DISINVESTMENT

GROUP MEMBERS
RAINA SHAH 41
ALKESH VERMA 59
PREETI HIWALE 15
ADITI ATHANIKAR 02
MANASI SOHANI 52
HARDIK PARMAR 30
SNEHAL DESHMUKH 11
PAYAL PABARI 29
PUBLIC SECTOR:DEFINITION


PUBLIC SECTOR IS THAT PART OF ECONOMIC AND

ADMINISTRATIVE LIFE THAT DEALS WITH THE
DELIVERY OF GOODS AND SERVICES BY AND FOR
THE GOVERNMENT, WHETHER NATIONAL,
REGIONAL OR LOCAL.


PUBLIC SECTOR:MEANING

AN ENTERPRISE WHERE THERE IS NO PRIVATE
OWNERSHIP,
FUNCTIONS ARE NOT MERELY CONFINED TO THE
MAXIMIZATION OF PROFITS OR THE PROMOTION
OF THE PRIVATE INTEREST OF THE ENTERPRISE,
FUNCTIONS ARE GOVERNED BY THE PUBLIC OR
SOCIAL INTEREST,
THE MANAGEMENT IS RESPONS.IBLE TO THE
GOVERNMENT
EVOLUTION OF PUBLIC SECTOR

BEFORE INDEPENDENCE:


√ RAILWAYS
√ THE POSTS AND TELEGRAPHS
√ ALL INDIA RADIO
√ SALT FACTORIES

EVOLUTION OF PUBLIC SECTOR

POST INDEPENDENCE:


ü INEQUALITIES IN INCOME
ü LOW LEVELS OF EMPLOYMENT
ü REGIONAL IMBALANCES IN ECONOMIC DEVELOPMENT
ü LACK OF TRAINED MANPOWER

OBJECTIVES OF PUBLIC SECTOR
TO HELP IN RAPID ECONOMIC GROWTH AND
INDUSTRIALIZATION OF THE COUNTRY AND PUT IT
ON INDUSTRIAL MAP OF THE WORLD.
TO PROMOTE BALANCED REGIONAL DEVELOPMENT
TO CREATE EMPLOYMENT OPPORTUNITIES
TO PROMOTE REDISTRIBUTION OF INCOME AND
WEALTH
TO ASSIST THE DEVELOPMENT OF SMALL-SCALE
AND ANCILLARY INDUSTRIES
TO PROMOTE IMPORT SUBSTITUTIONS, SAVE AND
EARN FOREIGN EXCHANGE FOR THE ECONOMY
PUBLIC SECTOR POLICY IN INDIA
1948 INDUSTRIAL POLICY RESOLUTION


√ MANUFACTURE OF ARMS AND AMMUNITION

√ PRODUCTION AND CONTROL OF ATOMIC ENERGY
√ OWNERSHIP AND MANEGEMENT OF RAILWAYS
√
√ IRON & STEEL
√ COAL
√ AIRCRAFT MANUFACTURING
√ SHIP BUILDING
√ MINERAL OILS
√ TELEPHONE,TELEGRAPH AND WIRELESS APPARATUS
√

PUBLIC SECTOR POLICY IN INDIA
1956 INDUSTRIAL POLICY RESOLUTION


ü SCHEDULE A:
 ARMS
 ATOMIC ENERGY
 IRON & STEEL
 COAL
 MINERAL OILS
 AIR AND RAILWAY TRANSPORT
 GENERATION AND DISTRIBUTION OF ELECTRICITY



PUBLIC SECTOR POLICY IN INDIA
1956 INDUSTRIAL POLICY RESOLUTION


ü SCHEDULE B:
 MINING INDUSTRIES
 CHEMICAL INDUSTRIES
 FERTILIZERS
 ROAD TRANSPORT
 SEA TRANSPORT
 SYNTHETIC RUBBER


ü SCHEDULE C:
 REMAINING INDUSTRIES



PUBLIC SECTOR POLICY IN INDIA
1991 INDUSTRIAL POLICY RESOLUTION


√ ARMS AND AMMUNITION AND THE ALLIED ITEMS OF

DEFENCE EQUIPMENTS,DEFENCE AIRCRAFTS AND
WARSHIPS
√ ATOMIC ENERGY
√ COAL NAD IGNITE
√ MINERAL OILS
√ RAILWAY TRANSPORT

REASONS OF POOR PERFORMANCE
OF PUBLIC SECTOR ENTERPRISES
POLITICAL INTERFERENCE
HIGH COST OF DELAY
LOW RATE OF ROI
HEADLESS PLANTS WITHOUT CEOs FOR MONTHS
INEFFECTIVE MANAGEMENT
HUGE INVENTORIES



DISINVESTMENT:DEFINITION


TRANSFER OF OWNERSHIP AND/OR MANEGEMENT

OF AN ENTERPRISE FROM THE PUBLIC SECTOR TO
PRIVATE HANDS.

DISINVESTMENT:MEANING


WITHDRAWLS OF THE STATE FROM INDUSTRY OR

SECTOR PARTIALLY OR FULLY.

IT ALSO STANDS FOR OPENING UP OF AN INDUSTRY
THAT HAS BEEN RESERVED FOR THE PUBLIC
SECTOR TO THE PRIVATE SECTOR.

BACKGROUND LEADING TO
DISINVESTMENT

FISCAL DEFICIT OF CENTRAL GOVERNMENT:


ü FISCAL POLICY IS THAT PART OF THE GOVERNMENT

POLICY THAT IS RELATED WITH RAISING REVENUE
THROUGH TAXATION AND OTHER MEANS AND
DECIDING ON THE LEVEL AND PATTERN OF
EXPENDITURE.
ü
ü IT OPERATES THROUGH THE BUDGET.
GROSS FISCAL DEFICIT
YEAR CENTRE STATES COMBINE

1980-81 5.75 2.57 D
7.5
 1981-82 5.11 2.40 6.3
1982-83 5.63 2.64 5.9
1983-84 5.93 2.89 7.3
1984-85 7.05 3.32 9.0
1985-86 7.80 2.68 8.0
1986-87 8.40 2.96 9.9
1987-88 7.61 3.16 9.2
1988-89 7.30 2.76 8.5
1989-90 7.31 3.16 8.9
1990-91 7.85 3.30 9.4
BACKGROUND LEADING TO
LOW PRODUCTIVITY OF INVESTMENT IN PSEs:
DISINVESTMENT

1950-51 1960-61 1970-71 1980-81 1989-90

INVESMENT
(CURRENT
10.2 15.7 16.6 22.7 24.1
PRICE, %OF GDP)
INVESMENT
(CONSTANT 1980-
14.7 18.1 18.7 22.7 22.8
81, PRICE, %OF
GDP)

DOMESTIC
SAVINGS
10.4 12.7 15.7 22.2 22.7
(CURRENT
PRICES, % OF
GDP)
NEED FOR DISINVESTMENT

GLOBAL PERCEPTION

INABILITY OF GOVERNMENT


TECHNOLOGY AND WORLD TRADE

ORGANIZATION(WTO)

OBJECTIVES OF DISINVESTMENT

RELEASE OF LARGE AMOUNT OF PUBLIC

RESOURCES

REDUCE PUBLIC DEBT

RELEASE TANGIBLE AND INTANGIBLE RESOURCES




BENEFITS OF DISINVESTMENT

EXPOSE THE PRIVATIZED COMPANIES TO MARKET

DISCIPLINE


EFFECT ON CAPITAL MARKET


RELIEFE TO CONSUMERS

INCREASE ECONOMIC ACTIVITY




ELEMENTS OF PRIVATIZATION
STRATEGY
BUILDING UP A BROAD-BASED CONSENSUS ON
PRIVATIZATION AND ON ITS MAIN OBJECTIVES

DEFINING GUIDELINES AND PROCEDURES FOR
SELECTING SOE’S FOR PRIVATIZATION

SELECTING APPROPIATE PRIVATIZATION
TECHNIQUES, KEEPING IN VIEW THE OBJECTIVES
OF PRIVATIZATION PROCESS

CHARACTERISTICS OF THE ENTERPRISE TO BE
PRIVATIZED

INSTITUTING SAFEGUARDS TO PREVENT
EXPLOITATION AFTER PRIVATIZATION
TYPES OF PRIVATIZATION

GREENFIELD PRIVATIZATION


COLD PRIVATIZATION
CRITERIA FOR SELECTION OF SOE’S

FOR DISINVESTMENT
COMPARATIVE ADVANTAGE CRITERIA



ECONOMIC CRITERIA

DETERMINANTS OF PRIVATIZATION

TECHNIQUES
CURRENT ORGANIZATIONAL FORM OF STATE
OWNED ENTERPRISE


FINANCIAL CONDITION AND RECORD OF

PERFORMANCE OF THE SOE

SECTOR OF ACTIVITY OF STATE OWNED
ENTERPRISE

STRENGTHS OF DOMESTIC FINANCIAL MARKET


METHODS
TWO TYPES OF PRIVATIZATION


ü DIVESTITURE OPTION


ü NON-DIVESTITURE OPTION
ü
NON-DIVESTITURE OPTIONS


RESTRUCTURING

LEASE AND MANAGEMENT CONTRACTS

CONTRACTING OUT

JOINT VENTURES

DIVESTITURE OPTIONS

PUBLIC OFFERING OF SHARES (FULL OR PARTIAL)


DIRECT PRIVATE SALE (FULL OR PARTIAL)

NEW PRIVATE INVESTMENT IN STATE OWNED
ENTERPRISE

LIQUIDATION-SALE OF SOE ASSETS

FRAGMENTATION-REORGANIZATION (BREAK UP)



EVOLUTION OF DISINVESTMENT
FIRST PHASE : 1991-1992 TO 1995 – 1996
 (WHERE PARTIAL DISINVESTMENT WAS UNDERTAKEN IN
A PIECEMEAL MANNER)


SECOND PHASE: 1996-1997 TO 1997- 1998

 ( DISINVESTMENT COMMISSION WAS FORMED)


THIRD PHASE: FROM 1998- 1999 ONWARDS

 (MINISTRY OF DISINVESTMENT (MOD) WAS FORMED)




 YEAR WISE


DISINVESTMENT
 (1991-2009)
 DISINVESTMENT IN 1991 –
1992 :
 IN BUDGET SPEECH 1991-1992 :


 GOVT. DECIDED TO DIVEST UP TO 20% OF ITS EQUITY.


ELIGIBLE INVESTORS – MUTUAL FUNDS , INVESTMENT
INSTITUTIONS IN PUBLIC SECTORS, WORKERS IN THESE
FIRMS.

OBJECTIVES – RAISING RESOURCES, ENCOURAGING
WIDER PUBLIC PARTICIPATION & PROMOTING GREATER
ACCOUNTIBILITY.




OUT OF 244 PUBLIC ENTERPRISES ( AS ON 1 APRIL 1990)
41 PSEs WERE SELECTED FOR DISINVESTMENT.

TWO TRANCHES :
1)DECEMBER 1991 ( 31 PSEs DISINVESTED)
2)FEBRUARY 1992 (16 PSEs DISINVESTED)


 METHODOLOGY USED : TO SELL MINORITY SHARES BY

AUCTION METHOD IN BUNDLES OF ‘VERY GOOD’ ,
‘GOOD’, AND ‘AVERAGE’ COMPANIES.


 TARGET RECEIPT- RS. 2500 CRORE.

 ACTUAL RECEIPT – RS. 3038 CRORE.

PSEs DISINVESTED IN 1991-1992
BHARAT EARTH MOVERS LTD (BEML)
……………………….20%
BHARAT ELECTRONICS LTD.(BEL)
……………………………..20%
BHARAT HEAVY ELECTRICALS LTD.(BHEL)
…………………..20%
BHARAT PETROLEUM CORPORATION LTD.(BPCL)
……….20%
HINDUSTAN PETROLEUM CORPORATION LTD.(HPCL)…
20%
INDIAN PETROCHEMICAL CORPN. LTD.(IPCL)
……………..20%
MAHANAGAR TELEPHONE NAGAR LTD.(MTNL)
………….20%
SHIPPING CORPORATION OF INDIA LTD.(SCI)………………
DISINVESTMENT IN 1992-1993
TARGET RECEIPT - Rs. 3500 CRORE
ACTUAL RECEIPT – Rs. 1913 CRORE


DIVESTITURE AMOUNT WAS REALISED IN THREE

TRANCHES
1)FIRST TANCHE - OCTOBER 1992
2)SECOND TRANCHE - DECEMBER 1992
3)THIRD TRANCHE - MARCH 1993


MINIMUN RESERVE PRICE OF SHARES OF PSEs WAS FIXED

BY THE 3 MERCHANT BANKS -
a)INDUSTRIAL CREDIT & INVESTMENT CO. OF INDIA
b)INDUSTRIAL DEVELPOMENT BANK OF INDIA
c)STATE BANK OF CAPITAL MARKET
d)
1993
OCTOBER 1992 :
HINDUSTAN ZINC LTD…………………………………………………
2.58%
NATIONAL ALUMINIUM CORP. LTD…………………………….5%

RCF

LTD………………………………………………………………………
1.57%


DECEMBER 1992 :
STEEL AUTHORITY OF INDIA LTD (SAIL)
….........................5%
BCPL………………………………………………………………………

……..5%


MARCH 1993:
 DISINVESTMENT IN 1993-
1994
ALTOUGH THE TARGET WAS SET FOR Rs. 3500
CRORE , DUE TO UNFAVOURABLE STOCK MARKET
CONDITIONS THROUGHOUT 1993-1994 GOVT.
COULD NOT GO IN FOR ANY DISINVESTMENT.
 1995
TARGET RECEIPT- Rs .4000 CRORE
ACTUAL RECEIPT – Rs. 4843 CRORE

THREE TRANCHES:
1)FIRST TRANCHE - MARCH 1994
2)SECOND TRANCHE - OCTOBER 1994
3)THIRD TRANCHE - JANUARY 1995


IMPORTANT CHANGES:
1)BIDDING AMOUNT LOWERED
2)FIIs REGISTERED WITH SEBI WERE ALSO PERMITTED
TO PARTICIPATE IN AUCTIONS OF PSEs SHARES.
1995
BHARAT HEAVY ELECTRICALS LTD……..11.74%
CONTAINER CORP. OF INDIA………………20%
OIL AND NATURAL GAS CO. LTD(ONGC)…2%
ENGINEERS INDIA LTD…………………………..5.99%
GAS AUTHORITY OF INDIA LTD………………3.37%
DISINVESTMENT
(1996-97 TO 1997-98)
HIGHLIGHTS OF POLICY FORMULATED BY
UNITED FRONT GOVT. IN 1996:

1)TO CAREFULLY EXAMINE PUBLIC SECTOR NON -
CORE STRATEGIC AREAS.
2)
2)TO SET UP DISINVESTMENT COMMISSION .

3) TO IMPLEMENT DECISIONS TO DISINVEST IN

TRANSPARENT MANNER.


PSEs CLASSIFIED INTO : STRATEGIC AND NON-

STRATEGIC

DISINVESTMENT IN 1996-
1997
IN BUDGET SPEECH:
1)TARGET RECEIPT – Rs. 5000 CRORE
2)ACTUAL RECEIPTS – Rs. 380 CRORE
3)
4)CONSIDERED COMPANIES FROM
COMMUNICATION AND PETROLEUM SECTOR.
 (VIDESH SANCHAR NIGAM LTD.( VSNL) AND
INDIAN OIL CORP. (IOL) THROUGH GDR ISSUE.


4)
 ONLY VSNL WAS DISINVESTED.
1998
IN BUDGET SPEECH:
1)TARGET RECEIPT – Rs. 4800 CRORE
2)ACTUAL RECEIPT – Rs. 902 CRORE
3)
4)COMPANIES TO BE DISINVESTED : MTNL, GAIL,
CONCOR, IOC THROUGH GDR ISSUE .
5)
6)ONLY MTNL DISINVESTED IN NOVEMBER 1997.
THIRD PHASE OF DISINVESTMENT
(1998-1999 ONWARDS)
IN BUDGET SPEECH:
BJP GOVT. DECIDED TO BRING DOWN GOVT.
SHAREHOLDING IN PSE TO 26%.

GOVT. WOULD RETAIN MAJORITY HOLDINGS IN
STRATEGIC PSEs.(ARMS AND
AMMUNITION,DEFENCE EQUIPMENTS, ATOMIC
ENERGY AND RAILWAY TRANSPORT)

MINISTRY OF DISINVESTMENT WAS FORMED ON 10
DEC. 1999

TERM PRIVATISATION WAS USED FOR THE FIRST
TIME.
DISINVESTMENT IN 1998-1999
TARGET RECEIPT – Rs. 5000 CRORE
ACTUAL RECEIPT – Rs. 5371 CRORE


PSEs DISINVESTED :
1)CONCOR
2)GAIL
3)IOC
4)VSNL
5)ONGC
DISINVESTMENT IN 1999-
2000
TARGET RECEIPT – RS. 10,000 CRORE
ACTUAL RECEIPT – Rs. 1818 CRORE
PSEs DISINVESTED :
1)MODERN FOODS INDIA LTD.(MFIL) - 74% OF
DIVESTITURE IN FAVOUR OF HINDUSTAN LEVER LT.
(HLL)
2)GAIL
3)IOC
4)ONGC
5)VSNL
DISINVESTMENT IN 2000-2001
BUDGET SPEECH:
TARGET RECEIPT – Rs. 10,000 CRORE
ACTUAL RECEIPT – Rs. 1868 CRORE
POLICY ADOPTED:
1)EMPHASIS ON STRATEGIC SALES
2)TO RESTRUCTURE AND REVIVE VIABLE PSEs
3)TO CLOSE DOWN PSEs WHICH CANOT BE
REVIVED
4)TO BRING DOWN GOVT. EQUITY TO 26% OR
LOWER IF REQUIRED.
5)TO PROTECT INTERESTS OF WORKERS
2001
BALCO ( STRATEGIC SALE OF 51% SHARES)

BPRL AND CHENNAI REFINERIES( TAKEOVER BY IOC)

KOCHI REFINERY ( TAKEOVER BY BPCL)
DISINVESTMENT IN 2001-
2002
TARGET RECEIPT – Rs. 12,000 CRORE
ACTUAL RECEIPT – Rs. 5,632 CRORE

PSEs DISINVESTED :
1)COMPUTER MAINTENANCE CORP.(CMC ) -
(STRATEGIC SALE OF 51%)
2)HTL ( STRATEGIC SALE OF 74%)
3)PRADEEP PHOSPHATE LTD.(PPL) ( STRATEGIS SALE
OF 74%)
DISINVESTMENT IN 2002-
2003
TARGET RECEIPT – Rs. 12,OOO CRORE
ACTUAL RECEIPT – Rs. 3348 CRORE

PSEs DISINVESTED :
1)MODERN FOODS INDUSTRY LTD.(MFIL)….26%
2)ITDC…….100%
3)HOTEL CORP. OF INDIA(TEN HOTELS)……..100%



DISINVESTMENT IN 2003-
2004
TARGET RECEIPT – Rs. 13,200 CRORE
ACTUAL RECEIPT – Rs. 15,547 CRORE

PSEs DISINVESTED:
1)MARUTI( IPO) – 28%
2)IPCL- 29%
3)GAIL – 10%
4)ONGC – 10%
DISINVESTMENT IN 2004-
2005
TARGET RECEIPT – Rs. 4000 CRORE
ACTUAL RECEIPT – Rs. 2,765 CRORE

PSEs DISINVESTED :
1)NTPC ( IPO) – 5.25%
2)IPCL ( TO EMPLOYEES) – 5%
3)ONGC - 0.01%
4)
DISINVESTMENT IN 2005-
2006
TARGET RECEIPT – NONE
ACTUAL RECEIPT – Rs. 1567 CRORE.

PSE DISINVESTED:
1)MARUTI UDYOG LTD. (MUL)


 DISINVESTMENT IN 2006- 2007

 THERE WAS NO DISINVESTMENT IN 2006-07
2008
TARGET RECEIPT – NOT FIXED
ACTUAL RECEIPT – Rs. 2367 CRORE
PSE DISINVESTED:
1)MUL ( SHARES TO PUBLIC SECTOR FINANCIAL
INSTITUTIONS , PSU BANKS, MUTUAL FUNDS)
2)
 DISINVESTMENT IN 2008-2009:
1)ACTUAL RECEIPT – Rs. 5,000 CRORE
2)PSEs DISINVESTED – OIL INDIA & NATIONAL HYDRO
POWER CORP.( NHPC)

DEPARTMENTS RELATING TO
DISINVESTMENT
DEPARTMENT OF DISINVESTMENT
DEPARTMENTS CHAIRMAN FUNCTIONS
CABINET PRIME MINISTER CONSIDERS CGD
COMMITTEE ON RECOMMENDATIONS
DISINVESTMENT DECIDES PRICING

(CCD) AND SP

CORE GROUP OF CABINET SECRETARY SUPERVISION OF

SECRETARIES ON STRATEGIC SALES
DISINVESTMENT MONITORS

(CGD) PROGRESS-CABINET
DECISIONS

INTER MINISTERIAL SECRETARY –DEPT OF DAY-TO DAY

GROUP (IMG) DISINVESTMENT IMPLEMENTATION
KEY TERMS
 AUCTION-PRICING OPTIMIZED, LOW TRANSACTION COST,
INITIAL ROUNDS


 UPSET PRICE –LOWEST PRICE OF SALE (AUCTION)



 STRATEGIC SALE-SUBSTANTIAL BLOCK OF SHARES

 (51%),TECHNOLOGY,COMPETITVE


 MARKET SALE –SALE TO INDIVIDUALS ,FI’S, ,BUSINESSES

THROUGH IPO'S, OFFER FOR SALE


 EXPRESSION OF INTEREST(EOI)-CONTAINS BACKGROUND

INFORMATION ABOUT MANAGEMENT, STRUCTURE,
BUSINESS ACTIVITIES, SUBMITTED ALONG WITH STATEMENT
OF LEGAL CAPACITY AND LITIGATION IMPACT STATEMENT
KEY TERMS CONT…
SHAREHOLDER’S AGREEMENT (SHA) -RIGHTS AND
OBLIGATIONS OF BOTH PARTIES, REFLECTS
PROTECTION OF EMPLOYEE RIGHTS, BUSINESS PLANS
AND ENTERED INTO AMONG PRESIDENT (JOINT
SECRETARY) COMPANY AND STRATEGIC PARTNER


SHARE PURCHASE AGREEMENT (SPA)-PURCHASE PRICE,

MODE OF PAYMENT, ACTIONS AT CLOSING TIME


TRANSACTION DOCUMENT


ADVISOR- SUCCESS FEE (PERCENTAGE), DROP DEAD FEE

(LUMP SUM)

PROCESS OF DISINVESTMENT
Core group List of Recommendations
of enterprise Disinvestment Commission Ministry of Finance
Secre tarie
Fina s
l Analysis
reco
mmen Inputs from
dati Admin Ministry
on & DOD

Cabinet
Committee of Advertisement for EOI
Disinvestmen Advertisement for Advisors Selection of advisors
t

Receipt of final bills Finalisation of SHA, SPA Due Diligence by bidders

Short listing of bidders

Bid evaluation CCD approval (T&Cs) of legal documents & inflow of funds
Execution
 MODERN FOODS
INDUSTRIES LIMITED
A CASE STUDY
A B R IE F H IS T O R Y

MODERN FOODS INDIA LIMITED WAS SET UP

UNDER THE COLOMBO ASSISTANCE PLAN.


IT WAS WHOLLY A CENTRAL GOVERNMENT OWNED

PSU.


PRIOR TO DISINVESTMENT THE AUTHORISED

CAPITAL OF THE COMPANY WAS RS. 15.00 CRORE
AND THE PAID UP CAPITAL WAS RS. 13.01CRORE.

D IV E R S IF IC A T IO N P R O G R A M M E

 TRANSFER OF THE FRUIT JUICE BOTTLING PLANT AT DELHI.



 TRANSFER OF SOLVENT EXTRACTION PLANT AT UJJAIN.



 TRANSFER OF MAIZE MILL AT FARIDABAD.- LAUNCHING OF '77



 COLA, '77 ORANGE AND LIME LEMON TINGLES.



 PROPOSAL TO SET UP PINEAPPLE JUICE CONCENTRATE PLANT AT

SILCHAR.


 FRUIT AND VEGETABLE PULPING PLANT AT BHAGALPUR.



HOWEVER, HUGE LOSSES WERE INCURRED IN THESE



ACTIVITIES.
R E C O N S T R U C T IO N O F IT S
O P E R A T IO N S
SHUTTING DOWN OF THE SOLVENT PLANT AT
UJJAIN.
ABANDONING OF THE PINEAPPLE JUICE
CONCENTRATE PLANT AT SILCHAR
RECONSTRUCTION OF THE FRUIT JUICE BOTTLING
PLANT AT DELHI TO MAKE "RASIKA.“
CONVERSION OF THE MAIZE MILL INTO A ROLLER
MILL.
CONVERSION OF THE PLANT AT BHAGALPUR TO
MANUFACTURE ENERGY FOODS.
THE COMPANY WAS REFERRED TO DISINVESTMENT
COMMISSION IN 1996. IN FEBRUARY 1997, THE
COMMISSION RECOMMENDED 100% SALE OF THE
COMPANY, TREATING IT IN THE NON-CORE
SECTOR.


MFIL'S WEAKNESSES:
ü UNDER- UTILIZATION OF THE PRODUCTION FACILITIES,
ü LARGE WORK FORCE
ü LOW PRODUCTIVITY
ü LIMITED FLEXIBILITY IN DECISION-MAKING.
 IN SEPTEMBER 1997, THE GOVERNMENT
APPROVED 50% DISINVESTMENT TO A
STRATEGIC PARTNER THROUGH COMPETITIVE
GLOBAL BIDDING...
IN OCTOBER 1998, ANZ INVESTMENT BANK WAS
APPOINTED AS THE GLOBAL ADVISOR FOR
ASSISTING IN DISINVESTMENT.
IN JANUARY 1999, THE GOVERNMENT DECIDED TO
RAISE THE DISINVESTMENT LEVEL TO 74%, AND
AN ADVERTISEMENT, INVITING EXPRESSION OF
INTEREST FROM THE PROSPECTIVE STRATEGIC
PARTNERS, WAS ISSUED IN APRIL 1999.
10 PARTIES SUBMITTED EXPRESSIONS OF
INTEREST.
OUT OF THESE, ONLY 4 CONDUCTED THE DUE
DILIGENCE OF THE COMPANY, WHICH INCLUDED
ü VISITS TO DATA ROOM,
ü INTERACTION WITH THE MANAGEMENT OF THE MFIL
ü SITE VISITS.
PROCESS DISINVESTMENT
Core group List of Recommendations
of enterprise Disinvestment Commission Ministry of Finance
Secre tarie
Fina s
l Analysis
reco
mmen Inputs from
dati Admin Ministry
on & DOD

Cabinet
Committee of Advertisement for EOI
Disinvestmen Advertisement for Advisors Selection of advisors
t

Receipt of final bills Finalisation of SHA, SPA Due Diligence by bidders

Short listing of bidders

Bid evaluation CCD approval (T&Cs) of legal documents & inflow of funds
Execution
PROCESS
1965
OF DISINVESTMENT OF MFIL
Core group List of Recommendations
of enterprise Disinvestment Commission Ministry of Finance
Secre tarie 1996
Fina s
l Analysis
reco
mmen Inputs from
dati Admin Ministry
on & DOD
74% ANZ
Cabinet
Committee of Advertisement for EOI
Disinvestmen Advertisement for Advisors Selection of advisors
t
10 bidders

Receipt of final bills Finalisation of SHA, SPA Due Diligence by bidders

Short listing of bidders
2 4 bidders
Only 1-HLL

Bid evaluation CCD approval (T&Cs) of legal documents & inflow of funds
Execution
REASON BEHIND PRIVATIZATION

THE REASONS FOR PRIVATIZATION WERE AS

FOLLOWS:


ü OPERATING IN THE EXISTING SCENARIO WAS COSTLY.

ü A NET WORTH EROSION BY 20% IN A YEAR.
ü AN INVESTMENT OF RS. 80 CRORE IN MACHINERY
WOULD BE REQUIRED TO TURN THE COMPANY
AROUND.
ü MANAGEMENT SKILLS WOULD HAVE TO BE CHANGED
ü TAXPAYER MONEY WOULD BE REMOVED FROM A VERY
VOLATILE BUSINESS.
ü TAXPAYERS WOULD GAIN RS. 109 CRORE.
ü MFIL WOULD NOT BECOME A BIFR COMPANY.

P R O T E C T IO N FROM ASSET
STRIPPING

WOULD KEEP THE VETO POWER WITH ITSELF.



FOR ANY LARGE-SCALE SALE OF LAND OR OTHER

ASSETS THE GOVERNMENT 'S APPROVAL WOULD
STILL BE REQUIRED.

IF AND WHEN THE GOVERNMENT DECIDED TO SELL
ITS 26% AN AGREEMENT WAS TO BE WORKED
OUT WHEREBY NO REAL ESTATE DEAL COULD
TAKE PLACE FOR A SPECIFIED PERIOD OF TIME.

SH A R E P U R C H A SE A G R EEM EN T
WITHIN 90 DAYS ACCOUNTS HAD TO BE AUDITED
FOR THE YR 1.04.99-31.01.00
ACCORDING TO THE AGREEMENT
IF THE NET WORKING CAPITAL ON THE CLOSING
DATE BE GREATER THAN THE NET WORKING
CAPITAL IN THE YEAR 1999, THEN HLL WOULD
HAVE TO PAY THE GOVERNMENT OF INDIA THE
DIFFERENCE MULTIPLIED BY 0.74.
IF THE WORKING CAPITAL IN THE YEAR 2000 BE
LESSER THAN THAT IN THE YEAR 1999, THEN THE
GOVERNMENT OF INDIA WOULD PAY HLL THE
DIFFERENCE MULTIPLIED BY 0.74.
P R O V IS IO N S F O R T H E W O R K E R S
AGREEMENT BETWEEN THE GOVERNMENT, HLL,
AND MFIL.
WORKERS WOULD ENJOY PROTECTION UNDER THE
INDUSTRIAL DISPUTES ACT, 1947.
RETRENCHMENT WOULD BE ACCORDING TO THE
PROVISIONS OF THE INDUSTRIAL DISPUTES ACT
(IDA) 1947
FOR THIS THE FOLLOWING WOULD BE MANDATORY:
ü PRIOR NOTICE
ü GOVERNMENT APPROVAL
ü ADEQUATE COMPENSATION

H L L 'S P L A N F O R M F IL
USING HLL'S STRENGTHS IN WHEAT PROCUREMENT ETC.
TO AID MFIL


HLL HAS ALSO INVESTED RS. 20 CRORE IN THE REVIVAL

PACKAGE.


USING SUPERIOR MARKETING TECHNIQUES



IMPROVEMENTS IN QUALITY AND DISTRIBUTION.



IMPROVEMENTS IN COMMUNICATION AND TREASURY


IN FEBRUARY 2001, HLL WAS REFERRED TO BOARD
OF INDUSTRIAL AND FINANCIAL
RECONSTRUCTION (BIFR)

ü A COMPANY MAY BE REFERRED TO THE BIFR UNDER
THE PROVISIONS OF THE SICK INDUSTRIAL
COMPANIES ACT (SICA).
ü CLAUSE 22 OF THIS ACT SPECIFIES THE CONDITIONS
UNDER WHICH LEGAL PROCEEDINGS, CONTRACTS
ETC. MAY BE SUSPENDED.


THE BIFR HAS THE AUTHORITY TO APPROVE THE

SCHEME OF REVIVAL IN CASE IT IS PUT FORTH.

IN CASE OF A LOSS OF 50% OF NET WORTH FOR 4
CONSECUTIVE YRS A COMPANY MAY BE
REFERRED TO THE BIFR.


OFFICIALS OF MFIL ALLEGED THAT HLL WANTED

MFIL TO BE REFERRED TO BIFR SO AS TO GET
SOME RELIEF FROM BANKS AND FINANCIAL
INSTITUTIONS.

THEY FURTHER CONTENDED THAT IF HLL HAD
USED THE RS 20 CRORES IT INFUSED INTO MFIL
AS PREFERENCE SHARE CAPITAL INSTEAD OF
LOANS, MFIL WOULD NOT HAVE BECOME SICK.

P O S T B IF R …
IN 2001, HLL SET A TWO-YEAR TIMEFRAME TO
TURN AROUND MFIL.
 THE TURNAROUND INCLUDED PROVIDING
ü FINANCIAL ASSISTANCE TO DISTRIBUTION CHANNELS
ü INTRODUCING BETTER-QUALITY BREAD INGREDIENTS
TO IMPROVE QUALITY.
HLL HAD ALREADY PUMPED IN AROUND RS 200
MILLION IN MFIL BY WAY OF SECURED LOANS AND
CORPORATE GUARANTEES.
HLL OFFICIALS CLAIMED THAT MFIL'S SALES HAD
MORE THAN DOUBLED SINCE IT WAS ACQUIRED.
HLL OFFICIALS EXPECTED TO ATTAIN BREAKEVEN
IN 2 YRS
THE INCREASE IN SALES WAS MAINLY DUE TO AN
INCREASE IN THE NUMBER OF OUTLETS THAT SOLD
MFIL BREAD.


IN MUMBAI, THE NUMBER OF OUTLETS INCREASED TO

ABOUT 250 FROM 100, AND CROSSED THE 400-MARK
IN NEW DELHI.


IN 2004 HLL OFFERED 1600 EMPLOYES OF MFIL A VRS

SCHEME WITH 65 DAYS OF SALARY FOR EVERY 1 YR
OF SERVICE.

O W N E R S H IP
PUBLIC OWNERSHIP
ü ECONOMIC GROWTH
ü INDUSTRIALIZATION
ü INFRASTRUCTURE


PRIVATE OWNERSHIP
ü PROFIT
ü MULTIPLY INVESTMENTS
P R IV A T E O W N E R S H IP
AGENCY PROBLEM


MORE EFFECTIVE INCENTIVE STRUCTURE

üSHAREHOLDERS MONITORING
üTAKEOVER BID
üTHREAT OF BANKRUPTCY


EFFECTIVE INFORMATION GATHERING


P U B L IC O W N E R S H IP
PUBLIC INTEREST THEORY – PUBLIC &
ECONOMIC WELFARE
GOVERNMENT MONITORS THE PERFORMANCE
SHAREHOLDERS - NO MAXIMIZED PROFITS
NO BANKRUPTCY CONSTRAINT
ADVANTAGE OVER PRIVATE OWNERSHIP
ü ADDITIONAL POLICY TOOL TO CORRECT THE
DEVIATION
ü NO DISPERSED SHAREHOLDER’S MONITORING
PROBLEMS
ü INCENTIVE STRUCTURE
ü GOODS AND UTILITY SERVICES AT STANDARD LOW
PRICES
MORE AGENCY PROBLEMS AND POLITICAL AFFAIRS
C O M P E T IT IO N – P U B L IC & P R IV A T E
E N T.

NATURAL MONOPOLY OF PUBLIC SERVICES

COMPETITTIVE – TECHNOLOGICAL ADVANCEMENT

IMPROVES PUBLIC ENT. WORKING EFFICIENCY

MORE INNOVATIVE STRATIGIES


ENTRY THREATS
 4 7 D IS IN V E S T E D P U B L IC
E N T E R P R IS E S
AY - ANDREW YULE & CO. LTD.
BRPL - BONGAIGAON REFINERY & PETROCHEMICALS LTD.
BEML - BHARAT EARTH MOVERS LTD.
BEL - BHARAT ELECTRONICS LTD.
BHEL - BHARAT HEAVY ELECTRICALS LTD.
BPCL - BHARAT PETROLEUM CORPORATION LTD.
BALCO - BHARAT ALUMINIUM CO. LTD.
CRL - COCHIN REFINERIES LTD.
CONCOR - CONTAINER CORPORATION OF INDIA LTD.
CMC LTD,
DCI - DREDGING CORPORAION OF INDIA LTD.
EIL - ENGINEERS INDIA LTD.
FACT - FERTILIZERS & CHEMICALS LTD.
GAIL - GAS AUTHORIT OF INDIA
HIND CABLE
HIND COPPER
HMT - HINDUSTAN MACHINE TOOLS LTD.
HPF - HINDUSTAN PHOTO FILMS MFG. CORPORATION LTD.
HOCL - HINDUSTAN ORGANIC CHEMICALS LTD.
IOC - INDIAN OIL CORPORATION LTD
ITI LTD.
IBP LTD.
IPCL - INDIA POWER CORPORATION LTD.
ITDC - INDIAN TOURISM DEVLOPMENT CORPORATION LTD.
JESSOP & LTD.
KIOCL - KUDREMUKH IRON ORE COMPANY LTD.
MMTC LTD.
MUL LTD.
MTNL - MAHANAGAR TELEPHONE LTD
MFIL - MODERN FOOD INDUSTRIES LTD.
MRL - MADRAS REFINERIES LTD.
NFL - NATION FERILIZERS LTD.
NALCO -NATIONAL ALUMINIUM COMPANY LTD.
NTPC - NATIONAL THERMAL POWER CORPORATION LTD.
NMDC - NATIONAL MINERAL DEVLOPMENT CORPORATION LTD.
NLC - NEYVELI LIGNITE CORPORATION LTD.
ONGC - OIL & NATURAL GAS LTD.
 DISINVESTMENT SHARE
S r. D isin v e stm e n N u m b e rs N a m e O f P S E s
N o. t in p e rce n t O f P S E s AY, CRL, DCI, EIL,
1
< 10 % 17 FACT, Hcabl,
HCopperL, HMT, HPF,
2 10 to 20 % 5 NTPC KIOCL
IOC, ,MRL , DCI MMTC
, , SAIL , ,
3 20 to 30 % 5 NFL
BRPL, ,NMDC
NALCO , NLC
Maruti RCFL
, ,ITI , ,
4 30 to 40 % 4 ICI
BEML
ONGC, BHEL
BEL , BPCL,
5 BALCO
CONCOR , GAIL, CMC, HOCL,
> 40 % 16 HPCL, HTL, HZL, IBP,
IPCL, MTNL, MFIL, PPL,
VSNL, Jessop & Ltd.,
ITDC, STC
CLASSIFICATION – WORKING
ENVIRONMENT

Sr . Total No . Of PSEs Details Of PSEs

1No . 29 ( Competitive AY, BEL, DCI, EIL, FACT,
Environment) HCabL, HCooperL, HMT,
HPF, KIOCL, MMTC, NFL,
RCFL, ICI, Maruti, ITI,
BEML, BHEL, HOCL, Jessop
& Ltd., ITDC, STC, SCI,
2 18 (Monopoly SAIL NALCO
CRL, ,NMDC , IPCL
, NLC , ,CMC
, IOC MRL, ,
Environment) HZL
BRPL, ,MFIL
ONGC, BPCL, CONCOR,
BALCO, GAIL, HPCL, HTL,
IBP, MTNL, PPL, NTPC,
VSNL
POST 1991
Parameters Before AFTER AFTER -
Sales  BEFORE
Efficiency
(Sales / No. Of
Employees)
Competitive 9.821 8.1479 -1.6735
Monopoly 27.22 29.8064 3.5878
Asset      
Turnover
(Sales /
Total Asset) 1.426
Competitive 1.4064 -0.0197
Monopoly 2.084 1.8927 -0.191
Employment      

(No. Of
Employees
Competitive
) 25096 23167 -1929
Monopoly 18873 20332 1459
Dividend      
Payout
(Cash Dividend
Net Income) 0.198
/Competitive 0.2602 0.0618
Monopoly 0.176 0.2389 0.0633
Parameters NO. OF PSEs Before AFTER AFTER - BEFORE
SALES        
EFFICIENCY
DISINVESTMENT UP TO 10% 17 21.9862 21.8992 -0.087
DISINVESTMENT 10-20% 5 24.0641 20.3264 -3.7377
DISINVESTMENT 20-30% 5 16.682 14.8991 -1.7829
DISINVESTMENT 30-40% 4 8.4417 11.1832 2.7715
DISINVESTMENT ABOVE 40% 16 14.3983 14.8743 0.476
ASSET TURNOVER        
DISINVESTMENT UP TO 10% 17 1.9664 2.0864 0.12
DISINVESTMENT 10-20% 5 1.4831 1.226 -0.2571
DISINVESTMENT 20-30% 5 1.3186 1.2864 -0.0322
DISINVESTMENT 30-40% 4 1.6439 1.9886 0.3447
DISINVESTMENT ABOVE 40% 16 2.1089 1.8324 -0.2765
EMPLOYMENT      
LEVEL
DISINVESTMENT UP TO 10% 17 20877 19841 -1036
DISINVESTMENT 10-20% 5 23219 22089 -1129
DISINVESTMENT 20-30% 5 22841 21488 -1353
DISINVESTMENT 30-40% 4 19844 19734 -110
DISINVESTMENT ABOVE 40% 16 21329 22804 1475
 RETURNS ON SALES
PARAMATERS NO . OF BEFORE AFTER AFTER - BEFORE
PSEs
DISINVESTMENT UP TO 17      
10 % / SALES
PBDIT 0.3276 0.2875 -0.0401
PAT / SALES 0.1492 0.116 -0.0332
DISINVESTMENT 10 - 20 % 5      
PBDIT / SALES 0.2274 0.1466 -0.0808
PAT / SALES 0.1132 0.2376 0.1244
DISINVESTMENT 20 - 30 % 5      
PBDIT / SALES 0.2968 0.2371 -0.0597
PAT / SALES 0.0924 0.0689 -0.0235
DISINVESTMENT 30 - 40 % 4      
PBDIT / SALES 0.2883 0.2372 -0.0511
PAT / SALES 0.1406 0.0981 -0.0425
DISINVESTMENT ABOVE 16      
40 % / SALES
PBDIT 0.286 0.2964 0.0104
PAT / SALES 0.0917 0.1836 0.0919
 RETURNS ON ASSET

Parameters NO . OF Before AFTER AFTER -

DISINVESTMENT UP TO PSEs
17     BEFORE
 
10 % / ASSET
PBDIT 0.2346 0.291 0.564
PAT / ASSET 0.0832 0.1492 0.066
DISINVESTMENT 10 - 20 % 5      
PBDIT / ASSET 0.2268 0.2506 0.0298
PAT / ASSET 0.2212 0.2467 0.0745
DISINVESTMENT 20 - 30 % 5      
PBDIT / ASSET 0.2767 0.2312 -0.0455
PAT / ASSET 0.1246 0.0928 -0.0318
DISINVESTMENT 30 - 40 % 4      
PBDIT / ASSET 0.232 0.2846 0.526
PAT / ASSET 0.1261 0.1394 0.0133
DISINVESTMENT ABOVE 16      
40 % / ASSET
PBDIT O.2881 0.2779 -0.0102
PAT / ASSET 0.1276 0.1281 0.0005
 RETURNS ON EQUITY

PARAMETERS NO . OF BEFORE AFTER AFTER -

PSEs BEFORE
DISINVESTMENT UP TO 17      
10
PBDIT
% / EQUITY 0.3841 0.3461 -0.038
PAT / EQUITY 0.1644 0.1436 -0.208
DISINVESTMENT 10 - 20 % 5      
PBDIT / EQUITY 0.1609 0.1429 -0.0179
PAT / EQUITY 0.4336 0.528 0.0944
DISINVESTMENT 20 - 30 % 5      
PBDIT / EQUITY 0.6186 0.5377 -0.0849
PAT / EQUITY 0.1418 0.1772 0.0354
DISINVESTMENT 30 - 40 % 4      
PBDIT / EQUITY 0.4139 0.4382 0.0243
PAT / EQUITY 0.1383 0.1009 -0.0374
DISINVESTMENT ABOVE 16      
40 % / EQUITY
PBDIT 0.5368 0.4862 -0.0506
PAT / EQUITY 0.2006 0.1898 0.0108
 OVERALL PERFORMANCE

PARAMETERS BEFORE AFTER AFTER - BEFORE

RETURN ON SALES      
PBDIT / SALES 0.3651 0.2708 -0.0943
PAT / SALES 0.1383 0.0213 -0.117
RETURN ON EQUITY      
PBDIT / SALES 0.5769 0.4632 -0.1137
PAT / SALES 0.1733 0.1066 -0.0667
RETURN ON ASSETS      
PBDIT / SALES 0.3664 0.3417 -0.9432
PAT / SALES 0.0987 0.0843 -0.6886
NEW ECONOMIC POLICY
ØFOCUS ON STRATEGIC, HI-TECH & ESSENTIAL INFRASTRUCTURE
ØNON PERFORMING PSEs – BOARD OF INDUSTRIAL & FINANCIAL
RECONSTRUCTION

IMPACT ON OPERATIONAL PERFORMANCE

PARAMETER BEFORE AFTER AFTER - BEFORE

SALES EFFICIENCY 19.4482 21.7136 2.2654
EMPLOYMENT 23916 22407 -1509
ASSET TURNOVER 1.5729 1.4595 -0.1134
DIVIDEND PAYOUT 0.1973 0.2744 0.0771
 BALCO
DISINVESTMENT
- A CASE STUDY
INTRODUCTION
IN FEB 2001, THE GOVERNMENT OF INDIA
(GOI) APPROVED THE SALE OF ITS 51% STAKE
IN ALUMINIUM MAJOR, BHARAT ALUMINIUM CO
LTD. (BALCO) TO STERLITE INDUSTRIES LTD.
(SIL), FOR RS. 551.5 CRORES
BALCO WAS A PROFIT MAKING PUBLIC SECTOR
COMPANY
IT HAD A TURNOVER OF RS. 898 CRORES AND
A PROFIT AFTER TAX OF RS. 56 CRORES
OPPOSITION TO THE
DEAL
OPPOSITION FROM THE STATE GOVERNMENT


OPPOSITION FROM EMPLOYEES
REASONS FOR
OPPOSITION
BALCO IS A PROFITABLE AND CASH-RICH
PUBLIC SECTOR
IT WAS UNDERMINED BY GOI
NO WILLING BIG BUYERS TO PURCHASE LARGE
CHUNKS OF THE STOCK AS CONTROL RESTS
WITH STERLITE
UNDECLARED RESERVE PRICE BELOW WHIT
THE GOVERNMENT WAS NOT WILLING TO
SELL HAS NEITHER BEEN TRANSPARENT NOR
UNDERTAKEN BY QUALIFIED VALUERS
RESERVE PRICE WAS KEPT SECRET,DECLARING
THAT STERLITE BID WAS IN KEEPING THE
RESERVE PRICE
THE GOI REJECTED THE STATE GOVERNMENTS
OFFER TO BUY THE 51% SHARES FOR RS 552
CRORE WHICH WERE SOLD TO SIL AT RS
551.5 CRORE
THE CONTROVERSY
DEEPEN
THE STATE GOVERNMENT ACCUSED THE GOI
OF INDULGING IN UNDERHAND DEALINGS TO
THE TUNE OF RS 100 CRORES
THE BALCO EQUITIES WOULD HAVE FETCHED
AT LEAST RS 5000 CRORE
NON DISCLOSURE OF THE FINAL BID
OFFERS,EVEN AFTER THE FINALIZATION OF
THE BID
ASSURANCE FROM GOI
AND SIL
GOI ASSURED THAT THE BID WAS TOTALLY
TRANSPARENT THEY EXPLAINED THAT TWO
BIDS WERE RECEIVED IN SEALED COVERS
ONE BID WAS TWICE THE AMOUNT OF THE
OTHER, I.E., ABOVE THE RESERVE PRICE
GOI PROMISED OF NO RETRENCHMENT
VRS PACKAGE
SIL MANAGEMENT ASSURED OF NO TRANSFERS
EFFECTS OF NEW ECONOMIC POLICY (1991) ON
DISINVESTED PSE’S

IMPACT OF COMPETITION


IMPACT ON POLICY MATTERS
EFFECT OF DISINVESTMENT ON PERFORMANCE OF PSE’S
EFFECT OF EXTENT OF DISINVESTMENT
ON PERFORMANCE OF PSE’S

EFFECT OF OWNERSHIP ON EFFICIENCY

OBSERVATIONS AND
RECOMMENDATIONS
BUDGETARY BURDEN AND PUBLIC

WHAT SHOULD BE THE ROLE OF GOVERNMENT

IN PSE’S?
OWNERSHIP AND PERFORMANCE

EMPLOYEES’ WELFARE

INTRODUCTION OF CLAW BACK MECHANISM

LIBERALISATION AND ITS AFTERMATH
IMPORTANCE OF PRICE MECHANISM
SOUND METHOD OF VALUATION
TENURE OF THE CEO’S AND BOARD OF
DIRECTORS
CHANGE IN OWNERSHIP
SOUND POLICY FRAMEWORK
WINDING UP
MULTIPLE AUDIT
DECENTRALIZATION OF POWERS
POWERS TO FORM JOINT VENTURES
OBJECTIVES OF DISINVESTMENT
REASONS FOR SLOW ACHIEVEMENTS
THANK
YOU