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Disinvestment can also be defined as the action of an organisation (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 organisation will typically disinvest an asset either as a strategic move for the company, or for raising resources to meet general/specific needs.
The following main objectives of disinvestment were outlined:I. To reduce the financial burden on the GovernmentII. To improve public financesIII. To introduce, competition and market disciplineIV. To fund growthV. To encourage wider share of ownershipVI. To depoliticise non-essential services
Improves corporate governance Develops and deepens the capital market through spread of equity culture. Enhanced corporate governance with the induction of independent Directors. Development and deepening of capital market and spread of equity culture. Infrastructure, defense, education, healthcar e, and law and order development.
This also creates fiscal space for relocation of resources locked with CPSEs. Resources locked in sectors developed enough to raise money from the market are channelized into areas of economy that are less likely to access resources for the market because of their stage of economic development.
Letting go of these assets is best in the long term interest of the tax payers as the current yield on these investments in abysmally low. Unlocking of shareholder value Employees: Pay rises, as has been seen in past divestments. Greater opportunities and avenues for career growth- further employment generation.
i. Minority Disinvestmentii. Majority Disinvestmentiii. Complete Privatisation
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. Historically, minority stakes have been either auctioned off to institutions (financial) or offloaded to the public by way of an Offer for Sale. The present government has made a policy statement that all disinvestments would only be minority disinvestments via Public Offers. Examples of minority sales via auctioning to institutions go back into the early and mid 90s. Some of them were 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., NTPC Ltd., NHPC Ltd. etc.
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. Historically, majority disinvestments have been typically made to strategic partners. These partners could be other CPSEs themselves, a few examples being BRPL to IOC, MRL to IOC, and KRL to BPCL. Again, like in the case of minority disinvestment, the stake can also be offloaded by way of an Offer for Sale, separately or in conjunction with a sale to a strategic partner.
Complete privatisation is a form of majority disinvestment wherein 100% control of the company is passed on to a buyer. Examples of this include 18 hotel properties of ITDC and 3 hotel properties of HCI. Disinvestment and Privatisation are often loosely used interchangeably. There is, however, a vital difference between the two. Disinvestment may or may not result in Privatisation. When the Government retains 26% of the shares carrying voting powers while selling the remaining to a strategic buyer, it would have disinvested, but would not have ‘privatised’, because with 26%, it can still stall vital decisions for which generally a special resolution (three-fourths majority) is required.
Privatization implies a change in ownership, resulting in a change in management. The privatization of public sector enterprises will occur only when govt. sells more than 51% of its ownership to private entrepreneurs. Disinvestment on the other hand, has a much wider connotation as it could either involve dilution of govt. stake to a level that result in a transfer of management or could also be limited to such a level as would permit govt. to retain control over the organization. Disinvestment beyond 50% involves transfer of management, where as disinvestment below 50% would result in the govt. continuing to have a major say in the undertaking .
The decision regarding disinvestment or liquidation viewed in the light of following criteria:a) Whether the objectives of the company areachieved. b) Whether there is decrease innumber of beneficiaries .c) Whether serving the national interest will beaffected because of disinvestmentd) Whether private sector can efficientlyoperate and manage the undertaking.e) Whether the original rate of return targetedcould not be possible to achieve.
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 publicsector enterprises at a fixed price through ageneral prospectus, the offer is made to thegeneral public through the medium ofrecognized market intermediaries. (2) Cross Holding: In the case of crossholding, the govt. would simply sell part of itsshare of one PSU to one or more PSU’s.
(3) Golden Share: in this model, the govt. retains a26 percent share in the PSU. This 26 percent sharewill continue to give the govt. the status ofmajority share holder. (4) Warehousing: Under this model, the govt.owned financial institutions were expected to buythe govt.’s share in select PSU’s and holding themuntil third buyer emerged. (5) Strategic Sale: Under this model, govt. sells amajor portion (51% and above) of its stake to thestrategic buyer and also gives over themanagement control.(6) FPO: An issuing of shares to investors by apublic company that is already listed on anexchange. Retail participation is mostly high.
The size of the offer shall be atleast 1% of the paid- up capital of the company, subject to a minimum of Rs 25 crores. Seller(s) may declare a floor price in the announcement/ notice. The duration of the offer for sale shall not exceed one trading day. A separate window for the purpose of offer for sale of shares shall be created by stock exchanges. Stock Exchange shall collect 100% of the order value in cash, at the order level for every buy order/ bid Criticism because retail investors do not have any quota as in IPO/FPO and not easy to bid also. Any of the top 100 listed companies by market capitalisation
Issuance of fresh shares and offer for sale of shares in a listed issuer for the purpose of achieving minimum public shareholding The minimum number of allottees for each offer of eligible securities made under institutional placement programme shall not be less than ten No partly paid-up securities shall be offered. The issue shall be kept open for a minimum of one day or maximum of two days. Must not result in increase in public shareholding by more than ten per cent. Allottee cannot sell the allocation /allotment before the period of one year.
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
Sellingof 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 Government’s Policy or disinvestment includes the disposal of both profit making, as well potentially viable PSUs.
(i) Citizens have every right to own part of the shares of Central Public Sector Enterprises. (ii) Central Public Sector Enterprises are the wealth of the Nation and this wealth should rest in the hands of the people. (iii) While pursuing disinvestment, the majority shareholding of at least 51% and management control of the Central Public Sector Enterprises to be retained by the Government.
Governments stakes in CPSEs would squeeze this important source of revenue for the Government. Thus essentially implying that the real beneficiaries would not be the ordinary retail investor but institutional investors. in the case of disinvestment, future streams of income from dividends are forgone against a one-time receipt from the sale of stakes Employees of PSUs would lose jobs
Profit making PSUs should not be disinvested as they are performing well in any which way. A good example against this criticism would be BALCO which was a profit making company that earned the Government an average dividend (over eight years) of Rs. 5.69 cr every year on the equity sold. The Government post-disinvestment, however started getting Rs. 82.65 crore every year. Complete Privatisation may result in public monopolies becoming private monopolies, which would then exploit their position to increase costs of various services and earn higher profits.
The 1980s Arguments by economist Steps taken by USSR and China in 1980s The World Bank report of 1997
Aggressive disinvestment spree in the 1980s by the Margaret Thatcher government. Public offer were one of the frequently used techniques in the UK. Consequences from the exercise carried out in the UK. Privatization did not lead to greater competition in all cases.
Germany privatized 13,500 companies by selling off its stake in a span of two years. Other countries like Taiwan, Hungary, Thailand, Philippines, Korea, Tu rkey, Poland, West Asia. Zambia, Vietnam and even China similarly marched ahead with the disinvestment program. In the UK and much of South America, Eastern Europe and Russia, the idea behind privatization was not merely to raise money, but was also driven by ideology – privatize swiftly at all costs to increase the firms efficiency and profitability and benefit the economy as a whole.
Period from 1991-92 - 2000-01i. The change process in India began in the year 1991- 92, with 31 selected PSUs disinvested for Rs.3,038 crore. In August 1996, the Disinvestment Commission, chaired by G V Ramakrishna was set up to advice, supervise, monitor and publicize gradual disinvestment of Indian PSUsii. The Department of Disinvestment was set up as a separate department in December, 1999 and was later renamed as Ministry of Disinvestment from September, 2001. From May, 2004, the Department of Disinvestment became one of the Departments under the Ministry of Finance.iii. Against an aggregate target of Rs. 54,300 crore to be raised from PSU disinvestment from 1991-92 to 2000- 01, the Government managed to raise just Rs. 20,078.62 crore
This was the period when disinvestment happened primarily by way of sale of minority stakes of the PSUs through domestic or international issue of shares in small tranches. The value realized through the sale of shares, even in blue chip companies like IOC, BPCL, HPCL, GAIL & VSNL, however,was low since the control still lay with the government. Most of these offers of minority stakes during this period were picked up by the domestic financial institutions. Unit Trust of India was one such major institution.
This was the period when maximum number of disinvestments took place. These took the shape of either strategic sales (involving an effective transfer of control and management to a private entity) or an offer for sale to the public, with the government still retaining control of the management. Some of the companies which witnessed a strategic sale included:I. BHARAT ALUMINIUM CO.LTD.II. CMC LTD.III. HINDUSTAN ZINC LTD.IV. HOTEL CORP .OF INDIA LTD. HTL LTD.V. IBP CO.LTD.VI. INDIA TOURISM DEVELOPMENT CORP .LTD.(18 HOTEL PROPERTIES)During this period, against an aggregate target of Rs. 38,500 crore to beraised from PSU disinvestment, the Government managed to raise Rs.21,163.68 crore.
The issue of PSU disinvestment remained a contentious issue through this period. As a result, the disinvestment agenda stagnated during this period. In the 5 years from 2003- 04 to 2008-09, the total receipts from disinvestments were only Rs. 8515.93 crore.
A stable government and improved stock market conditions initially led to a renewed thrust on disinvestments. The Government started the process by selling minority stakes in listed and unlisted (profit-making) PSUs. This period saw disinvestments in companies such as NHPC Ltd., Oil India Ltd., NTPC Ltd., REC, NMDC, SJVN, EIL, CIL, MOIL, etc. through public offers. However, from 2011 onwards, disinvestment activity has slowed down considerably. As against a target of Rs.40,000 crore for 2011-12, the Government was able to raise only Rs.14,000 crore.
VSNL was the first CPSE to be divested by way of a Public Offer in 1999-00 ONGC Public Offer in 2003-04 has been the largest CPSE FPO, raising Rs. 10,542 crore Coal India Public Offer in 2010-11 has been the largest CPSE IPO, raising Rs. 15,199 crore The maximum number of applications received in a PSU IPO/FPO since 2003-04 was in CIL (15.96 lakhs)
Policy intervention : There is an urgent need to take immediate steps to minimize the resource shortfall and keep expenditures within control. Current reform scenario.I. Tax measuresII. Disinvestment receiptsIII. Subsidies I. Petroleum subsidy II. Fertilizer subsidy III. Food subsidyIV. Plan expenditureV. Deficit
Total Disinvestments Current Financial Year, till date: Rs. 21,402 crore Cumulative, till date: Rs. 131,511 crore 10 per cent stake sale in OIL fetched Rs 3,141 crore. NTPC stake of 9.5% garnered Rs 11,496 crore. Stake sale of Nalco, MMTC, SAIL and Rashtriya Chemicals and Fertilisers (RCF) is also scheduled for current fiscal.
So far this fiscal, the government has raised Rs 21,500 crore as against the target of Rs 30,000 crore Besides, 10 per cent stake sale in OIL fetched Rs 3,141 crore and 9.5 per cent in NTPC garnered Rs 11,496 crore. Stake sale of Nalco, MMTC, SAIL and Rashtriya Chemicals and Fertilisers (RCF) is also scheduled for current fiscal.
Following the target of Rs. 30,000 to be raised through disinvestment in this fiscal, the government has sold 9.5% share of NTPC through Offer for Sale (OFS) through which the government mobilized about Rs 11,400 crore (about $2.1 billion).1. So far in the fiscal, the government has mobilized about Rs 20,000 crore though divestments of its stake in these companies, which is about 67% of its target.2. This would also help the government remain closer to its fiscal deficit target of 5.3% of GDP. The recent change in rules for OFS, of allowing institutional investors to bid for stocks at no margin, helped the NPTC issue sail through.3. Earlier, institutions had to put in full margin money while bidding in an OFS. Under the new rules, an institutional investor which is bidding in OFS without any upfront margin, cannot revise its bid price downward, while those bidding with full margin money can do so.
The Cabinet Committee on Economic Affairs has approved the Follow On Public Offer (FPO) of Power Finance Corporation (PFC) consisting of:1. 17,21,65,005 equity shares of Rs.10 each constituting fresh issue of 15% of pre-issue existing paid up capital;2. In addition to above, 5,73,88,335 equity shares of Rs.10 each representing disinvestment by Government of India of 5% of pre-issue paid up capital of PFC;3. Reservation of equity shares for PFC employees subject to the limit prescribed for retail investors by SEBI, which will not exceed 0.12% of the issue size.4. Discount of 5% of offer price to the retail individual investors and eligible employees.5. Fresh issue of equity shares would enable PFC: i) To meet the eligibility requirement of maintaining a CRAR (Capital to Risk Assets Ratio) of 15% for IFC (Industrial Finance Company) status and ii) To enhance equity base to enable it to meet the growing future investment needs of the power sector.
1. The governments failure to sell all of the shares in its $2.5 billion auction of a 5% stake in Oil and Natural Gas Corp (ONGC) is an embarrassing setback in its effort to revive stock sales and trim a yawning fiscal deficit.2. ONGC shares fell more than 2% on Friday, a day after a glitch- ridden auction saw just 98.3% of the shares taken up. Media reports said state-run Life Insurance Corp of India (LIC) had bought a huge chunk of the shares.3. New Delhi hoped to follow up the ONGC sale by unloading shares in companies including Bharat Heavy Electricals Ltd (BHEL), Steel Authority of India Ltd (SAIL) and Oil India but will need to rethink
1. It will also need to address the concerns of overseas institutional investors about regulatory risk associated with investing in state-run companies.2. A lack of clarity on how much of Indias hefty oil subsidies would be borne by ONGC was a key deterrent to more interest from foreign institutions.3. The floor price for the auction was set at Rs 290 late on Tuesday, a 2.3% premium to the days closing price, prompting widespread criticism that it should have been priced at a discount. Shares of ONGC, Indias second most valuable company, were trading at Rs 281.95 on Friday.
1. Government had approved a 10 percent stake sale in the countrys largest iron-ore miner NMDC that could fetch the exchequer over Rs 7,000 crore.The disinvestment, like in the case of Hindustan Copper, will be through offer-for-sale (OFS) route, popularly known as auction method.2. The government will offer about 39 crore equity in NMDC of face value of Rs 1 each to investors. At present, the government holds 90-percent stake in the (NMDC). As of March 31, 2012, the paid-up equity capital of NMDC was Rs 396.47 crore.3. NMDC has reported a nearly 15 percent decline in net profit at Rs 1,678.62 crore for the quarter ended September 30, 2012, largely due to lower production and fall in sales. Shares of NMDC closed at Rs 166.50 apiece, down 1.89 percent on the BSE on Friday.4. Kick-starting the disinvestment process of this year, the government on Friday sold 5.58-percent stake in Hindustan Copper for about Rs 808 crore at an average price of Rs 156.56 apiece, with bulk of the bids coming from LIC and PSU banks.
On 27 January 2005, the Government had decided to constitute a National Investment Fund (NIF) into which the realization from sale of minority shareholding of the Government in profitable CPSEs would be channelised. The Fund would be maintained outside the Consolidated Fund of India.
The proceeds from disinvestment of CPSEs will be channelized into the National Investment Fund which is to be maintained outside the Consolidated Fund of India. The corpus of the National Investment Fund will be of a permanent nature. The Fund will be professionally managed to provide sustainable returns to the Government, without depleting the corpus
75%of the annual income of the Fund will be used to finance selected social sector schemes, which promote education, health and employment. The residual 25% of the annual income of the Fund will be used to meet the capital investment requirements
(a) 75% to finance selected social sector schemes, which promote education, health and employment. (b) 25% to meet the capital investment requirements of profitable and revivable CPSEs that yield adequate returns, in order to enlarge their capital base to finance expansion/diversification.
Accordingly, from April 2009, the disinvestment proceeds are being routed through NIF to be used in full for funding capital expenditure under the social sector programmes of the Government, namely: (i) Mahatma Gandhi National Rural Employment Guarantee Scheme (ii) Indira Awas Yojana (iii) Rajiv Gandhi Gramin Vidyutikaran Yojana (iv) Jawaharlal Nehru National Urban Renewal Mission (v) Accelerated Irrigation Benefits Programme (vi) Accelerated Power Development Reform Programme
UTI ASSET MANAGEMENT CO.LTD. SBI FUNDS MANAGEMENT CO.PVT.LTD. LIC MUTUAL FUND ASSET MANAGEMENT CO. LTD.
Unfavorable market conditions Offers made by the government were not attractive for private sector investors Lot of opposition on the valuation process No clear-cut policy on disinvestment Strong opposition from employee and trade unions Lack of transparency in the process Lack of political will