Strategic Management

Divestment, Disinvestment & Liquidation Strategies

PRESENTED BY: SANDEEP AMIYA RANJAN(12MFC010) RAKESH KUMAR SWAIN(12MFC018)

Divestment
It is a form of retrenchment strategy used by

businesses when they downsize the scope of their business activities or part of rehabilitation and restructuring plan Divestment usually involves eliminating a portion of a business. Firms may elect to sell, close, or spin-off a strategic business unit, major operating division, or product line

Reasons to Divest
Diversification of Portfolio Market Share Too Small Availability Of Better Alternatives Need For Increased Investment Lack Of Strategic Fit Legal Pressures To Divest

IMPLEMENTATION OF DIVESTMENT STRATEGIES

Firms may pursue a divestment strategy by spinning off a

portion of the business and allowing it to operate as an independent business entity Another way to implement a divestment decision is to simply close a portion of the firm's operations Divestment is not usually the first choice of strategy for a business. However, as product demand changes and firms alter their strategies there will almost always be some portion of the business that is not performing to management's expectations.

LIQUIDATION
Selling all of a companys assets, in parts, for their

tangible worth.
Recognition of defeat. Cease operating than to continue losing large

sums of money because something is always better than nothing.

Guidelines for Liquidation

If the only alternative is bankruptcy, liquidation is an

orderly alternative
When stockholders can minimize their losses by selling

the firms assets

Disinvestment
Disinvestment is a process in which the public

undertaking reduces its portion in equity by disposing its shareholding. Disinvestment as per SEBI (substantial acquisition of shares) guideline, means the sale by the central government/state government, of its shares or voting rights and/or control, in PSUs. The disinvestment reduces government participation in the company.

Contd.
In India, the new economic policy have given rise to

significant focus for privatization of public sector enterprises. Hence, disinvestment is one of the method of privatization, which started in the year 1992. It implies selling of govt. equity shares of public sector units in the market. It is a concrete step towards privatization and liberalization of our economy.

Criteria for Disinvestment

The decision regarding disinvestment or liquidation

viewed in the light of following criteria: a) Whether the objectives of the company are achieved b) Whether there is decrease in number of beneficiaries c) Whether serving the national interest will be affected because of disinvestment d) Whether private sector can efficiently operate and manage the undertaking. e) Whether the original rate of return targeted could not be possible to achieve. f) Whether socio-economic objectives lots its purpose

Merits of Disinvestment
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

Demerits of Disinvestment
Selling of profit-making and dividend paying PSU

would result in loss of regular source of income to the government. There would be chances of asset stripping by the strategic partner. Most of the PSUs have valuable assets in the shape of plant and machinery, land and buildings etc. The Governments Policy or disinvestment includes the disposal of both profit making, as well potentially viable PSUs.

Objectives of Disinvestment:

(a)
(b) (c)

(d)
(e)

(f)

The following are the main objectives of the disinvestment policy of the government: To reduce financial burden on the government To encourage wider share of ownership To introduce competition and market discipline To help public enterprise upgrade their technology to become competitive To rationalize and retain their workforce To improve efficiency and productivity in public enterprise through new industrial policies.

Modalities of Disinvestment:
In order to achieve the various objectives and goals of disinvestment many methods have been formulated and implemented. These includes: (1) Public Offer: offering shares of public sector enterprises at a fixed price through a general prospectus, the offer is made to the general public through the medium of recognized market intermediaries. (2) Cross Holding: In the case of cross holding, the govt. would simply sell part of its share of one PSU to one or more PSUs.

Contd.
3) Golden Share: in this model, the govt. retains a 26 percent share in the PSU. This 26 percent share will continue to give the govt. the status of majority share holder. (4) Warehousing: Under this model, the govt. owned financial institutions were expected to buy the govt.s share in select PSUs and holding them until third buyer emerged. (5) Strategic Sale: Under this model, govt. sells a major portion (51% and above) of its stake to the strategic buyer and also gives over the management control.