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What is Disinvestment
In business, disinvestment means to sell off certain assets such as a manufacturing plant, a division or subsidiary, or product line. Some people use the term divestiture, or to divest when discussing disinvestment. For example, an electric generator manufacturer might sell off its consumer generator product lines and manufacturing facilities in order to raise money that can be used to expand its industrial generator product line. Another example is a consumer products company selling off a profitable division that no longer meets its long range goals. The proceeds from this disinvestment are then used to improve the companys financial position by reducing its debt.
Investment refers to conversion of money or cash into securities, debentures, bonds or any other claims on money. At the same time, disinvestment involves the conversion of money claims or securities into money or cash. Disinvestments, also known as divestments, are processes utilized by companies when there is a need or desire to initiate a reduction in capital investment. Essentially functioning as the polar opposite of an investment, the process of divestment involves selling off current investments in order to generate assets that can be used to better advantage in some other manner. Businesses sometimes use disinvestment as a means of changing the direction of the company in order to meet changing consumer needs and remain competitive. 3|Page
One of the easiest ways to understand divestment is to think in terms of a company that has successfully produced a product for many years. However, changing technology is shrinking the demand for the companys product. A new product is developed that is anticipated to recapture the interest of consumers. However, this will leave the company with several physical facilities and a great deal of equipment that is not required for the production of the new product. In order to generate revenue that will aid in the manufacturing of the new product, the company will undergo a period of disinvestment. The plants and other facilities that are no longer required for production are sold off, along with the now obsolete equipment. By generating income from the sale of these divested holdings, the company creates resources that constitute a capital investment in the new product. At times, a company may choose to sell off a subsidiary or business unit as part of a disinvestment strategy. Doing so allows the company to begin the migration from focusing on one market sector to a different sector that holds more promise. In some cases, disinvestment involves selling the business unit to another company. At other times, the business unit is spun off into a separate company altogether. Disinvestment can also occur when there is a decision to make changes in the regulation of an industry. Perhaps the most well known example of this type of disinvestment application would be the deregulation of the communications industry in the United States during the 1980s. As part of the process, the Bell System was completely divested and emerged as eight different entities: the new AT&T, and seven regional Bell companies that were known collectively as the Baby Bells. 4|Page
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2) The policy on disinvestment has evolved through statements of Finance Ministers in their budget speeches. In the interim budget 1991-92, it was announced that the Government would disinvest up to 20 per cent of its equity in selected public sector undertakings in favor of mutual funds and financial or investment institutions in the public sector to broad-base the shareholding, improve management, enhance availability of resources for these CPSUs and yield resources for the exchequer.
3) The Rangarajan Committee recommended in April 1993 that the percentage of equity to be disinvested should be generally under 49% in industries reserved for the public sector and over 74% in other industries. As per statement of Industrial Policy dated 24th July 1991 the following industries were proposed to be reserved for the public sector:- Arms and ammunition and allied items of defense equipment, Defense aircraft and warships.
Atomic Energy Coal and lignite Mineral oils Mining of iron ore, manganese ore, chrome ore, gypsum, sulphur, gold and diamond
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Minerals specified in the Schedule to the Atomic Energy (Control of Production and Use) Order, 1953
Railway transport.
4) In the budget speech of 1996-97, the proposal to establish a Disinvestment Commission was announced. It was also stated that the revenues generated from such disinvestment will be utilized for allocation to education and health sectors and for creating a fund to strengthen CPSUs. 5) Public Sector Disinvestment Commission:- The Public Sector Disinvestment Commission was established on 23rd August 1996, for a period of three years, as an independent, non-statutory, advisory body with Shri G.V. Ramakrishna as full time Chairman, four other Members (part time) and a full time Member Secretary. 72 CPSUs were referred to the Commission. Subsequently, 8 cases were withdrawn. The Commission submitted 12 reports for 58 CPSUs, recommending strategic sale in 28 cases, trade sale in 8 cases, closure of 4 units, equity sales in 6 cases and no change (disinvestment deferred) in 12 cases. The Commission did not take up examination of the cases of six CPSUs, which were registered with the Board for Industrial & Financial Reconstruction (BIFR). The tenure of the Chairman of the Commission was extended till 30th November 1999.
6) In the budget speech of 199899, it was announced that, in the generality of cases, the Governments shareholding in CPSUs would be brought down to 26%. In the case of CPSUs involving strategic considerations, the Government would continue to retain majority shareholding. The interest of workers would be protected in all cases.
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8) On 16th March 1999, the Government classified the CPSUs into strategic and non-strategic areas for the purpose of disinvestment. It was decided that the strategic CPSUs would be those functioning in areas of: Arms and ammunition and the allied items of defense equipment, defense aircrafts and warships Atomic energy (except in the areas related to the generation of nuclear power and applications of radiation and radio-isotopes to agriculture, medicine and non-strategic industries) Railway transport.
All other CPSUs were to be considered as being non-strategic. For the nonstrategic CPSUs, it was decided that reduction of the Governments shareholding to 26% would not be automatic and the manner and pace of doing so would be decided on a case-by-case basis on the following considerations: a) Whether the industrial sector required the presence of the public sector as a countervailing force to prevent concentration of power in private hands, and
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elements of the Governments policy were to restructure and revive potentially viable CPSUs; close down CPSUs which cannot be revived; bring down Governments shareholding in all non-strategic CPSUs to 26% or lower, if necessary; and fully protect the interests of workers. The receipts from disinvestment and privatization will be used for meeting expenditure on social sectors, restructuring of CPSUs and for retiring public debt.
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12) In the budget speech of 2001 2002, it was announced that CPSUs must be strengthened to compete and prosper in the new environment. A receipt of Rs. 12,000 crore was budgeted from disinvestment. Out of this, an amount of Rs. 7,000 crore was to be used for providing restructuring assistance to CPSUs, safety net to workers and reduction of debt burden and a sum of Rs. 5,000 crore for providing additional budgetary support for the Plan, primarily in the social and infrastructure sectors. This additional allocation for the Plan would be contingent upon realization of the anticipated receipts.
13) The Government decided in September 2002 that CPSUs and Central Government owned cooperative societies (where Governments ownership is 51% or more) should not be permitted to participate as bidders in the disinvestment of other CPSUs unless specifically approved by the Core Group of Secretaries on Disinvestment (CGD). In December 2002 on the basis of a proposal of the Department of Fertilizers, it was decided that Multi State Cooperative Societies under the Department of Fertilizers be allowed to participate in the disinvestment of fertilizer CPSUs including National Fertilizers Limited.
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not result in alienation of national assets, which, through the process of disinvestment, remain where they are. It would 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 would 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 would work out guidelines. The Ministry of Finance would 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
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15) The
then
Ministry
of
Disinvestment
issued
guidelines
regarding
Management-Employee Bids in Strategic Sale on 25th April 2003 to encourage and facilitate the participation of employee participation in strategic sales.
16) In the budget speech for 2003-04, the Government announced that details regarding the already announced Disinvestment Fund and Asset Management Company, to hold residual shares post disinvestment, would be finalized early in 2003-04.
Summary: Industries reserved for PSUs prior to July 1991 1. Arms and Ammunition and allied items of defence equipment. 2. Atomic energy. 3. Iron and steel. 4. Heavy castings and forgings of iron and steel. 5. Heavy plant and machinery required for iron and steel production, for mining, for machine tool manufacture and such other industries as may be specified by the Central Government. 6. Heavy electrical plant including large hydraulic and steam turbines. 13 | P a g e
This list by December 2002 includes only three areas reserved for PSUs: Atomic Energy 2) Minerals specified in schedule to atomic Energy (Control of Production and Use) Order, 1953. 3) Railway Transport. Because of the current revenue expenditure on items such as interest payments, wages and salaries of Government employees and subsidies, the Government is left with hardly any surplus for capital expenditure on social and physical infrastructure. While the Government would like to spend on basic education, primary health and family welfare, large amount of resources are blocked in several non-strategic sectors such as hotels, trading companies, consultancy companies, textile companies, chemical and pharmaceuticals companies, consumer goods companies etc. Not only this the continued existence of the PSEs is forcing the Government to commit further resources for the sustenance of many non-viable PSEs. The Government continues to expose the taxpayers' money to risk, which it can 15 | P a g e
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Objectives of Disinvestment
The new economic policy initiated in July 1991 clearly indicated that PSUs had shown a very negative rate of return on capital employed. Inefficient PSUs had become and were continuing to be a drag on the Governments resources turning to be more of liabilities to the Government than being assets. Many undertakings traditionally established as pillars of growth had become a burden on the economy. The national gross domestic product and gross national savings were also getting adversely affected by low returns from PSUs. About 10 to 15 % of the total gross domestic savings were getting reduced on account of low savings from PSUs. In relation to the 17 | P a g e
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Importance of Disinvestment
Presently, the Government has about Rs 2 lakh crore locked up in PSUs. Disinvestment of the Government stake is, thus, far too significant. The importance of disinvestment lies in utilization of funds for: Financing the increasing fiscal deficit Financing large-scale infrastructure development For investing in the economy to encourage spending For retiring Government debt- Almost 40-45% of the Centres revenue receipts go towards repaying public debt/interest For social programs like health and education Disinvestment also assumes significance due to the prevalence of an increasingly competitive environment, which makes it difficult for many PSUs to operate profitably. This leads to a rapid erosion of value of the public assets making it critical to disinvest early to realize a high value.
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Benefits of Disinvestment
Some overall benefits of Disinvestment, irrespective of the approach used are For the Government:as follows:
1. Raising valuable resources for the government, which could be used to bridge the fiscal deficit for one, but also for various developmental projects in key areas such as infrastructure? The Financial Times (20th May 2009) quotes a report brought out by the French securities firm CLSA to state: A reduction in shareholding to hypothetically 51% across all the state-owned entities could bring in USD 62 billion (Rs. 2.9 lakh crore approximately) at current market prices (thus valuing the government holdings in listed state-owned companies at Rs 8.8 lakh crore). Even a 10% stake sale in the ten large public state undertakings that are likely disinvestment candidates can bring in USD 17 billion (Rs. 80000 crore approximately)". Another such estimate by Delhi-based PRIME Database suggests that if the Government follows up on its promise of bringing down its equity stake in listed CPSEs to 86%, it can mobilise Rs. 7248 crore going by the current market valuations. 2. Apart from generating a one-time sale amount, a lot of these stake sales would also result in annual revenues for the government, as has been shown in the past. 3. The government can focus more on core activities such as infrastructure, defence, education, healthcare, and law and order. 4. A leaner government with reduction in the number of ministries and 22 | P a g e
For the Markets and Economy: 1. Brings about greater efficiencies for the economy and markets as a whole. For the Taxpayers:-
1. Letting go of these assets is best in the long term interest of the tax payers as the current yield on these investments in abysmally low. Even if the funds from the sale are not utilised for bridging fiscal deficit, a much better utilisation of these stuck funds would be into critical sectors such as healthcare, education and infrastructure. 2. Unlocking of shareholder (in this case the citizens of India) value For the Employees: 1. 2. Monetary gains through ESOPs and preferential issue of shares. Pay rises, as has been seen in past divestments.
3. Greater opportunities and avenues for career growth- further employment generation For the PSUs: 1. Greater autonomy leading to higher efficiencies
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Benefits specific to each approach used for Disinvestment Complete Privatisation: In most parts of the world, it has been proven that Privatisation brings the maximum returns to the tax payer, thus making it the best form of Disinvestment. Since complete control is given off by the government, the reforms are immediate, and the results start showing soon. Majority Sale: A majority stake sale to a strategic buyer has its positives in getting a superior valuation (though sometimes not as good as an outright sale) for the government purely due to market dynamics. With some of the PSUs being virtual monopolies, private players have a lot of interest in acquiring stakes in them. It was because of this reason that this became the chosen vehicle for Disinvestment in the early 2000's.
Minority Sale: Given the current political and social compulsions, complete privatisation may not be a solution in the Indian context. Even a majority stake sale would be met with opposition. Offloading a part of the governments equity by way of a minority stake sale 24 | P a g e
For the Employees: 1. Though there could be opposition from employees of some PSUs, this can be countered and also turned into a favorable situation by offering ESOPs/preferential issue of shares to them. This would provide tangible monetary benefits to them, and also make them an interested party in better performance of their companies. For the Markets and Economy: 1. These PSU IPOs present the best opportunity of widening the equity investing retail base by providing greater and safer investment opportunities. Curbs and measures, however, would need to be put in 26 | P a g e
Types of Disinvestment
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Methods of Disinvestment
The following are the three methods adopted by the Government of India for disinvesting the Public sector undertakings. There are three Methods of valuation approved by the Disinvestment Commission 1. Net Asset Method: This will indicate the net assets of the enterprise as shown in the books of accounts. It shows the historical value of the assets. It is the cost price less depreciation provided so far on assets. It does not reflect the true position of profitability of the firm as it overlooks the value of intangibles such as goodwill, brands, distribution network and customer relationships which are important to determine the intrinsic value of the enterprise. This model is more suitable in case of liquidation than in case of disinvestment. 2. Profit Earning Capacity Value Method: The profit earning capacity is generally based on the profits actually earned or anticipated. It values a company on the basis of the underlying assets. This method does not consider or project the future cash flow. 3. Discounted Cash Flow Method: In this method the future incremental cash flows are forecasted and discounted into present value by applying cost of capital rate. The method indicates the intrinsic value of the firm and this method is considered as superior than other methods as it projects future cash flows and the earning potential of the firm, takes into account intangibles such as brand equity, marketing & distribution network, the level of competition likely to be faced in future, risk factors to which enterprises are exposed as well as value of its 30 | P a g e
Questionnaire
1) Do you know about Disinvestment? 2) Do you think Disinvestment has fundamental effect on the company? 3) Do you think the disinvestment that has happened till now has achieved its objective? 4) Do you think that Engineering and power generation sector are two major pillars for growth of Indian Economy? 5) Do you think there are unidentified government companies or sectors that can have been identified at early stage to go for disinvestment?
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The heavy and light engineering segments in this sector can be further classified as shown in the table. As the sector demands a high level of capability and investment, it is dominated by large organized players.
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This industry comprises multinational companies, joint ventures, large domestic players, regional players in the organized sector and large number of small players in the unorganized sector. Some unorganized players also exist at lower levels where the technology required is very basic.
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BHEL
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b)
Engineering Industry:
Market overview The process of electrification commenced in India almost with the developed world, in the 1880s, with the establishment of a small hydroelectric power station in Darjeeling. However, commercial production and distribution started in 1889, in Calcutta (now Kolkata). In the year 1947, the country had a power generating capacity of 1,362 MW. Generation and distribution of electrical power was carried out primarily by private utility companies such as Calcutta Electric. Power was available only in a few urban centers; rural areas and villages did not have electricity. After 1947, all new power generation, transmission and distribution in the rural sector and the urban centers (which was not served by private utilities) came Power Sector Report 40 | P a g e
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NTPC
Introduction: Indias largest power company, NTPC was set up in 1975 to accelerate power development in India. NTPC is emerging as a diversified power major with presence in the entire value chain of the power generation business. Apart from power generation, which is the mainstay of the company, NTPC has already ventured into consultancy, power trading, ash utilization and coal mining. NTPC ranked 317th in the 2009, Forbes Global 2000 ranking of the Worlds biggest companies. 43 | P a g e
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NTPC IPO:In October 2004, NTPC launched its Initial Public Offering (IPO) consisting of 5.25% as fresh issue and 5.25% as offer for sale by Government of India. NTPC thus became a listed company in November 2004 with the government holding 89.5% of the equity share capital. The rest is held by Institutional Investors and the Public. The issue was a resounding success. NTPC is among the largest five companies in India in terms of market capitalisation
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. At NTPC, People before Plant Load Factor is the mantra that guides all HR related policies. NTPC has been awarded No.1, Best Workplace in India among large organizations and the best PSU for the year 2009, by the Great Places to Work Institute, India Chapter in collaboration with The Economic Times. The concept of Corporate Social Responsibility is deeply ingrained in NTPC's culture. Through its expansive CSR initiatives, NTPC strives to develop mutual trust with the communities that surround its power stations.
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Operations
In terms of operations, NTPC has always been considerably above the national average.
availability factor for coal based power stations has increased from 89.32% in 1998-9 increased from 76.6% in 1998-99 to 90.81% during the year 2009-10.
91.76% in 2009-10, which compares favorably with international standards. The PLF
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The table below shows that while the installed capacity has increased by 62.15% in the twelve years the generation has increased by 99.84%.
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MW MUs
17,786 1,09,505
28,840
2,18,840 99.84
The table below shows the detailed operational performance of coal based stations over years.
OPERATIONAL PERFORMANCE OF COAL BASED NTPC STATIONS Availabilit Generation(BU) PLF(%) y Factor(%) 2009-10 2008-09 2007-08 2006-07 2005-06 218.84 206.94 200.86 188.67 170.88 90.81 91.14 92.24 89.43 87.52 91.76 92.47 92.12 90.09 89.91 49 | P a g e
Market overview: Hydropower In FY09, demand for electricity exceeded supply by 11%, compared with 9.90% in FY08. Indias peak demand deficit during FY09 was 12% or 13,124MW; it is anticipated to be 152,746MW by 2012 with total energy requirements of 969 billion units. Hydropower Potential in India According to the Hydro Power Policy 2008, India has enormous potential for hydroelectric generation; about 84,000MW at 60% load factor, which translates into 148,700MW in terms of installed capacity, according to CEA. Moreover, 6,782MW of installed capacity has been assessed from small, mini, and micro hydroelectric schemes. The estimated hydropower potential and probable installed capacities of major Indian River systems are given below:
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As of May 31, 2009, the total installed capacity in the country was 149,392MW and hydropower (including pumped storage schemes in the country) accounts for 36,878MW.
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NHPC
Company NHPC was incorporated under the Companies Act in 1975 as a private limited company. It became a public limited company from, 1986, and its name changed to NHPC Limited. NHPC is a hydroelectric power generating company, which is dedicated to the planning, development and
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