The document discusses disinvestment and payback period. It defines disinvestment as a government or organization selling or liquidating an asset or subsidiary. The objectives of disinvestment include reducing financial burden, improving public finances, and introducing competition. Payback period is defined as the time required for a firm to recover its original investment. It is calculated by dividing the original investment by the annual cash flows. Payback period is used to measure risk, control the effects of uncertain future cash flows, and minimize the impact on liquidity.
2. Introduction
Investment and disinvestment are two sides of
the same coin. Investment refers to conversion of
money or cash into securities, debentures, bonds
or any other claims on money. At the same time,
disinvestment invloves the conversion of money
claims or securities into money or cash.
4. Objectives of Disinvestment
To reduce the financial burden on
government
To improve public finances
To introduce, competition and market
discipline
To increase growth of the firm
To encourage wider share of ownership
5. Reasons for Disinvestment
• To meet fiscal deficit
• Expansion or diversification of the firm
• To repayment of government debts
• Implementation of government plan
• PSU's give negative rate of return on
capital
6. Background of Disinvestment
The Indian economy had virtually embraced
bankruptcy during the period of 1980-92.
In 1991, there was 236 operating public sector
undertakings, of which only 123 were profit making.
The top 20 profit making PSU’s were responsible for
80 percent of profits.
The return on public sector investment for the year
1990-91 was just over 2 percent.
7. Criteria for Disinvestment
The decision regarding disinvestment or liquidation
viewed in the light of following criteria:
Whether the objectives of the company are achieved
Whether there is decrease in number of beneficiaries
Whether serving the national interest will be affected
because of disinvestment
Whether private sector can efficiently operate and manage
the undertaking.
Whether the original rate of return targeted could not be
possible to achieve.
Whether socio-economic objectives lots its purpose
8. Process of Disinvestment
The govt. in July 1991 initiated the disinvestment process in
India, while launching the New Economic Policy (NEP).
The govt. had appointed the Krishnamurthy committee in
1991 and Rangarajan committee in 1992 to look after the
disinvestment process.
Both the committees have recommended disinvestments to
fulfill objectives of modernization of the PSE’s through:
(a) Strengthening R &D
(b) Initiating diversification/expansion programme.
(c) Retaining and reemployment of employees.
(d) Funding genuine needs of expansion.
(e) Mitigating fiscal deficit of the government.
Contd..
9. These committees also distinguished between the
short term and long term goals of the disinvestment
and advised the govt. not to sacrifice the long term
goals for the sake of fulfilling the short term
objectives.
The govt. has announced in its NEP that mitigating the
fiscal deficits is the only objective of disinvestment.
The crucial shift in govt. policy for disinvestment of
PSU’s was mainly attributed to poor performance of
these enterprises and burden of financing their
requirements through budget allocation.
Contd..
Process of Disinvestment
10. Privatization and Disinvestment
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.
11. 11
PAYBACK PERIOD: Definition
Is the time required for a firm
to recover its original
investment.
12. 12
FORMULA: Payback Period
Payback period tells how long it will take a
project to break even.
Payback period
= Original investment ÷ Annual cash flows
= $1,000,000 / $500,000
= 2 years
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PAYBACK PERIOD: Uses
• Sets maximum payback period for all projects;
rejects any that exceed payback period
• Measures risk
– Riskier firms use shorter payback period
– In liquidity problems, use shorter payback period
• Avoids obsolescence
14. 14
PAYBACK PERIOD: Summary
Payback period provides information that can be
used to help
– Control risks of uncertain future cash flows
– Minimize impact of investment on liquidity
problems
– Control risk of obsolescence
– Control effects of investment on performance
measures