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Disinvestment in India Methods , Procedures and Problems

Disinvestment - defined
Meaning of Investment

Conversion of money or

Converting
Money Claims Securities Into Money or Cash

cash into either :

Securities Bonds Debentures Or any other form of money

Disinvestment in a p.s.u
Transfer of Government

Ownership when the dilution is beyond 51 %


Imperative for the Government

Less than 51%

to sell a part of its holdings

PSU

Transfer Of Ownership

Government

Government Holdings

Objectives in any disinvestment


Depoliticize Essential Services Reduce Financial Burden on Government

Encourage Wide Share in Ownership

Improve Public Finances

Introduce Competition with Market Discipline

Governments Strategy
Meet the growing budget deficit

The Government knew that they could make more money by selling off their assets cheaply
Faster realization value

Industries reserved for PSUs since December 2002

Atomic Energy

Minerals specified in schedule to atomic Energy (Control of Production and Use) Order, 1953

Railway Transport

Government Policies on Disinvestment


Government Policies
Bring down Government equity to 26% or lower

Restructuring of potential & viable P.S.U


Close down P.S.U that cant be revived Protect the interest of the workers

Methods of Disinvestment
Strategic Sale
Capital Market
Offer for sale Fixed Price / Book Building Secondary market / Private Placement

Reduction in Equity
Buy back of Shares Conversion of equity into other instruments

Other Methods
Trade Sale
Asset Sale and Winding up Management/Employees Buyout (M/EBO)

Cross Sale
Sale through De-merger/Spinning off

DISINVESTMENT PROCESS
Selection of PSU by MODI Approval by CCD Formation of IMG & Selection of Global Advisors

2-3 months

Submission of Expression of Interest Submission of Initial Technical Proposal

Due Diligence / Commercial negotiations 3-6 months

Finalise Shareholders Agreement (SHA) & Share Purchase Agreement (SPA)


Financial bids 1 week Selection of strategic partner & signing of SHA & SPA

Three Methods of valuation


Discounted cash flow
Net asset value' approach Profit Earning Capacity

Problems in Disinvestment process


Soft Budget constraint

Policy adopted by the

government.
Multiple Control

authorities

Reasons for Slow Progress


No clear framework or policy
Disinvestment used to meet fiscal deficit No transparency Failure to attract foreign buyers

Disinvestment Case Laws

BALCOs Disinvestment

The deal was like loot of Chattisgarh in a day-light robbery. "Sterlite's offer for Balco is more than fair."
- Business World, March 12, 2001. - Chattisgarh CM, Ajit Jogi.

Fact File
Mines

Top line 898 Cr. PAT 56 Cr. HC 7500

Sale of 51% stake in Balco (Management Control)

Company running on Outdated technology. Cash Case for Disinvestment reserve 500 Cr. not adequate for Modernization
Share of Operating profit in total Profit Impact of Aluminum prices

Company recovered from state of sickness and hence

right time for sale.

Bidders for Strategic Stake

Hindalco (Birla Group) Alcoa (US based) Sterlite Ind. (Anil Agarwal)

Valued on 4 Parameters (JP Morgan) Valuation Conundrum

Discounted cash flow Comparative valuation Balance sheet Asset valuation


Control premium added to arrive at reserve price

Analysis Paralysis

Reserve Price fixed at 514 Cr. using 25% mark up to the valuations arrived by DCF Model
Hue and cry by Opposition over valuation methodology Question Earnings Vs Asset Value

The Verdict

Sterlite Industries emerges as the highest bidder with an offer of 551 Cr.

Post Sell Out Drama


Lack of Transparency Political Pressure & threats

Allegations of Under hand deals


Company wide Agitation, strike continued for 67 days

Post Sell out Drama


Threat of damage to companys assets Supreme Courts role
Union Management Meetings Agreement Signed

SUGGESTIONS AND REMARKS

suggestions
Clear policy & framework for disinvestment process

De-link disinvestment with budgetary control

exercise

Disinvestment process be audited by at least 2

reputed auditing firms

Creation of separate disinvestment fund