INTRODUCTION

Disinvestment:-The withdrawal of capital from a country or corporation.  Disinvestment involves sale of only part of equity holdings held by the government to private investors. Disinvestment process leads only to dilution of ownership and not transfer of full ownership.  Privatization refers to the transfer of ownership from government to private investors. Disinvestment is called partial privatization .

 DEFINITION:- Disinvestment is a process of transferring property from public ownership.  Capital investment shrinkage caused by a firm's failure to maintain or replace capital assets being used up or by the firm's sale of capital goods such as equipment.  The term also refers to the reduction of investment in firms, industries or countries for reasons of political or social policy.

PROBLEM FACED BY PSU's

 Low Productivity. Low capacity utilization and low efficiency.  Low rate of return on capital. Large number of loss making firms.  Poor work ethics and quality of services.  Over capitalization due to substantial time and cost overruns.  Bureaucratic controls.  Most of the PSU s were monopolies in their industries due to tight governmental controls, and hence they were not very efficient.

Evolution of the Disinvestment Policy

1. Interim Budget 1991-92 :-Disinvestment Up to 20% of the Equity in selected PSEs undertaking was in favour of the Mutual Fund, Financial and Institutional Investor in 2. Industrial Policy Statement of 24th July 1991 Government didn t place restriction in class of investor Nor the equity share capital

3. Budget 1992-93 Cap of 20% for disinvestment was reinstated and Eligible investor modified to Institutional Investor, Mutual Fund and Workers in these Firms.

4. Rangarajan Committee April 1993 It recommended 49% of PSEs Equity to be disinvested for industries explicitly reserved for the public sector Holding of 51% was recommended for only six industries. 5. The Common Minimum Programme 1996 Examine the public sector non-core strategic areas. Setting up of Disinvestment Commission Transparency 6. Disinvestment Commission Recommendations 1999 Disinvestment Commission was set up in 1996 August 1999, 58 PSEs were shifted from Public offering to Strategic/ Trade sales with transfer of management .

 7. Strategic & Non-strategic Classification March 199 3 industries were strategic industries and rest all the industries were non strategic. Percentage of disinvestment change in government stake going down to less 51% or up to 26% would be case to case.

8. Budget 2000 - 2001 First time government was ready to reduce the stake below 26% in a Non Strategic PSEs. 9. Budget 2001 - 2002 Credit receipt of 12000 crore from disinvestment next year. 10. Suo Moto Statement of Shri Arun Shourie ,2002 Specific aim of Disinvestment Policy Disinvestment does not result in alienation of national assets Disinvestment Proceeds Fund .

TYPES OF DISINVESTMENT
Offer for sale to Public at fixed price: The government holds the sale of the equity shares to the public at large at a pre determined price. Examples:-MFIL, BALCO, CMC, HTL,IBP, HZL, PPL, IPCL. Strategic sale: In this type significant management rights are transferred to the investor i.e. majority of equity holdings are divested. Examples: -Offer of 1 million shares of VSNL, listing of ONGC IPO.

International offering: This is essentially targeted at the FII (foreign institutional investors). Ex:-GDR of VSNL,MTNL etc. Asset Sale and Winding up: This is normally resorted to in companies that are either sick or facing closure. This is done by the process of auction or tender.

Ex:-Auction of sick PSU s.

Objectives of disinvestment
 Redeploying resources locked up in non-strategic PSEs in areas that are much higher on the social welfare priority.  Stewing further flow of resources for the non-strategic activities.  Ensuring that the taxpayers money is not subjected to the volatility of the market.  Converting PSEs into strong private commercial enterprises.  Reducing public debt and pressure on government resources.  Providing vibrant, large and deeper capital market with investment alternatives to investors as well as assuring them easy exit options.  Disinvestment would result in wider distribution of wealth through offering of shares of privatized companies to small investors and employees.  In many areas, e.g., the telecom sector, the end of public sector monopoly would bring relief to consumers by way of more choices, and cheaper and better quality

of products and services, as has already started happening.

VALUATION OF PSU's
The guidelines on valuation in the PSUs, are prescribed in Chapter 18 of the manual titled "DISINVESTMENT: POLICY & PROCEDURES", published by the Ministry of Disinvestment in 2001. The disinvestment Commission has prescribed four approaches to valuation of PSUs. These are:  The Discounted Cash Flow method.  The Balance Sheet method.  The Net Asset Value method.

Discounted Cash Flows

The Discounted Cash Flow (DCF) methodology expresses the present value of a business as a function of its future cash earnings capacity. This methodology works on the premise that the value of a business is measured in terms of future

cash flow streams, discounted to the present time at an appropriate discount rate.

The Balance Sheet method

The Balance sheet or the Net Asset Value (NAV) 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.

The Net Asset Value method

The asset valuation methodology essentially estimates the cost of replicating 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 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.

Utilization of money from Disinvestment

 Mainly to fill fiscal deficits of the government.  Generated capital has not been utilized for the benefit of the disinvested PSU.  Governments have used disinvestment merely as a tool to raise resource to satisfy interim needs rather than with a long vision to restructure Indian industry.  Even though NIF was created by the present UPA Govt, till date the money raised through only one disinvestment process has been transferred to its account.E.g.: sale of Government equity in PGCIL.

Sale to foreign companies

 In the sale of government equity in PSUs to the Indian private sector, there is no decline in national wealth  But the sale of such equity to foreign companies has far more serious implications relating to national wealth, control and power, particularly if the equity is sold below the actual price.  Increase the dependence of Indian economy on the international fluctuations.

Strategic Mistakes
 Monopolies created by privatization(?). E.g.: Selling of IPCL to reliance despite the fact that it held 60% of market share already.  Possibility of concentration of shares in few hands: E.g.: ONGC disinvestment, Claim by left party activist that large number of shares were being bought over by Canadian firm.

CONCLUSION
Disinvestment in India has never been an attractive idea simply because successive governments have treated disinvestment merely as a tool to raise resources rather than as one designed to restructure the massive public sector. Red Tapism and administrative loopholes have led to many controversies regarding disinvestment leading to many legal hassles and creating a negative image regarding DISINVESTMENT. Its time a proper consensus is arrived through discussions on disinvestment aimed at restructuring Indian industry to make true the lofty visions of Jawaharlal Nehru and to continue growing.