PSU, Privatization and Disinvestment in India

What is PSU?
‡ In India, public sector undertaking (PSU) is a term used for a government-owned corporation. ‡ The majority (51% or more) of companies equity is held by union government or state government. ‡ Divisions of activity in 1956 a)Public sector-Heavy and basic industries which require high capital and low return. b)Private sectors-Consumer based goods industries having high and early returns

Role of Public sector in Indian Economy
‡ ‡ ‡ ‡ ‡ ‡ Development of infrastructure Small scale and other ancillary industries Removal of regional disparities Import substitution and Export promotion Redistribution of income Employment opportunities

Investment of Government in PSU
As on 1 st April 1951 1956 1961 1980 1985 1990 1992 1995 2007 2008 No. of units 5 21 47 179 215 244 237 239 247 242 Total Investment(Crs) 29 81 948 18150 42673 99329 135445 164690 421089 455409

Crs) Years Nos of PSU Turnover PBIT Net Profit Dividend Contribu paid tion to country revenue 687 2205 8260 8068 13768 15288 20714 22886 26805 19951 30878 61037 62866 81867 89035 110599 125456 147728 1991-92 1995-96 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 237 239 234 231 227 230 227 226 217 133906 226919 458237 447529 535165 587052 700862 837295 964410 13675 27587 48767 63190 73374 99053 109518 117614 142949 2356 9574 15653 25978 32399 53084 65429 69536 81550 .Performance of Public sector (Rs.

Railway Transport .Industries reserved for PSU s since July 1991 1. 7. Minerals specified in the schedule to Atomic Energy (Control of production and use) Order. Mining of copper. Atomic Energy 3. Mining of iron ore. led. Arms and Ammunition and allied items of defence equipment. zinc. 1953 8. tin and molybdenum. Mineral oil 5. gold and diamond 6. defence aircraft and warship 2. Coal and Lignite 4.

most profitable PSU. contributes to 28.contributes 77% of India s crude oil. listed in Fortune 500 lists ‡ HPCL-operates the largest lube refinery in India ‡ ONGC-5 largest company .Top 10 PSU in India ‡ IOC-20 largest company in the world. ranked in Fortune 500 lists ‡ NTPC-India largest power company.5% of the power to the country. 81% of natural gas production . ‡ BPCL-3 largest company in India.

Top 10 PSU in India ‡ SAIL-6 largest company in India and leading steel producer ‡ BHEL-manufactures over 180 products and caters to core sector of indian economy ‡ BSNL-Largest telecom industry ‡ HAL-Largest public sector in aeronautical engineering ‡ Bharat Dynamics Limited has made it to the top ten list due to the sheer grit and diligence that it showcases in its balance sheet and the profitability that it shows year after years .

Many projects in the public sector have not been finished according to the time schedule. 78.2 crore on townships. several public enterprises suffer from over-capitalization The Administrative Reforms Commission found that Hindustan Aeronautics. Hindustan Steel alone incurred an outlay of Rs. etc. ‡ Excessive Overheads: ± ± Public enterprises incur heavy expenditure on social overheads like townships.Problems of Public sector ‡ Poor Project Planning: ± ± Investment decisions in many public enterprises are not based upon proper evaluation of demand and supply. schools. Such over-capitalization resulted in high capital-output ratio and wastage of scare capital resources. hospitals. cost benefit analysis and technical feasibility. Heavy Engineering Corporation and Indian Drugs and Pharmaceuticals Ltd were over-capitalized. . Such amenities may be desirable but the expenditure on them should not be unreasonably high. In many cases such establishment expenditure amounted to 10 percent of the total project cost. lack of effective financial control and easy availability of money from the government. ‡ Over-capitalization: ± ± ± Due to inefficient financial planning.

Civil servants who are deputed to manage the enterprises often lack proper training Motivations and morale of both executives and workers are low due to the lack of appropriate incentives. .utilization of Capacity: ± One serious problem of the public sector has been low utilization of installed capacity. .‡ Overstaffing: ± Manpower planning is not effective due to which several public enterprises like Bhilai Steel have excess manpower. In the absence of definite targets of production. ‡ Under. ‡ Lack of a Proper Price Policy: ± There is no clear-cut price policy for public enterprises and the Government has not laid down guidelines for the rate of return to be earned by different undertakings ‡ Inefficient Management : ± ± ± The management of public enterprises in our country leaves much to be desired. In some cases productivity is low on account of poor materials management or ineffective inventory control. There is considerable idle capacity. effective production planning and control and proper assessment of future needs many undertakings have failed to make full use of their fixed assets.

Meaning and Reasons for Privatization ‡ Privatization is a process by which the government transfers the productive activity from the public sector to the private sector ± ± ± ± ± Improvement in efficiency and performance Fixing responsibility is easier Response time incase of Private sector is less Privatization leads to better services to customers Remedial measures are taken early in private sector .

private company such as water supply. they get better salary and reduces the country jobless rate. private companies tends to collect revenue higher than the government.that is why the provide the best services.. it helps the government to have more funds for development. Privatization provides job opportunity to many people. 2.. 4. as private company pay taxes to the central government. Much efficient and better.. electricity.etc. better telephone lines and reception.. Increase revenue of the country. airport. It lessens the government burden.etc 3..Role of Private Sector 1.. .private companies have better pays than government servant. you will have cleaner water.the money can be spent on development such as public facilities..such as foreign invest and etc..

767 1.775 269 125 1.113 5.610 2.293 42.107 4.940 GROSS OUTPUT 11.494 2.087 9.43.132 6.12.40.046 3.20.338 3.227 1.161 9.91 8 7.864 13.112 .70.06.21.547 13.ROLE OF PRIVATE PUBLIC AND JOINT SECTOR IN EMPLOYMENT AND GROSS OUTPUT SECTOR PUBLIC PRIVATE JOINT OTHERS TOTAL FACTORY NOS EMPLOYM FIXED CAP ENT(000S) IN CRORES 3.11.

Problems of Private Sector ‡ Profit generation is the main motive ‡ Monopoly and Concentration ‡ Declining share of net value added in total output ‡ Infrastructure Bottlenecks ‡ Industrial Disputes ‡ Industrial Sickness ‡ Threat from Foreign Competition .

Disinvestment in India .

most commonly in the United States . ± The term was first used in the 1980s.Disinvestment in India ‡ What is Disinvestment? ± The action of an organization or government selling or liquidating an asset or subsidiary as a strategic move for the company.

Many undertakings traditionally established as pillars of growth had become a burden on the economy. 134 were running on profits and as many as 101 were loss making units. Out of the 239 operating PSUs in 1995-96.Objectives of Disinvestment ‡ ‡ PSUs had shown a very negative rate of return on capital employed. National gross domestic product and gross national savings also getting adversely affected by low returns from PSUs. personnel and management ± Lack of autonomy ‡ ‡ ‡ ‡ . 86 of them were sick. the following were identified as particularly important:± Price policy of public sector undertaking ± Under utilisation of capacity ± Problems related to planning and construction of projects ± Problems of labour. Of the various factors responsible for low profits in the PSUs. Inefficient PSUs had become and were continuing to be a drag on the Government s resources turning to be more of liabilities to the Government than being assets.

‡ Few main objectives are: ± To reduce the financial burden on the Government ± To improve public finances ± To introduce.‡ Finally. This was identified as an active tool to reduce the burden of financing the PSUs. disinvestment was also seen by the Government to raise funds for meeting general/specific needs. the Government adopted the 'Disinvestment Policy'. competition and market discipline ± To fund growth ± To encourage wider share of ownership . ‡ In this direction.

Government s perspective) ‡ Minority Disinvestment ‡ Majority Disinvestment ‡ Complete Privatisation .e.Different Approaches to Disinvestments There are primarily three different approaches to disinvestments (from the sellers i.

. CMC Ltd. at the end of it. Ltd. ‡ Examples of minority sales via Offer for Sale include recent issues of Power Grid Corp. . etc. of India Ltd. thus ensuring management control. NTPCLtd. the government retains a majority stake in the company..NHPC Ltd.. ‡ Examples of minority sales via auctioning to institutions Andrew Yule & Co.Minority Disinvestment ± A minority disinvestment is one such that. Rural Electrification Corp. Ltd. typically greater than 51%. etc.

. CMC to TCS etc.e. BALCO to Sterlite. post disinvestment. it sells off a majority stake ‡ Eg: Modern Foods to Hindustan Lever.Majority Disinvestment ± A majority disinvestment is one in which the government. retains a minority stake in the company i.

± Examples of this include 18 hotel properties of ITDC and 3 hotel properties of HCI. .Complete Privatisation ‡ Complete privatization is a form of majority disinvestment wherein 100% control of the companies passed on to a buyer.

.Cabinet Committee on Disinvestment (CCD) Chaired by the Prime Minister Functions: ± To consider the advice of the Core Group of Secretaries To decide the price band To decide the final pricing Intervention in case of disagreement between the recommendations ± To approve the three-year rolling plan and the annual programme of disinvestment every year.

.Core Group of Secretaries on Disinvestment (CGD) Headed by the Cabinet Secretary Functions: Supervises the implementation of the decisions of all strategic sales Monitors the progress of implementation of the CCD decisions. Makes recommendations to the CCD on disinvestment policy matters.

6. Implementation of disinvestment decisions. including restructuring. pricing of shares. and other terms and conditions of disinvestment 5. All matters relating to disinvestment of Central Government equity from Central Public Sector Undertakings 2. Disinvestment Commission. Financial Policy in regard to the utilization of the proceeds of disinvestment channelized into the National Investment Fund . Decisions on the recommendations of the Disinvestment Commission on the modalities of disinvestment. including appointment of advisers. All matters relating to sale of Central Government equity through offer for sale or private placement in the erstwhile Central Public Sector Undertakings 3.Ministry Of Disinvestment  Set up in 1999  Assisted by Advisors Business Allocated to Ministry of Disinvestment 1. 7. Central Public Sector Undertakings for purposes of disinvestment of Government equity only. 4.

the Government is required to provide more funds every year that go into maintaining of the unviable / weak PSEs . The PSE Survey shows PSEs.Major Issues In Disinvestment Profitability: The return on investments in PSEs. which is at least 3% points below the interest paid by the Government on its borrowings Recurring Budgetary support to PSEs: Despite huge investment in the public sector. at least for the last two decades. as a whole. has been quite poor. never earned post tax profits that exceeded 5% of total sales or 6% of capital employed.

which is able to contain costs on all parameters.7 4.5 11.Cost Control: ‡ As per NCAER Study Report the cost structure in PSEs is increasing as compared to private sector.3 6. sector Wages/Net Sales PSEs Pvt.5 5 Pvt. sector 23.sector Interest/Net sales PSEs Pvt.7 . Power & fuel /Net sales PSEs I9.

or two thirds.6 million jobs added in the organized sector 1 million.57 crores.00 Profit & Loss A/C of 21 PSUs showed accumulated loss of 13959. the government has been sanctioning restructuring packages from time to time. were added in the private sector during the period 1991 to 2000.Industrial Sickness in PSUs: To save the PSUs from sickness. 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 .3. As on 31. Employee issues: Of the 1.

HUL Modern Foods CASE STUDY .

large work force. the Silchar project was abandoned and the production of Rasika drink was curtailed. ‡ The company was referred to Disinvestment Commission in 1996. treating it in the non-core sector.1.utilization of the production facilities. ‡ As per the Disinvestment Commission the major problems at MFIL were under. In February 1997.Introduction ‡ MFIL was incorporated as Modern Bakeries (India) limited in 1965.2000 ‡ It went through minor restructuring during 1991-94 when its Ujjain Plant was closed. ‡ It had 2042 employees as on 31. the Commission recommended 100% sale of the company. low productivity and limited flexibility in decision-making .

The Disinvestment Process ‡ September 1997 The Government approved 50% disinvestment to a Strategic Partner through competitive global bidding ‡ October 1998 ANZ Investment bank was appointed as the Global Advisor for assisting in disinvestment ‡ January 1999 The Government decided to raise the disinvestment level to 74% ‡ April 1999 An advertisement inviting the EOI from prospective strategic partners was issued .

The Disinvestment Process ‡ In a response to the advertisement 10 parties submitted Expressions of Interest ‡ Out of these. . ‡ October 1999 Post due diligence.99).2000. interaction with the management of the MFIL. the only bid received was that from Hindustan Lever Limited (HLL). 4 conducted the due diligence of the company.10. and site visits. 2 parties remained in the field. ‡ January 2000 .1. which included visits to Data Room. and on the last day for submission of the financial bid (15.The Government approved the selection of HLL as the strategic partner in and the deal was closed on 31.

25.07 TOTAL 149.45 1999-00 Modern Food Industries (India) Ltd.52 . Sale of residual shares to SP (Put Option by GoI) Hindustan Lever Ltd. 74 26 2002-03 Modern Food Industries (India) Ltd. Amount Realised (Rs.Year Seller Type of sale Buyer Percentage of Equity Sold Percentage of Residual Equity of Govt. Strategic sale Hindustan Lever Ltd. crore) 105.995 - 44.

Rs. 109. (post sale).as done by global advisors AFTER SALE 1. 3.99 cr. Rs. 74% of the shares sold for Rs. i. 3247 on 25th Feb.3. 30 cr. Invested by HLL in the company.490.51 cr.00 cr. realisation) as per DPE Survey 1998-99 Value of assets as per 31. towards provisions made for previous years.01 cr. Thus.99 accounts: Gross Net Market value of land & building as per Government valuer 3 Valuation of 100% equity by .19 cr. (prior to sale) to Rs. 11. Rs. Rs.45 cr. 20 cr.68 times the Book Value. . Paid up capital Losses 1998-99 Losses 1999-00 **(Inclusive of an amount of Rs. 70 cr.23 cr ** 2042 2.87 cr Rs.e. 6. the Government gained by selling Rs.76 cr. 18. 38.more than 11 times the face value & 3.PRIOR TO SALE 1 Authorised share capital . Rs. Rs. 1000 shares for Rs. 28.) Number of employees 2 Net Worth (and total expected . 15. HLL's share value went up from Rs. 13. and further Rs.00 cr. to Rs. 48. different methods . Rs. Rs. 2138 on 30th Dec. 35. 105.

PRIOR TO SALE ." 5 Company referred to BIFR. POST SALE 4.an efficient company. . which was inevitable. The employees of a company incurring losses became HLL employees . Now HLL will pick up the bill for restructuring. The Shareholders¶ Agreement envisages:" the parties envision that all employees of the company on the date hereof will continue in the employment of the company.

5 crores for meeting the requirement of funds for working capital and capital expenditure. Punjab National Bank. which is a 100% increase over the figure of April 2000. ‡ As on 31. which continued till the beginning of 2000.2000. viz.. . HLL has extended secured corporate loans to MFIL to the extent of Rs.12. ‡ HLL has provided a corporate guarantee to MFIL's banker. 16. which has helped the Company in getting the interest rate reduced considerably to the extent of 3-4% of its earlier borrowing cost.Post Disinvestment Scenario ‡ The decline in the sales of Modern Bread. Weekly sales in December 2000 were around 44 lakhs SL. has been arrested.

‡ Rs. and to train the manpower in quality control systems. 7 crore infused for safety & hygiene purposes at various manufacturing locations ‡ The Government was also entitled to Put its share of remaining equity of 26 % at Fair Market Value for 2 years from 31st January 01 to 30th January 03. 30 crore has been spent VRS. The Government has exercised this option and thereby received Rs. .Post Disinvestment Scenario ‡ Steps have been taken to improve the quality of bread.07 crore on 28th November 02. Rs.1800 per employee. its packaging and marketing with trade-promotion activities. 44.2002 wages have increased by an average of Rs. ‡ November.

Hence overall sales declined by 35% to Rs 95 crore. HUL did enjoy tax benefits as MFIL was a sick industrial unit ‡ The company put MFIL on the block in 2006 but failed to clinch a deal . The company suffered as it lost some lucrative government contracts and changed its operational structure. it did make a profit though of Rs 22 crore compared to a loss of Rs 7 crore in the previous year. ‡ However.Post Disinvestment Scenario ‡ Despite HUL s best efforts MFIL continued to make losses. before interest and depreciation. ‡ Bread sales grew by about 7%. its losses were Rs 15 crore and accumulated losses were Rs 79 crore. ‡ At the operating profit level. HUL has invested 157 crore in MFIL s equity ‡ In 2005.

Reasons for the Failure ‡ However. ± The culture of MFIL was a complete misfit with its own ± The company has committed a mistake while conducting the due diligence process . HUL still was unsuccessful in turning around the business and due to high employment costs and low margins ‡ As per the company.

Thank You .