disinvestment policy

disinvestment policy of india as a capital receipt of government budget

1. DISINVESTMENT POLICY MADE BY : NEERAJ GARWAL

2. DEFINITION The process of an organization or government selling or liquidating an asset or subsidiary is called disinvestment . “ Disinvestment ” as per SEBI means the sale by central government /state government ,of its shares or voting rights and/or its control in PSUs .The disinvestment reduces government participation in the company.

3. IMPORTANCE OF DISINVESTMENT POLICY Financing the increasing fiscal deficit . Financing large scale infrastructure development. For investing in the economy to encourage spending. For retiring government debts - Almost 40-45% of the center’s revenue receipts go towards repaying public debts/interest. For social programs like health and education

4. OBJECTIVES OF DISINVESTMENT POLICY To reduce budgetary deficit To overcome the problems of political involvement in PSU’s Enable the government to concentrate on social development . To ensure proper planning and execution . To overcome the problem of corruption.

5. THE SALIENT FEATURES OF THE POLICY ARE : Public Sector Undertakings are the wealth of the Nation and to ensure this wealth rests in the hands of the people, promote public ownership of CPSEs. While pursuing disinvestment through minority stake sale in listed CPSEs, the Government will retain majority shareholding, i.e. at least 51 per cent of the shareholding and management control of the Public Sector Undertakings. Strategic disinvestment by way of sale of substantial portion of Government shareholding in identified CPSEs up to 50 per cent or more, along with transfer of management control.

6. BENEFITS OF DISINVESTMENT : For the government Government can focus more on activities such as infrastructure , defense, education , healthcare , and law & order . For the market and economy Brings about greater efficiencies for the economy and market as whole .

7. DIFFERENT APPROACHES TO DISINVESTMENT MINORITY DISINVESTMENT : A minority disinvestment is one such that ,at the end of it ,the government retains a majority stake in the company ,typically greater than 51% thus ensuring management control . Historically minority stakes have been either auctioned off to institutions(financial) offloaded to the public by the way of an offer for sale . The present government has made a policy statement that all the disinvestment would only be minority disinvestment via public offer. Examples of minority sales via accounting to institutions to go back in early and mid 90’s . Some of them were Andrew yule & co. ltd. CMC ltd. etc. examples of minority sale via offer for sale include recent issues of Power Grid Corporation of India ltd. , Rural Electrician corporation ltd., NTPC Ltd., NHPC ltd. etc.

8. MAJORITY DISINVESTMENT : A Majority disinvestment is one in which the government post disinvestment, retains a minority stake in the company i.e. it sells off a majority stake . Historically , majority disinvestment have been typically made to strategic partners . These partners could be other CPSEs themselves a few examples being BRPL to IOC , MRL to IOC ,KRL to BPCL . Again like in the case of minority disinvestment , the stock can also be offloaded by way of an offer for sale strategic or conjunction with the sale to a strategic partner .

9. COMPLETE DISINVESTMENT Complete disinvestment is a form of majority disinvestment wherein 100% control of the company is passed onto buyer . Examples of this include 18 hotel properties of ITDC and 3 hotel properties of HCI. Disinvestment and privatization are often loosely used interchangeably . There is however , a vital difference between two. Disinvestment may or may not result in privatization . When the government retains 26% shares carrying voting powers while selling remaining to a strategic buyer , it would but it would have not ‘privatized’ , because with 26% it can still stall vital decisions for which a generally special resolution(three-fourth majority) is required.

10. DISINVESTMENT METHODS IN INDIA NET ASSETS METHOD : It indicates the net assets of an enterprise as shown in the books of accounts(historical value of the assets). It is the cost price less depreciation provided so far on assets. It reflects the true position of profitability like goodwill, brands distribution network and customer relationship. This model is more suitable in case of liquidation then in case of disinvestment.

11. Profit actually earned or anticipated. It values a company on the basis of underlying asset. This method does not consider or project the future cash flow. 2. PROFIT EARNING CAPACITY VALUE METHOD

12. 3. DISCOUNTED CASH FLOW METHOD (SUPERIOR METHOD): THE FUTURE INCREMENTAL CASH FLOWS ARE FORECASTED AND DISCOUNTED INTO PRESENT VALUE BY APPLYING COST OF CAPITAL RATE THE PROJECTS FUTURE CASH FLOWS TAKES INTO ACCOUNTS OF TANGIBLES SUCH AS : -BRAND EQUITY -MARKETING -DISTRIBUTION NETWORK -LEVEL OF COMPETITION IN FUTURE -RISK FACTORS

13. MODALITIES OF DISINVESTMENT In order to achieve the various objectives and goals of disinvestment many methods have been formulated and implemented. These includes : Public Offer : O ffering shares of public sector enterprises at a fixed price through a prospectus ,the offer is made to the general public through the medium recognized market intermediaries . Cross holding : In the case of cross holding , the government would simply sell part of its share of one PSUs to one or more PSUs. Golden share : In this model , the government retains a 26% share in the PSUs .this 26% share will continue to give the government ,the status of majority share holder .

14. (4)Warehousing : Under this model the government owned financial institutions were expected to buy the government share in select PSUs and holdings them until third buyer emerged (5) Strategic sale : Under this model , government sells a major portion (51% and above) of its stake to the strategic buyers and also gives over the management control. (6) FPO : An issuing of shares to investors by a public company that is already listed on an exchange .retail participation is mostly high .

15. THE STEP BY STEP DISINVESTMENT PROCEDURE Proposals for disposal of any PSU (Public Sector undertaking), based on recommendations of DC (Disinvestment Commission) or CCD (Cabinet Committee on Disinvestment). After CCD clears, selection of Advisor through competitive bidding process. The Advisor assists GOI (Government) in the preparation and issue of EOI (Expression of Interest) in newspapers. After receipt of EOI from interested parties, prospective bidders are short-listed. Due diligence (DD) by concerned PSU. Based on DD by PSU, the Advisor prepares Information Memorandum for giving it to the short-listed bidders who has entered into a confidentially Agreement. Advisor, with the help of Legal Advisor, prepares Share Purchase Agreement. Discussions among Advisors, Govt. & representatives of PSU. Valuation of the PSU in accordance with the standard national practice.

16. The share Purchase Agreement (SPA) is finalized based on the reactions received from the prospective bidders. These Agreements are then vetted by the Minister of Law and are approved by Govt. Thereafter these are sent to prospective bidders for inviting final bidding bids. The bids received are examined, analyzed and evaluated by the IMG (Inter Ministerial Group) and placed before the CCD for final approval of bids. After the transaction is completed, all papers and documents relating to it are too turned to the C&AG (Controller and Auditor general of India, to enable C&AG to undertake an evaluation of the disinvestments, for placing it in parliament and releasing it to the public. In the disinvestments process mentioned above, the DOD (Department of Disinvestment) is assisted at each stage by an IMG (Inter Ministerial Group) comprising, Officers from the Ministry of Finance, Department of Public Enterprises, and the administrative Ministry, Department of controlling PSUs (Dep't. of (HI&PE) and Officers of Department of disinvestments & Advisors.

17. MERITS OF DISINVESTMENT POLICY In private sector ,the decision making process is quick and decisions are linked with the competitive market changes . The disinvestment process would bring in better corporate governance ,exposure to competitive ,corporate responsibility , improvement in work environment etc . The market participation in capital of PSUs through stock exchanges would enable the market to discover the latent worth of PSUs . The loss making PSUs can be successfully revived by asking the strategic partner to infuse fresh capital and exercising excellent management control over sick PSUs . 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 early exit options, help establish more accurate benchmarks for valuation and raising of funds by privatized companies for their projects and expansion. Disinvestment would result in an increase in an overall economic activity that would benefit the economy by providing higher rates of employment and greater tax revenues in the medium to long term. In many areas, the end of public sector monopoly would benefit the primary consumers by way of more choices, better quality of products and services at cheaper prices.

18. DEMERITS OF DISINVESTMENT POLICY Selling of profit making and dividend paying PSUs would result in loss of regular source of income to government . There would be chances of ‘asset stripping’ by the strategic partner . Most of the PSUs have valuable asset in the shape of plant and machinery , land and building etc . The Government policy or disinvestment include the disposable of both profit making and ,as well potentially viable PSUs . Financial institutions like UTI and other mutual funds have been compelled by the Government to purchase the equity which was being unloaded through disinvestment. Instances of insider trading of shares by them have also come to light. All this has led to low valuation or underpricing of equity

19. PINPOINTS First of all disinvestment proposals of loss-making PSUs needs to seriously address the task of reviving a survival of loss-making PSUs. Rather than sticking to the controversial decision of disinvestments of profit-making PSUs, particularly Oil Companies, the Ministry of Disinvestment should take-up first the loss-making PSUs, which have still chances of survival. GOI should have a clear plan and unhesitating will to cede the control and acknowledge that employment increases with industrial and commercial health. There is no point in sleeping over the problem those disinvestments of oil major companies (profit making PSUs) like HPCL/BPCL has been postponed/deferred, there are chances of survival if an immediate step is taken by privatization of those PSUs. The ugly episode involving VSNL's decision to invest in Tata Teleservices is still fresh in public memory. The best assurance would be to sell out completely and use the proceeds to invest in infrastructure or retire costly debt. The transaction documents should take care of the eventualities by insertion of suitable clause in the SPA so as to avoid the resale of PSUs within few months of take over control as happened in case of resale of Mumbai Centaur property by the original buyer, Sahara Group, within four months of acquiring the Hotel.

20. ROLE OF RBI (Reserve bank of India) IN DISINVESTMENT After the Completion of the several successful disinvestments in PSUs by GOI, RBI has issued guidelines governing the provisions of bank finance for PSU disinvestments exempting the banks from the restrictions earlier imposed on lending against shares and lending for acquisition of corporate control. Now a days all PSU disinvestments are funded primarily by pledging of the shares acquired through the disinvestments with additional/third party security of varying degrees as appropriate from bidder to bidder. As a safety policy, the government insists that the successful bidder remains committed to not disturbing the status quo with the PSU for at least 3 years that means the shares initially purchased from government are subject to a contractual 'lock-in', requiring the winning bidder not to sell these shares. Even a financial pledge of these shares has to be approved by the Government and enforcement to the pledge requires government approval. RBI guidelines impose a condition that the bank finance may be extended only for acquiring shares from the government and under open offer prescribed under the SEBI Takeover Code. Subsequent acquisition can't be funded and hence put and call options will not enjoy bank funding. RBI guidelines permit bank finance only for disinvestments approved by the government and therefore, bidders for state levels PSUs are excluded from access to bank finance. RBI has also directed to banks not to lend unless the bidder has an excellent track of record of servicing the loans from the banking systems.

21. ROLE OF SEBI(Security exchange board of India ) IN DISINVESTMENT As per regulation 10 of the SE13I (Acquisition of Shares) Regulation, 1997 No acquirer shall acquire shares or voting rights in a company, unless such acquirer makes a public announcement to acquire shares of such company in accordance with the regulations. Hence SEBI's Takeover Code gets triggered when a person (Strategic Partner) acquires more than 15% of the Voting equity shares is required to make a public offer to purchase shares not less than 20% of the equity of the company. This provision has a great impact on the strategic sale transaction. For instance, in such case the Strategic Partner would be required to buy another 20% of the shares from public, which means SP, has to buy total 45% of the shares.

22. Argument in favor or against IN AGAINST IN FAVOUR Socialist / leftist ideology: private sector cannot achieve equal distribution of resources for all classes. Private enterprises only focus on profit maximization. They won’t cater poor people. Therefore Government needs to control all or some industrial sectors. Such Government controlled units cannot compete in free market economy due to political interference and price control mechanisms. Ultimately more public money is wasted in running these loss making entities Government’s dividend income will decline. (Because they’ll have less shares). Consequently, Fiscal deficit will increase. Whatever “dividend” Government earned so far- compared to that, Government has spent far more crores rupees to revive these PSUs. There is no point in throwing good money after bad money. A survey indicated 0.5% retail participation (i.e. PUBLIC investment) in equity market. Meaning, only Large corporates and financial institutions will benefit from this drive. It’ll not help in “financial inclusion” Absurd logic, that just because corporates will benefit, we shouldn’t begin disinvestment. Government already taken plenty of initiatives on financial inclusion front.

23. The funds received from disinvestment are used to finance fiscal deficit. Need amendments in FRBM act to ensure this doesn’t happen. After disinvestment employees of PSUs will loss their jobs If board of directors have many private sector experts- they may approve plans to reduce staff strength, to increase profitability. Overstaffing = One of the main reasons why PSUs don’t make optimum profit. At some point we’ve to swallow the bitter pill. Besides, such employees are given attractive VRS offers. Disinvestment would lead to private monopolies Dragging the logic too far. Unlikely to happen in today’s world. CCI is always watching and punishing the firms that try to create monopoly or oligopoly Allegations that PSEs are sold cheap to preferred parties e.g. BALCO That used to happen in 90s era, when Government sold shares to specific private companies at an arbitrary price. To complete the disinvestment targets, Government asks one PSUs to buy shares of another PSU. e.g. ordering LIC to buy ONGC’s shares . In such cases, disinvestment doesn’t decrease Government control over those companies. Need for a clear policy on disinvestment to stop this practice.

24. DISINVESTMENT OF PUBLIC SECTOR UNITS IN INDIA YEAR Total receipts (RS. crore)(Inflation adjusted in 2016 prices) 1991-1992 17,313 1992-1993 9,868 1993-1994 1994-1995 23,387 1995-1996 362 1996-1997 1,399 1997-1998 3,143 1998-1999 16,624 1999-2000 5,512 2000-2001 5,261 2001-2002 15,131 2002-2003 8,662 2003-2004 38,611 2004-2005 6614

25. SUGGESTION The government has to form a policy framework for the entire disinvestment process . The government should de-link the disinvestment process from the budgetary exercise . Government should stop setting up of the targets in every year annual budget and should have a long – term plan . Timing of disinvestment is crucial and the government should follow a specific method or process in order to reap more chunks .