of their term of employment under their
respective employment contract(s) with the Company; or
(ii) remuneration as provided under their respective employment contract(s) for a period of six
months.

In any case, functional Directors are contractual appointees and after termination of the contract,
they are entitled to terminal benefits, leave encashment, gratuity etc. as per the rules of the
company.

14.S Provisions in the Shareholders' Agreement

Protection of Employees interest forms an integral part of the disinvestment Process. The
Government is committed to protect the interests of all the workers, including those belonging to
the Scheduled Castes and Scheduled Tribes. Transaction Agreements entered into by the
Government with the Strategic Partner (SP), at the time of strategic sale, state that the SP
recognizes that the Government follows certain employment principles for the benefit of the
members of the Scheduled Caste/Scheduled Tribes, physically handicapped persons and other
socially disadvantaged sections of the society and that the strategic partner shall use its best
efforts to cause the Company to provide adequate job opportunities for such persons. Further, in
the event of any reduction in the strength of the employees of the Company, the SP shall use its
best efforts to ensure that the physically handicapped persons, Scheduled Castes I Scheduled
Tribes are retrenched at the end. A specimen copy of the typical provisions related to employees'
interest incorporated in the Shareholders Agreement is given below:

Recitals:

• Subject to the substantives clauses in this regard, the Parties envision that all Employees of
the Company on the date hereof will continue in the employment of the Company.
• The SP recognises that the government in relation to its employment policies follows certain
principles for the benefit of the members of the Scheduled Caste I Scheduled Tribes,
physically handicapped persons and other socially disadvantages categories of society. The
SP shall use its best efforts to cause the Company to provide adequate job opportunities for
such persons. Further, in the event of any reduction in the strength of the employees of the
Company, the SP shall use its best efforts to ensure that the physically handicapped persons,
Scheduled Castes/Scheduled Tribes are retrenched at the end.

101
94 M. of DisinvestrMnt/ND/2002-15.
Substantive Clauses:
• Notwithstanding anything to the contrary in this Article _, the Government, shall at any
time and at its sole discretion, have the option of selling shares from its shareholding in the
company, representing not more than _ of the share capital of the company existing as of
date of this Agreement, to the employees of the Company ("employees sell share"). In the
event that the Government exercises its option to sell part of its shares to the employees, the
employees shall be issued fresh share certificates for the shares transferred to the employees.
The Shareholders agree that, upon the completion of transfer, the shares transferred to the
employees pursuant to this sub-clause shall not be subject to any restrictions in this
Agreement, whether by way of a voting arrangement or a right of first refusal.
• The SP covenants with the Government that
(a) notwithstanding anything to the contrary in this Agreement, it shall not retrench any of
the Employees of the Company for a period of 1 (one) year from the Closing Date
other than any dismissal or termination of Employees of the Company from their
employment in accordance with the applicable staff regulations and standing orders of
the Company or applicable Laws;
(b) notwithstanding anything to the contrary in this Agreement, but subject to Sub-Clause
(a) above, any restructuring of the labour force of the Company shall be implemented
in the manner recommended by the Board and in accordance with allapplicable Laws;
(c) notwithstanding anything to the contrary in this Agreement, but subject to Sub-Clause
(a) above, in the event of any reduction of the strength of the Company's Employees,
the SP shall ensure that the Company offers its Employees an option to voluntarily
retire on terms that are not, in any manner, less favourable than the YRS applicable
before disinvestment.

14.6 Labour Related Issues In PSUs Under Disinvestment:

A Ceil has been created in the Ministry to look into labour related issues and will act as a focal
point for the Public Sector Undertakings slated for disinvestment. Minister and the Secretary of
MODI meet the representatives of the workers' Unions of the PSUs where disinvestment process
is underway and explain the policy of the Government in this regard and solicit their cooperation,
whenever needed. Similarly, the administrative Ministries and the management of the companies
discuss labour-related issues with the trade-union representatives and other leaders to clarify the
Government's position and allay misgivings, if any.

Films have also been made by Ministry of Disinvestment and certain States, which depict how
labour has fared post-disinvestment. They have encouraging experiences to share. However,
employees of some companies which have not been privatised but have fallen on bad days, can
be seen to be lamenting at the idle state of their once very well managed and profit making
company. As a consequence, these employees also have to bear uncertainties like non-payment
of wages for months together, doubts on continuation of employment etc. The employees in
these companies feel that if they had been privatised before their company came to this state,
they would also have had better pay packets and working conditions that they see in privatised
companies.

102
 PART C:
PROGRESS
15. CHAPTER: DISINVESTMENT TILL NOW
Other than Modem Food Industries (India) limited, only minority stakes in -different PSEs were
sold before the year-ending March 2000. The Government has since modified its policy to
emphasise on strategic sales. The disadvantages of sale of minority stakes by the Government
have been found to be as follows:

• Lower realisations because management control is not transferred.

• With the limited holding remaining with the Government after minority sales, only small
stakes can be offered to the strategic partner, if it is decided to go for a strategic sale
subsequently. This depresses the possibility of higher realizations from the strategic
partner, especially since the latter has to offer the same price to other shareholders also
through an open offer.
• The minority sales also give a wrong impression that the main objective of the
Government is to obtain funds for reducing its fiscal deficit, and not to improve
performance or governance.

The following table indicates the actual disinvestment from the year 1991-92 to so" Nov. 2002,
the methodologies adopted for such disinvestment and the extent of disinvestment in different
CPSUs:

No. of Target receipt Actual receipts

Companies in for the year (Rs. In Crore)
Year which equity (Rs In Crore) Methodology
sold

I 991-92 47 2500 3038 Minority shares sold by auction method In

(31 in one bundles of "very good", "good", and "average"
tranche and I 6 companies.
in other)
1992-93 35 2500 1913 Bundling of shares abandoned. Shares sold
(in 3 tranches) separately for each comoanv bv auction method.
1993-94 -- 3500 Nil Equity of 7 companies sold by open auction but
proceeds received in 94-95.
I 994-95 13 4000 4843 Sale through auction method, in which NRis and
other persons legally permitted to buy, hold or
sell equity, allowed to participate.
1995-96 5 7000 362 Equities of 4 companies auctioned and
Government piggy backed in the IDBI fixed
price offering for the fifth comoanv.
1996-97 l 5000 380 GDR (YSNL) in international market.
1997-98 I 4800 902 GDR (MTNL) in international market.
1998-99 5 5000 5371 GDR (YSNL) / Domestic offerings with the
participation of Flls (CONCOR, GAIL). Cross
purchase by 3 Oil sector companies i.e. GAIL,
ONGC & Indian Oil Corporation

103
 No. of Target receipt Actual receipts
Companies in for the year (Rs. In Crore)
Year which equity (Rs In Crore) Methodology
sold
1999-00 4 10000 1829 GDR-GAIL, VSNL-domestic issue, BALCO
restructuring, MFIL's strategic sale and others
2000-01 4 10000 1870 Strategic sale of BALCO, LJMC; Takeover -
KRL (CRL), CPCL (MRL), BRPL
2001-02 10 12,000 5632 # Strategic sale of CMC - 51 %, HTL -74%,
VSNL - 25%, IBP - 33.58%, PPL-- 74%, and
sale by other modes: !TDC & HCI; surplus
reserves: STC and MMTC
2002-03 6 12,000 4777 # Strategic sale of JESSOP-72%, HZL - 26%,
MT-IL-26%, IPCL - 25% and other modes:
HCI, !TDC, Maruti
Total 48 * 78,300 30917#

* Total number of companies in which disinvestment has taken place so far.

# Figures (inclusive of amount expected to be realised, control premium, dividend/dividend tax
and transfer of surplus cash reserves prior lo disinvestment etc.)

The disinvestment phase can be divided into 2 parts as per the moue of disinvestment and the
methodologies adopted. The following table shows the realisations in the two periods.

Actua] Disinvestment from April 1991 lili November 30, 2002; Realisation and
Methodologies Adopted

Sale of shares - 1991- Strategic sale Total

92 to i 999-2000 1999-2000 till date
1 No. of Companies 39 * 36 *1\ /\ 68 *
2 Equity sold (Rs. in crore) 2347.5 894 3241.5
3 As% of total equity of central 3% 1.13 %
Govt. and holding cos. (as on
march 2000)
4 Total Receipts (Rs. in crore) 19573 11344 /\ 30917"
5 Realisation as multiple of 7 ** 12
equity sold
"' Seven companies are common in both modes
"'*Of profit making companies in monopoly days
" Includes expected accruals from deals finalised
"" From 25 loss making & 11 profit making

In the first phase disinvestment through sale of shares yielded over Rs.19,000 crore by selling
equity worth Rs. 2347 crore. In the latter phase Govt. has already realised around Rs. 11000
crore by selling equity worth Rs. 894 crore.

104
 The company wise realisation through strategic sale is shown below:
111
Strategic Disinvestment beginning 1999-2000 till 30 November 2002
(Rs in crore)
Sr.No Gol Realisation Gov1. borrows @ I 0%: Dividend recd by Govt. on
Name Equity Interest on equity sold average of last
sold realization annually 8 years upto 2000

la. MFIL 9.63 105 10.5 0.48

lb. MFIL - Phase II 3.38 44 4.4 0.17
2. BALCO 112.52 826.5" 82.65 5.69
3. CMC 7.73 152 15.2 0.8
4. HTL I I.I 55 5.5 0.29
5. LJMC 0.77 2.53 0.25 Nil
!TDC-19 HOTELS
6. Agra 1.70 3.61 0.36 NIL/lff(Annual Loss 1.51)
7. Bodhgaya 0.44 1.81 0.18 NIL## (AL 0.30)
8. Hassan 0.21 2.27 0.23 NIL #II (AL 0.63)
9. Mamallapuram 0.83 6.13 0.61 NIL ff# (AL 0.51)
IO. Madurai 0.71 4.97 0.50 NIL## (AL 0.89)
11. Bangalore 0.96 39.41 (up-front fee); 6.00"' NIL #ff (AL 1.78)
(4.1 I - MGAP)
12. Qutab 0.83 34.46 3.85 * NIL## (AL 0.2)
13. Lodhi 0.96 71.93 8.68 * NIL #II (AL 2.0)
14. LVPH, Udaipur 0.55 6.77 0.68 NIL II# (AL 1.0)
15. Manali 0.63 3.65 0.37 NIL## (AL 0.3)
16. Kovalam 1.85 40.39 4.04 NIL## (AL 1.9)
17. Aurangabad 1.16 16.50 1.65 NIL## (AL I.I)
18. Airport Kolkata 0.66 19.39 1.94 * NIL## (AL 2.6)
19. Khajuraho 0.97 2.19 0.22 NIL## (AL 0.80)
20. Varanasi 1.74 8.38 0.84 NIL## (AL 1.9)
21. Kanishka 1.90 92.37 10.97 * NIL## (AL 7.6)
22. lndruprastha (AYN) 0.80 43.39 5_.18 * NIL## (AL 3.4)
23. Chandigarh project 7.00 17.27 2.03 * Incomplete project
24. Ranjit 3.20 29.20 2.92* NIL## (AL 3.2)

Sub-total 27.10 444.09 51.25 NIL #II (AL 31.6)

HCl-3 HOTELS
25. Juhu, Bombay 8.95 153 15.3 NIL## (AL I .St)
26. Rajgir 1.72 6.51 0.65 NIL## (Profit 0.32)
27. Airport, Mumbai 4.0 83 9.96 * NIL## (AL 3.24)
Sub-total 14'.67 242.51 25.91 * NIL## (AL 4.48)
28. IBP 7.44 1153.68 I 15.36 1.84
29. VSNL 71.25 36,89" 368.9 10.4
30. STC ----- 40" 4 ------
31. MMTC ---- 60" 6 ------
32. PPL 320.16 151.70 15.17 (-) 71#
33. JESSOP 68.13 18.18 ** 1.82 (-) 55#
34. Hindustan Zinc Ltd. 109.85 445 44.5 3.5

35. Manni Udyog 66.00 2424 /\/\ ** 242.4 13

36. IPCL 64.5 1490.84 149 16.24
Grand Total 894.23 11344.03 1142.79 - 73.59
• Including NPV of future earnings on MGAP & lease rentals •• expected #ff Loss making for latest years
" including dividend & divi. Tax.cash surpluses M minimum amount 10 be received over 3 tranches; could go up to Rs. 3158 er

.II Restructuring/Conversion of Loan into equity & waiver of interest - hence a loss. Companies at Sr. No. 5, 23, 25, 26. 27 & 33 are
subsidiaries. Sale at 33 10 be approved by Government/Bl FR

105
 The table reveals that during the last two years the Government has sold a little over 1 %
of its total equity.

The Government has received Rs. 11344 crore from these sales. Some sales also lead to
annual revenue. The Government of India's borrowing rate is of the order of 10%. Hence, this
•
realisation would lead to a benefit of Rs. 1140 crore to the country every year in perpetuity. As
against this benefit, the dividends received by Government on its equity, which has been sold,
averaged Rs. 52.41 crore during the last eight years. However, PPL and Jessop led to an
average annual outgo of Rs. 126 crore as shown in the Table. Thus, the Government lost Rs.
73.59 crore ever year due to its majority equity presence in these companies. The sales of part
equity in 36 companies would bring an annual real benefit to the economy to the tune of Rs.1140
+ 73 crore = Rs. 1213 crore. There can be no justification for maintaining public sector character
in these industries, if the taxpayer has to lose more than Rs. 1213 crore every year by non-
privatisation.

There is often an argument that the Government should not sell profit-making companies.
BALCO was a profit making company, which earned the Government an average dividend (over
eight years) of Rs. 5.69 crore every year on the equity sold. As shown in the Table, the
Government would now get Rs. 82.65 crore every year. CMC was a very well managed and
profitable company, yet the average dividend was only Rs. 0.80 crore. The Government's
benefit now is Rs. 15.2 crore annually. Similarly, Maruti Udyog Ltd. gave average returns to the
tune of Rs. 13 crore annually to the Govt. and IPCL gave Rs. 16.24 crore on equity sold against
Rs. 242 crore and Rs. 149 crore respectively which can be expected now. The argument can be
multiplied in each sale of profit making company implemented so far. Thus the reason to
privatise these companies

In case of a loss making company like PPL, the Government was losing Rs. 12 crore
every month (after privatization, the revised accounts reveal that the losses were higher) and
there can be no justification for maintaining it in the public sector. All hotels of ITDC sold so far
were loss making. There were some hotels whose losses exceeded their turnover. The sale of
such hotels, besides getting revenue for the government have saved the tax payer from having to
make good these losses at some future date.

106
16. CHAPTER: SUCCESSFUL PRIVATISATIONS IN
INDIA
All cases of privatisation since the Department / Ministry was created have been of different
nature and taught new lessons for refining / fine-tuning the procedures. The highlights of the
privatisations completed by the Ministry of Disinvestment so far are given below. The month-
wise progress of completing privatisation and the time taken in completing each transaction, the
performance of privatised listed companies and available details of post-disinvestment
performance is also shown in this chapter.

16.1 Modern Food Industries (India) Limited (MFIL)

MFIL. was incorporated as Modem Bakeries (India) limited in 1965. It had 2042 employees as on
31.1.2000. It went through minor restructuring during 1991-94 when its Ujjain Plant was closed,
the Silchar project abandoned and the production of Rasika drink curtailed. The company was
referred to Disinvestment Commission in 1996. In February 1997, the Commission
recommended 100% sale of the company, treating it in the non-core sector. While making this
recommendation, the Disinvestment Commission cited under-utilisation of the production
facilities, large work force, low productivity and limited flexibility in decision-making, as some
of its weaknesses.

In September 1997, the Government approved 50% disinvestment to a Strategic Partner through
competitive global bidding. In October 1998, ANZ Investment Bank was appointed as the Global
Advisor for assisting in disinvestment. In January 1999, the Government decided to raise the
disinvestment level to 74%, and an advertisement, inviting Expression of Interest from the
prospective Strategic Partners, was issued in April 1999.

Pursuant to the advertisement and other marketing efforts by the Advisor, 10 parties submitted
Expressions of Interest. Out of these, only 4 conducted the due diligence of the company, which
included visits to Data Room, interaction with the management of the MFIL and site visits. After
due diligence, only 2 parties remained in the field, and on the last day for submission of the
financial bid (15.10.99), the only bid received was that from Hindustan Lever Limited (HLL).
The Government approved the selection of HLL as the strategic partner in January 2000, and the
deal was closed on 31.1.2000.

As per the accounting procedure followed prior to disinvestment (31.1.2000), the Company did
not make a provision for outstanding recoveries exceeding 5 years even, whereas the new
management made provision for all outstanding recoveries which were more than 3 years old on
the grounds that strict application of accounting principles warrant so. The accounts for the year
1999-2000, thus prepared, show an accumulated loss of Rs. 3099.97 lakhs, with the net-worth of
the company as Rs. 20 I .45 lakhs. Since the net-worth of the company got eroded by more than
50% of its peak net-worth (Rs. 1756.79 lakhs), during the immediately preceding four financial
years, MFIL had to file a report with the BIFR in accordance with the requirements of Sick
Industrial Company (Special Provisions) Act, 1985.

107
$4 M. of Dlslnvestment/ND/2002-18.
 The following Table shows the highlights of the Strategic Sale.

Modern Food Industries (India) Ltd.

PRIOR TO SALE AFTER SALE

Authorised share capital Rs. 15.00 er. l. 74% of the shares sold for Rs. 105.45 er. and
Paid up capital Rs.13.01 er. further Rs. 20 er. Invested by Hl.L in the company.
Losses 1998-99 Rs. 6.87 er.
Losses 1999-00 Rs.48.23 er. (Inclusive of an amount
of Rs. 35. I 9 er. towards provisions
made for previous years.)

Number of emnlovees 2042

Net Worth (and total
expected realization) as per
DPE Survey 1998-99
Value of assets as per
3 J .3.99 accounts
Markel value of land &
building as per Government
valuer (unrestricted use)
3. Valuation of 100%, equity
by different methods - as
done bv global advisors
Rs. 28.51 er. 2. Thus, the Government gained by selling Rs.
1000 shares for Rs. l 1,490 each i.e., more than 11
times the face value & 3.68 times the Book Value.
Gross Rs. 38.76 er.
Net Rs. 18.99 er.
Rs.109.00 er.
3. HLL's share value went up from Rs. 2138 on
Rs. 30 er. to Rs. 70 er. 30th Dec.'99 (prior to sale) to Rs. 3247 on 25th
Feb.'00 (post sale).
4.The employees of a company incurring losses
became l-Il..L employees - an efficient company.
The Shareholders' Agreement envisages:" the
parties envision that all employees of the company
on the date hereof will continue in the employment
of the cornnauv."

Post - Disinvestment Scenario

l. Wages have increased by an average of Rs. 1800/- per employee. Company has incurred an
expenditure of Rs. 30 crore on YRS.

2. Due to the erosion of entire net worth of the company because of poor performance during the
pre-disinvestment period, MFIL had to be referred to BFIR as per statutory requirements
immediately after its take over by HLL. But, HLL has not sought any relief on rehabilitation and
has categorically indicated that it is confident of turning around the company with its
management strength and capability of injecting additional funds. BIFR has approved the Plan
of Action for revival of the company, as submitted by HLL, for implementation vide its order
dated 5.3.2002. An additional amount of around Rs. 7 crore has been infused for safety and
hygienic purposes at various manufacturing locations.

3. During the period 1/4/2000 to 31/12/2000, HLL has given financial support to MFIL by way
of secured loans to the extent of Rs. 16.50 crore. HLL had also given a corporate guarantee for

108
Rs. 9.~0 crore to Punjab National Bank as collateral security for the cash credit facility of the
Company.

4. Steps have been taken towards improvement in quality of bread, its packaging and marketing
with trade-promotion activities besides training the manpower in quality control systems. MFIL
is thus registering strong and steady growth. Sales in 2000-2001, the first year under HLL's
management, had increased by 52% over the previous year and 20% in the year 2001-2002 over
the corresponding period.

As per the Share Holders Agreement, the Purchaser is entitled to Post Closure Adjustments as
declared by the Post closing Auditor. A sum of Rs.17.48 crore is payable to the Purchaser of
which Rs.4 crore is still pending settlement. The Government was also entitled to 'Put' its share
st th
of remaining equity of 26 % at Fair Market Value for 2 years from 31 January O I to 30
January 03. The Government has exercised this option and thereby received Rs. 44.07 crore on
28th November 02 thus finalising the complete sale of MFIL.

16.2 Bharat Aluminium Company Ltd. (BALCO)

BALCO is a fully integrated aluminium producing company, having its own captive mines, an
alumina refinery, an aluminium smelter, a captive power plant, and down-stream fabrication
facilities. It was set up in 1965 and has its corporate office in New Delhi. lts main plant and
facilities are situated in Korba (Chhattisgarh). It also has a fabrication unit in Bidhanbag (West
Bengal). The refining capacity of BALCO is 2 lakh tonnes per year and its smelting capacity is
0
one lakh tonnes per year. Its employee strength was 6436 as on 2° March 200 l.

In pursuance of the recommendations of the Disinvestment Commission, the Government

appointed Mis Jardine Fleming as Advisor to assist in the sale of its 51 % stake in BALCO to a
strategic buyer.

Simultaneously, it was brought to the attention of the Government that BALCO had a bloated
equity of Rs. 489 crore and large unutilized free reserves of the level of Rs. 424 crorc. It was
suggested by the Ministry of Mines that BALCO's equity be reduced by 50% prior to
disinvestment, using its substantial cash surplus. This proposal was accepted. As a result, the
Government received Rs. 244 crore from the capital restructuring of BALCO, and another Rs. 31
crore as tax on this amount, prior to disinvestment.

The strategic sale process for BALCO started in late 1997, after the first decision of the
Government, and finally came to an end on 2nd March 200 I. The 51 % stake was sold to Sterlite
Industries, the highest bidder, and fetched the Government Rs. 551.50 er. The price received was
higher than the values indicated by the various methods of valuation used. The Government thus
recovered a total amount of Rs 826.50 crore from this privatisation and looking at a 10% rate of
interest on Government of India borrowing the Government gains about Rs. 82 crore against

109
 approximately Rs. 5.69 crore as dividend it used to get for the 51 % shares, in earlier years. The
Government/ tax-payer thus gain by around 15 times every year through this privatisation.

Post sale, a number of issues were raised in certain quarters on the disinvestment of BALCO,
especially with regard to transparency, valuation and protection of employees interests. ..
However, the entire sale process, including the appointment of Advisor and the approval of the
price bid, has been carried out in an extremely transparent manner, in keeping with the highest
standards of global practices. Of special mention are the clauses in the Shareholders Agreement
with the strategic buyer, which offer adequate protection to all levels of employees with regard to
their job safety and severance packages.

Post Disinvestment Scenario

I. The new management had introduced YRS from 31.07.01 to 16.08.01. 981 applications
(151 executives and 830 workers) were received. 694 old YRS applications were
pending. A total of 956 applications were accepted mostly where units were lying closed.
2. In spite of losses of Rs. 200 crore due to the strike (at the time of disinvestment), an
exgratia payment of Rs. 5000/- was made to all employees.
3. Long-term wage agreement for a period of 5 years was entered into on 7.10.2001 (Wage
revision was due w.e.f. 01.04.99 and earlier revision was for ten years) as follows:
a) Workmen get a guaranteed benefit@ 20% of basic pay.
b) Increase in allowances:
• . Night shift allowance: Rs. IO to Rs.20 per shift.
• Canteen allowance: Rs.400 p.m. (instead of subsidised canteen facilities)
• Education allowance: Rs. 50 to Rs. 75 per month
• Hostel allowance: Rs.150 to Rs.200 per month
• Scholarship amount to meritorious children doubled.
• Leave Travel Assistance of around Rs. 6000 as cash every year.
• Conveyance allowance: Scooter users Rs. 400 to Rs. 500 pm, moped users
Rs. 240 to Rs. 350 pm, others users Rs. 150 to Rs. 260 pm.
4. New practices introduced:
a) Job rotation
b) Appraisal system

5. The new management is proposing an investment of Rs. 6000 crore which will increase
production 4 times.

LANDMARK JUDGEMENT IN BALCO DISINVESTMENT

In protest of the BALCO disinvestment, the workers went on a 67-day strike. Three writ
petitions - two in Delhi high Court and one in Chhatisgarh High Court were filed against
disinvestment in BALCO in February 2001. The Supreme Court in its unanimous judgement
delivered on io" December 2001 validated disinvestment by the Government in BALCO. The
landmark judgement also defined, amongst others, the parameters of judicial review in
Government's economic policy matters. The Hon'ble Supreme Court, while validating BALCO

1 IO
 disinvestment and dismissing the petitions, remarked, "Thus, apart from the fact that the policy
of disinvestment cannot be questioned as such, the facts herein show that fair, just and equitable
procedure has been followed in carrying out this disinvestment." This judgement facilitated the
path of other successful privatisations.

16.3 Computer Maintenance Corporation Ltd. (CMC Ltd.)

CMC Ltd. was incorporated in 1975 with a paid up capital of Rs. 15.15 crore, 83.31% of which
was owned by the Government. The company is mainly involved in hardware maintenance,
systems engineering, system design, development, consultancy and networking .with an
employee strength of 3200.

The Company has a wholly owned subsidiary - Baton Rouge International Inc., USA

In April 1999, CMC was referred to the Disinvestment Commission but was withdrawn as
Government decided raising of additional equity via private placement or by directly going for
public issue. The company could not raise the funds till November 2000, by way of private
placement 0f shares or through public issue.

On 151 February 2001, Government decided to bring down its equity to 26% by \Vay of induction
of a Strategic Partner and other means and appointed KPMG Pvt. Ltd. as the Advisor.

Tata Sons Limited have acquired 51 % stake in CMC Ltd. for Rs.152 crore at a per share price of
around Rs.197/- on October 16, 2001. PE Ratio at which CMC shares were sold is 12.
Government also approved allotment of 6.31% equity shares of CMC Ltd. to employees under
the Employees Stock Option Scheme.

As per the requirements under the SEBI's Takeover Code the strategic partner had announced an
open offer for acquiring shares from the market. The opening date was 27.11.2001 and the
closing date was 26.12.2001. In response to this public offer 96 applications were received for
18561 shares i.e. 0.12% of CMC's paid up capital.

Post sale, the new management distributed 50% of Productivity Linked Incentive for the FY
2000-2001 to all eligible staff members amounting to about 4-6 months' basic pay in the pre-
revised grade. Provision for Productivity Linked Incentive for the FY 2001-2002 was also made
in the 2nd quarter financial results. Fresh recruitment of 558 personnel has also taken place in the
one year after privatisation.

Since disinvestment, CMC and the Strategic partner are offering their complementary products
and services to many of their customers both in domestic and international markets. The share
pr-ices are also soaring showing positive market sentiment. The Government was getting a
dividend (8 year average) of Rs. 0.80 crore annually whereas now the Government can gain Rs.
• 15.2 cror-e per year on the disinvested amount at a 10% annual rate of return.

111
 16A HTL Limited

The Company was wholly owned by the Government of India, and was incorporated in 1960
primarily for manufacture of electromechanical teleprinters, to cater to the needs of erstwhile
Post and Teiegraph Department. Since the early 1990s, HTL diversified its product portfolio to
digital telephone exchange products, transmission products, access products and data & terminal
products. HTL employs approximately 1100 people.

Despite being one of the largest revenue earners amongst the telecom equipment companies in
India, HTL's profit margins had been low. HTL's main product line, digital telephone products
(manufactured with technology support from C-DoT and Siemens) contributed to the top line
substantially. These products commanded a lower margin than the other categories like
transmission and access products.

The Disinvestment Commission in its 2nd report of April 1997 had classified HTL in the non-
core category and interalia recommended for strategic sale of either I 00% or 50% of its shares
through competitive bidding.

The Cabinet on December 1998 decided to disinvest 50% of the equity in HTL to a strategic
partner. Subsequently, in May 2000, Government decided to disinvest 74% of the equity in HTL,
as there was lukewarm response from the bidders for the earlier proposal of 50% disinvestment.

KPMG India Private Limited was appointed as Advisors.

Himachal Futuristic Communications Ltd. (HFCL), a leading Indian telecom equipment

manufacturer won the transaction at Rs 55 crore for 74% of the equity. The takeover formalities
were completed on October 16, 2001. This corresponds to Rs. 74.3 crore for 100% of the equity
and Rs. 495.50 per share for a Rs. 100 share. HTL was giving the Government Rs.0.29 crore
average dividend in the last 8 years on the equity disinvested. For this equity Govt. has received
Rs. 55 crore and at a 10% annual rate of return, Government can now expect a gain of Rs. 5.5
crore per year.

After disinvestment there was no retrenchment. The Chairman of HFCL announced two special
increments to all the employees. In order to keep the infrastructure and manpower force fully
utilized, DOT/BSNL has agreed to support HTL including reservation of orders for the next two
years for stabilizing this large company to stand on its own feet.

The present management sees synergies in this acquisition as they were strong in transmission
and access products and did not make switching equipments. Now, they have the entire range of
telecom products. The new management is however facing hardship due to lack of orders from
the Deptt. of Telecom as they do not seem to have placed any orders under the Reservation
Quota HTL is entitled to as per the Share Holders Agreement. There are also inordinate delays
in release of outstanding payments by BSNL / MTNL. DOT is trying to sort out these matters.

112
16.5 Indian Tourism Developmcn_t Corporation (ITDC)

India Tourism Development Corporation (ITDC) was set up as a wholly owned government
company in 1966 for the development and promotion of tourism in India. In 1996, Gel's
shareholding in lTDC was reduced to 89.97%. Over the years !TDC has built a portfolio of 33
hotels including 7 hotels as Joint Ventures with State Governments or their agencies.

The Disinvestment Commission identified hotels as a non-core business for Gol on the basis that
the initial objectives of the public sector in this industry had been met. The existing public sector
in this industry may not have any unique or special responsibilities and accordingly the
Commission recommended restructuring of lTDC for the purpose of disinvestment.

The Government of India (Gol) accepted the recommendations of the Disinvestment

Commission and accordingly approved the disinvestment of its holding in ITDC.

The disinvestment / restructuring of ITDC hotels include either (a) handing over the hotel
properties to established hotel chains for operating on a long-term structured contract on lease-
cum-management basis, or (b) sale of properties as separate entities.

The major issues in the disinvestment of ITDC are enumerated below:

1) Lack of records or documents, like completion plans and other real estate information or
lease agreements;
2) Frequent changes in management at the units and the corporate office;

3) Resistance from Labour Unions

The resistance from ITDC's labour unions led to interrupt.ions and postponement of due
diligence by bidders and advisors' visits to !TDC properties resulting in delays.

4) Issues with Other Government Agencies.

A majority of the 26 hotel properties of ITDC have issues with State / Central Government
departments and other Public Sector Units and Statutory Authorities that have been outstanding
in some cases for more than 20 years. Some of the agencies include:
- State Governments of States where ITDC hotels are located
- Land & Development Office
- New Delhi Municipal Council
- Municipal Corporation of Delhi
- Airports Authority of India

ll3
 Some of the issues that arose involving these agencies include:

• Violations by ITDC and lack of co-ordination between ITDC and agencies to resolve
the issues. viz.,
i) Unauthorized construction at most of the hotel units
ii) Absence of completion plans for buildings
iii) Issues like payment of property taxes outstanding for over two decades.

• Resolving these issues was very critical for the closure of the transaction to
i) Ensure adequate interest by prospective bidders
ii) Mitigate the risk of subsequent litigations and financial implications on the Gol
iii) Prevent large dilution in value of these properties

• Demands by agencies

The real estate of most of the properties of ITDC were made available by State and
Central Government Agencies at nominal costs as ITDC was viewed as a Government Agency.
With the process-of disinvestment of ITDC, these agencies also got an opportunity to raise their
claims.

IT D C Properties Sold/ Let out on Long Term Lease

J

Eighteen hotel properties of ITDC have been sold and one property has been let out on Long
Term Lease cum Management Agreement by November 2002, after sorting out outstanding
issues with other agencies, as mentioned in the previous paragraph.

The total proceeds from all the properties sold upto 30th November 2002 are Rs. 444.09 crore to
the Government.

114
The performance of these hotels in the year 2000-01 was as follows:

Avg. Occu Sales (Rs Salaries & Gross GOP Net Profit Net Profit
Property Room pancy crore) Wages (Rs. Operating Margin (Rs crore) Margin
Rent (%) crore) Profit (Rs.
(Rs) crore)
Hotel Ashok,
Bangalore 2,297 36% 12.42 6.65 -1.39 -11% -1.87 -15%
Hotel Hassan
Ashok 1,136 17% 0.72 0.61 -0.46 -64% -0.64 -89%
TABR,
M'puram 2,207 37% 1.90 0.92 -0.35 -18% -0.54 -28%
!Hotel '
Bodhgaya
Ashok 1,234 30% 0.76 0.54 -0.26 -34% -0.32 -42%
Hotel Madurai
Ashok 1,482 26% 1.37 1.05 -0.62 -45% -0.91 -66%
!Hotel Agra
Ashok 1,052 36% 1.77 1.40 -1.36 -77% -1.55 -87%
ILVPH, Udaipur 2,192 26% 2.0 1.4 -0.8 -40% -1.0 -51 %
ILodhi Hotel 1,400 36% 5.6 4.6 -1.9 -33% -2.0 -36%
Qutab Hotel 2,696 64% 7.7 3.4 0.0 1% -0.2 -3%
Hotel Manali 1,043 22% 0.35 0.3 -0.22 -62% -0.3 -88%
Ashok
KABR, 2,892 32% 10.28 6.3 -1.56 -1.9 -19%
Kovalam -15%
Aurangabad 901 17% 0.82 1.1 -1.04 -126% -1.1 -117%
Ashok
Airport Ashok, 2,396 35% 6.97 5.3 -2.26 -32% -2.6 -39%
Kolkata
Varanasi Ashok 863 29% 1.70 2.0 -1.8 -111% -1.9 -117%
Khajuraho 709 22% -0.38 0.7 -0.82 -0.8 -231 %
Ashok -214%
Hotel Kanishka 2,304 28% 11.7 10.l -6.8 -59% -7.6 -66%
Hotel 649 31 % 7.6 6.5 -3.0 -40% -3.4 -46%
[ndraprastha
Hotel Ranjit 1078 36% 2.2 3.7 -3.2 -146% -3.2 -146%
* - The hotel project at Chandigarh is still under construction

It would be seen from the above table that all hotel properties were incurring losses and in some
properties, losses exceeded turnover.

115

94 M. of Dlslnveatment/ND/2002-17.
The details of the values fetched by these properties are as follows:

First Tranche
Properties Sold

SI no. Property Transaction Value

(Rs. er.)
1. Agra Ashok 3.61
2. Madurai Ashok 4.97
3. Bodhgaya Ashok 1.81
4. Hassan Ashok 2.27
5. TABR, Mamallapuram 6.13

Property Let Out on Long Term Lease cum Management Agreement

SI Property Upfront amount Annual Lease Rent

no. (Rs. er.) (Rs er)
I. Hotel Ashok, 39.41 (up-front);*
Bangalore (4.11 - MGAP)
(including Higher of Rs. 2.055
Airport crore OR. 16.5% of
Restaurant Turnover

* payment inclusive of 50% of discounted MGAP growing @ 25% every 5 years, Business
Transfer consideration for both the Hotel and Airport Restaurant, security deposit in favour of
AAI, 6 months average water and electricity charges to AAI, security deposit equivalent to 2
years' MGAP.

Second Tranche
Properties Sold

SI Property Transaction Value Annual rentals to

no. (Rs. cr.) L&DO (Rs. lakhs)
I Qutab Hotel,
New Delhi 34.46 36.62
2 Lodhi Hotel,
New Delhi 71.93 134.27
3 LVPH,
Udaipur 6.77 -

l 16
 Third Tranche

Properties Sold

SI Property Transaction Remarks

no. Value (Rs. cr.)
1 Hotel Manali ---
Ashok, Manali 3.65
2 KABR, ---
Kovalam 40.39
3 Hotel ---
Aurangabad
Ashok,
Auranzabad 16.50
4 Land on 29 year lease from AAI. Also
includes lease for Airport Restaurant for
5 years from AAI. Transaction value
Hotel Airport does not include annual lease rent for
Ashok, Kolkata 19.39 hotel and airport restaurant

Fourth Tranche

SI no. Property Transaction Annual rentals to

Value (Rs. er.) LDO (Rs. lakhs)
1 Hotel Varanasi Ashok, Varanasi 8.38 ---
2 Hotel Khaiuraho Ashok, Khaiuraho 2.19 ---
3 30.98 (Annual rentals
to Chandigarh
Hotel project at Chandigarh 17.27 Administration)
4 Hotel Kanishka, New Delhi 92.37 156.12
5 Hotel Indraprastha, New Delhi 43.39 76.05
6 Hotel Raniit 29.20 40.70
st
The process of disinvestment of 4 hotels (3rd tranche), which were advertised on I Jan.02, is on:
Hotel Jaipur Ashok, Jaipur
Hotel Pataliputra Ashok, Patna
Hotel Kalinga Ashok, Bhubaneshwar
Hotel Jammu Ashok, Jammu

As per the agreements and the report of the Post closing Auditor, the Purchaser is entitled to Post
Closure Adjustments which have been received in respect of a number of hotels. No payments
have been made so far and Deptt. of Tourism has sought budgetary provision to meet
" requirements of Post Closure Adjustments.

117
16.6 Hotel Corporation of India (HCI)

Hotel Corporation of India Limited ("HCI") was incorporated on July 8, · 1971 with the objective
of carrying on business of operating hotels and flight kitchens as a wholly owned subsidiary of
Air India. Air India entered the hotel business in order to promote tourism in the country and to
cater to the requirements of in-flight catering as well as to provide quality hotel accommodation
to the passengers and crew. HCI was operating four 5-Star hotels (two in Mumbai, one in Delhi
and one in Srinagar), one 4-Star hotel at Rajgir and 2 flight-catering units in Mumbai and Delhi.

The working conditions of HCI deteriorated to an extent that very often even Air India did not
avail its services.

The Disinvestment Commission, in its 6th Report published in December 1997, presented its
recommendations in respect of disinvestment of Hotel Corporation of India (HCI).

In accordance with the recommendations of the Disinvestment Commission, the Ministry of

Civil Aviation and Air India processed the case and it was decided that all the businesses of HCI
are to be sold on slump sale basis. Air India appointed Jardine Fleming India Securities Limited
(JP Morgan now) as Advisor for the sale of HCI. The advertisement calling for Expressions of
Interest (EOI) was issued on 12th October 2000.

It was decided by the Government in September 2001 that the Ministry of Disinvestment would
take over the process of disinvestment of the Hotel Corporation of India in accordance with the
established procedures. This was done on the basis of a proposal moved by the Ministry of Civil
Aviation.

After the process was taken over by the Ministry of Disinvestment, the transaction documents for
disinvestment of the business of HCI were finalised and bids in respect of Centaur Hotel Airport
Mumbai, Centaur Hotel Juhu Beach Mumbai, Centaur Hotel Airport Delhi (including Chefair
Delhi), Chefair Mumbai and Indo Hokke Hotels Ltd. (Centaur Rajgir) were invited in November
2001. Centaur Lake View Hotel, Srinagar has not been taken up because of certain issues raised
by the Government of Jammu & Kashmir requiring resolution.

One bid each was received for Centaur Hotel Airport Mumbai, Centaur Hotel Juhu Beach
Mumbai, Centaur Hotel Airport Delhi (including Chefair Delhi) & Indo Hokke Hotels Ltd.
(Centaur Rajgir). There was no bidder for Chefair Mumbai. The financial bid submitted by Mis
Tulip Hospitality Services Pvt. Ltd. for Centaur Hotel Juhu Beach Mumbai for Rs.153.00 crore
and the bid submitted by M/s Inpac Travels (India) P. Ltd. for Indo Hokke Hotels Limited for
Rs.6.51 crore were accepted by the Government. Transaction documents for these two hotels
were executed on 11.3.2002 and 26.3.2002 respectively.

Financial bids from the existing Qualified Interested Parties were re-invited in January 2002 for
Centaur Hotel Airport Mumbai, Centaur Hotel Airport Delhi (including Chefair Delhi) and
Chefair Mumbai. There was no bidder for Centaur Hotel Airport Delhi (including Chefair Delhi)

118
 and Chefair Mumbai. The financial bid submitted by Mis A.L. Batra (Batra Hospitality Private
Limited) for Centaur Hotel Airport Mumbai for Rs.83.00 crore was accepted by the Government.
Transaction documents for this hotel were executed on 18.4.2002.
Since HCI is a subsidiary of Air India Limited, the proceeds from disinvestment would accrue to
Air India Limited, the holding company.

For the remaining two businesses, viz., Centaur hotel Airport Delhi (including Chefair Delhi)
and Chefair Mumbai, the process of privatisation is on.

16.7 IBP Limited

Government of India (GOI) finalised strategic sale of 33.58% of the IBP's equity out of
Government holding of 59.58% on 5th Feb., 2002. The total paid up equity of the company as on
31.3.200 I was Rs. 22.15 crore, out of which Government held shares of Rs. 13.20 crore. The
face value of equity sold to the strategic partner was Rs. 7.44 crore.

IBP is engaged in the retail marketing of petroleum products, manufacture and marketing of
industrial explosives and cryo-vessels for industrial and biological applications. Unlike other oil
companies in the public sector it does not own any refining capacity. It markets products of other
refineries.

Based on competitive bidding, Mis. HSBC Securities and Capital Markets (India) Ltd. (HSBC)
were appointed as Advisor for the transaction in December 2000, for a fee of 0.65% of the
transaction value. Mis Amarchand Mangaldas A. Suresh Shroff and Co. were appointed as
Legal Advisors to Government of India and Mis S.K.Godbole & Associates, Mr.A.P.Saxena,
Mis Meticulous Consultants Pvt. Ltd., Mr.N.K.Chakravarty and Mis M.M.Kulkarni were
appointed as Asset Valuers.

Interested investors submitted expression of interest (Eol) in February2001. The short listed
parties completed the due diligence exercise and agreed upon the transaction documents, after a
number of rounds of discussions with bidders. Thereafter, based on the agreed terms,
Government invited financial bids from the bidders on 31.1.2002. Seven bidders; including
PSUs, national and international bidders, submitted the bids.

Government approved the bid of Indian Oil Corporation for a price of Rs. 1153.68 crore i.e. Rs.
1551/- per share at a P.E. ratio of 63. The mandatory open offer by the buyer for 20% shares was
completed in June 2002 at the disinvestment price.

IBP was a profitable and well managed company which gave an average dividend of Rs. 1.84
• crore for the last eight years on the equity sold. Since the Government has received Rs. 1153.68
crore from the sale of 33.58% equity, at 10% annual rate of return the Government would get Rs.
115 crore i.e. 62 times more than in the earlier CPSU structure.

119
16.8 Videsh Sanchar Nigam Limited (VSNL)

Government approved sale of 25% equity shareholding out of a total government share holding
of 52.97% in Videsh Sanchar Nigam Limited (VSNL) on 5th Feb., 2002. The total paid-up capital
of VSNL is Rs.285 crore, the Govt. holding being Rs.15 lcrore. Rs.71.25 crore of this equity has
been sold to Mis Panatone Finvest Ltd. (Tata Group) at a price of Rs. 1439 crore translating into
a price of Rs. 202 per share.

Government had decided to disinvest in VSNL in January 2001 and the advertisement for
inviting Expression of Interest was issued in February 2001. 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. acted as the legal advisor and Pricewaterhouse Coopers Ltd. as the asset valuer. 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.

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). Besides the Government has also taken measures to take out surplus, yet
very valuable land from VSNL, and also restrict use / sale of land through provisions in
transaction documents.

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 Board position to enforce its
affirmative vote on assets. In addition, 1.97% of VSNL equity capital has been given to
employees, at concessional prices in February 2002.

The Strategic Partner in VSNL, Mis Panatone Finvest Ltd. has also made an open offer for
acquiring upto 20% of equity shares from general public at a price of Rs. 202/- per share, as
required under SEBI Takeover Code.

Before disinvestment upto March 2000, VSNL gave an average dividend (on 25% equity, which
Government has disinvested now) for the last eight years of Rs. 10.4 crore annually. Now the
Government has received Rs. 1439 crore as disinvestment price and an additional Rs. 2250 crore
by way of dividend and dividend tax. All this put together can yield around Rs. 369 crore
annually for the Govt. at a 10% annual return.

The disinvestment of VSNL has also unleashed the power of a large Government monopoly into
the market thus making international call and internet rates competitive. The customer stands to
gain from this and so will VSNL as a privatised company which may have found it difficult to
survive after the International Long Distance telephony (ILD) was opened to private players.
With the help of the private partner VSNL can now look at new products to meet the competitive
edge with its competitors.

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 VSNL SPECIAL DIVIDEND DETAILS DURING FINANCIAL YE AR 2001-02
2000-01 (Final) 2001-02 (Interim) Total
500% Dividend 750% Dividend (Rs. Crore)
(Rs. Crore) (Rs. Crore)
Total Dividend 1425 2137.50 3562.50
Dividend Tax 145.35 218.03 363.38
Total Outflow 1570.35 2355.53 3925.88
for companv
Gal Share of 754.82 1132.23 1887.05
dividend
Dividend Tax 145.35 218.03 363.38
Total inflow for 900.17 1350.26 2250.43
Gal (including
Dividend Tax)
Payment Details Already paid in m/o Book closure dates - 29m and so"
October 200 l January 2002. Payment made in
early Feb. 2002.

Post Disinvestment Scenario

At the time of disinvestment in February 2002, the demonopolisation of International Long

Distance (ILD) was announced to take place from April 2002. This would affect VSNL's
revenues, as according to Deptt.of Telecommunications (DOT) guidelines VSNL could not
operate basic services in the same area as BSNL / MTNL. Therefore, as per disinvestment policy
VSNL was accorded the "most-favoured" customer treatment at market rates for two years after
the change of management as a result of disinvestment.

Due to the opening of ILD competitors started quoting very low rates and MTNL/BSNL entered
into business agreements with them at the cost of VSNL's market share. A compromise formula
was worked out after six months of negotiations.

The new management of YSNL had planned to invest in TATA TELE in order to enable them to
provide basic services, which was objected to by DOT. This was resolved mutually later.

121
 16.9 Paradeep Phosphates Ltd. (PPL)

PPL incorporated in 1981 had been a loss making Company requiring frequent restructuring. It
had accumulated losses of Rs. 431.50 crore on 31 Mar 2001.It had not paid interest or the
principal amount due to the Government on loans since inception.

PPL was referred to Disinvestment Commission in July 1998. The Disinvestment Commission
classified PPL as non-core and recommended 51 % sale to a strategic partner. The Government,
however, decided in November 2000 to disinvest 74% through strategic sale.

Key financials of PPL for the last four years:

Year Sales Net Profit Dividend Earning Per Book Value

(Rs. crore) (Rs. Crore) Paid to GOI Share Per Share
(Rs.)
1997-1998 1171.35 (-) 105.52 NIL Negative Negative
1998-1999 1005.41 (-) 57.95 NIL Negative Negative
1999-2000 890.84 23.96* NIL 109.42* Negative
2000-2001 710.87 (-) 141.02 ---- Negative Negative
·•
(provisional)
* This was on account of financial restructuring rather than performance.

There have been three financial restructuring till date amounting to Rs.568.72 crore to revive the
Company. Even then, the Company was incurring losses @ Rs.10 - 12 crore every month.

Employees of PPL were agitating for wage revision at the time of accepting bids as wage
revision due w.e.f. 1997 had not been affected due to the health of the company. There were
four bidders in the beginning but only Mis Zuari Industries Ltd. bid Rs. 151.7 crore for 74% of
PPL's equity at a rate of Rs. 473/- per share and Government accepted the bid on 14.2.2002.

The new management had assured that revision of pay scales would be implemented within 30
days of their becoming strategic partners and that they would finalise the modalities of payment
of arrears within 90 days. The new management has implemented the revised wages w.e.f.
March 2002. · :
The revision would mean:
• Average increase of Rs. 2789/- per month for 1140 regular employees
• Average salary to go up from Rs. 9360/- to Rs. 12419/- p.m. (increase of.about 28.74%.)
• Additional financial burden of Rs. 31.61 lakh per month (approx. Rs. 3. 79 crore per
annum).
Since inception, PPL' s plants had produced raw material at 40% of plant capacity which are now
working at 110% capacity. The production of fertiliser has gone up from 20000 metric tonnes to
70000 metric tonnes in May-June 2002, which is 120% of rate capacity.
•

122
16.10 Hindustan Zinc Limited (HZL)

The decision to disinvest 26% equity through strategic sale was taken on 29.8.2000. Following
due process, price bids were invited from all the Qualified Interested Parties, to be received on
8.11.2001. Only one QIP submitted the price bid, which was rejected since it was lower than the
reserve price fixed.

In pursuance of Government directions, a renewed exercise was undertaken involving the

original QIPs who had completed their due diligence. BNP Paribas served as the Advisor and
Mis Amarchand Mangaldas & A Shroff and Company served as the Legal Advisor to the
transaction to ensure how the value depleters in the transaction documents and bidding
conditions be modified to enhance the potential value of the company in order to make it more
attractive to the bidders. Mis URS Corporation was appointed to conduct environmental, health
and safety due diligence review of the company. Amongst the modifications made in the
transaction documents were the sequencing of call and put options and their pricing, the
provision to have the Chairman nominated by the Strategic Partner once it acquires 51 % stake,
unlimited environmental indemnity for pre-disinvestment actions, for a period of three years and
a clear road map for the Government to exit from the company. Meanwhile, on 28.2.2002
Government announced that the customs duty on import of zinc will be reduced from 35% to
25%, which is likely to impact the profitability of the company.

Finally, price bids were invited from all the five Qualified Interested Parties (Glencore
International, Binani Industries, Inda-Gulf Corporation, Sterlite and Metdist).

Two financial bids were received from M/s Inda Gulf Corporation and Mis Sterlite Opportunities
and Ventures Limited. The reserve price fixed was Rs.32.15 per share (Rs.353.17 crore for 26%
stake). Both the price bids received were above the reserve price. The higher bid, that of Mis
Sterlite Opportunities and Ventures Limited, for Rs.445 crore (translating to about Rs.40.50 per
share) was accepted. The price offered by M/s Sterlite Opportunities & Ventures Limited was
substantially higher than the offer made by Sterlite Industries in November 2001. The PE Ratio
at which HZL was sold is around 26. With the receipt of Rs. 445 crore the Government can earn
upto Rs. 44.5 crore at 10% annual rate of return as against a dividend of Rs. 3.5 crore it got in the
last eight years on this equity (12.7 times).

The transaction was closed on 11 April 2002. The mandatory open offer by the buyer for 20%
shares was completed in July 2002 at the disinvestment price.

An attractive ESOP scheme was offered to the employees and full-time functional directors of
the Company in December 2002.

123
94 M. of Dlslnvestment/NO/2002-18.
16.11,Jessop & Co Ltd.

Jessop & Co. Ltd. (JCL) was nationalised in 1973 as it was incurring losses. Subsequent to
nationalisation also, the company continued to incur losses except for a few years. The
performance of the company in the last few years is given below:

Year Profit After Tax (Rs. crore)

1998-1999 0.70*
1999-2000 (-) 43.92
2000-2001 (-) 48.77
2001-2002 (up to September 2001) (-) 21.19
*Includes adjustment relating to waiver of interest

The accumulated losses and the networth of the company as on 31.3.2001 and 30.9.2001 are:

(Rs. crore)

Ason Networth Accumulated Loss

31.3.2001 (-) 270.57 351.18
30.9.2001 (-) 290.38 372.37

Government made several attempts since 1986 to revive the company through restructuring. The
details of relief and concessions given by the Government in the past are:

(Rs. crore)

Year of financial Fund based Non-fund based

Total
restructuring restructuring restructuring
1986 52.39 52.39
1997 54.00 241.55 295.55
1997-98 to 2001-02
118.06 118.06
(January 2002)
Total 172.06 293.94 466.00

In spite of the huge infusion of funds and financial restructuring, the company could not be
revived.

124
Since JCL is a sick company under the purview of BIFR , BIFR also made attempts to revive the
company, but ultimately in August 2000, it declared the revival scheme as having failed and
asked the Operating Agency to explore the possibility of changing the management. The
Operating Agency issued an advertisement in September 2000. That did not yield any proposal
for reviving the company.

Therefore, as a final attempt to revive the company, Government started the process of
disinvestment in JCL. Government appointed Mis AF Ferguson and Co. as Advisors for
disinvestment in JCL. Mis Luthra and Luthra and Mis Devcon Engineers and Valuers were
appointed as Legal Advisors and Asset Valuers respectively. Advertisements inviting Eols were
released in February 2001. The shortlisted parties completed due diligence exercise. The
transaction documents were finalised. Government approved fresh restructuring proposal (both
cash and non-cash based) involving approximately Rs.203.82 crore. But, as per the computation
made by the Advisor, the networth of the company as on 31.3.2002 even after the financial
restructuring by Government is likely to be Rs. (-) 17 .87 crore.

Government received two financial bids for 72% equity stake in JCL. The bid of Mis Ruia Cotex
Ltd. amounting to Rs.18.18 crore was more than the reserve price of Rs.12 crore for 72% equity
shares.

Government decided on 27.2.2002 to accept the financial bid of Mis. Ruia Cotex Ltd. for
acquiring 72% stake in the equity of JCL for Rs.18.18 crore at Rs. 2.67 per share for a share of
Rs. 10/-. Since Jessop & Co. was under the purview of BIFR, BIFR was approached for seeking
its approval to the proposal of induction of the Strategic Partner. In September 2002, BIFR
cleared the revival scheme through induction of strategic partner selected by the Government.
However a writ petition was filed by Jessop & Co. Ltd. Staff Association in the Kolkata High
Court, the judgement for which has been reserved by the Court on 15-11-02. Final orders have
not yet been passed (as on 20.1.2003).

16.12Maruti Udyog Limited

Government on 14th May 02, approved disinvestment in Maruti Udyog Limited (MUL) through a
two-stage process :
(i) a rights issue by MUL in the first phase of Rs.400 crore with Government renouncing
its rights share to Suzuki. Suzuki would gain majority control and pay Rs. 1000 crore
to Government as control premium.
(ii) sale of its existing shares through a public issue in the second phase ; the issue to be
underwritten by Suzuki.

HIGHLIGHTS OF THE AGREEMENT REACHED

The highlights of the agreement reached between the Negotiating Teams of 001 and SUZUKI
are summarised below:-

i. The total value of the rights issue would be Rs. 400 crore.

125
 11. The rights issue price would be Rs. 3280/- per share. Thus, the rights issue would be for a
total of 12, 19,512 shares of Rs.100/- each.
111. The fair value for the purpose of working out renunciation premium would be the average
of the 3 values as calculated by the three Advisors appointed for the purpose i.e. Rs.
3280/- per share.
1v. GOI will renounce all its rights shares of 6,06,585 shares and SUZUKI will subscribe all
the rights shares so renounced by GOI at the fair market value.
v. SUZUKI would through this method and those spelt out below, enhance the value of
MUL and Suzuki will pay a control premium of Rs. 1000 crore to GOI without 001
parting with a single of its shares in MUL.
vi. SUZUKI and 001 have agreed to enter into a Revised Joint Venture Agreement (JVA).
The Revised JVA shall constitute the entire agreement between GOI, SUZUKI and MUL
and any prior understanding and agreements between the Parties with respect to such
subject matter shal I be superseded.
v11. Suitable amendments in the Memorandum and Articles of Association of MUL would be
canied out to bring them in line with the decisions recorded above and also to enable the
listing of MUL shares on the stock exchange.
v111. The Revised JV A envisages that GOI would sell its existing shares in the domestic
market with participation of Indian and Global investors as permitted by law after the
completion of the rights issue transaction.
1x. SUZUKI has agreed to underwrite the first public issue of approximately 36 lakh shares
held by GOI at a price of Rs.2300/- per share. For the balance shares, 001 has a 'put'
option at a discount of 15% and I or 10% of average market price. GOI always has a 'put'
1h
option upto 30 April,2004 at the book value now (Rs.2000/-) or then, whichever is
higher.

Since the rights issue will be of a size of 12,19,512 shares, the relative shareholding of SUZUKI
and 001 after completion of the rights issue would be 54.20% and 45.54% respectively.

ANALYSIS OF THE DEAL

The MUL disinvestment is unique in nature compared to the other strategic sale transactions
completed so far such as VSNL, BALCO, HZL, CMC, etc. Therefore, this transaction would
have to be judged using different methods as discussed below.

Comparison with other disinvestment cases: Since MUL is not a listed company, both sides had
agreed to determine the fair value of MUL shares through valuation by three independent
valuers. This average value worked out to Rs. 3280/- per share. Therefore, the value of
Government's existing 65,80,181 shares works out to approximately Rs. 2158 crore based on this
fair value. What Government is receiving from SUZUKI now is Rs. 1000 crore as control
premium and considering the undertaking at Rs. 2300/- per share for the 36 lakh shares and
Rs.2000/- per share for the balance approximately 29 lakh shares, it would be an additional
.arnount of Rs. 1424 crore for the existing shares. If the existing shares could be sold at more
than the present book value, GOI's receipt would further go up.

126
 SUZUKI already has 50% shares in MUL and control and management rights, which were more
than equal as per earlier agreements. This was due to their being technology suppliers. In other
cases of disinvestment the strategic partner does not have any control before acquiring GOI
shares but acquires control only after the strategic sale. Thus, the control premium presently
offered by SUZUKI should be viewed in this background.

Annual Cash inflows to Government : Currently, GOI receives dividend on its shareholding.
The dividend received by GOI in the past several years has been about Rs.13-20 crore per
annum. In the year 2000-01, MUL did not declare any dividend. In case this transaction is
completed, 001 would receive Rs.1000 crore upfront which would yield interest of Rs. 100 crore
per annum at the conservative rate of 10%. Added to this would be the dividend on the existing
shares, even if Government does not sell these shares. If it sells the shares then GOI would
receive a minimum of Rs. 142 crore per annum (at the rate of 10%) on the balance receipt of
Rs.1424 crore as indicated above. Thus, the minimum annual yield to GOI would be Rs. 242
crore against the present dividend level of Rs. 13-20 crore per annum.

Value enhancement by SUZUKI: The Revised NA incorporates commitment by SUZUKI

that.-
l!l Suzuki will endeavour to make MUL the source for some of its models globally.
❖ Suzuki will assist MUL to access new export markets.
e Suzuki will give discount on certain components as previously agreed to by it.
ill Suzuki will set up a task force to explore the possibilities of further reduction in costs
at MUL.
ill Suzuki will promote MUL and its products in the global market.
fll Suzuki will aggressively strengthen MUL's manufacturing and technical capabilities
so as to make MUL's products internationally competitive in terms of quality and
cost.

In case the withdrawal of GOI results in SUZUKI undertaking the above actrvrties, the
beneficiary would be not only SUZUKI but also the Indian automobile sector in India. MUL
today contributes nearly Rs. 2500 crore to the national exchequer annually. Also higher growth
and earnings of MUL would result in higher receipts to GOI through taxes from MUL. Further,
all the above measures by SUZUKI would enhance the value of MUL and hence ensure the
possibility of much higher receipts than the minimum estimated above. -

Price Multiple ratio analysis : One other way to look at the transaction would be to test the PIE
in this case with the P/E of earlier disinvestments. The PIE in earlier cases have been 37(HTL),
63(1BP), 1 l(VSNL),19(BALCO),12(CMC) and 26(HZL). In case we take the conservative
scenario discussed above, GOI receives Rs. 2424 crore for 49.74% holding which means an
equity value of Rs.4873 crore for MUL as a whole. The Profit earned by MUL in 2001-2002 was
•.
Rs 55 crore. This gives a PIE ratio of about 89, which compares very well with PIE of the earlier
disinvestments.

Comparable Companies: Taking the conservative scenario discussed above, the per share value
works out to about Rs 3684, which is far above the present Book.Value of about Rs. 2000 per
share resulting in price to book value ratio of 1.8. Also it is higher than the valuation made by the

127
three valuers. This is relevant as some automobile sector companies are currenuy trading at less
than even their book values.

BACKGROUND TO NEGOTIATIONS

MUL, India's dominant automobile manufacturer, is a joint venture of Government of India

(001) and Suzuki Motor Corporation (SUZUKI). As on year ended March 31, 2001, MUL had
an equity capital of 132.30 crore and a net worth of Rs. 2642 crore. With the advent of
competition, Maruti's profitability has been under pressure.

As per the existing joint venture agreement, both 001 and SUZUKI had joint control over the
management of MUL and took turns in appointing the Chairman and Managing Director of the
company. In addition, the jq{~t venture agreement restrained the 001 from selling the shares of
MUL to a third party without: the consent of SUZUKI.

Government had decided in February 2001 on disinvestment in MUL through the option of MUL
offering shares on a rights basis to existing shareholders with a renunciation option. Government
constituted a Negotiating Team to negotiate on behalf of the Government with SUZUKI. The
Team comprised Secretary, Ministry of Disinvestment, Secretary, Department of Heavy Industry
and Shri KV Karnath, Managing Director and CEO, ICICI Ltd. The Committee was asked to
negotiate and finalise the modalities of disinvestment with SUZUKI.

MEETINGS WITH SUZUKI

The first round of meetingswere held between the Negotiating Team of 001 and SUZUKI
between 2nd March 2001 and Iih March 2001 at New Delhi. At the conclusion of the
th
discussions, a record note of discussions was signed by both the parties on 13 March, 2001. To
summarise, both sides had agreed that the road-map for disinvestment of 001 shares in MUL
would comprise two phases .;,,_:tights issue in the first phase and, after the completion of the rights
issue, sale of existing 001 shares in the market in the second phase. It was acknowledged that
this road map would help in.bringing in capital into MUL required for its expansion and growth
and at the same time lead to increase in the value of MUL and its share price discovery through a
transparent manner, which would help determine the benchmark for further disinvestment. The
value of the rights issue agreed upon was Rs.400 crore, which was arrived at primarily on the
basis of the estimates of capex, requirements in MUL.

Regarding valuation of Maruti shares, it was agreed that 001 and SUZUKI would jointly
identify and appoint three reputed valuers to determine the value of shares and the average of the
three values accepted. KPMQ, Ernst & Young and S.B. Billimoria were appointed as Valuers
and they submitted their valuation reports in January, 2002, copies of which were also made·
available to SUZUKI. The fair value per share recommended by the three valuers are Rs. 3200
by KPMG, Rs. 3142.18 by ~?nst & Young and Rs. 3500 by S.B. Billimoria. The average of the
valuations made by three different valuers works out to Rs.3280.

After receipt of the valuation report, the second round of meetings were held between the
th th
Negotiating Teams of the GOI and SUZUKI between 12 February 2002 and 29 April 2002 at
New Delhi to arrive at an agreement on the price at which the rights issue would be made, the

128
portion of the GOI's rights share to be subscribed by SUZUKI, the renunciation premium and
the control premium and modalities for the sale of existing shares held by GOI, etc. Discussions
were also held to finalise the Revised Joint Venture Agreement. At the conclusion of the
discussion a record note of discussion was signed by both parties.

Kotak Mahindra Capital Company Limited (KMCC) acted as the financial advisor to GOI. Dua
& Associates were legal advisors to Government.

16.13 Indian Petrochemicals Corporation Ltd. (IPCL)

Government of India (GOI) approved induction of Reliance Petroinvestments Limited (Reliance

Group) as strategic partner in IPCL, a leading fetrochemical PSU, through sale of 26% equity
shares at a consideration of Rs.1491 crore on 171 May 2002.

Background

IPCL, one of the India's leading petrochemical products company has been classified as
operating in 'non-core' sector. The total paid up equity of the company is Rs. 248.22 crore, out
of which Government holds shares of Rs.148.80 crore. The equity sold to the strategic partner
would be of face value Rs.64.54 crore (26.6%). The Government on 16.12.1998 had decided 'in
principle' to the disinvestment in IPCL through strategic sale. The Government had invited
Expressions of Interest from interested investors through a Press advertisement.

Meanwhile, in November 2000, in view of synergy of operations and interests of IOC and IPCL
Government also explored the possibility of the Yadodara Complex of IPCL being transferred to
IOC and then disinvestment of 25% equity processed in respect of rest of the IPCL. Finally,
Government decided on 12.11.2001 to no longer pursue this route and decided instead on
continuing the effort for strategic sale for IPCL as a whole. It was decided that the equity offered
for strategic sale should be raised to 26% instead of 25% proposed earlier with the commitment
of disinvesting at least a further 25% equity.

Government was assisted by Mis. UBS Warburg as Advisor for the transaction. The legal
advisors were Pathak & Associates and the Asset Valuers were Mis. Deloitte, Haskins & Sells.
Interested investors submitted expression of interest (EOI) in December 2001. The short listed
parties completed the due diligence exercise and the transaction documents were agreed upon,
after a number of rounds of discussions with bidders. Thereafter, based on these documents,
financial bids were received from the bidders on 29.4.2002.

Reserve Price

The Advisor (UBS Warburg) had in their report computed the valuation of shares in IPCL by
adopting four methods, namely, Discounted Cash Flow, Adjusted· Balance Sheet, Comparable
Companies and Adjusted Asset Valuation. The Evaluation Committee considered the valuation
of IPCL done by the Advisor and recommended a reserve price:

129
Reserve Price for 26% equity Approx. equivalent value of 100% Approx. value per
(Rs. In crore) equity (Rs. in crore) share (Rs.)
845 3252 131
..
The reserve price recommended by the Evaluation Committee was based on the Discounted Cash
Flow methodology, as it is the most appropriate valuation methodology for a going concern.

Bids received
The bids submitted by the three bidders is summarized below:-
Bidder Bid value for 26% Approx. equivalent value of Approx. value
equity (Rs. m 100% equity (Rs.in crore) per share (Rs.)
crore)
Reliance 1491 5735 231
Petroinvestments
Limited
Indian Oil Corporation 826 3177 128
Limited
Nirma Chemical Works 711 2735 110
Limited

The highest bid of Reliance Petroinvestments Limited for a price of Rs.1491 crore translates into
a PIE of 58 which is much higher than the PIE multiple of peer group companies.
The mandatory open offer from the public holding, by the buyer for 20% shares was completed
in September 2002 at the disinvestment price.

The figures of Profit after Tax (PAT), rate of Dividend declared and share of GOI on 26% equity
for last five years are as under:

Years Profit after Tax Dividend on 26% Government equity shares

(Rs. in crore) (Rs. in crore)
1996-1997 510 25.8
1997-1998 244 25.8
1998-1999 29 6.5
1999-2000 189 12.9
2000-2001 249 19.4

Taking into account an accrual of 10% on the sale proceeds realized from transfer of 26%
Government equity stake to the Strategic Partner, an amount of Rs.149 crore would accrue per
year as compared to an average of Rs. 18 crore per year approx. received by Government of
India as dividend from IPCL.

130
16.13.lPace of Disinvestment

S.No. Month PSU/Asset Sold Total

l. Jan.,2000 Modern Food Industries (India) Limited 1
2. Jul., 2000 Lagan Jute Machinery Limited 2
3. Mar.,2001 Bharat Aluminium Company Limited 3
4. Oct.,2001 HTL;CMC 5
5. Nov.,2001 Hotel Ashok, Bangalore; Hotel Bodhgaya Ashok; 8
Hotel hasan Ashok.
6. Jan.,2002 Hotel Ashok, Madurai 9
7. Feb.,2002 IBP ;Videsh Sanchar Nigam Limited; Paradip 15
Phosphates Limited; Hotel TBABR Mamallapuram;
Hotel Azra Ashok; Luxmi Bilas Hotel Udiapur.
8. Mar.,2002 Qutab Hotel, New Delhi; Lodi Hotel, New Delhi; 19
Centaur Hotel, Juhu Beach, Mumbai; Centaur Raigir.
9. Apr.,2002 Hindustan Zinc Limited ; Centaur Hotel Airport, 21
Mumbai.
10. Mav, 2002 Maruti Udvoz Limited. 22
11. Jun., 2002 Indian Petrochemicals Corporation Limited. 23
12. Jul.,2002 Hotel Airport Ashok Kolkata; Kovalam Ashok Beach 26
Resort ;Hotel Manali Ashok.
13. Aug.,2002 Hotel Khaiuraho Ashok; Hotel Varanasi Ashok. 28
14. Sept.,2002 Hotel Auranzabad Ashok 29
15. Oct.,2002 Hotel Ranjit, Hotel Kanishka, Hotel lndraprastha and 33
Chandigarh Hotel Project.

131
94 M. of Disinvestment/ND/2002-19.
 16.13.2Comparative statement of Reserve/ Bid /Market Price of Companies sold

Sr. PSU Reserve Bid Price Month of Market Market Market.

No. Price. per Per share Sale price price price as
share* (Rs.) around around one on 6
time of year before Nov.02
Sale Sale
1. MFIL 6035 11489.55 January, N.L. N.L. N.L.
2000
2. BALCO 36.73 48.97 March N.L. N.L. N.L.
2001
3. CMC 140.92 196.73 October, 308.55 160 385.60
2001
4. HTL 350 495.50 October, N.L. N.L. N.L.
2001
5. VSNL** 171 202 February, 156 329 92.20
2002
6. IBP 507 1551 February, 573.30 210 230.20
2002
7. PPL 550 - 473.82 February, N.L. N.L. N.L.
2002
8. HZL 32. 15 40.50 April, 32.50 17.35 15.50
2002
9. JESSOP" 1.76 2.67 February, N.L. N.L. N.L.
2002
10. -. , ~IPCL I 31 231 June, 105.65 50 66.30
- 2002
l I Maruti I '3280 - Control May, N.L. N.L. N.L.
premium of Rs. 2002
1000 er.
(received without
selling a single -
share)

N.L- Not Listed ;

* without adding control premium
**High Dividend paid during this period
"Not yet closed

132
 I
19
35 I 41
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12
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14
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15 I
15
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:::, 17
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...
V,

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C
18
I

:::, 18
17.5 I
19 3,
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19 6
19

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19
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21 !
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15 4::
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j

]JJ
17. CHAPTER: PRIVATISATION IN STATES
17.1 Investment in State Level Public Enterprises

The consolidated position of the State level Public Sector Enterprises (SLPEs), as on Mach 2001
was as under:

Name of the Approximate Estimated Net Approximate Approximate

State number of total Accumulated number of· number of
State Level investment Loss * (Rs. in loss making non-working
Public ~n SLPEs (Rs crore) SLPEs SLPEs
Sr. Enterprises in crore)
No. (SLPEs)
lAndhra
1 Pradesh . 40 4444 2894 25 14
2 Assam 42 3649 2792 28 10
3 Delhi NIA NIA NIA NIA NIA
4 Goa 12 4869 730 NIA NIA
5 Gujarat 54 23438 965 NIA NIA
6 Haryana 45 443 384 10 4
' Himachal
7 Pradesh 21 3143 369 12 2
Jammu &
8 Kashmir NIA NIA NIA NIA NIA
9 Kamataka 76 19295 811 37 13
10 Kerala 109 9805 1124 52 13
!Madhya
11 Pradesh 26 7923 600 8 15
12 Maharashtra 65 19186 NIA 43 17
13 Manipur 14 NIA NIA 10 NIA
14 brissa 68 9796 1180 18 34
15 Puniab 53 12425 847 25 23
16 Raiasthan 24 11576 261 6 3
17 rfamil Nadu 59 6192 NIA 33 12
13· IU ttar Pradesh 41 17773 5327 21 19
19 IWest Bengal 82 18241 5068 59 6
831 172198 23352 387 185
NI A - Not available
Source: State Government, !PE, Hyderabad and other sources.
~ The figures indicated are only of those SLPEs, which have finalised their accounts (could be only 25-
30% of the total companies)
Figures are approximate as they relate to States where information is available and reported, therefore
not a complete list/figures.

134
17.2 Disinvestment in States
A number of States have also started making privatisation I disinvestment I restructuring of State PSEs as
a fundamental part of their economic reforms. Many of these have also set up State level Disinvestment
Commissions. The following Table, compiled on the basis of the information received from the States and
other sources, illustrates the disinvestment efforts in the States.
I of No.
1s, Name of the Approximate SLPEs identified No. oflNo. of
1No State number of for SLPEs in SLPEs SLPEs
' State Level disinvestment I which privatised closed
I
Public
Enterprises
winding up
restructuring
/ process
initiated
ldown
I
i

!l Andhra
(SLPEs)

21
I
1- ~--1·
2
8
-----

~::h lhi
40
42
NIA I
•·•-·
NIA
NIA
-----
NIA
---·-~-
l
,-
I
I

I l
-
*
1-~
- l
-
-
,4
r-
Goa 12 2 2 I 2 -
j5 Gujarat 54 24 24 1 6
~6jH~ryana 45 I
22 13 1 12
Himachal 3 2
j7 15 5'
l Pradesh 21
I
lg Jammu &
7 2
- 2
I Kashmir NIA
i

19 Karnataka 76 19 6 2 6
10 Kerala 109 12 - - -
! Madhya 1 -
111 Pradesh 26 I
I
14 14

! 12 Maharashtra 65 6 - -
13 Manipur 14 10 NIA - -
14 Orissa 68 27 27 8 11
15 Punjab 53 9 5 5
I 16 Rajasthan 24 10 6 1 1
!17
I
Tamil Nadu 59 13 3 - 12
118 Uttar Pradesh 41 I
9 9 - -
19 West Bengal 82 2 2 1 -
TOTAL 831 222 140 29 68
- N/A - Not available
~: State Government, Institute of Public Enterprises (IPE), Hyderabad.
• Delhi Vidyut Board .

135
States have taken up the task of privatisation and found the "Policy and Procedures" of the
Ministry of Disinvestment a useful guide. Some states like Andhra Pradesh & Orissa have even
held seminars and interactions for guidance and education of all affected parties, like employees,
their families etc.

State finances have been under stress and most of the states have under taken a Public Sector
Restructing Programme, while Karnataka has set up a Department of Disinvestment, Punjab a
Directorate of Disinvestment and Uttar Pradesh has a Disinvestment Commission in place. As
part of the Reforms, they have paid special attention to employee concerns and given YRS to as
many as 37000 employees, trained the retirees and assisted them in obtaining re-employment in
many cases.
Orissa and Andhra Pradesh have made films to educate the concerned people and help them
adapt to the change.
Punjab Government has put on fast track privatisation of Punjab Communication Ltd., Punjab
Tractors Ltd., Punjab Alkalies & Chemicals, and Punjab Tourism Corporation. The process is
likely to be completed by June 2003 in most of these cases.
Andhra Pradesh is going ahead with great speed and privatising their sugar and spinning
Cooperatives. Other neighbouring states are also seeking guidance from Andhra Pradesh.
Delhi Government has taken their first step forward and privatised distribution of Power. They
have also expressed interest in privatising Delhi Transport Corporation.
Gujrat has privatised Gujrat Tractor Corporation Ltd. in 1999 and is in the process of selling the
remaining equity.
Karnataka and Kerala Government have taken keen interest in the process. Madhya Pradesh has
advertised Intel Telecommunications for 65% stake sale. Orissa has sold Orissa Leather Industry
Ltd., Orissa Pump, Engineering Corporation Ltd.& Orissa Ferro Chrome and has signed an
MOU with Central Government for privatising 27 Government Corporations.
A number of States have closed unviable and loss making units as it was not feasible to keep
them running.

136
 18. CHAPTER: FUTURE DIRECTION
18.1 Primary objectives of disinvestment

Globally, the beneficial effect of privatisation on the economy has come to be widely appreciated
now and the investors are eagerly looking forward to further privatisation in India. The recent
strategic sales in CMC, HTL, VSNL, IBP, HZL and IPCL resulted in increase in the market
capitalisation/ value of the Government holdings in the listed PSEs by almost double within this
year which indicates that privatisation is not only being looked at favourabl~ by the market but
also that it is a very strong motivator for bringing in substantial resources to the country.
Moreover, the removal of quantitative restrictions on imports, lowering of import tariffs and
removal of restrictions of other kinds on global trade, services and capital, pursuant to our
acceptance of the WTO regime and various economic reforms, have made it imperative that the
public sector is privatised at the earliest, failing which it will fall sick and find it extremely
difficult to survive in the new competitive environment.

Privatisation, in future, should be driven by the primary objectives of disinvestment, as

mentioned earlier. To re-emphasise, the corner stone for privatisation should be the most
efficient allocatior. ot scarce resources, both monetary and non-monetary, that meets the
uppermost social objectives of the country. The concerns on the social priorities are basic health,
family welfare, primary education, development of infrastructure and the retirement of public
debt. The resources currently blocked in non-strategic PSEs, should therefore, be released as
soon as possible through sale of Government stake in such PSEs for redeployment in the above
sectors. It should also be ensured that there is no further flow of resources to these PSEs and no
new PSEs are formed in non-strategic sectors. The mission would, therefore, be to - ·

• Obtain decision of Government on disinvestment / strategic sale in all non-strategic

CPSEs in the next few years.
• Complete such sales within the next few years, and wind up the Ministry of
Disinvestment.
• All loss making non-strategic CPSEs to be financially restructured, if necessary, and
privatised.
• Even with financial restructuring package, if privatisation is not possible, such CPSEs,
which are, prima-facie unviable, should be closed, to prevent wastage of public funds in
running I reviving such units.

It is often suggested that weak and sick PSEs should be privatised first, and the profit making
PSEs need not be touched. However, the logic/ rationale for privatising or not privatising a PSE
is not based on whether it is making profit or loss but whether it is in a strategic sector or in a
non-strategic sector, and whether the taxpayers' money can be saved from the commercial risks
~ by transferring the risk to the private sector wherever the private sector is willing to step in and
assume such risks.

The objective should be not to waste too much time over this but to privatise those PSEs first in
the case of which this can be done with the least possible delay, since the opportunity cost of

137
letting the resources remain locked up in PSEs is too high. However, broadly, the following
criteria would be used for identifying the PSEs for disinvestment/ privatisation: -.

• .PSEs in the sectors where adequate regulations and/ or competition exist to take care of
the monopoly and consumer interest aspects;
• The unviable PSEs whose continued existence is likely to cause a drain on exchequer;
• The PSEs that are subject to intense competition or are· likely to be exposed to
competition because of the impending reforms.
• PSEs providing services or goods, which, with the altered perceptions of the role of the
State, are not the ones, that Government need provide or manufacture.

138
 19. Annexures :
19.1 Annexure-1: Agreement For Advisory Services

THIS AGREEMENT is made ton this day of . 2002) OY AND llETWEr.N THE PRESIOENT 01-' INDIA acting 1hrnugh tilt' Jui111
Secretary. Ministry of Disinvestment, Government of India (hereinafter referred 10 as "GoI", which expression shall mean and include i1,
successors and assigns) of the ONE PART and (ADVISOR NAME····················). a company incorporated under the Comp:m•<"> .'u:1. 1956
and registcrpd as a Category I Merchant Banker with the Securities and Exchange Hoard of India. having its registered office al (,\l)J>Jn:ss OF
ADVISOR································) (hereinafter referred 10 as "(ADVISOR NAME)'' which expression shall mean and include 1h w.:c,~"",
and permitted assigns and liquidators) acting through Shri •···············, Director & Head of Corporate Finance & Advisory and Sh11
Associate Director duly appointed and authorised on its behalf of the 0TH ER PART.

WHEREAS

A) (CO. NAME·················) (hereinafter referred to as "(CO. NAME)" or the "Company") is a public sector company. controlled by
the Government of India and is predominantly a (NATURE AND DESCRll'TION OF BUSlNESS································ -);

B) Government of India wishes to identify and conclude a contrnci with an appropriate strategic partner (hereinafter referred to as
"Strategic Partner") involving disinvestment of-····% (out of ••---'Jf-J or the paid-up c,111i1y of (CO. NAME) held b) Gol m 1k best
possible price:

CJ (ADVISOR NAME) submitted an Expression of Interest dated •·--·························IO Director (Finance) (CO. NAMF, .
··--···place) in accordance with the instructions as contained in the advertisement dated issued by the
Government of India:

DJ Further 10 the Expression of Interest, (ADVISOR NAME) made prcscntauons 10 the Inter Ministerial Group (hereinafter referred 10
as "IMG'·) constituted by the Government of India 10 appoint the advisor and submitted a fee bid by (c11er dated - .
···· addressed 10 the Director (Finance), (CO. NAME) Co. Limited proposing a fee structure for (ADVISOR NAME) 10 act as advisor;

EJ Pursuant 10 the kc bid made by (ADVISOR NAME) and other investment bankers, the Go! appointed (ADVISOR NAME) as advisor
in relation 10 the Transaction (as defined in Recital F below) and communicated its decision 10 (ADVISOR NAM EJ by leuer dated•········-
............................. ,. as issued by the Ministry of Disinvestment and the Parties are desirous of recording the detailed terms of the
appoi.urrcm of (ADVISOR NAME) as advisor.

F) It is considered appropriate and desirable by the Panics hereto to formalise the terms on which (ADVISOR NAME) has been engaged
as the exclusive advisor (the "Engagement") in relation to l~C proposed sale by the President of India, acting through Joint Secretary,
Ministry of Disinvestment, Govcrnrrent of India, of•····••% shareholding along with management control (the "Stake") 10 a Strategic
Partner in (CO. NAME) Co. Limited (the "Transaction").

NOW, THEREFORE. IN CONSIDERATION OF THE PREMISES AFORESAID. THE PARTIES HEREBY AGREE AS FOLLOWS:

I. Role of (ADVISOR NAME)

(ADVISOR NAME) shall. in accordance with all applicable laws. provide the following financial advice and assistance together with any
additional assistance agreed in writing between (ADVISOR NAME) and the Gol:

A. To carry out the valuauon and assist in the sale of•·····% shareholding of the Gol in (CO. NAME):
13. (i) To carry out the valuation of (SUl3Sll)IARIES, IF ANY):
(ii) To advise on the modalities for transfer of (CO. NAM E)'s stake in (SUBSIDIARIES , IF ANY):

For the avoidance of doubt, the duties and responsibilities of (ADVISOR NAME) shall not include other than as set out above. In particular.
(ADVISOR NAME) is not responsible for:

a) Giving tax, legal, regulatory. accountancy or other specialist or technical advice or services: or
b) Giving general financial or other advice that is nm related 10 the Transaction; or
c) Valuation of assets and other intangibles of the Company

<I,
The valuation advice which (ADVISOR NAME) provides will be given on the understanding that unless otherwise expressly agreed in writing,
(ADVISOR NAME) shall not be responsible for the accounting or other data and commercial assumptions on which such a valuation is based,
the assessment and evaluation of which shall remain the Company's responsibility.

In this Agreement, where any obligation is imposed on the Company, the Gol agrees that it will ensure the Company complies with such
obligation.

139
94 M. of Disinvestment/ND/2002-20.
2. Fees and ExpeDst"S
The Go! has agreed with (ADVISOR NAME) the following fce(s):

i. Success rec
Ir the Transaction is completed. a fee inclusive or all applicable taxes (the ··success Fee"), equal 10 •···· pcrccnt:igc or the 101al amount
or the Consideration 1hat is paid or is payable by the Strategic Partner 10 acquire the Slake from the Gol in connection with the Transaction,
whether by way or cash, equity. debt or in kind or by way of a'll waiver. release or assignm:nt or any rights or obligations (the "Consideration").
The Success Fee will be payable 15 days from the date or full p!,yment by the Strategic Partner (the ~closing Date").

ii. If. for any reason, Gol decides to terminate this Agreemcm and the Engagcme{i in accordance with clause 5 prior to completion of the
Transaction or in case the Gol decides nOI 10 go ahead with the Transaction for any reason whatsoever, then (ADVISOR NAME) will be
paid a drop-dead fee ("Drop Dead Fee") of R,--------·- (Rupees •··--·--·•Only).

iii. For the purposes of calculating the Success Fee. the Consideration will be translated. if necessary, into Indian Rupees at the Stale
Bank of India's buying spot rate at the close of business on the day prior 10 the Closing Date. ·

iv. No payments, other than those rrolle by the Gol for and on behalf or (ADVISOR NAME) in pursuance of orders I judgement of a
court. 10 third parties other tban persons belonging 10 (ADVISOR NAME). shall be reduced from amoums ~wed by the Gol to (ADVISO!t
NAME) pursuant 10 rhis Agreement.

v. The Gol will b,: responsible for its own legal fees and the costs of accountants (including the cost of audit and accounting reports) and
other advisors. im:ludill'.!: technical advisors. (ADVISOR NAME) will be responsible for its own travel and all other out-of-pocket expenses
in connection with the Engagement.

vi. Alf fees and payments 1n (ADVISOR NAME) shall be subject to deductions as per applicable laws or l11Pia.

3. Compliance
The Gol will comply with all applicable !Ggal and regulatory provisions (including Stock Exchange requirements).

•
4. lnformatfon and ,\nnou1kerne11ts

i. The Gol will:

a) provide (ADVISOR NAME) and its advisors with such access to the direct= and management of. and the auditors and advisors to
the Company and its subsidiatie,. if ar.y. for the purpose of the Transaction/Engagement as (ADVISOR NAME) may reasonably
require; and

b) provide (ADVISOR NAME) with, and/or give access to. all information which is relevant for the purposes of the
Transaction/Engagement and will ensure that. in so doing, Gol will not breach any confidentiality obligation and that the information
so supplied is and remains complete. true and accurate in all material respects and not misleading, whether by omission or otherwise.
The Gol will immediately notify (ADVISOR NAME) if it subsequently discovers that any information provided by it is incomplete,
untrue, inaccurate or misleading.

ii. The Gol will ensure that all announcements and documents published or statements made by the Gol/Company or on their behalf in the
course of, and relevant 10. the Transaction/Engagement will only be made or published after consultation with (ADVISOR NAME) and will
be true and accurate and not misleading and. where appropriate, will contain all information necessary for legal or regulatory purposes
(including the Stock Exchange requirements).

iii. The Gol undertakes that it will at all times keep (ADVISOR NAME) fully informed of all strategics, developments and discussions relevant
to the Transaction and that no initiatives relevant to the Transaction/F.r.gagement will be taken without prior consultation with (ADVISOR
NAME).
1v. (ADVISOR NAME) represents man} other companies. individuals, and other entities. A; present, there is no conflict of interest resulting
from the (ADVISOR NAME)'s representation or Gol for the disinvestment of (CO. NAME) and (ADVISOR NAME)'s representation of its
other clients. It is possible, however. that during (ADVISOR NAME)'s representation of Gol in connection with the disinvestment of (CO.
NAME). some of (ADVISOR NAME)'s present or future clients may have disputes or transactions with Goll(CO. NAME). Gol agrees that
(ADVISOR NAME) may represent those clients (present or future) in any mauer that is not directly related 10 (ADVISOR NAME)'s work
for Gol described here. (ADVISOR NAME} agrees however, that Gol's prospective consent to the above shall not apply in any instance
where, as a result of (ADVISOR NAME)'s representation or Got for the (CO. NAME) disinvestment. (ADVISOR NAME) has obtained
any proprietary or confidential intorrrsnion that. if known 10 such other client. could be used in any such mailer by such client to Gel's

140
 material disadvantage. It needs to be understood that. in similar eogagemcnt letters with many or their clients. (ADVISOR NAME) is
requesting similar agreements to preserve the ability or (ADVISOR NAME) to represent other enterprises that are or become clients of
(ADVISOR NAME) in comparable situations.

v. (ADVISOR NAME) and each of its directors, officers. employees and agents will ensure that all information. whetber written or oral,
acquired from the Go! or (CO. NAME) and their respective agents and advisors in connection with rhc Transaction is kept strictly
confidential and used solely and exclusively for the purposes expressly specified in this Agreement. This obligation of confidentiality shall
not apply to any information already in the public domain at the iirrc of disclosure other than as a result of breach of this clause by
(ADVISOR NAME) or which (ADVISOR NAME), is required to disclose ny law. regulation or court order, provided thai before making
such disclosure (ADVISOR NAME) will, to the extent permitted by law, in writing advise Gol and consult with Gol about any inforn1;11ion
that (ADVISOR NAME) proposes to disclose pursuant to this exception.

vi. Advice (including any opinion or report) whether written or oral by (ADVISOR NAME) to the Gol /Company. or any communications
between (ADVISOR NAME) and the Gol/Compeey in connection with the Transaction may only be used and relied upon by the Gol and
may not be used or relied upon by any third party and may nOI be disclosed IO any third party without the prior written approval of
(ADVISOR NAME).

5. Termination

This Agreement and the Engagement may be terminated with or without cause by the Gol or by (ADVISOR NAME) by wFitten notice at
any time and without conunuing obligation.

{i) In case the Gol terminates the Agreement am! the Engagement without cause the following shall survive any termination and remain
in full force and effect: ·

a) Success Fee provision (Clause 2 (i}- for Success Fee earned by (ADVISOR NAME) but not yet paid by the Gol as at the date of
termination (if at the date of the tennination. the Transaction has already been completed):

b) Drop Dead Fee provision (Clause 2 (ii), ir at the date or the termination. the Transaction has not yet been completed); and

c) The conflicts or interest and indemnity provisions of this Agreement.

(ii) In case the Gol terminates the Agreement and the Engagement with cnuse the following shall survive any termination and remain in
full force and effect:

a) The conflicts of interest and indemnity provisions of this l\greement

(iii) Notwithstanding the foregoing. it is hereby clarified that if:

a) any order is made by any competent court or any resolution is passed for the dissolution or windrng-up of (ADVISOR NAME)
or for the appointment of a liquidutor. receiver. administrator or manager of (ADVISOR NAME) or all or a substantial part of ita
assets or anything analogous occurs in any other jurisdiction to (ADVISOR NAME). other than in connection with a solvent
reorganisation. reconstruction. amalgamation or merger which doc, nm adversely affect the interest of (CO. NAME) or Gol: or

b) · (ADVISOR NAME) is found guilty of any criminal offence in any jurisdiction that materially adversely affects its ability to
carry out the Engagement; or

c) (ADVISOR NAME) fails to comply with any final decision reached as a result of arbitration proceedings pursuant to para (b)
and Schedule II of this agreement: or

d) (ADVISOR NAME) is in breach of its obligation under this agreement and has not remedied the same within 30 days (or such
longer period as the other party may have subsequently approved in writing) following the receipt by (ADVISOR NAME) of a
notice from Gol specifying the breach: or

e) In the event of a conflict or interest during the engagement that materially adversely affects the ability of (ADVISOR NAME) to
carry out the engagement and not remedied within 15 days of arising due to handling of the transaction by (ADVISOR NAME)
as Advisor to the Gol for disinvestment in (CO. NAME) the Gol shall have the right to immediately terminate thi~ Agreement
and such termination shall be deemed to be a termination for cause.

6. Conflicts or Interest

(ADVISOR NAME) Group is involved in a wide range of commercial hanking. investment banking and orhcr activities (including
investment management. corporate finance, securities trading. research and private equity) out of which conflicting interests or duties may
arise. Gol acknowledges and accepts that (ADVISOR NAME) Group (other than (ADVISOR NAME)) may have interests or duties which
., conflict with Gol's interests and which would or might otherwise conflict with the duties owed by (ADVISOR NAME) to Got. Gol funher
accepts that any other entity in the (ADVISOR NAME) Group or any other division of (ADVISOR NAME) will not restrict its activities in
any way nor have any obligation to advice Gol of any conflict of interest. which exists or may arise. In relation 10 the Engagement.
information which is held elsewhere within (ADVISOR NAME)/ (ADVISOR NAME) Group hut of which 11011-, of the individual
executives in the Corporate Finance & Advisory division of (ADVISOR NAM F.) having the conduct or the Engagement could reasonably
have access 10 shall not for any purpose be taken into account in determining (ADVISOR NAMrr, responsibitities to the Go! or the

141
 Company and such rcsponsrbilitics shall be entirely determined by the regulatory rules and principles and me contractual terms applicable 10
the Engagc1ocn1.
•
(ALJVISOR NAME)/(ADVISOR NAME) Group shall not have any duly 10 disclose 10 the Gol /Company or utilise for the Gol /Company's
benefit any non-public information acquired in the course of carrying on any business for. or in connection with the provision of services to
any other person.

7. Indemnity

The indemnity provision in connection with this Engagement are set out in the attached Schedule I (the "Indemnity") and forms a part of
this Agreement

8. Disqualification

If subsequent evernts) makes (ADVISOR NAME) liable for disqualification from engagerrent, then a notice of 15 days may be given by
Ciol 10 (ADVISOR NAMF.) to cure the disqualification and/or eliminate the conflicts of interest and if after the expiry of 15 days notice, the
said disqualification is not cured, then Gol may, al its option. terminate this Agreerrent with cost if (ADVISOR NAME) fails to withdraw
from the transaction.

9. Scvcrability
Each provision of this Agreement and the Indemnity is severable and, if any provision is or becomes invalid or unenforceable or
contravenes any applicable regulations or law, the remaining provisions will not be affected.

10. Amendments and Modifications

This Agreement constitutes the entire understanding between both parties relating ro the Transaction and ii shall not be amended or
modified except as agreed in writing by both the Gol and (·ADVISOR NAME).

11. Notice

Any notice or other communication required to be given pursuant 10 this Agreement shall be in writing and shall be sufficiently given or
served if delivered by hand or by courier with acknowledgement or faxed at the numbers given below or sent by registered post to the
respective persons al the addresses given below: ·
Director & Head of Corporate Finance & Advisory
( ADVISOR NAME)------·-----·-···---·-·-·······---
PHONF.
Fax:

Jomt Secretary
Minislry of Disinvestment
II Floor. Block Nn. 11
CGOComplcx
l.odhi Road
New Delhi 110 003
Fax: (011) 4:16 C:1.124

12. Dispute Resolution

Any controversy or dis pule which arises between the parties 10 this Agreement concerning its construction or application. or the rights.
duties or obligations of any party hereunder shall be referred to arbitration subj eel 10 procedures set out in Schedule II attached hereto
which forms integral part of this engagement Agreemenl.

13. Governing Law

This Agreement shall be governed by and construed in accordance with the la~s of the Republic of India. Neither the Gol nor
(ADVISOR NAME) shall have the right 10 transfer or assign their responsibilities resulting from the acceptance of this Agreerrent.

142
 IN WITNESS WHEIH:Of THE PARTIES HA VE EXECUTED AND DELIVERED THIS AGREEMENT AS OF HIE DAY AND YEAR
1-lRST ABOVE WRITrEN

For and on behalf of the President of India

by the Joint Secretary- Ministry of Disinvestment. Government of India

Witnesses:
I.
2.

For and on behalf of

(ADVISOR NAME) Witnesses:
I.
( ··-·····-···········-············-·-···· 2.
Director & Head of Corporate Finance & Advisory

I.
( ······················) 2.
Associate Director

Schedule I: IND EMINITY

l. Gol hereby agrees to indemnify and hold harmless each of the Indemnified Persons as defined below from and againsr any'and all expenses
(including the fees and expenses of its counsel). losses, claims. actions. suits, damages, of liabilities, joint or several (including the
aggregate amount paid in senlement of any action, suit proceeding or claim that may be made against any Indemnified Person) that any
Indemnified person suffers or incurs which are determined by a judgement of a coun or an arbitration of competent jurisdiction to have
resulted from any dishonest, illegal or fraudulent act or the wilful default or negligence on the pan of any Gol indemnified Pany as defined
below. Sub~I to the foregoing. the (ADVISOR NAME) agrees that no Go! Indemnified party shall have any liability whatsoever (Whether
,,. contract, tort, otherwise) 10 the (ADVISOR NAME) for or in connection with things done or emitted to be done pursuant to the .
Engagement.
2.
.., (a) Each of (ADVISOR NAME) and the Indemnified Persons agree that promptly after receiving a notice of an action, suit, proceeding or claim
against any of the Indemnified Person or receipt of a notice of the commencement of any investigation which is based, directly or
indirectly. upon any matter In respect of which indemnification may be sought from the Gol. (ADVISOR NAME) or Indemnified Party
will notify the Gal in writing of the particulars thereof and. will provide copies of all relevant documentation of the Gol and, unless the Gol
assumes the defence thereof, will keep the Gol informed of the progress thereof and will discuss all significant actions proposed. The
omission so to notify the Gol shall not relieve the Gol of any liability which the Gol may have 10 (ADVISOR NAME) or any Indemnified
Person except only to the extent that any such delay in or failure to give notice as herein required prejudices the defence of such action, suit,
proceeding, have under this indemn ity had (ADVISOR NAME) or any other Indemnified Persons not so delayed in or failed 10 give the
notice required hereunder.

(b) the Gol shall be entitled. at its own expense, to participate in and. 10 the extent i1 may wish to do so, assume the defence of such action, suit,
proceeding, claim or investigation, provided such defence is conducted by experienced and competent counsel. Upon the Gol notifying
(ADVISOR NAME) or any Indemnified Person in writing of its election to assume the defence and retaining counsel, the Gol shall not be
liable to (ADVISOR NAME) or any other Indemnified Person for any legal expenses subsequently incurred by them in connection with
such defence. If such defence is assumed by the Gol, the Go! throughout the course of thereof will provide copies of all relevant
documentation to (ADVISOR NAME). will keep (ADVISOR NAME) advised of the progress thereof and will discuss with (ADVISOR
NAME) all significant actionsproposed.

(c) No Indemnified Person shall admit.any liability or seule any action, writ proceeding, claim or investigation without the prior written consent
of the Gol, which shall not be unreasonably withheld. The Gol will not be liable for any settlement of any action, suit, proceeding, claim or
investigation that any Indemnified Person makes without the written consent of the Gol.

(d) The Gol's right to assume the defence set out above shall be subject 10 the following conditions:

No admission of liability or compromise whatsoever in connection with the claim or action may take place without (ADVISOR NAME)'s
prior written consent; which shall not be unreasonably withheld.

ii Notwithstanding the foregoing, the Indemnified Person shall have the right to employ its or their own counsel in any such case, b11t the
fees and expenses of such counsel shall be at the expense of such Indemnified person unless (a) the employment of such counsel shall have
been authorised in writing by the Gol in connection with the defence of such action, and (bl the Gol have not employed counsel to take
charge of the defence of such action, within a reasonable rirre after notice of commencement of the action.

3. (ADVISOR NAME) hereby assumes full and absolute responsibility for each and every act or omission of all its directors, officers,
employees and agents. Subject to the foregoing and without prejudice to any claim the Gol may have against (ADVISOR NAME), no
proceedings may be taken against any director. officer. employee or agent of (ADVISOR NAME) in respect of any claim the Gol may
have against (ADVISOR NAME).

143
3. (ADVISOR NAME) hereby agrees to indemnify and hold harmless each of the Company. the Gol. their directors. officers and employees
(collectively the "Gol Indemnified Parties") and (individually, a "Gol lndcmnified Party") from and against any and all expenses (including
the fees and expenses of its counsel), losses. claims. actions. suits, damages. or liabilities. joint or several (inc!uding the aggregate amount
paid in settlement of any action, suit, proceeding or claim that may be made against any Gol Indemnified Party) that any Gol Indemnified
Party suffers or incurs which are determined by a judgement of a court or an arbitration of competent jurisdiction to have resulted from any
dishonest, illegal or fraudulent act or the wilful default or negligence on the part of any Indemnified Person. Subject to the foregoing. the
Go! agrees that no Indemnified Person shall have any liability whatsoever (whether in contract. tort, or otherwise) to the Go! for or in
connection with things done or omitted to be done pursuant to the Engagement.

5. The Go! will notify (ADVISOR NAME) if the Go! becomes aware of any claim. which may give rise to a liability pursuant to this
indemnity.

6. "Indemnified Persons" means (ADVISOR NAME) and all directors. officers. employees of (ADVISOR NAME).

Schedule II

a) Dispute Resolution

Any and all claims, disputes, questions or controversies involving the parties or any two or more of them and arising out of or in connection with
this Agreement or the execution, interpretation, validity, performance, breach or termination hereof (including, without limitation, the provisions
of this Schedule (collectively, hereinafter referred to as" Disputes") which cannot be finally resolved by such parties within sixty (60) calendar
days of the arising of a Dispute by amicable negotiation and conciliation shall first be submitted for settlement by informal arbitration to an
arbitral panel consisting of one nominee of each of such party as applicable. If any such panel, negotiating in good faith is unable to resolve and
seute the Dispute within sixty (60) calendar days after lhe Dispute is first submitted to it, then any pany shall be entitled to cause the Dispute to
be submitted for arbitration pursuant to the terms of paragraph (b) hereof.

(b) Arbitration

Any dispute which is nor settled after aR attempt by the parties to the Dispute at amicable negotiations and conciliation under paragraph (a)
hereof, shall be finally resolved by final and binding arbitration under the provisions of the Arbitration and Conciliation Act, 1996 as modified
ftom time to time and rules framed thereunder, the arbitration rules of Indian Council of Arbitration and by three arbitrators appointed in
accordance with the said rules. The Arbitration shall be held in New Delhi and all arbitration proceedings shall be conducted in English.

In connection with the arbitration proceedings. the parties to the Dispute hereby agree to co operate in good faith with each other and the arbitral
tribunal and to use their respective best efforts to respond promptly to any reasonable discovery demand made by such party and the arbitral
tribunal. ' ·

Except as otherwise required by law or any applicable stock exchange rules and regulations, the arbitral proceedings and the arbitral award ( the
►.:
"Award") shall not be ~c public without the joint consent of the parties to the Dispute and, if n01 a party, (ADVISOR NAME) and each such
party shall maintain the confidentiality of such proceedings or the Award, unless otherwise permitted by other such pany in writing. The costs of
the arbitration shall be borne by the parties to the Dispute in accordance with the provisions of the Arbitration and Conciliation Act 1996 as
modified from time m time and rules framed there under and applicable provisions of the arbitration rules of Indian Council of Arbitration. The
Award may include interest from the date of any breach or other violation of this Agreement and rate of such interest, if any, shall be specified .
by the arbitral tribunal and shall be calculated from the date of any such breach or other violation to the date when the Award is paid in full.

Each of the parties expressly understands and agrees that the Award shall be the sole, exclusive, final and binding remedy between them
regarding any and all Disputes presented to the arbitral tribunal. Application shall b.: made to any court with jurisdiction over the party ( or its
assets) against whom the Award is rendered for a judicial acceptance of the Award and an order of enforcement.

144
19.2 Annexure-11: Guidelines for Advisors and Bidders

No. 6/4/200 I-DD-II

Government of India
Ministry of Disinvestment
Block 14, CGO Complex
New Delhi.
Dated 13"' July, 200 I.

OFFICE .MEMORANDUM
<
Sub: Guidelines for qualification of Advjsors and Bidders seeking 10 acquire stBkes in Public Sector Enterprises through the process of
djsinvesrment

Government has examined the issue of framing comprehensive and transparent guidelines defining the criteria for bidders
interested in PSE-disinvestment so that the parties selected through competitive bidding could inspire public confidence.
Earlier, criteria like net worth, experience etc. used to be prescribed. Based on experience and in consultation with concerned
departments, Government has decided to prescribe the following additional criteria for the qualification / disqualification of
the parties seeking to acquire stakes in public sector enterprises through disinvestment:

(a) Ill regard to matters other than the security and integrity of the country, any conviction bya Coun of Law or indictment / adverse order by a
regulatory authority that casts a doubt on the ability of the bidder to manage the public sector unit when it is disinvesred, or which relates to
a grave offence would constitute disqualification. Grave offence is defined to be of such a nature that it outrages the moral sense of the
community. The decision in regard to the nature of the offence would be taken on case-to-case basis after considering the facts of the case
and relevant legal principles. by the Government.

(b) In regard to matters relating to the security and integrity of the country, any charge-sheet by an agency of the Government/ conviction by a
Coun of Law for an offence committed by the bidding party or by any sister concern o( the bidding party would result in disqualification.
The decision in regard 10 the relationship between the: sister concerns would be taken based on the relevant facts and after examining
whether the two concerns are substantially controlled by the same person/persons.

(c) In both (a) and (b), disqualification shall continue for a period that Government deems appropriate.

(d) Any entity, which is disqualified from participating in the disinvestment process. would not be allowed to remain associated with it or get
associated merely because it has preferred an appeal against the order based on which it has been disqualified. The mere pcndency of
appeal will have no effect on the disqualification.

(e) The disqualification criteria would come into effect immediately and would apply to all bidders for various disinvestment transactions,
which have not been completed as yet.

(f) Before disqualifying a concern, a Show Cause Notice why it should not be disqualified would be issued 10 it and ii would be given an
opportunity 10 explain its position.

(g) Henceforth, these criteria will be prescribed in the advertisements seeking Expression of Interest (EOI) from the interested panics. The
interested panics would be required 10 provide the information on the above criteria, along with their Expressions of lnrerest (EOI). The
bidders shall be required to provide with their EOI an undertaking to the effect that no investigation by a regulatory authority is pending
against them. In case any investigation is pending against the concern or its sister concern or against its CEO or any of its
Directors/Managers/employees. full details of such investigation including the name of the investigating agency. the charge/offence for
which the investigation has been launched. name and designation of persons against whom the investigation has been launched and other
relevant information should be disclosed. 10 the satisfaction of the Government. For other criteria also, a similar undenaking shall be
obtained.along with EOI.

-sd/-
(A.K. Tewari)
Under Secretary to the Government of India.

145
19.3 Annexure-III: Expression of Interest

EXPRE SSION OF IN TEREST

{To be forwarded on the leuerhead of the interested party/lead
bidder/member of the consortium submitting the EOI)

Reference No. _ Dale _

To,
ADVISOR NAME

Sub: GLOBAL INVITATION OF EXPRESSIONS OF INT.EREST

FOR DISINVFSTMENT OF '1o STAKE IN <CO. NAME)
Sir,

This is with reference to the advertisement dated---~

. inviting Expression of Interest for (CO. NAME)

As specified in the advertisement, we have read and understood the contents of lhe Preliminary Information Memorandum {PIM) and are desirous
of participating in the above disinvestment process, and for this purpose:

We propose-to submit our EOI in individual capacity as (insert name of party)

OR

We have forme<Vpropose to fonn a consortium comprising of _members as follows:

I. ____________ (Insert name)

2. ____________ (Insert name)
___________ (Insert name)
3.

We understand that __% equity stake of (CO. NAME) is proposed to be divested and we are interested in bidding for-the same. We believe
that we/our consortium'proposed consortium satisfies the eligibility criteria set out in relevant sections of the PIM including the guidelines for
qualification of bidders seeking lo acquire stakes in Public Sector Enterprises through the process of disinvestment issued by the Government of
India vide Department of Disjnvestmcnt OM No.6/412001-DD-II dated 13'" July 20Ql and subsequent amendments/clarifications thereto.

We certify that in regard to mailers other than security and integrity of the country, we have not been convicted by a Court of law or indictedor
adverse orders passed by a regulatory authority which would cast a doubt on our ability to manage the public sector unit when it is disinvested or
which relates 10 a grave offence that outrages the moral sense of the community.

We further certify that in regard to manen relating to security and integrity of the country, we have not been charge-sheeted by any agency of the
Government or convicted by a Court of Law for any offence committed by us or by any of our sister concerns.

We further certify that no investigation by a regulatory authority is pending either against us or against our sister concerns or against our CEO or
any of our Directors/Managers/ employees.

We undertake that in case due to any change in facts or circumstances during the pendency of the disinvestment process, we are attracted by the
provisions of disqualification in terms of the subject guidelines, we would intimate the GOJ of the same immediately.

The Statement of Legal Capacity and Request for Qualification as per formats indicated hereinafter, duly signed by us/respective members, who
jointly satisfy the eligibility criteria. are enclosed.

We shall be glad to receive funher communication on the subject.

Enclosure: Yours faithfully,

I. Statement of Legal Capacity
2. Request for Qualification Authorised Signatory
For and on behalf of the party/consortium

146
19.4 Annexure-IV: Statement Of Legal Capacity

(To be forwarded on ihe letterhead of the interested party/ each member of the consortium submitting the EOI).

Reference No. _ Dale _

To,
Senior Vice President & Head Regional Office
ADVISOR NAME

Sub: GLOBAL INVJTA TION OF EXPRESSIONS OF INT EREST

FOR DISINVFSTM ENT OF % STAKE IN
(CO.NAME)

Sir,

This is with reference lo the advertisement dated inviting Expression of Interest for (CO. NAME)

We have read and understood the contents of the PIM and the advertisement and pursuant to this hereby confirm that:

We satisfy the eligibility criteria laid out in the PIM and the advertisement.

We are a member of the consortium (constitution of which has been described in the Expression of Interest), which jointly satisfies the eligibility
criteria as detailed in the PIM.*

We have agreed that (insert member's name) will act as the lead member of our consortium.*

We have agreed that (insert individual's name) will act as our representative on our behalf and has been duly authorized to
submit the EOI. Further, the authorized signatory is vested with requisite powers to furnish such teller and Request for Qualification and
authenticate the same.*

We have agreed that (insert the name of the individual) chosen as representative of our consortium and on our behalf and has been duly
authorized to submit lhe EOI. Further, the authorized signatory is vested with requisite powers 10 furnish such letter and Request for
Qualification and authenticate the same.*

Yours faithfully.

Authorised Signatory
For and on behalf of (panylmember)

*Strike off whichever clause is not applicable

147
94 M. of Dislnvestment/ND/2002-21.
 19.5 Annexure-V: Request For Qualification
(To be submitted in respect of interested party/each member of the consortium)

Name of the interested Party(ies)/Member(s) _

I. Constitution (Tick, wherever applicable)

i) Public Limited Company

ii) Private Limited Company
iii) Others, if any (Please specify)

If the interested party is a foreign company/ OCB, specify list of statutory approvals from Goll RBI/ FIPB applied for/ obtained/ awaiting:

2. Sector (Tick, wherever applicable)

i) Public Sector
ii) Joint Sector
iii) Others, If any (Please specify)

3. Details of Shareholding

4. Role/ Interest of each Member in the Consortium (if applicable)

5. Nature of business/products dealt with

6. Date & Place of incorporation

7. Date of commencement of business

8. Full address including phone No./fax No.

i) Registered Office

ii) Head Office

9·. Address for correspondence

I 0. Salient features of financial performance for the last three years

11. Basis of eligibility for participation in the process (Please mention details of your eligibility) as under:

Please attach most recent Audited Statement of Accounts/Annual Report. Additionally, please provide a chartered account/auditor certificate
certifying the Turnover and Net Worth as defined in the Eligibility criteria.

i2. Please provide details of all contingent liabilities that, if materialised. that have or would reasonably be expected to have a material adverse
affect on the business, operations (or results of operations). assets. liabilities and/or financial condition of the Company, or other similar
business combination or transaction.

13. Contact Person(s):

i) Name:
ii) Designation:
iii) Phone No.:

148
 Mobile No.:
Fax No.:
Email:
Yours faithfully,

Authorised Signatory Authorised Signatory

For and on behalf of the (pany/rnember) For and on behalf of the consonium

Place:
Date:

Note: Please fo low the order adopted in the Format provided. ff the interested party i.,· unable to respond to a particular question/ request, the
releva111111111 er 11111st be nonetheless be set (JU/ with the words .. Nu res ome riven" u tainst it.

I.

..

149
19.6 Annexure-VI: Qualification For Bidders

OUALIFICA TION FOR BIDDERS

1. Introduction

1.1 In a strategic sale. apart from Government's interest i11 receiving a good return or price for its companies, the Government
is also concerned that the company, which is taken over, should function well after disinvestment. The strategic buyer
should be able 10 bring in more capital and improved technology, wherever needed, introduce beuer management practices
and should be in a position 10 take proper care of the work force. In short, the strategic partner is expected to have a good
track record of performance so that the Government can be satisfied that its assets are being passed on to capable hands.

1.2 In order 10 achieve this objective, it is important that the Government evolves a selection procedure that ensures that only
those entities gel selected as strategic partners who possess:
• The requisite managerial and financial strength.
o A proven track record of following good corporate practices.
• A good reputation as regards integrity.

l .3 To address these considerarions and to ensure greater transparency of the process, the Ministry has taken the step to publish
these "Guidelines on qualifications for Bidders" to enable the bidders to understand the requirements expected of them.

1.4 While any company, domestic or foreign, in private or public sector, can take part in a strategic sale process, depending on
the unique features of a case, and taking into consideration all relevant factors including monopoly issues,
Government can always impose reasonable restrictions. in specific cases, in public interest.

1.5 The bidders are selected through a competitive bidding process but, for Government companies to pass into private hands,
there are some critical areas which government has to ensure that the bidder is capable of complying with. These critical
areas are: -

• Financial capabilities of the bidder

•
•
•
Technical and Legal capacity of the bidder
FOi restrictions
Integrity of the bidder
•
• Security considerations

1.6 The qualification/eligibility criteria for the bidders arise at two stages of the bidding process:

• Atthe time of submission of Expression of Interest (Eol),

• At the time of submission of the financial bid which comes much later and at the end of the process.

2. Financial Capacity

2.1 Since the bidder has to buy a block of shares typically involving a substantial financial outlay, it has to be ensured that,
companies which are financially sound and capable vis-ii-vis the size and business of the CPSUs being disinvested, are
only allowed to bid. The 'open offer' requirement of SEBI and 'Put/Call' option add further to the financial
strength/capacity required. Therefore, while issuing an advertisement in the newspaper and website for inviting bidders to
take part in the disinvestment process through submission of EOl (financial bids come much later at the end of the process)
the qualifying minimum networth criteria and/or minimum turnover required of the bidding company is specified. This
gives a fair idea of the size and financial strength of the bidding company, Besides, relevant financial and performance
details are also sought for. For example, while seeking EOJ from bidders 111 MECON Ltd., the minimum annual turnover
stipulation was Rs. 150 crore and networth Rs. 50 crore, whereas in VSNL minimum networth was specified as Rs. 2500
crore as VSNL was a much bigger company. In case of consortium bids, Government may insist on each consortium
member satisfying individually a minimum networth/turnover criteria to be included as a member of the consortium. In the
case of VSNL, each consortium member had to satisfy the minimum networth criteria of 10% i.e. Rs. 250 crore. In some
cases, in addition to this or in lieu thereof, Government may require majority networth contribution from the lead bidder.
For example, in the case of Shipping Corporation of India, the networth criteria is Rs. 800 crore but it has been specified
that the lead member of the consortium must have a net worth of at least Rs. 408 crore (i.e. 51 %). At this stage, those of the
bidders who satisfy these criteria, get shortlisted and get on to the next stage.

2.2 At the stage of submission of the financial bids, the prospective bidders are required to furnish a bank guarantee which is
retained gply in the case of the highest bidder. This is meant to bind him to fulfil his commitments till the successful
closing of the transaction.

150
 2.3 Before accepting th e finan cial bid of an y part y, a certi fica te is required eith er from th e ban ker or from an indepe ndent
Ch art ered Accoun tan t th at th e bidder has got enough funds to comp lete th e tran saction . In addition 10 tha t the bidder gives
an un derta ki ng that he has not been prohibited by any agreements with others from acquiring the equity stake from
government.

2.4 These prerequisites are also a deterrent to bidders who may be having unhealthy balance sheets. The bank guarantee is a
further proof of their financial standing and reputation in the financial world.

3, Tes;hnlcaI and k&aJ capadtf"

3.1 Every company must provide along with the EOI a representation, duly executed by its authorised officiaV representative
that it has the requisite corporate authorization to submit the EOI and that all infonnation provided in the EOI is complete
and accurate in all material respects to the best of their knowledge. If, at a subsequent date, it is discovered thai the
company or any consortium member did not either possess the requisite authorization or that any part of the information
provided in the EOI was not complete or accurate in any material respect, the Government reserves the right to disqualify
such company or consortium or member of the consortium from the process.

3.2 To access the technical capabilities of the prospective bidder, the Government may ask them to provide a business plan so
that the Government is assured of continued services to the satisfaction of the user. In case of Air India, the business plan
was sought in advance. In certain cases, Government may even require the bidders 10 satisfy a criteria of minimum
experience in a particular business/sector, say manufacturing.

3.3 The bidder is required to submit enough information in the EOI for Government to assess the bidding entity's managerial,
financial and technical capability. Typically, the EOI would contain the following details:

(i) Executive Summary: This provides a brief description of the bidding company and (where appropriate) of each
member in the consortium, containing details like ownership structure, write up on business history and growth,
business areas / activities, respective revenue details, etc. It includes a brief commentary or. the capability of the
company/ consortium, as demonstrated, inter alia, in its past track record, 10 run its own business.

.') (ii) The Applica/11: The full name, address, telephone and facsimile numbers, e-mail address of the company or of each
member of the consortium and the names and the titles of the persons who are the principal points of contact.

(iii) Basic lnfonnation: This contains the details of the place of incorporation, registered office, current directors, key
management personnel and principal shareholders of the company/companies in the consortium. II also contains a
copy of its current Memorandum and Articles of Association and copies of audited accounts for the last three years of
the· company I companies in the consortium. (The latter details help in evaluating financial capabilities as well).

(iv) Ma11neme111 Orga11iwtio11:An overview of the applicant's senior managemcnt and organization structure and in the
case of a consortium, that of each member; summaries of the roles and responsibilities of the directors, key
management personnel of the applicant and, in case of a consortium. those of each member.

(v) h1tematio11al OperatiQ11s/Joint Ventures IAl/iall(:es: Brief write up of the company's or, in the case of a consortium,
of the members, of their international operations, joint ventures/ alliances (whether international or dorrestic), nature
and size of such operations, equity ownership, if applicable, copies of the audited accounts for the last one year of
such companies.

(vi) Professio11al Advisors: The names and addresses of those companies and the professional firms, if any, who are (or
will be) advising the applicant/consortium, together with the names of the principal individual advisors a1 those
companies and firms.

(vii) Ou1sramli11g Litigation: Each company, and each member of a consortium must provide with the EOl a statement of
pending litigation.

I_ 4. Foreign Djrect Investment <FDil RestrlcUons

4.1 In case of foreign bidders, the prospective buyer has 10 comply with the sectoral Foreign Direct Investment (FD!) caps
determined by Government of India and revised from time to time. In some cases of disinvestment, the FD! restrictions on
the bidder are more onerous than the sectoral restrictions. These could be typically those PS Us, which are into businesses,
which arc sensitive to national security. For example, in the case of Air India, Government decision is to sell 40% stake
but a restriction of maximum 26% foreign holding was incorporated. In the case of Shipping Corporation of India, foreign
holding has been restricted 10 25% though there is no FD! restriction for the shipping sector.

151
94 M. of Dlslnvestment/ND/2002-22.
s. Integrity of the bidder

5.1 The Ministry of Disinvestment has laid down specific guidelines vide letter no.6/4/2001/DD-II dated 13 111 July 2001
(Annexure - II) for qualification in terms of integrity of bidders seeking to acquire stakes in Public Sector Enterprises
through the process of disinvestment. The prospective bidders have to give an undertaking a1 the stage of submission of
Expression of Interest (EOI) that they are eligible as per the criteria fixed by the said guidelines and the bidders also have
to make disclosures regarding pending proceedings/investigations as per para (g) of these guidelines.

6. Security Considerations

6.1 As PSUs, the companies were wholly or substantially owned by the Government and were operated and managed by the
Board of the company under the administrative control of the Ministry concerned. In this arra ngement, security
consideration, if any, were taken care of. Al the time of transfer of these companies to private players, the Government has
lo ensure that the security of the country is nor jeopardized through use/ abuse of these compan ies.

6.2 Government has excluded the "strategic areas" from disinvestment, (strategic areas being defence related, atomic energy
with few exceptions and railway transport). However, sectors like Airlines, Telecommunication etc. could also be called
upon to provide strategic services in times of war or otherwise. In such cases, Government may require a separate security
clearance for each bidder. In addition. 10 protect the security of the country, provisions are made in the transaction
documents to deter the purchaser from misuse of the company. In addition, there are covenants in the Agreements, which
oblige the new management 10 provide emergency services to the Government in times of need. In such cases the strategic
partner may be asked to disclose his source of funds and give an undertaking that he would ensure that no prohibited
person ("prohibited person' being a person who constitutes a threat 10 the security requirements of the nation) gets control
of the company. If needed, restrictions in foreign shareholding can also be imposed. For example, as referred to earlier, in
the disinvestment of Shipping Corporation of India, bidders are allowed to form Joint Venture Companies along with a
foreign partner but with a cap of25% of foreign partners' holding.

6.3 Further. me companies which have been charge-sheeted or convicted on mailers relating to "national security or integrity"
under the provision of the Indian Penal Code or Official Secrets Ac, or other relevant legislation, are disqualified from the
bidding process. (See para (b) Annexure II)

7. Confidentiality Undertaking

7. I On being found suitable after submining the EOI, the Qualified Interested Parties are required to enter into a
Confidentiality Undertaking with the Government. Only then are they allowed to participate in the disinvestment process.

7.2 Typically, this undertaking requires that the potential bidders do not misuse this wealth of information. It is not uncommon
for competitors to send a bogus team to discover the trade secrets of the other parties. The undertaking is made by the
bidder in favour of President of India (acting through Joint Secretary of the administrative ministry), the company and
advisors to treat all the confidential information in confidence and not to disclose to any person, the fact rha: he has been
provided the 'Confidential Information' or has inspected any confidential documents or tho: discussion/negotiation
regarding the transaction.

7.3 'Confidential Information' means all information, concerning the business, operations. prospects, finances, or other affairs
of the company. It includes, but is not limited to, documents delivered in connection with a due diligence investigation,
information concerning business activities, products, specifications. data, know-how. compositions, designs, sketches,
photographs, graphs, drawings, research and development, marketing or distribution methods and processes, customer lists.
customer requirements. price lists. market studies, computer software and programs, database technologies, systems
structures and architectures, historical financial projects and budgets, historical and projected sales, capital spending
budgets and plans, current or prospective financing sources, the names and background of personnel, personnel training
techniques and materials.

7.4 Confidentiality undertaking also provides that the bidder shall not deal with any officer, Director or employee of the Govt
or Company. regarding the business. operations. and prospects or financing of the company without advisor's express
written consent ·

7 .5 The confidentiality undertaking contains an indemnity clause, whereby the bidder agrees to indemnify the advisor, the
Govt. and the company against any damages. loss, cost or liability arising out of any unauthorized use or disclosure by the
bidder.

7.6 The undertaking stipulates that the Strategic Partner will use the Confidential Information only 10 assist the Strategic
Partner in the evaluation of the Transaction and determine whether or not to proceed with the Transaction and the Strategic
Partner will no, use the Confidential Information for any purpose other than the Transaction or in any other man ner

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 whatsoever and shall part icularly ensure that the interests of the Coll1)a ny/Advisors/Govem men t are not adversely affected
in any ma nner whatsoever.

7.7 Th e undertaki ng stipulates that in cas e the Bidder or any Consorti um Membe r decides not to proceed with the Tran saction
or if the Advisors or the Go vernme nt notifies the Bidder or any Con sorti um Member that the Govern me nt does not wish
the Bidder or any such Consortium Member to consider the Transaction any further, the terms of the Undertaking survive
the date of receipt of notification of such decision by the relevant party .

7 .8 The Bidder agrees through the undertaking that after termination of access of the bidder by the Government, all documents
or Olher materials furnished by such Company/Advisors/Government 10 the Strategic Partner, including those constituting
Confidential Information, together with all copies and summaries thereof in the possession or under the control of the
Strategic Partner, will be destroyed.

7 .9 The language of the Undertakings may vary depending on the case, based on legal advice.

s. Oualification of Companlest<;onsortla

8.1 The advertisement for the transaction indicates the broad qualifications of the prospective bidders. Based on the
information submitted in EOls, the Ministry and the advisors carry out an evaluation of the qualifications of the
companies/consortia and subsequently notify in writing those companies/ consortia which qualify to participate in the next
stage of the process.

8.2 However, where a Consortium has submitted the EOI, it is generally expected that there shall not be any changes in the
Members of the Consortium consequent to the submission of EOI.

• 8.3 If a Consortium bidder desires a change in the Consortium by inclusion/exclusion of members or if a non-Consortium
bidder desires lo fonn a Consortium by inducting new Member(s), it shall have to seek an approval from Go! for such
change. Such requests would be entertained only before the financial bids are received by Government.

8.4 Where the Bidder is a Consortium, the stake in the ordinary share capital of the company can be acquired and held either
through an investment vehicle ("Special Purpose Vehicle") or through direct holding in the company by each Member or
through any Group Company (ies).

9. Additional Information

9.1 Government reserves the right to seek any additional indemnities, warranties, representations or performance obligations
from the bidders or any of their group companies to Government's sole satisfaction.

10. Reasons for DisguaJIQcatlon

JO.I Notwithstanding anything 10 the contrary contained in the Request for Proposal document and without prejudice to any of
the rights or remedies of Government, Government shall be entitled in its sole discretion to determine that a Bidder is to be
disqualified at any stage of the process and its participation in the Strategic Sale process and/oc its Technical Proposal
and/or Financial Bid dropped from further consideration for any of the reasons including without limitation those listed
below:

(i) if a misrepresentation/false statement is made by the bidder/Member, at any stage in the Strategic Sale process,
whether in the Technical Proposal, the Financial Bid, supporting documentation or otherwise and whether written or oral;

(ii) if the Technical Proposal submitted by the bidder is in any respect inconsistent with, or demonstrate any failure
to comply with, the provisions of the Request for Proposal ;

(ii) if the Financial Bids submitted by the bidder is inconsistent with the requirements of the Request for Proposal in
1111y respect, including not being accompanied by an Ernest Money Guarantee of the specified amount or the Financial Bid
being conditional in any respect;

(iv) failure 10 col1')ly with any other material requirement of this Request for Proposal;

(v) Government is not satisfied with sources of funds/ownership structure of the bidder.

(vi) failure 10 col1')1y with the reasonable requests of Government in relation to the Strategic Sale process.

153
 (vii) Breach of Confidentiality Undertaking executed by the bidder.

(viii) if i1 is discovered at any time that a bidder is subject matter of winding up/insolvency or other proceedings of a
similar nature;

(ix) any information regarding the bidder which becomes known 10 Government/Company/ Advisor and which is
detrimental to Strategic Sale process and/or the interests of the Company.

(x) initiation or existence of any legal proceedings. by or against the bidder in respect of Company, which
proceeding may be prejudiced by the participation of the bidder in the selection process or the transaction, e.g. inspection
by a bidder of case files of the Company of matters filed against that bidder. and

(xi) the bidder or if the bidder is a Consortium then any membe r of such Consortium not being qualified to
participate in the process pursuant to the Government of India office memoran dum No. 6/4/2001-DDII dated July 13, 2001
as amended from time to time.

10.2 If information becomes known after the bidder has been qualified, at any stage, to proceed with the Strategic Sale process.
which would have entitled Government to reject or disqualify the relevant bidder/Consonium, Government reserves the
right to reject or disqualify the relevant bidder/Consortium at the time, or at any time, such infonna tion becomes known to
Government. Where such party is a Consortium, Governmen t may disqualify the entire consortium, even if it applied to
only one membe r of the Consortium,

I 0.3. Government determination that one or more of the events specified under paragraph IO has occurred shall be final and
conclusive.

11. Formats roe submitting EQls by tntemted parties

t
II.I The formats for submitting Expression of Interest. srarerrent of Legal Capacity and Request For Qualification (RFQ) are
enclosed as Annexure JI[, IV, and V.

Frequently Asked Questions

Question· Does de/au/I in paymenl by the bidder to a flnancial institution automatically disqualify the bidder?

Answer: It is clarified that Ministry of l)isinvestment is guided by its guidelines dated 13.7.2001 as mentioned earlier. It would be seen from
these guidelines that if the bidding pany or its consortium membe rs are defaulting in payment of dues to financial institutions, they are not
automatically disqualified. This is mainly because if the bidding panics have more than one business, there may be cases where some of the
businesses may be incurring losses due to which it may not be possible for the bidding pan y to honour the commi tment with regard 10 payme nt of
interest/repayment of principal in that particular unit. So, any default on account of poo r performan ce of a unit cannot ipso facto mean that the
party who is controlling the biisiness is incapable of running any other business.

What would be relevant here is whether there has been a wilful default on the part of the bidding party, which could happen due 10
diversion of funds from one unit to another. However, ii may be difficult in such cases for Ministry of Disinvestment to determine whether
default by a particular party is a wilful one. Since the institutions, which have lent may claim the bidder as a wilful defaulter, while the bidder
rnay say that he is not a wilful defaulter and that his default is due to reasons beyond his control. This is really the task of a regulator i.e,
RBI/SEIJI to adjudicate on such matters who can decide whether the default was wilful or whether the practice adopted by the bidder is
J
unhealthy. unethical or unscrupulous. MODI guidelines do cover such adverse orders by regulators.

Question: In case of a consortium bid, if a consortium member is disqualified, does the whole consortium get disqualified?
7
tlmwer: Even on default by a member of the consonium the Government reserves the right 10 disqualify all members of the consortium. Tho:
other option that would be considered is that the bidder removes the defaulting member from the consonium.

154
 Question: In case there are no cases pending al the stag, of EOI againsl any bidder bu: this comes up later on, what is the bidder supposed to
do?

Answer: The bidder is supposed to disclose all relevant material envisaged in the Guidelines dated 13n/2001 to the Government whenever it
? occurs or it comes to his notice and Govemment reserves the right to disqualify the bidder on receipt of such information at any stage of the
process.

a
Question: Does charge sheet by an agency such as the CBI automatically disqualify a bidder?

Answer: No. The charge sheet by an agency like CBI would result in disqualification if the matter relates to the security and integrity of the
country. In other cases , there has to be a con viction by a court of law.

Questiq11: Will any indictmenlladverse order by a regulatory authority disqualify a bidder!'

Answer: An indictment /adverse order by a regulatory authority will disqualify either.-

(a) If such order casts a doubt on the ability of the bidder to man age the public sector unit when ii is disinvested QI:
(b) If such an order relates to a grave offence where grave offence is defined to be an offence of such a nature that outrage the moral
sense of the community e.g. fraud. It is clarified that the decision in regard to the nature of the offence would be taken on a case-
to-case basis after considering the facts of the case and relevant legal principles by the Government.

Question: In case an order disqualifying a bidder is passed by Government, does the bidder remain disqualifiedfor all times to come?

Answer: Not necessarily. Government may decide on the period for which such disqualification shall continue.

Question: Why is there a minimum net worth requirement- is ii linked to reserveslsi:.e of the disinvesting company? Hes not been seen to be
linked in the past?

Answer: The minimum net worth criteria is to ensure that the bidder has enough financial muscle to run the l'SU effectively post-disinvestmeru
and to also be in a position to raise enough resources in the future to enhance capacity, other capcx requiremen ts ~c. Though there is no direct
proportionality between the minim.am net worth criteria fixed and the net worth of the compan y being disinvested, Governmen t does keep in
mind the net worth/turnover/business potentiaVrcsourcc requirements of the compan y getting disinvested while fixing the net worth criteria.

Question: Government of India asks bidders to submit a Technical Proposal- Is this proposal on bidders' plans for tile company etc. given
any weightag« in the process? Seems not, as aU that mailers is the priceju,aUy.

Answer: It is a fact that selection of the successful bidder is purely on the basis of the price bid. Normally, the bidder who bids the highest
would be selected. However, as clarified in every advertisement soliciting EOis, Government reserves the right always to mak e any changes in
the procedure as laid down in the Request for Proposal. Moreover, the Government would like to be satisfied that the bidder has a well thought
out plan on the future of the compa ny once he takes over. Though this plan is not legally binding on him after take over, it is expected that, since
the bidders are very carefully chosen and would be companies of repute, they would honour the commitment made by them in their Technical

Proposal.
f
Question: WIiy does every consortium change require GO/ approval?

Answer: In every case of disinvestment, there are some prequalifying criteria stipulated as explained in the text. Therefore, Government has to
.,,
be cenain that the consortium which finally gets selected satisfy these eligibility criteria. Otherwise Bidder A. having satisfied the net worth
criteria set by Government, may get shortlisted. Thereafter. he may form a consortium with Bidder B, where Bidder B may not be independently
satisfying the net wonh criteria. Bidder A+B will obviously satisfy the criteria. Later, Bidder A may exit from this consortium and Bidder B
would be lefl in the fray. though originally it did not satisfy the eligibility criteria. Secondly, since there are specific guidelines on integrity of

155
bidders. 11 ,s necessary 1ha1 al each stage of addition of consortium members. Government satisfy itself that lh<· nn• cnllty also sausfies the

eligibility criteria.

Question: Till what time in the process is a request for changl in consortium entertained?
(
Am,.·u: Normally, a request for a change in consortium is entertained by Government before financial bids are received. No request is
emcn.nncd once the financial bids have been received. In certain specific cases. however, Government may require a request for such change to
be filed on a date earlier than the date financial bids are received.

Questi<ln: If a bidder wants to change the consortium, then is ht ptrmilred to a4' to the consortium an entity which has not filed an EDI or a
change in the consortium can be made only by addition of bidders who lu,-n/fhd an EOlt

Answer: Government would entertain II request even for 1nclus10n of a new entity as a member of the consortium by the bidder
(who was not one out of the entities who had filed Hlh l pru, ,<let! all tilt' eli1?1t,ih1y criteria and qualification/disqualification criteria are satisfied.
Of course, the decision of whether or not to perrnu a ,han~,· ,n tht· .:un,,,mum would finally rest with the Government.

156
 20. CHAPTER: Abbreviations
Abbreviations used
' . I. ADR/GDR American Depository Receipt/ Global Depository Receipt
2. IBSE/NSE/LSE I Bombay Stock Exchange / National Stock Exchange/ London Stock Exchange
3. lcAPM j Capital Asset Pricing Model
4. lcco,cco j Cabinet Committee On Disinvestment/ Core Group Of Secretaries On Disinvestment
5. DCF Discounted Cash Flow

· ation & Arrortisations

unting Principles

Inter-Ministerial Group
Initial Public Offering

j Ministry Of Disinvestment
•'
Net Asset Value
i National Council For Applied Economic Research
New Economic Policy
Non Resident Indian

Exchange

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j21. l Rl<'P/RFQ

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~-j~E j State Level Public Enterprise _ _ _
E.JI SP II Strategic Partner
·'-'· _ I VRS/VSS j Voluntary Retirement Scheme/Voluntary Separation Sche~

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GMGIPN-PLW-94 M. of Disinvestment/ND/2002-4000 Bks.