PSU, Privatization and Disinvestment in India

What is PSU?
In India, public sector undertaking (PSU) is a term used for a government-owned corporation. The majority (51% or more) of companies equity is held by union government or state government. Divisions of activity in 1956 a)Public sector-Heavy and basic industries which require high capital and low return. b)Private sectors-Consumer based goods industries having high and early returns

Role of Public sector in Indian Economy

Development of infrastructure Small scale and other ancillary industries Removal of regional disparities Import substitution and Export promotion Redistribution of income Employment opportunities

Investment of Government in PSU

As on 1 st April 1951 1956 1961 1980 1985 1990 1992 1995 2007 2008 No. of units 5 21 47 179 215 244 237 239 247 242 Total Investment(Crs) 29 81 948 18150 42673 99329 135445 164690 421089 455409

Performance of Public sector (Rs.Crs)

Years Nos of PSU Turnover PBIT Net Profit Dividend Contribu paid tion to country revenue 687 2205 8260 8068 13768 15288 20714 22886 26805 19951 30878 61037 62866 81867 89035 110599 125456 147728

1991-92 1995-96 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

237 239 234 231 227 230 227 226 217

133906 226919 458237 447529 535165 587052 700862 837295 964410

13675 27587 48767 63190 73374 99053 109518 117614 142949

2356 9574 15653 25978 32399 53084 65429 69536 81550

Industries reserved for PSU s since July 1991

1. Arms and Ammunition and allied items of defence equipment, defence aircraft and warship 2. Atomic Energy 3. Coal and Lignite 4. Mineral oil 5. Mining of iron ore, gold and diamond 6. Mining of copper, zinc, led, tin and molybdenum. 7. Minerals specified in the schedule to Atomic Energy (Control of production and use) Order, 1953 8. Railway Transport

Top 10 PSU in India

IOC-20 largest company in the world, most profitable PSU, ranked in Fortune 500 lists NTPC-India largest power company. contributes to 28.5% of the power to the country. BPCL-3 largest company in India, listed in Fortune 500 lists HPCL-operates the largest lube refinery in India ONGC-5 largest company ,contributes 77% of India s crude oil, 81% of natural gas production

Top 10 PSU in India

SAIL-6 largest company in India and leading steel producer BHEL-manufactures over 180 products and caters to core sector of indian economy BSNL-Largest telecom industry HAL-Largest public sector in aeronautical engineering Bharat Dynamics Limited has made it to the top ten list due to the sheer grit and diligence that it showcases in its balance sheet and the profitability that it shows year after years

Problems of Public sector

Poor Project Planning:
Investment decisions in many public enterprises are not based upon proper evaluation of demand and supply, cost benefit analysis and technical feasibility. Many projects in the public sector have not been finished according to the time schedule.

Over-capitalization:
Due to inefficient financial planning, lack of effective financial control and easy availability of money from the government, several public enterprises suffer from over-capitalization The Administrative Reforms Commission found that Hindustan Aeronautics, Heavy Engineering Corporation and Indian Drugs and Pharmaceuticals Ltd were over-capitalized. Such over-capitalization resulted in high capital-output ratio and wastage of scare capital resources.

Excessive Overheads:
Public enterprises incur heavy expenditure on social overheads like townships, schools, hospitals, etc. In many cases such establishment expenditure amounted to 10 percent of the total project cost. Hindustan Steel alone incurred an outlay of Rs. 78.2 crore on townships. Such amenities may be desirable but the expenditure on them should not be unreasonably high.

 Overstaffing:
Manpower planning is not effective due to which several public enterprises like Bhilai Steel have excess manpower.

Under- utilization of Capacity:

One serious problem of the public sector has been low utilization of installed capacity. In the absence of definite targets of production, effective production planning and control and proper assessment of future needs many undertakings have failed to make full use of their fixed assets. There is considerable idle capacity. In some cases productivity is low on account of poor materials management or ineffective inventory control.

Lack of a Proper Price Policy:

There is no clear-cut price policy for public enterprises and the Government has not laid down guidelines for the rate of return to be earned by different undertakings

Inefficient Management :
The management of public enterprises in our country leaves much to be desired. . Civil servants who are deputed to manage the enterprises often lack proper training Motivations and morale of both executives and workers are low due to the lack of appropriate incentives.

Meaning and Reasons for Privatization

Privatization is a process by which the government transfers the productive activity from the public sector to the private sector

Improvement in efficiency and performance Fixing responsibility is easier Response time incase of Private sector is less Privatization leads to better services to customers Remedial measures are taken early in private sector

Role of Private Sector

1. It lessens the government burden, private company such as water supply, electricity, airport.etc..the money can be spent on development such as public facilities.. 2. Much efficient and better, private companies tends to collect revenue higher than the government..that is why the provide the best services.. you will have cleaner water, better telephone lines and reception..etc 3. Privatization provides job opportunity to many people..private companies have better pays than government servant, they get better salary and reduces the country jobless rate. 4. Increase revenue of the country, as private company pay taxes to the central government, it helps the government to have more funds for development..such as foreign invest and etc..

ROLE OF PRIVATE PUBLIC AND JOINT SECTOR IN EMPLOYMENT AND GROSS OUTPUT
SECTOR PUBLIC PRIVATE JOINT
OTHERS TOTAL
FACTORY NOS

EMPLOYM FIXED CAP ENT(000S) IN CRORES 3,107 4,20,767 1,70,547 13,494 2,132 6,06,940

GROSS OUTPUT 11,12,91 8 7,43,293 42,087 9,338 3,11,864

13,227

1,21,113 5,610 2,046 3,775 269 125

1,40,161 9,112

Problems of Private Sector

Profit generation is the main motive Monopoly and Concentration Declining share of net value added in total output Infrastructure Bottlenecks Industrial Disputes Industrial Sickness Threat from Foreign Competition

Disinvestment in India

Disinvestment in India
What is Disinvestment?
The action of an organization or government selling or liquidating an asset or subsidiary as a strategic move for the company. The term was first used in the 1980s, most commonly in the United States

Objectives of Disinvestment
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 Government s resources turning to be more of liabilities to the Government than being assets. Out of the 239 operating PSUs in 1995-96, 134 were running on profits and as many as 101 were loss making units, 86 of them were sick. Many undertakings traditionally established as pillars of growth had become a burden on the economy. National gross domestic product and gross national savings also getting adversely affected by low returns from PSUs. Of the various factors responsible for low profits in the PSUs, the following were identified as particularly important: Price policy of public sector undertaking Under utilisation of capacity Problems related to planning and construction of projects Problems of labour, personnel and management Lack of autonomy

 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. Few main objectives are: To reduce the financial burden on the Government To improve public finances To introduce, competition and market discipline To fund growth To encourage wider share of ownership

Different Approaches to Disinvestments

There are primarily three different approaches to disinvestments (from the sellers i.e. Government s perspective) Minority Disinvestment Majority Disinvestment Complete Privatisation

Minority Disinvestment
A minority disinvestment is one such that, at the end of it, the government retains a majority stake in the company, typically greater than 51%, thus ensuring management control. Examples of minority sales via auctioning to institutions Andrew Yule & Co. Ltd., CMC Ltd. etc. Examples of minority sales via Offer for Sale include recent issues of Power Grid Corp. of India Ltd., Rural Electrification Corp. Ltd., NTPCLtd,NHPC Ltd. etc.

Majority Disinvestment
A majority disinvestment is one in which the government, post disinvestment, retains a minority stake in the company i.e. it sells off a majority stake Eg: Modern Foods to Hindustan Lever, BALCO to Sterlite, CMC to TCS etc.

Complete Privatisation
Complete privatization is a form of majority disinvestment wherein 100% control of the companies passed on to a buyer. Examples of this include 18 hotel properties of ITDC and 3 hotel properties of HCI.

Cabinet Committee on Disinvestment (CCD)

Chaired by the Prime Minister Functions: To consider the advice of the Core Group of Secretaries To decide the price band To decide the final pricing Intervention in case of disagreement between the recommendations To approve the three-year rolling plan and the annual programme of disinvestment every year.

Core Group of Secretaries on Disinvestment (CGD)

Headed by the Cabinet Secretary Functions: Supervises the implementation of the decisions of all strategic sales Monitors the progress of implementation of the CCD decisions. Makes recommendations to the CCD on disinvestment policy matters.

Ministry Of Disinvestment
 Set up in 1999  Assisted by Advisors Business Allocated to Ministry of Disinvestment 1. All matters relating to disinvestment of Central Government equity from Central Public Sector Undertakings 2. All matters relating to sale of Central Government equity through offer for sale or private placement in the erstwhile Central Public Sector Undertakings 3. Decisions on the recommendations of the Disinvestment Commission on the modalities of disinvestment, including restructuring. 4. Implementation of disinvestment decisions, including appointment of advisers, pricing of shares, and other terms and conditions of disinvestment 5. Disinvestment Commission; 6. Central Public Sector Undertakings for purposes of disinvestment of Government equity only. 7. Financial Policy in regard to the utilization of the proceeds of disinvestment channelized into the National Investment Fund

Major Issues In Disinvestment

Profitability: The return on investments 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 profits that exceeded 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 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 / weak PSEs

Cost Control: As per NCAER Study Report the cost structure in PSEs is increasing as compared to private sector, which is able to contain costs on all parameters.

Power & fuel /Net sales PSEs I9.5 5 Pvt. sector

Wages/Net Sales PSEs Pvt.sector Interest/Net sales PSEs Pvt. sector

23.3 6.5

11.7 4.7

Industrial Sickness in PSUs: To save the PSUs from sickness, the government has been sanctioning restructuring packages from time to time. As on 31.3.00 Profit & Loss A/C of 21 PSUs showed accumulated loss of 13959.57 crores. Employee issues: Of the 1.6 million jobs added in the organized sector 1 million, or two thirds, were added in the private sector during the period 1991 to 2000. This indicates that the private sector has become the major source for incremental employment in the organized sector of the economy over the last decade

HUL Modern Foods CASE STUDY

Introduction
MFIL was incorporated as Modern Bakeries (India) limited in 1965. It had 2042 employees as on 31.1.2000 It went through minor restructuring during 1991-94 when its Ujjain Plant was closed, the Silchar project was abandoned and the production of Rasika drink was curtailed. 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. As per the Disinvestment Commission the major problems at MFIL were under- utilization of the production facilities, large work force, low productivity and limited flexibility in decision-making

The Disinvestment Process

September 1997 The Government approved 50% disinvestment to a Strategic Partner through competitive global bidding October 1998 ANZ Investment bank was appointed as the Global Advisor for assisting in disinvestment January 1999 The Government decided to raise the disinvestment level to 74% April 1999 An advertisement inviting the EOI from prospective strategic partners was issued

The Disinvestment Process

In a response to the advertisement 10 parties submitted Expressions of Interest Out of these, 4 conducted the due diligence of the company, which included visits to Data Room, interaction with the management of the MFIL, and site visits. October 1999 Post due diligence, 2 parties remained in the field, and on the last day for submission of the financial bid (15.10.99), the only bid received was that from Hindustan Lever Limited (HLL). January 2000 - The Government approved the selection of HLL as the strategic partner in and the deal was closed on 31.1.2000.

Year

Seller

Type of sale

Buyer

Percentage of Equity Sold

Percentage of Residual Equity of Govt.

Amount Realised (Rs. crore) 105.45

1999-00

Modern Food Industries (India) Ltd.

Strategic sale

Hindustan Lever Ltd.

74

26

2002-03

Modern Food Industries (India) Ltd.

Sale of residual shares to SP (Put Option by GoI)

Hindustan Lever Ltd.

25.995

44.07

TOTAL

149.52

PRIOR TO SALE 1 Authorised share capital . Paid up capital Losses 1998-99 Losses 1999-00 **(Inclusive of an amount of Rs. 35.19 cr. towards provisions made for previous years.) Number of employees 2 Net Worth (and total expected . realisation) as per DPE Survey 1998-99 Value of assets as per 31.3.99 accounts: Gross Net Market value of land & building as per Government valuer 3 Valuation of 100% equity by . different methods - as done by global advisors

AFTER SALE 1. 74% of the shares sold for Rs. 15.00 cr. Rs. 13.01 cr. Rs. 105.45 cr. and further Rs. 6.87 cr Rs. 20 cr. Invested by HLL in the company. Rs. 48.23 cr **

2042 2. Thus, the Government gained by selling Rs. 1000 shares for Rs. 11,490, i.e.more than 11 times the face value & 3.68 times the Book Value.

Rs. 28.51 cr.

Rs. 38.76 cr. Rs. 18.99 cr. Rs. 109.00 cr. Rs. 30 cr. to Rs. 70 cr.

3. HLL's share value went up from Rs. 2138 on 30th Dec. (prior to sale) to Rs. 3247 on 25th Feb. (post sale).

PRIOR TO SALE .

POST SALE 4. The employees of a company incurring losses became HLL employees - an efficient company. The Shareholders Agreement envisages:" the parties envision that all employees of the company on the date hereof will continue in the employment of the company." 5 Company referred to BIFR, which was inevitable. Now HLL will pick up the bill for restructuring.

Post Disinvestment Scenario

The decline in the sales of Modern Bread, which continued till the beginning of 2000, has been arrested. Weekly sales in December 2000 were around 44 lakhs SL, which is a 100% increase over the figure of April 2000. As on 31.12.2000, HLL has extended secured corporate loans to MFIL to the extent of Rs. 16.5 crores for meeting the requirement of funds for working capital and capital expenditure. HLL has provided a corporate guarantee to MFIL's banker, viz., Punjab National Bank, which has helped the Company in getting the interest rate reduced considerably to the extent of 3-4% of its earlier borrowing cost.

Post Disinvestment Scenario

Steps have been taken to improve the quality of bread, its packaging and marketing with trade-promotion activities, and to train the manpower in quality control systems. November,2002 wages have increased by an average of Rs.1800 per employee. Rs. 30 crore has been spent VRS. Rs. 7 crore infused for safety & hygiene purposes at various manufacturing locations The Government was also entitled to Put its share of remaining equity of 26 % at Fair Market Value for 2 years from 31st January 01 to 30th January 03. The Government has exercised this option and thereby received Rs. 44.07 crore on 28th November 02.

Post Disinvestment Scenario

Despite HUL s best efforts MFIL continued to make losses, HUL has invested 157 crore in MFIL s equity In 2005, its losses were Rs 15 crore and accumulated losses were Rs 79 crore. At the operating profit level, before interest and depreciation, it did make a profit though of Rs 22 crore compared to a loss of Rs 7 crore in the previous year. Bread sales grew by about 7%. The company suffered as it lost some lucrative government contracts and changed its operational structure. Hence overall sales declined by 35% to Rs 95 crore. However, HUL did enjoy tax benefits as MFIL was a sick industrial unit The company put MFIL on the block in 2006 but failed to clinch a deal

Reasons for the Failure

However, HUL still was unsuccessful in turning around the business and due to high employment costs and low margins As per the company,
The culture of MFIL was a complete misfit with its own The company has committed a mistake while conducting the due diligence process

Thank You