DISINVESTMEMT POLICY IN INDIA

Vedant Bhutra

Submitted To: -

Index
Definition Evolution Disinvestment Policy of India Facts and figures till 2004-05 Current Strategies
1) 2) 3) 4)

Valuation of PSUs Valuation Techniques Challenges in valuation Right valuation approach

5) Problems associated with disinvestment policy 6) Conclusion

Definitions of Disinvestments:

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.

Disinvestment is a process of transferring property from public ownership. (By Wordnet Dictionary)

Disinvestment refers to the use of a concerted economic boycott, with specific emphasis on liquidating stock, to pressure a government towards policy or regime change.

The term also refers to the reduction of investment in firms, industries or countries for reasons of political or social policy.

Evolution of Disinvestments Policy

Disinvestment was a term first used in the 1980s, most commonly in the United States, to refer to the use of a concerted economic boycott designed to pressure the government of South Africa into abolishing its policy of apartheid, which was still in force at that time. In India since 1991 the term is applied to the privatization of State-held assets; the Minister for Disinvestment is a Cabinet-level post. The Department of Disinvestment was formed on the10th December 1999, with a view to establishing a systematic policy.

DISINVESTMENT POLICY OF THE GOVERNMENT OF INDIA

The whole policy of disinvestments has undergone a sea change. Initially, it was one of offering a part of the equity to various private sector players both domestic and foreign. Now it is one of outright sale of majority shares to be so called strategic partners, with a clear commitment to ultimately off-load the rest of the shares after a time lag. And with such a strategy, the anxiety of the present Govt to bridge the fiscal deficit is creating a situation of distress sale of PSUs to private hands. Therefore, it is no longer disinvestments policy, but clear-cut policy conclusive privatization. The whole privatization process has become an instrument of transferring public property to private hands for a song much to the detriment of the national interest and the industrial economy of the country in particular. And with the whole process, corruption is woven intrinsically. The very concept of privatization of public sector units and more so the blue chip ones, in itself is a bankrupt corrupt policy perception, treachery with the nation and fraud on the people of the country.
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INTERIM BUDGET 1991-92 (Chandrasekhar Government)

" 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 in1991-92. The modalities and details of implementing this decision, which are being worked out, would be announced separately."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, and enhance availability of resources for these PSEs and yield resources for the exchequer.

Industrial Policy Statement of 24th July, 1991

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 ".

Budget speech: 1991-92

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"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"

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: I) ii) iii) iv) v)
vi)

Coal and Lignite Mineral Oils Arms, ammunition and defence equipment Atomic energy Radioactive minerals, & Railway transport

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

Budget Speech by Finance Minister Shri P. Chidambaram (1996-97) on 22nd July, 1996
Government has approved the proposal to establish a Disinvestment Commission. Any decision to disinvest will be taken and implemented in a transparent manner. Revenues generated from such disinvestment will be utilised for allocations for education and health and for creating a fund to strengthen Public Sector Enterprises. The interim budget for 1996-97 took credit for Rs. 5000 crore through disinvestment. I propose to take credit for the same amount.

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.

Budget Speech by Finance Minister Shri P. Chidambaram (1997-98) on 28th February, 1997
The Commission has observed The essence of a long-term disinvestment strategy should be not only to enhance budgetary receipts, but also minimise budgetary support towards unprofitable units while ensuring their long-term viability and sustainable levels of employment in them. Government agrees with this view and I would appeal to Honble Members to take a positive view of disinvestment.

Budget Speech by Shri Yashwant Sinha (1998 -99) on (1st June, 1998)
"Government has also decided that in the generality of cases, the Government shareholding in public sector enterprises will be brought down to 26per 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".

Budget Speech by Shri Yashwant Sinha (1999-2000) on 27th February, 1999

"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".

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. It 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 aircrafts and warships; Atomic energy (except in the areas related to the generation of nuclear power and applications of radiation and radioisotopes to agriculture, medicine and non-strategic industries); Railway transport. All other Public Sector Enterprises were to be considered nonstrategic. 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. Whether the industrial sector requires a proper regulatory mechanism to protect the consumer interests before Public Sector Enterprises are privatised.

Excerpts from the Address by the President Shri K. R. Narayanan 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 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 Government is compelled to embark on a programme of disinvestment. The Governments 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 VRS 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, VSNL, CMC, BALCO, Hindustan Zinc, and Maruti Udyog.Where necessary, strategic partners would be selected through a transparent process".

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Budget Speech: 2000 2001 by Shri Yashwant Sinha on 29th February, 2000.
Disinvestment/Privatization/Public Sector Restructuring Governments 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; Fully protect the interests of workers.

Government have recently established a new Department for Disinvestment to establish a systematic policy approach to disinvestment and privatization 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 privatization will be used for meeting expenditure in social sectors, restructuring of PSUs and retiring public debt.

Budget Speech: 2001 2002 by Shri Yashwant Sinha on 28th February, 2001.
Our public sector has expanded in almost every area of economic activity. In many ways, it has served the nation well; capability has been developed all round and a strong industrial base built up. These enterprises must now be strengthened to compete and prosper in the new environment. Last year I had defined governments policy in this regard clearly. 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
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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 Mrs. 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."Additional budgetary support for the Plan, primarily in the social and infrastructure sectors (contingent upon realisation of the anticipated receipt.) 2.14 Excerpts from the Address by the President Shri K. R. Narayanan 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 selfreliance. 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 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 selfemployment for workers retiring under VRS.

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Excerpts from the Budget Speech for 2002-03 of the Finance Minister Shri Yashwant Sinha on 28th February, 2002.
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 (ITDC). 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 ITDC 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. 2.16 SuoMoto Statement of Shri Arun Shourie, Minister of Disinvestment, made in both Houses of Parliament on 9th December, 2002. 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 Up gradation 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

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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 Governments continued commitment of utilization 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 retirement of public debt. For the disinvestment of natural asset companies, the Ministry of Finance and the Ministry of Disinvestment will work out guidelines. 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. 2.17 Excerpts from the Budget Speech for 2003-04 of the Finance Minister Shri Jaswant Singh on 28thFebruary, 2003. I am confident that the pace of disinvestment will accelerate in the coming year. I wish to also state that details about the already announced Disinvestment Fund and Asset Management Company, to hold residual shares post disinvestment, shall be finalized early in 2003-04.disinvestment is not merely for mobilizing revenues for the Government, it is mainly for unlocking the productive potential of these undertakings, and for reorienting the Government, away from business and towards the business of governance. The following table indicates the actual disinvestments from 199192 till date, the methodologies adopted for such disinvestments and the extent of disinvestment in different CPSUs:

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Disinvestment from 1991-92 to 2004-05, the methodologies adopted

No. of transacti ons in which equity sold 47 Target receipt (Rs. in Crore) Actual receipts (Rs. in Crore)

Year

Methodology

1991-92

2500

Minority shares sold in Dec 1991 and Feb 1992 by auction method in bundles of 3037.74 "very good", "good" and "average" companies 1912.42 0.00 Shares sold separately for each company by auction method. Equity of 6 companies sold by open auction but proceeds received in 94-95.

1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99

29 17 5 1 1 5

2500 3500 4000 7000 5000 4800 5000

Sale through auction method, in which NRIs 4843.10 and other persons legally permitted to buy, hold or sell equity, allowed to participate. 168.48 Equities of 4 companies auctioned 379.67 GDR (VSNL) in international market. 910.00 GDR (MTNL) in international market. GDR (VSNL) / Domestic offerings with the participation of FIIs (CONCOR, GAIL). Cross 5371.11 purchase by 3 Oil sector companies i.e. GAIL, ONGC & IOC GDRGAIL, VSNL-domestic issue, BALCO 1860.14 restructuring, MFILs strategic sale and others 1871.26 Strategic sale of BALCO, LJMC; Takeover KRL (CRL), CPCL (MRL), BRPL

1999-00 2000-01

5 5

10000 10000

2001-02 #

12,000

Strategic sale of CMC 51%, HTL 74%, VSNL 25%, IBP 33.58%, PPL-- 74%, and 5632.25 sale of hotel properties of ITDC & HCI; receipt from surplus cash reserves from STC and MMTC 3347.98 Strategic sale: HZL (26%), IPCL (25%), HCI, ITDC, Maruti: control premium from renunciation of rights issue, Put Option MFIL (26%), Shares to employees in HZL,

2002-03 #

12,000

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CMC and VSNL. Jessop & Co. Ltd.(72% Strategic Sale), HZL (18.92% Call Option), through Public Offer15547.41 Maruti (27.5%), ICI Ltd. (9.2%), IBP (26%), IPCL (28.945%), CMC (26.25%), DCI (20%), GAIL (10.%) and ONGC (9.96%) 2764.87 NTPC (5.25% Offer for Sale), IPCL (5% to Employees) and ONGC (0.01%)

2003-04

14,500

2004-05 2005-06 Total

4,000

By sale of shares to Public Sector Financial 1567.60 Institutions & Public Sector Banks on 'Differential Pricing Method' 96800 49214.03

# Figures (inclusive of control premium, dividend/dividend tax, restructuring and transfer of surplus cash reserves prior to disinvestments)

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Realization through strategic sale during 1999-2000 to 2004-05

Sr. No Name Percentage of Government Equity sold 74 25.995 51 51 Realisation Rs. in crore Profit/Loss Making during the year of disinvestment Loss Making

1 a. 1 b. 2. 3a. 3b 4 5.

Modern Food Industries (India) Ltd. (MFIL) (MFIL) Phase II Bharat Aluminium Co. Ltd. CMC Ltd. CMC Ltd. @ HTL Lagan Jute Machinery Corporation ITDC-19 HOTELS

105.45 44.07 826.92 ^ 152 6.07

Profit Making Profit Making

74 74

55 2.53

Profit Making Loss Making

6. 7 8. 9. 10. 11. 12. 13.

Hotel Agra Ashok Hotel Bodhgaya Ashok Hotel Hassan Ashok TBABR Mamallapuram Hotel Madurai Ashok Hotel Ashok Bangalore * Qutab Hotel, New Delhi Lodhi Hotel, New Delhi

89.97 89.97 89.97 89.97 89.97 89.97 89.97 89.97

3.61 1.81 2.27 6.13 4.97 39.41 34.46 71.93

Loss Making Loss Making Loss Making Loss Making Loss Making Loss Making Loss Making Loss Making

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14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31 (a) 31 (b) 31 (c) 32

LVPH, Udaipur Hotel Manali Ashok KABR, Kovalam Hotel Aurangabad Ashok Hotel Airport Ashok, Kolkata Hotel Khajuraho Ashok Hotel Variants Ashok Hotel Kanishka, New Delhi Hotel Indraprastha, New Delhi Chandigarh Hotel project Hotel Ranjit, New Delhi HCI - Centaur Hotel Juhu Beach, Mumbai HCI-Indo Hokke Hotels Ltd.(Centaur Rajgir) HCI - Centaur Hotel Airport, Mumbai IBP Co Ltd Videsh Sanchar Nigam Ltd. Paradeep Phosphates Ltd. Hindustan Zinc Ltd. Hindustan Zinc Ltd. @ Hindustan Zinc Ltd. @@ Maruti Udyog Ltd.

89.97 89.97 89.97 89.97 89.97 89.97 89.97 89.97 89.97 89.97 89.97 100 100 100 33.58 25 74 26

6.77 3.65 40.39 16.50 19.39 2.19 8.38 92.37 43.39 17.27 29.28 153 6.51 83 1153.68 3689^ 151.70 445 6.19

Loss Making Loss Making Loss Making Loss Making Loss Making Loss Making Loss Making Loss Making Loss Making Loss Making Loss Making Loss Making Profit Making Loss Making Profit Making Profit Making Loss Making Profit Making

18.92 4.2

323.88 1000 Profit Making

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33. 34. 35 36

Indian Petrochemicals Corporation Ltd. State Trading Corporation of India MMTC Ltd. Jessop & Co Ltd Grand Total

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1490.84 40 ^^^ 60 ^^^

Profit Making

72

18.18 10257.19

Loss Making

The Fund-Bank design in Operation

The Indian ruling polity, of course, cannot claim any originality in their disastrous designs on the countrys economy and her people. Each and every move is meticulously designed under the prescription of the World Bank and the IMF and at the behest of the imperialist powers and the MNCs. The World Bank publication, called Research Report and titled Bureaucrats in Business has already detailed out each and every step, the Indian rulers have been taking since 1991to dismantle the public sector network in the country including the various modalities of privatization. The publication also had written down with every detail the game plan to create downward pressure on wages of the public sector employees, drastically curtail workers rights, stop industry-wise wage settlement and to make the PSUs an unholy destination by suitable policy engineering from Govt level. It is amusing to note that the current model of outright privatization through strategic disinvestments aggressively pursued by the Government has been copied from the World Bank prescription. The `Research Report of the World Bank has prescribed that: If potential buyers cannot otherwise raise the funds, the enterprise can be sold in trenches (passing management control immediately to private, allowing them time to raise the funds to buy out rest of the
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share gradually). With freedom to hire and fire, which is an important factor in successful management contracts. The message of the World Banks guideline is loud and clear: tune your privatization strategy to the advantage of the potential buyers, the foreign and Indian Corporate, without bothering for the immense financial loss and harm to economic sovereignty caused to the country. Thus it is clear that the offensive against the public sector is not guided by financial or managerial prudence but because of the ideological position taken by IMF/WB/WTO with rich countries led by United States pushing from behind, that there should be no public sector any where in the world. Private oligarchies want complete command over the entire world economy and they wouldnt tolerate even a token presence of PSU on their way. The BJP-led government is more than obliging to meet their dictates.

The Policy to Wipe out Public Sector

Under the on going drive of privatization, the Government has mainly targeted most of the blue chip profit making PSUs which were decorated with the classification of Ratnas. Further, the most strategic sectors have been engulfed under the drive for privatization. Notable among them are oil & petroleum, power, telecom, rail, road and air transport, ports & docks, airports and of course the financial sector. The game plan is to completely erase the public sector network from the industrial map of the country. The creation of a separate Disinvestments Ministry under the exclusive charge of one Cabinet Minister clearly demonstrates the present Governments point of priority to completely destroy the public sector. This fact was reflected in the budget speech (2000-01) of the Union Finance Minister pronouncing that, Government have recently established a new Department for Disinvestments to establish a systematic policy approach to disinvestments and
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privatization and to give fresh impetus to this programmed, which will emphasize increasingly on strategic sales of identified PSUs. As noted above, when the Government is desperately taking steps to wipe out public sector from the country, the mention in the agenda note that the Government strategy is, strengthening strategic units, privatizing non-strategic ones is nothing but travesty of truth. The Government has refused to recognize the strategic importance oft he PSEs in energy, telecommunication and defense production sectors including the airports in protecting the economic sovereignty and even security of the countrys independence. They have identified these CPSUs as non-strategic and selling them off chaotically. And after that talking about strategic and non-strategic sectors is nothing but extreme hypocrisy and self-deception. Similarly it is nothing but a stupid argument that price realized through the sale of minority stakes, was low as compared to price realized through strategic disinvestments It is but natural that conclusive privatization is bound to fetch higher yields than offloading of minority shares. The price differential is bound to be there between simple share holding and acquiring the ownership including whole sole control of the enterprise and its management which in turn open up host of private commercial interest to the buyer. On the other hand, the dangerous fall out of conclusive privatization is also colossal. Realizing higher price by so-called strategic sale of PSUs is short sighted and suicidal for the country. Therefore, there is no rationale behind the suicidal steps of strategic sale of CPSUs, particularly the blue chips ones. The claim of the Government that The concerns of the various stakeholders are taken care of through the Shareholders Agreement (SHA), Share Purchase Agreement (SPA) and Parent Guarantee Agreement (PGA) is not correct. Except extending
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due and undue benefits to the private buyers, the strategic sale cause immense harm to all the nation, the people and of course the workmen. The SHA is supposed to protect the interest of the employees and act against asset stripping. Let us examine some concrete examples:

Asset Stripping
The Tata Teleservices Limited (TTSL) acquired 25 per cent stake of Videsh Sanchar Nigam Limited (VSNL) from the Government at a price of Rs.1,439.00 crore. The Company further acquired another 20 per cent stake of VSNL through open offer at a cost of Rs.1,151.00 crore. Now with 45 per cent stake. The TTSL has been handed over the total management control of the telecom giant. VSNL is a classic example of pre and post privatization asset stripping.

Manual on Disinvestments & Strategic Sale Agreement

On the basis of the experience of disinvestments in the last decade in more faithful tune with the World Bank guidelines, the Union Ministry of Disinvestments has brought out a Manual on Privatization. By the said manual, the process of loot on national wealth through fast track privatization as prescribed by the World Bank has been sought to be systematized and legitimized with deceptive posture of transparency. While dealing at length various methods of valuation of the PSUs under sale, the manual recommends a particular methodthe discounted cash flow method (DCF), which ensure price-fixing for the PSUs under sale at a low level, without any consideration of its huge asset base and replacement cost, solely to the advantage of the prospective buyers. The said Manual published by the Disinvestments Ministry has squarely discarded the Asset valuation method, which could capture
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the real value of the huge national assets created by the public sector industries over a long period. While recommending the Discounted Cash Flow method (DCF), the Manual went a step ahead to advise that the prospective cash flow to the company under sale must also capture for discount the future (after sale) presumable cost for modernization, capital-replacement, market etc. that may be incurred by the new owner, which would lead to assessment of the cash flow at a lower level and facilitate low pricing to facilitate the prospective customer. Thus, it is crystal clear that the Government of the day is more concerned to protect the interest the private capitalist at the cost of the national asset. It is not without reason the Comptroller & Auditor General (CAG) has found intrinsic fault in the valuation method recommended by the Govts Disinvestments Manual and commented, As per international valuation standards, depreciated replacement cost (i.e., Asset Valuation method) would have been the most appropriate method. The love and affection of the Government of the day at the centre for the private business is further exposed in yet another document published by the Ministry of Disinvestments Understanding The Strategic Sale Agreement As if the under valuation and other undue concessions granted while transferring the national assets to the private buyer for a song are not enough, provision has been made to pay cash reward in the name of Post Closing Adjustment. An unique scope has been created by the Government by providing for the buyer to grab money from the seller (PSUs) During the data room visits and the due diligence exercise by the Strategic Partner, the Strategic Partner gets the picture of the assets and liabilities of the company as on a certain date The deal may actually close at a much later date In the intervening period the company has been functioning and the asset/liability position has undergone a change The perception of the Government, in this matter, has got expression in the statement of the Disinvestments Minister Arun Shourie to the Financial Express on 07.03.02 : This means that the government could actually end up paying private bidders to rid itself
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of loss-making PSUs. Now a concrete example is the sale of Paradip Phosphates Ltd. (PPL). PPL has been conclusively privatized and purchased by the sole bidder Zuari-Maroc combine at a cost of Rs.151.7 crore against the reserve price of Rs.176 crore. Taking advantage of the post closing adjustment clause, ZuariHaroe has claimed an amount of Rs.190 crore from the Government. Thus, the net outcome of the privatization deal is the private business combine got a PSU plus a cash gift of Rs.39.00 crore. In the deal of Modern Foods, the Hindustan Lever also got some money under the same consideration. So also was the case of ITDC hotels deal where an amount of Rs.27.5 crore is being returned to the buyers.

Current Targets: The Cash-rich PSUs

The motivated, unfounded blame of inefficiency attributed to the socalled sick and uneconomic PSUs are also nothing but a ploy to justify the closure of such PSUs. Had that not been so, then why the most efficient and consistently profit making oil PSUs are being privatized by robbing them of their investible surplus. It is evident that whether loss making or profit making, good or bad record of performance, the onslaught of Fund-Bank dictated policy of closure, and privatisation of public sector shall spare none. It has been aptly said that, What is Shouries argument? PSUs are loss making, therefore profit-making PSUs should be the first to be sold. (TOI, 13.8.02)The Government has been repeatedly projecting the performance records of the comparatively weak PSUs to justify the privatisation policy. However, the interesting fact is that the recent past cases of privatisation and the ones lined up for the forthcoming period, are all consistently profit making cash-rich public sector companies. Indian Petrochemicals Corporation Ltd (IPCL) has been handed over to the Reliance Industries Ltd., (RIL) own by the Ambanies. While RIL has acquired the controlling share of IPCL at price of Rs.1,491.00 crore, at the time of privatisation the IPCL had
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an amount of Rs.2,946.13 crore as reserve and surplus. The Sterile Group has acquired the equity and management control of Hindustan Zinc Limited (HZL) at a price of Rs.445.00 crore and the PSU has a reserve fund of Rs.737.00 crore and estimated asset base of around Rs.10,000.00 crore. In fact the CPSUs which are under current prioritized initiative of the Government for privatisation are from among the top ten profit making public sector companies with huge investible surplus and belong to very important sectors of the economy namely: Oil, Power and Telecommunication. The two cash rich profit making Oil PSUs which are in the advanced stage of privatisation are Bharat Petroleum Corporation Ltd. (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL). These two CPSUs together have earned a profit of Rs.1,908.13 crore in the year 2000-01.

Valuation of Public Sector Units for the purpose of Disinvestment The process of disinvestment in India began in 1992, under the aegis of new economic liberalization policy put forward by then Finance Minister, Dr. Manmohan Singh. Disinvestment was supposed to be the tool in the hands of government to improve the functioning and profitability of public sector enterprises and also raise funds to mitigate its fiscal deficits. However, over the past decade, this exercise has been plagued by criticisms and controversies and has not achieved desired results for the government because of political bickering.

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The enunciated Government of Indias policy on disinvestment as per Economic Survey 2001 was: Bring down Government equity in all non-strategic PSUs to 26% or lower, if necessary. Restructure and revive potentially viable PSUs. Close down PSUs which cannot be revived, Fully protect interests of workers. There have been several criticisms of the disinvestment process. One is that valuations processes were unsound and that the government gave away its stakes too cheaply; two, disinvestment has been merely a revenue-raising affair for the government, with little thought being given to the requirements of the firms concerned; thirdly, it is contended that the governments reluctance to disinvest more than 51% and relinquish control over PSUs has meant that the government has been unable to attract suitably priced bids, as bidders do not believe the firms performance would improve significantly with small government stakes being offloaded. An important and perhaps most critical issue in the process of disinvestments or privatization of PSUs is valuation. Be it disinvestments of 1991-92 or that of BALCO in 2001, valuation has always been at the core of controversy. This is so because there are several methods of valuation and different methods yield widely varying results. The criticality of the issue of valuation in disinvestment or privatization can be easily gauged from the fact that the value of BALCO as put by different people differed as widely as from Rs.1100 crore to Rs.5000 crore.

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Valuation Techniques 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 Transaction Multiple method The Net Asset Value 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 liquidation of a company. Let us discuss about each one of them: The Discounted Cash Flow 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.

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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. Transaction Multiple method: This method takes into account the value paid for similar transactions in the industry and benchmarks it against certain parameters, like earnings or sales. Two such parameters are: Earnings Before Interest, Taxes, Depreciation & Amortizations (EBITDA) , & Sales. Although the Transaction Multiples method captures most value elements of a business, it does not properly reflect the cash flows generated by a business, or take into account the time value of money. However, it is considered as a useful rule of thumb, in valuing businesses by various valuation experts. Accordingly, one may have to review a series of comparable transactions to determine a range of appropriate capitalization factors to value a company as per this methodology. 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. The asset valuation is a good indicator of the entry barrier that exists in a business. Alternatively, this methodology can also assume the

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amount which can be realized by liquidating the business by selling off all the tangible assets of a company and paying off the liabilities.

Challenges in valuation of Indian PSUs Companies listed on stock exchange can be assessed fairly on the basis of market price of shares. However, most of the PSUs are either not listed on stock exchange or command extremely limited trade float. Valuation of PSU is different from establishing the price for which it can be sold. Government can only realize what the buyer is willing to pay for the PSU. Valuation is a subjective figure arrived at by the bidder by leveraging his strengths with the potential of the company. The profitability of the PSUs as reflected through the profit and loss account does not adequately reflect the earning potential of PSUs because the PSUs have generally been run in unprofessional manner. Public Sector undertakings own not only huge business assets but also highly valuable non-business assets like real estate, residential complex and utilities like power plant etc. Valuing companies in India becomes even more difficult, as there is no databank of transactions carried out in the past. In the US, the valuation report of any acquisition has to be filed with Securities and Exchange Commission (SEC).

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The Right Valuation Approach All of the above methods have their own merits and demerits. No method will suffice in any particular case. The valuation methods are benchmark figures and in no way can predict the exact price at which an entity can be sold. The buyer will be willing to pay the price depending on the synergy value that will result from improvements made when the companies are combined. This value will accrue to the acquirers shareholders rather than to the targets shareholders. The more the synergy value a particular acquisition can generate, the higher the maximum price an acquirer will be interested in paying. Price a buyer would be willing to pay could be a function of Synergies expected from proposed integration of Target Company In case of Modern Foods depending on the valuation method, the companys value oscillated between Rs 28 crore and Rs 78 crore. Hindustan Lever, however, offered Rs 125.45 crore. HLL quoted the price depending on the value they thought they would derive from the company. The value is a function of the individuals perception of the risk, the nature of financial resources available to the purchaser, opportunity, and other similar factors. Therefore, the government in order to realize better proceeds from disinvestment should consider following issues in future: It is important to understand that price is not value; in fact, the difference between price and value is the raison detre of investment valuation, independent of market pricing.
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B. The final value to be paid by acquirer will depend on the controlling premium he is willing to pay. Most foreign companies are not comfortable with less than 51 percent holding. But the government isnt offering 51 percent in most strategic sales. The government should have clear future policy when going in for big-ticket disinvestments like Air India. For instance, main assets of Air India are the bilateral rights. Will these bilateral rights vest with Air India if yes, Air Indias valuation will be higher. However, no country in the world has committed all its bilateral to one airline. These uncertainties with regard to future of the sector will prevent bidders to quote higher prices for Air India. There is no reason why the government should continue to hold a part of the equity in PSEs that are operating in non-core sectors. This strategy leads to sub-optimal realization of revenue and significant loss to the government. In the cases of disinvestment involving transfer of control of management affairs to the private investor, higher weightage has to be given to the value of assets both tangible and intangible and relatively lower value can be assigned to fair market price. While disinvesting minority shares, more weightage will have to be given to market price. In such case asset valuation approach needs to be given lesser weightage. Nonetheless, what is important is that, not merely should the value derived be unquestionable on the basis of well-established equity valuation principles, but also the processes and methodologies (and the underlying assumptions) adopted for deriving such value be reasonable. Transparency in valuations is a must so as to avoid controversies.

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Problems associated with Disinvestments

A number of problems and issues have bedeviled the disinvestment process. The number of bidders for equity has been small not only in the case of financially weak PSUs, but also in that of betterperforming PSUs. Besides, the government has often compelled financial institutions, UTI and other mutual funds to purchase the equity, which was being unloaded through disinvestment. These organizations have not been very enthusiastic in listing and trading of shares purchased by them, as it would reduce their control over PSUs. Instances of insider trading of shares by them have also come to light. All this has led to low valuation or under pricing of equity. Further, in many cases, disinvestment has not really changed the ownership of PSUs, as the government has retained a majority stake in them. There has been some apprehension that disinvestment of PSUs might result in the? Crowding out? Of private corporate (through lowered subscription to their shares) from the primary capital market. Contrary to the publicity of the Government, privatisation of CPSUs almost invariably involves reduction of workmen. Such reduction takes place both immediately before and after privatisation, as we have seen in the case of asset stripping in the VSNL. To cite an example of pre-privatisation reduction of workmen, let take the case of Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL). These two PSEs have drawn plan to reduce the number of workmen by around 4,000. In fact ever, since the Government has launched the privatisation onslaught, the management of CPSUs, under orders from the Government has
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been reducing the workmen. The Labour Ministry note itself has mentioned, During last ten years, the workforce in the Public Sector Undertakings has reduced from 2.3 million to 1.7 million. In BALCO, most widely noticed case of privatisation, several hundred workmen has been retrenched after privatisation. In IPCL 400 hundred workmen are being dislodged and further Reliance has identified 2,000 excess staff at the Vadoda plant alone. So far as the question of wage revision is concerned, the experience of the CPSU workers in privatized companies is very bad. The drum beating by the Ministry of Disinvestments citing the example of wage revision of the BALCO workers is rather a case of deprivation. It is a case of mourning and not rejoicing. The wage revision was deliberately kept pending by the Government keeping in mind the impending privatisation. Further, theguaranteed benefit of 20% of basic pay is one of the lowest in a profit making company like BALCO. During its entire period in the public sector, BALCO workers never got such a paltry wage rise. In fact, in many CPSUs the workers got guaranteed benefit of more than 80% of basic pay. The ex-gratia payment of Rs.5,000 referred in the note of the Ministry is in lieu of the unpaid wages of the workers on an average amounting to Rs.15,000 per worker and hence not gratis from the management. The experience with Modern Foods, ITDC Hotels, Maruti, VSNL are more or less same. The Hindustan Lever Ltd (HLL) management has declared that the acquired Modern Food employee shall continue to get less pay than the HLL employees. An Executive of the company has been quoted, we will not pay a Modern Foods employee the same salary. If, however, we recruit a new employee and post him at Modern Foods, he will get the same compensation as his Hindustan Lever counterparts, As is generally the case in the private sector, rampant violation of labour laws and blatant refusal to trade rights is seriously confronted by the workers in the post privatisation era.

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Conclusion
Disinvestment plays an important role in revenue generation. Good disinvestment receipts can help the government reduce fiscal deficit not only by way of equity sale in PSUs but also for the subsequent cap in government transfers to bleeding PSUs. But has the government been successful in this context. Trends in the past few years have displayed wide and abysmal differences in disinvestment targets and actual receipts. Year 1999-2000 2000-2001 2001-2002 Targeted Receipts 10,000 10,000 12,000 Actual Receipts 1829 1870 5632

Political hurdles in disinvestment, intervention of stakeholders and interest groups as well as poor state of PSUs have all contributed to this performance. Efficient Market Structure is also one of the important goals in the disinvestment/privatisation process. The government would seek to establish a competitive market which would result in driving down consumer prices (telecom sector privatisation in India) or it would try to maximize revenue by divesting in a pseudo monopoly environment and using regulation to control rent seeking behaviour (Reliance acquisition of IPCL) but it cannot try to maximize both revenue and market structure. The following case will explain the contradiction in the two objectives. Solutions are not simple, especially where stakeholders are many and come from all sections of the society; workers, employees, management, equity holders and consumers. Further this essay looks only at a single variable i.e. market structure and its relationship with disinvestment receipts. Several other variables play more important roles in the scheme of disinvestment. The government should study international best practices, customize
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them to the Indian landscape and arrive at the right direction of the liberalization process.

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