Disinvestment in India- Process & Methods

Disinvestment in India Methods , Procedures and Problems

Meaning of Investment
Conversion of money or cash into either : -
Securities
Bonds
Debentures
Or any other form of money

Transfer of Government Ownership when the dilution
is beyond 51 %
Imperative for the Government
to sell a part of its holdings
Less than 51%

Government’s 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 PSU’s 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 can’t 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 2-3 months 3-6 months 1 week Selection of PSU by MODI Approval by CCD Formation of IMG & Selection of Global Advisors Submission of Expression of Interest Submission of Initial Technical Proposal Due Diligence / Commercial negotiations Finalise Shareholders Agreement (SHA) & Share Purchase Agreement (SPA) Financial bids 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

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

Fact File Top line 898 Cr. PAT 56 Cr. HC 7500 Sale of 51% stake in Balco (Management Control) Mines

Case for Disinvestment
Company running on Outdated technology. Cash 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)

Valuation Conundrum
Valued on 4 Parameters (JP Morgan)
Discounted cash flow
Comparative valuation
Balance sheet
Asset valuation
Control premium added to arrive at reserve price

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
Analysis Paralysis

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 company’s assets
Supreme Court’s role
Union – Management Meetings
Agreement Signed

SUGGESTIONS AND REMARKS

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
Yearly action plan should be taken

Disinvestment in India- Process & Methods

by Rajesh Soni on Jun 03, 2009

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Disinvestment in India- Process & Methods Presentation Transcript