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Q. (1) Explain the rational (reason/ objective) of disinvestment in PSUs? Ans.

Public Sector Undertaking (PSU) In India, public sector undertaking (PSU) is a term used for a government-owned corporation (company in the public sector ). The term is used to refer to companies in which the government(either the Union Government or state or territorial governments, or both) owned a majority (51 percent or more) of the company equity. A Public Sector Undertaking is a corporation in the public sector in India, where management control of the company rests with the Government; it can be Central Government or the State Governments. Disinvestment Definition of Disinvestment At the very basic level, disinvestment can be explained as follows: Investment refers to the conversion of money or cash into securities, debentures, bonds or any other claims on money. As follows, disinvestment involves the conversion of money claims or securities into money or cash. Disinvestment can also be defined as the action of an organization (or government) selling or liquidating an asset or subsidiary. It is also referred to as divestment or divestiture. In most contexts, disinvestment typically refers to sale from the government, partly or fully, of a government-owned enterprise. A company or a government organization will typically disinvest an asset either as a strategic move for the company, or for raising resources to meet general/specific needs. 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 capital employed, the levels of profits were too low. Of the various factors responsible for low profits in the PSUs, the following were identified as particularly important: Price policy of public sector undertakings Underutilization of capacity Problems related to planning and construction of projects Problems of labour, personnel and management Lack of autonomy

Hence, the need for the Government to get rid of these units and to concentrate on core activities was identified. The Government also took a view that it should move out of non-core businesses, especially the ones where the private sector had now entered in a significant way. Finally, disinvestment was also seen by the Government to raise funds for meeting general/specific needs. In this direction, the Government adopted the 'Disinvestment Policy'. This was identified as an active tool to reduce the burden of financing the PSUs. The following main objectives of disinvestment were outlined: To reduce the financial burden on the Government To improve public finances To introduce, competition and market discipline To fund growth The Disinvestment process in India The following are the three methods adopted by the Government of India for disinvesting the Public sector undertakings. There are three broad methods involved, which are used in valuation of shares. 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 core assets. Out of these three methods the Discounted cash flow method is used widely though it is the most difficult.

Q. (2) Explain offshore financial instruments. Ans. Located or based outside of one's national boundaries. The term offshore is used to describe foreign banks, corporations, investments and deposits. A company may legitimately move offshore for the purpose of tax avoidance or to enjoy relaxed regulations. Offshore financial institutions can also be used for illicit purposes such as money laundering and tax evasion. Offshore bank accounts provide individuals seeking an alternative avenue of financial management an opportunity to improve their financial planning options. Financial instruments held within expat bank accounts often include products thats' value is based on market forces, or pre-determined contracts that offer lower interest rates and costs. The potential benefits of offshore banking outweigh those of more restrictive banking regulation and policy. This is achievable via a range of products. Types of financial instruments held in offshore accounts 1) Currencies Foreign currency of various countries and denominations is held within offshore bank accounts. Money held in offshore accounts for foreign exchange trading also have several benefits. For starters many offshore banking facilities offer enhanced privacy protection, and the ability to pay bills or expenses in foreign currency rather than a domestic one. Some offshore financial institutions even provide accounts able to hold more than one currency or multi-currency accounts. 2) CFDs Contracts for difference such as currency pairs, equity swaps and similar financial instruments are in effect derivative financial securities. These products provide traders an opportunity to capitalize on price movements without actually having to hold the underlying asset. In some cases these CFDs are purchased using capital leveraging or margin. In other words, a credit account is used in addition to the primary fully funded offshore account. 3) Funds Funds come in many shapes and sizes, and are either directly managed by offshore banks, or traded with their services. Bond funds, exchange traded funds, and mutual funds are just a few of the fund types that are held within expat bank accounts. Additional funds such as hedge funds, money market funds and fixed income funds are examples of others. These funds are either maintained independently through a trust established at an international bank, or managed with the assistance of financial service professional.

4) OTCs Over the counter securities trading services are available via select offshore financial institutions. These include pink sheets, another term for stocks not traded on larger exchanges. Collateralized debt obligations are another type of OTC exchanged through offshore accounts. Essentially, if it is not traded via a major formal exchange that is regulated by a particular organization, then financial instruments are considered OTCs.

5) Equities Equities are an asset class within several offshore financial institutions and expat bank accounts. Moreover, stocks that are not over the counter can be traded via accounts at offshore banks. This is because when the offshore bank has a headquarters in the domicile of residence, the trading networks are interlinked enabling offshore securities trading. Stock options or stock derivatives, are also available via some offshore banks. 6) CDs Certificate of deposits are able to yield as high as eight percent or more at select offshore financial institutions. Specific rates are determined based on deposit amount, location, term and applicable banking policy. These rates are above and beyond some of the best international CD rates available, and this makes these negotiable instruments an attractive investment opportunity. Additionally, offshore banks do not necessarily withhold interest income tax due to differences in regulatory requirements. 7) Bonds Due to the fact offshore accounts are located in foreign jurisdictions, they are not subject to the monetary decisions of other banks in larger jurisdictions. It is for this reason, interest rates on loans from offshore banks are able to be more competitive. For example, offshore bonds that cost less to underwrite are better able to offer higher yields to lenders or investors. Similarly, just as loans are made, debt instruments such as international treasuries, corporate debentures and convertible bonds are also held or purchased within offshore accounts. The range of financial products made available through offshore accounts is as diverse as the jurisdiction's regulations and banking policies allow. Due to the more liberal banking practices made possible via these financial institutions, more opportunities are available to investors and traders seeking investment alternatives with higher yields and potentially higher capital gains. In any case it is important to understand how any offshore investment, deposit or account is protected and to carefully study and discuss the risk and safety of such decisions with a financial professional.

Q. (3) EXPLAIN MOU BETWEEN GOVERNMENT AND PSU, s? Memorandum of Understanding (MOU) is a negotiated agreement between Government as owner of public enterprises and the management of the Public Sector Enterprises (PSEs). MOU is meant to measure the Performance of Management of PSE at the end of the year in an objective and transparent manner. In the search of improving accountability and giving higher operational autonomy to Public Sector Undertaking, the Department of Public Sector Enterprises (DPE) Government of India introduced the concept of Memorandum of Understanding (MOU) in early nineties. The new Industrial Policy of 1991 made it mandatory for all PSUs to enter in to MOU with their respective Administrative Ministries. The MOU over these years has gained significant improvement from the fact that it reflects the companys overall composite rating and secondly the performance of the Chief Executive of the company is partly seen through MOU. The strengthening of existing system of monitoring PSUs through MOU is an important element of the present policy of the Government. The Concept of MOU The concept of Memorandum of Understanding (MOU) is quite simple. The concept of MOU is analogous to the concept of Management by Objectives (MBO), proposed by Peter F. Drucker. The concept is based on a regular evaluation of performance against objectives which are decided upon mutually by the supervisors and the subordinate. By the process of consultation, objectives-setting leads to the establishment of a control system that operates on the basis of commitment and self-control. Thus, the scope of MBO to be used as an operational control is quite extensive. Further, MOU makes at attempt to move the management of CPSEs from management by controls and procedures to management by results and objectives. MOU is a performance agreement between management of PSE and Government of India (administrative Ministry).MOU clearly defines the relationship of the PSE with the Government, and clarifies the respective role of the PSEs as well as the Government for achieving better results. The Memorandum of Understanding is a negotiated document between the Government, acting as the owner of Central Public sector Enterprise (CPSE) and a specific CPSE. It should contain the intentions, obligation and mutual responsibilities of the government and the CPSE. It is commitment to objectives between individuals, a memorandum of understanding is an "agreement between a public enterprise and the Government, represented by the administrative ministry in which both parties clearly specify their commitments and responsibilities." Memorandum of Understanding (MOU) is a negotiated agreement between

Government as owner of public enterprises and the management of the Public Sector Enterprises (PSEs). It is supposed to be freely negotiated document between the Government, acting as the owner of Public Sector Enterprise and the specific PSE. Secondly, it is supposed to clearly specify the intentions, obligations and mutual responsibilities of both parties to the Memorandum of Understandings. If either of the above these two conditions is violated, the effectiveness of the MOU as an instrument of performance improvement is bound to be affected. Further, MOU makes an attempt to move the management of PSEs from management by control and procedures to management by results and objectives. Another way of saying the same thing that MOU make an attempt to move the management of PSEs from reliance on ex-ante control to a system of ex-post control. The MOU is an attempt to bring a proper balance between accountability and autonomy. The emphasis is on achieving the negotiated and agreed objectives rather than interfering in day to day affairs of the PSEs. The MOU also forms the basis of selecting a CPSE as a ' Navratna ' company. Before the introduction of MOU system, the general perception about the functioning of Central PEs was that: (i) PSEs are less efficient than their private sector counterpart. (ii) PSEs are unable to perform because there are varieties of agencies who feel that they have mandate to run public enterprises. These organisations keep setting different objectives for the enterprise which are often conflicting (iii) No one in PSE is accountable for performance of the enterprise. (iv) PSEs are handicapped in their operation due to absence of functional autonomy. Objectives of the MOUs The objectives of the MOU system with regards to Central Public Sector Enterprises are to : 1. Measure the performance of PSEs taking into account the complexity fusing social and financial objectives and translating them into measurable parameters. 2. Introduce a performance improvement system that would simultaneously increase autonomy and accountability in the PSEs. 3. Remove the fuzziness in the goals and objective of the enterprises.

4. Set-up an objective performance evaluation system and introduce a performance incentive plan. 5. Set-up new institutions and administrative and personnel system and 6. Replace 'multiple principles with multiple objectives' with clarity in goals and objectives. MOU between Government and PSUs Memorandum of Understanding (MOU) is a mutually negotiated agreement between the management of PSUs and the government for setting annual performance targets for PSUs. MOU is meant to measure the Performance of Management of PSU at the end of the year in an objective and transparent manner. The strengthening of existing system of monitoring PSUs through MOU is an important element of the present policy of the Government. Present Policy / Guidelines It has been now decided by the Government of India that all CPSEs including sick and loss making and CPSEs under construction will be covered under MOU system Subsidiaries CPSEs should sign MOU with their holding companies. Main highlights of the guidelines on the MOU system existing since 2006-07 are as follows : (i) There would be MOU evaluation of CPSEs only once during the year based on audited figures. Those CPSEs who do not submit self-evaluation score based on audited accounts to Department of Public Enterprises by 31st August will not be eligible for awards. (ii) The MOU composite scores and rating should be prepared and finalised by the Syndicate Group concerned of the Task force. (iii) Once the MOU are signed between the CPSEs and the Department, no revision of target will be permitted. (iv) The total number of awards will be 12 ( 1 from each of 10 syndicates, 1 from the listed CPSEs, and 1 from amongst the turnaround sick and loss making Enterprises), all other excellence performing CPSEs will get merit certificate. (v). Performance evaluation henceforth will be done once a year and this will have to be done with combined effort of all the Syndicate Members. (vi) One MOU Excellence award shall be based on the listed CPSEs.

(vii) One MOU excellence award shall be given from amongst the sick and loss making CPSEs for the best turn around performance. In the search of improving accountability and giving higher operational autonomy to the public sector undertaking, the Department of Public Sector Enterprise (DPE), Government of India introduced the concept of Memorandum of Understanding in early nineties. The new Industrial Policy of 1991 made it mandatory for all PSUs to enter in MOU with their respective Administrative Ministries. The strengthening of existing system of monitoring PSU through MOU is an important element of the present policy of the Government. The MOU system envisaged the granting of operational autonomy to enterprises and, in return, the making of boards and managers accountable through a contract system which was geared to improving performance. MOU aimed at providing greater autonomy to public sector enterprises. The focus, under the MOU system, has sifted to achievements of results. The MOU system has brought about greater fiscal discipline among the MOU. Delegating more financial and administrative powers to the MOU signing enterprises has also increased the operational autonomy of the enterprises. After implementation of the system of MOU of performance evaluation of CPSEs, their Operational autonomy has also been encouraged and increased. By laying stress on marketing efforts and comparing with private sector enterprises, MOU proved conducive for PEs to face competition. The quarterly performance review (QPR) meeting has become more focused since the introduction of MOUs. Discussion is confined to overall achievement as outlined in MOUs. But since the focus under the MOU system has shifted to achievement of results, Political Pressures have come down and ministries have begun to withdraw from their tendency to control by procedures. There noticed lack of co-ordination among the ministries as well as between the Public Sector Enterprises and the Ministries, but the system of MOU proved quite effective in establishing greater co-ordination in this regard. The High Power Committee on MOU played effective role in removing and minimizing every contradictions in performance evaluation.

Q. (4) WHAT ARE THE MAJOR PROBLEMS ASSOCIATED WITH DISINVESTMENT OF PSU,s IN INDIA? DEFINITION: Disinvestment Disinvestment refers to the action of an organization or the government in selling or liquidating an as sector subsidiary. In simple words, disinvestment is the withdrawal of capital from a country or corporation. Some of the salient features of disinvestment are: Disinvestment involves sale of only part of equity holdings held by the government to private investors. Disinvestment process leads only to dilution of ownership and not transfer of full ownership. While privatization refers to the transfer of ownership from government to private investors. Disinvestment is called as Partial Privatization. Public Sector Undertaking (PSU) In India, public sector undertaking ( PSU ) is a term used for a government-owned corporation (company in the public sector ). The term is used to refer to companies in which the government(either the Union Government or state or territorial governments, or both) owned a majority (51 percent or more) of the company equity. A Public Sector Undertaking is a corporation in the public sector in India, where management control of the company rests with the Government , it can be Central Government or the State Governments. PROBLEMS OF PUBLIC SECTOR UNDERTAKINGS: The most important criticism levied against public sector undertakings has been that in relation to the capital employed, the level of profits has been too low. Even the government has criticized the public sector undertakings on this count. Of the various factors responsible for low profits in the public sector Undertakings, the following are particularly important:Price policy of public sector undertakings Under utilization of capacity Problem related to planning and construction of projects Problems of labor, personnel and management

Lack of autonomy

REASONS FOR DISINVESTMENT The public sector in India at present is at cross roads. The new economic policy initiated in July 1991, clearly indicated that the public sector undertakings have shown a very negative rate of return on capital employed. On account of this phenomenon many public sector undertakings have become burden to the government. They are in fact turning out to be liabilities to the government rather than being assets. This is a sector which the government clearly wants to get rid off. In this direction the government has adopted a new approach to reform and improve the public sector undertakings performance i.e. Disinvestment policy'. This has gained lot of importance especially in latter part of 90s. At present the government seriously perceives the disinvestment policy as inactive tool to reduce the burden to financing the public sector. OBJECTIVE OF THE DISINVESTMENT: Privatization intended to achieve the following: Releasing large amount of public resources Reducing the public debt Transfer of Commercial Risk Releasing other tangible and intangible resources Expose the privatized companies to market discipline Wider distribution of wealth Effect on the Capital Market Increase in Economic Activity MAJOR ISSUES IN DISINVESTMENT 1) Profitability: The return on investment in PSEs, at least for the last two decades, has been quite poor. The PSE survey shows PSEs as a whole, never earned post tax profit that exceeds 5% of total sales or 6% of capital employed , which is at least 3% points below the interest paid by the government on its borrowings.

2) Recurring budgetary support to PSEs: Despite huge investment in the public sector, the Government is required to provide more funds every year that go into maintaining of the unviable/week PSEs. 3) Industrial sickness in PSUs: To save the PSUs from sickness, the government has been sanctioning restructuring packages from time to time. 4) Employees issue: Of the 1.6 million jobs added in the organized sector 1 million, or two third, were added in the private sector during the year 1991 to 2000. This indicates that the private sector has become the major sources for incremental employment in the organized sector of the economy over the last decades. Problems associated with Disinvestment The number of bidders for equity has been small not only in the case of financially weak PSUs, but also in that of better-performing 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. An important fact that needs to be remembered in the context of divestment is that the equity in PSUs essentially belongs to the people. Thus, several independent commentators have maintained that in the absence of wider national consensus, a mere government decision to disinvest is not enough to carry out the sale of peoples assets. Inadequate information about PSUs has impeded free, competitive and efficient bidding of shares, and a free trading of those shares. Also, since the PSUs do not benefit monetarily from disinvestment, they have been reluctant to prepare and distribute prospectuses. This has in turn prevented the disinvestment process from being completely open and transparent. It is not clear if the rationale for divestment process is well-founded. The assumption of higher efficiency, better / ethical management practices and better monitoring by the private shareholders in the case of the private sector all of which supposedly underlie the disinvestment rationale is not always borne out by business trends and facts.

Total disinvestment of PSUs would naturally concentrate economic and political power in the hands of the private corporate sector. The US economist Kenneth Galbraith had visualized a role of countervailing power for the PSUs. While the creation of PSUs originally had economic, social welfare and political objectives, their current restructuring through disinvestment is being undertaken primarily out of need of government finances and economic efficiency. Lastly, to the extent that the sale of government equity in PSUs is to the Indian private sector, there is no decline in national wealth. But the sale of such equity to foreign companies has far more serious implications relating to national wealth, control and power, particularly if the equity is sold below the correct price! If the disinvestment policy is to be in wider public interests, it is necessary to examine systematically, issues such as - the correct valuation of shares, the crowding out possibility, the appropriate use of disinvestment proceeds and the institutional and other prerequisites.

Q. (5) VC funding in india explain? Ans= Definition of of venture capital venture capital is capital provided by outside investor for financing of startup ventures, growth ventures or struggling (to be turned around from losses) business. Venture capital funding in india: World bank organized a VC awareness seminar in 1988 and selected 6 institution to start VC investment in india. This included TDICICI(ICICI), IFCI,SVCL,IL&FS, GVFL and ILF. (1) ICICI venture funds management company limited: ICICI venture (formerly TDICI limited) was founded in 1988 as ajoint venture with the unit trust of india. Subsequently, ICICI bought out UTIs stake in 1998 and ICICI Venture became fully owned subsidiary of ICICI. ICICI venture also has an affiliation with the trust company of the west (TCW), which provides it a platform for networking Indian companies with global markets and technology. (2) IFCI venture capital funds ltd. : IFCI venture capital funds limited was originally set up by IFCI as a society by the name of risk capital foundation (RCF) in 1975 to provide institutional support to first generation professionals and technocrats setting up their own ventures in the medium scale sector ,under the risk capital scheme . in 1988, RCF was converted into a company , Risk capital and technology finance corporation LTD. (RCTC), when it also introduced the technology finance and development scheme for financing development and commercialization of indigenous technology. (3) SIDBI venture capital limited (SVCL): SIDBI venture capital limited is wholly owned subsidiary of SIDBI, incorporated in july 1999 to act as an umbrella organization to oversee the venture capital operation of SIDBI. SVCL mission is to catalyze entrepreneurship by providing capital and other strategic inputs for building businesses around growth opportunities and maximize returns on investment.

(4) IL&FS Group Businesses: IL&FS was incorporated in 1987, and commenced operations in may 1988 as a subsidiary of central bank of india (CBI) , one of the largest nationalized banks in the country . the initial shareholders were the unit trust of india(UTI) and the housing development finance corporation limited (HDFC). Thus , from its inception , IL&FS inherited the experience and expertise of these institutions. (5) Gujarat Venture finance Limited (GVFL): Started in july 1990, at the initiative of the world bank, GVFL ltd. Is regarded as a pioneer of venture capital in india. Over the past ten years , GVFL ltd. Has provided financial and managerial support to over 57 companies with a high growth potential. GVFL ltd. Invest all over india and across industries. It has created a niche for itself in small and medium scale companies. Investment and monitoring such companies require considerable effort and involvement as compared to large projects. (6) 2i Capital : 2i capital is an asset management group that has insight into investment opportunities that arise from indias vibrant and broad industrial and service sectors, and large, growing domestic market on the one hand , while leveraging the countries recognized expertise in technology , engineering, and technology services into global markets, on the other. Followings are some examples of Indian enterprises which received VC fund: Banglore based jiGrahak, a mobile payment company , has received $2.2 million from hellion venture . the mobile payment company recently launched a beta of its mobile payment services. JiGrahak is a startup founded in august 2003. Bharat Matrimony : An online matchmaking or a matrimonial service company, received $8.6 million in funding from canaan partners and yahoo Inc. An investment in bharat matrimony makes strategic sense for the yahoo. Vijay Electricals limited : A power transmission and distribution (T & D) equipment maker, received over $25 million from 3i, a London based venture capita and private equity firm. Hyderabad-based vijay electricals is one of the largest T&D equipment makers in india. Bangalore based microland received $11 million from Cargill ventures , intel capital , trident capital ventures.

Q.(6) EXPLAIN DIFFERENT WAYS IN WHICH VENTURE CAPITAL CAN FINANCE INVESTMENT PROPOSAL? Ans= Definition of of venture capital venture capital is capital provided by outside investor for financing of startup ventures, growth ventures or struggling (to be turned around from losses) business.

Following diagram shows different ways of investment proposal finance by venture capital

Equity

Conditional loan

Methods Participating debentures

Income note

(a) Equity financing: The venture capital undertaking requires long-term funds but is unable to provide returns in initial stage so equity capital is the best option. (b) Conditional Loan: A conditional loan is repayable in the form of a royalty after the venture is able to generate sales. No interest is paid on such loans. (c) Participating debenture: Such security carries charges in three phases - in the start-up phase, no interest is charged, next stage a low rate of interest up to a particular level of operation is charged, after that, high rate of interest is required to be paid. (d) Income note: It is hybrid security; the entrepreneur has to pay both interest and royalty on sales but at substantially low rates. Alternative Forms of venture Capital: Leveraged Buy-out (LBO): An acquisition of a business using mostly debt and a small amount of equity. The debt is secured by the assets of the business. Management buy-in (MBI): Purchase of a business by an outside team of managers who have found financial backers and plan to manage the business actively themselves.

Mezzanine financing: Financing for a company expecting to go public usually within 612 months; usually so structured to be repaid from proceeds of a public offering, or to establish floor price for public offer.

Series of preferred stock: The first round of stock offered during the seed or early stage round by a portfolio company to the venture investor or fund. This stock is convertible into common stock in certain cases such as an IPO or the sale of the company. Later rounds of preferred stock in a private company are called series B, series C and so on

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