Disinvestment in India- Process & Methods

35,549 views

Published on

Disinvestment in India- Process & Methods

  1. 1. Disinvestment in India Methods , Procedures and Problems
  2. 2. <ul><li>Meaning of Investment </li></ul><ul><li>Conversion of money or cash into either : - </li></ul><ul><ul><li>Securities </li></ul></ul><ul><ul><li>Bonds </li></ul></ul><ul><ul><li>Debentures </li></ul></ul><ul><ul><li>Or any other form of money </li></ul></ul>
  3. 3. <ul><li>Transfer of Government Ownership when the dilution </li></ul><ul><li>is beyond 51 % </li></ul><ul><li>Imperative for the Government </li></ul><ul><li>to sell a part of its holdings </li></ul>Less than 51%
  4. 5. <ul><li>Government’s Strategy </li></ul><ul><li>Meet the growing budget deficit </li></ul><ul><li>The Government knew that they could make more money by selling off their assets cheaply </li></ul><ul><li>Faster realization value </li></ul>
  5. 6. Industries reserved for PSU’s since December 2002 <ul><li>Atomic Energy </li></ul><ul><li>Minerals specified in schedule to atomic Energy (Control of Production and Use) Order, 1953 </li></ul><ul><li>Railway Transport </li></ul>
  6. 7. Government Policies on Disinvestment <ul><li> Government Policies </li></ul><ul><li>Bring down Government equity to 26% or lower </li></ul><ul><li>Restructuring of potential & viable P.S.U </li></ul><ul><li>Close down P.S.U that can’t be revived </li></ul><ul><li>Protect the interest of the workers </li></ul>
  7. 8. Methods of Disinvestment <ul><li>Strategic Sale </li></ul><ul><li>Capital Market </li></ul><ul><ul><li>Offer for sale –Fixed Price / Book Building </li></ul></ul><ul><ul><li>Secondary market / Private Placement </li></ul></ul><ul><li>Reduction in Equity </li></ul><ul><ul><li>Buy back of Shares </li></ul></ul><ul><ul><li>Conversion of equity into other instruments </li></ul></ul>
  8. 9. Other Methods <ul><li>Trade Sale  </li></ul><ul><li>Asset Sale and Winding up </li></ul><ul><li>Management/Employees Buyout (M/EBO) </li></ul><ul><li>Cross Sale </li></ul><ul><li>Sale through De-merger/Spinning off </li></ul>
  9. 10. 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
  10. 11. Three Methods of valuation <ul><li>Discounted cash flow </li></ul><ul><li>Net asset value' approach </li></ul><ul><li>Profit Earning Capacity </li></ul>
  11. 12. Problems in Disinvestment process <ul><li>Soft Budget constraint </li></ul><ul><li>Policy adopted by the government. </li></ul><ul><li>Multiple Control authorities </li></ul>
  12. 13. Reasons for Slow Progress <ul><li>No clear framework or policy </li></ul><ul><li>Disinvestment used to meet fiscal deficit </li></ul><ul><li>No transparency </li></ul><ul><li>Failure to attract foreign buyers </li></ul>
  13. 14. <ul><li>Disinvestment Case Laws </li></ul>
  14. 15. BALCO’s Disinvestment <ul><li>&quot;Sterlite's offer for Balco is more than fair.&quot; </li></ul><ul><li>- Business World, March 12, 2001. </li></ul><ul><li>The deal was like loot of Chattisgarh in a day-light robbery.“ </li></ul><ul><ul><ul><ul><ul><li>- Chattisgarh CM, Ajit Jogi. </li></ul></ul></ul></ul></ul>
  15. 16. Fact File Top line 898 Cr. PAT 56 Cr. HC 7500 Sale of 51% stake in Balco (Management Control) Mines
  16. 17. Case for Disinvestment <ul><li>Company running on Outdated technology. Cash reserve 500 Cr. not adequate for Modernization </li></ul><ul><li>Share of Operating profit in total Profit </li></ul><ul><li>Impact of Aluminum prices </li></ul><ul><li>Company recovered from state of sickness and hence right time for sale. </li></ul>
  17. 18. Bidders for Strategic Stake <ul><li>Hindalco (Birla Group) </li></ul><ul><li>Alcoa (US based) </li></ul><ul><li>Sterlite Ind. (Anil Agarwal) </li></ul>
  18. 19. Valuation Conundrum <ul><li>Valued on 4 Parameters (JP Morgan) </li></ul><ul><ul><li>Discounted cash flow </li></ul></ul><ul><ul><li>Comparative valuation </li></ul></ul><ul><ul><li>Balance sheet </li></ul></ul><ul><ul><li>Asset valuation </li></ul></ul><ul><li>Control premium added to arrive at reserve price </li></ul>
  19. 20. <ul><li>Reserve Price fixed at 514 Cr. using 25% mark up to the valuations arrived by DCF Model </li></ul><ul><li>Hue and cry by Opposition over valuation methodology </li></ul><ul><li>Question – Earnings Vs Asset Value </li></ul>Analysis Paralysis
  20. 21. The Verdict <ul><li>Sterlite Industries emerges as the highest bidder with an offer of 551 Cr. </li></ul>
  21. 22. Post Sell Out Drama <ul><li>Lack of Transparency </li></ul><ul><li>Political Pressure & threats </li></ul><ul><li>Allegations of Under hand deals </li></ul><ul><li>Company wide Agitation, strike continued for 67 days </li></ul>
  22. 23. Post Sell out Drama <ul><li>Threat of damage to company’s assets </li></ul><ul><li>Supreme Court’s role </li></ul><ul><li>Union – Management Meetings </li></ul><ul><li>Agreement Signed </li></ul>
  23. 24. SUGGESTIONS AND REMARKS
  24. 25. <ul><li>Clear policy & framework for disinvestment process </li></ul><ul><li>De-link disinvestment with budgetary control exercise </li></ul><ul><li>Disinvestment process be audited by at least 2 reputed auditing firms </li></ul><ul><li>Creation of separate disinvestment fund </li></ul><ul><li>Yearly action plan should be taken </li></ul>

×