This PPT explains very comprehensively the process of Disinvestment in India.

1. Disinvestment of
Central Public
Sector Enterprises
in India (1991-2013)

2. DISINVESTMENT - BACKGROUND
 Definition - Involves sale/reduction of Government’s equity in CPSEs.
 Approaches to Disinvestment -
 Minority Disinvestment - Government retains a majority stake in the
company, typically greater than 51% ; ensuring management control.
 Majority Disinvestment – Government retains a minority stake while
transferring management control to a strategic partner.
 Complete Privatization - a form of majority disinvestment wherein
100% control of the company is passed on to a buyer.
 Started in 1991 as a part of reform of the Public sector in India.
 Department of Disinvestment(DoD), mandated with the task of handling
all matters relating to disinvestment in CPSEs.
 Total receipts from disinvestment stand at Rs. 1,38,295.54 crore as on
13.08.2013. (Source–Summary of Receipts from Disinvestment, DoD)

3. PUBLIC SECTOR IN INDIA- A BROAD OVERVIEW
 Includes “all activities funded out of Government’s budget.” ; hence in
terms of coverage its size is, indeed, quite large.
 Consists of Central and State Government undertakings apart from public
administration and defence.
 Public sector presence predominant in public utilities & infrastructure
 Departmental enterprises – the railways, post & telegraph, power, etc.
 Non-departmental enterprises – establishments set up by the GoI either as
Statutory Corporations or companies producing & selling goods & services.
 First Five Year Plan – 5 Central Public Sector Enterprises, Rs. 29 crore (total
investment) ; as on 31.03.2012, 260 CPSEs with more than Rs. 7 lakh crore
as investment.
 As on 31st October 2013, the 50 CPSEs listed on the stock exchanges
(Bombay stock Exchange and National Stock Exchange) contributed about
15% of the total market capitalization (M-cap).

4. DISINVESTMENT METHODS ADOPTED IN INDIA
 Capital Market Sale –
 Auction – Auction to a set of institutional investors where pricing
optimized through bidding
 International offering - Offer for sale in the international markets
 Private Placement - Placement of equity to a set of institutional
investors based on price discovery through book building
 Public Issue - An issue of securities (shares) made to the public in terms
of a SEBI approved prospectus or an offer for sale document. Includes :
 Initial Public Offer (IPO) ; an issue of fresh equity by an unlisted CPSE
or the Offer for Sale (OFS) by GoI out of its shareholding or a
combination of both to the public for subscription for the first time
 Follow on Public Offer (FPO) by a listed company
The OFS to public can be at a fixed price or through book building.
 Strategic Sale - Two basic elements:
 Transfer of a large block of shares to a Strategic Partner (SP)
 Transfer of management control to the SP
Pricing optimized through competitive tension & control premium

5. EVOLUTION OF DISINVESTMENT POLICY IN INDIA
 First echoed in the Interim & then Final budget speech 1991-92 : To
disinvest up to 20% of GoI equity in selected CPSEs -
 Raise resources;
 Encourage wider public participation;
 Promote greater accountability.
 Rangarajan Committee on Disinvestment (1993) recommended
percentage of equity to be disinvested :
 Under 49% in reserved areas for the public scetor
 Either 74% or 100% for others
 Disinvestment Commission(DC) 1996 (for 3 years) ; made specific
recommendations for 58 out of 72 PSUs referred to it ; stressed a
shift from public offerings to Strategic Sales.
 Budget 1998-99: GoI Shareholding to be brought down to 26%
except in CPSEs involving strategic considerations.
 In March 1999, GoI classified CPSEs into strategic & non-strategic.
Defence related, Atomic Energy related with some exceptions & Rail
transport regarded as strategic.
 Department of Disinvestment in established December 1999.

6. Contd…
 Budget Speech 2000-01 - the term “privatization” used for the first time ;
increasing emphasis on Strategic Sales ; creation of a Disinvestment
Proceeds Fund to meet expenditure in the social sector, restructuring of
CPSEs and retiring public debt;
 Reconstitution of the DC in 2001; examined 41 CPSEs ; wound up in 2004.
 National Common Minimum Programme (NCMP) May, 2004 –
 Generally profit making PSEs will not be privatized;
 GoI not to support the emergence of any monopoly; case-by-case
approach to privatization; privatized revenues for social sector schemes;
 Modernize & restructure sick PSUs; Chronically loss making companies
to be sold after giving workers their dues.
 Retaining ‘Navratna’ companies in the public sector; can raise resources
from the capital market.
 GoI in February 2005, decided to call off the Strategic Sale process.
 GoI, in principle, also approved the following :
• Listing of currently unlisted profitable CPSEs (other than Navratnas) and
sale of minority shareholding of GoI in listed profitable CPSEs through an
IPO with GoI retaining at least 51% of equity and management control
of the CPSE.
• Constitution of a National Investment Fund

7. CURRENT POLICY ON DISINVESTMENT (2009)
 Case - by – case approach to the Disinvestment process.
 Already listed profitable CPSEs (not meeting SEBI’s mandatory public
shareholding of 10%) to be made compliant by OFS by Government or by
the CPSEs through fresh equity issue or a combination of both.
 Unlisted CPSEs to be listed having earned net profit in three preceding
consecutive years with no accumulated losses.
 For profitable CPSEs having 10% or higher public ownership, FPOs to be
considered keeping in view the capital requirements of the CPSE; GoI
could offer a portion of its equity shareholding in conjunction.
 CPSEs can use their surplus funds to buy back their shares as well as one
CPSE may buy the shares of other CPSEs from the GoI.
(Source – Public Enterprises Survey 2011-12, Vol-1, Chapter – 13)

8. VALUATION METHODS
 Valuation – carried out to determine the Reserve Price in case of sale of a
company (below which offers/bids considered as inadequate) ; for
companies listed on the Stock Exchanges, market price of shares also used
as a benchmark to arrive at a fair value of the company.
 Four methods identified
 Discounted Cash Flow method
(Present value comes from future cash earnings capacity) ;Useful for an
ongoing concern
 Balance Sheet method
(Value of the underlying assets) ;Useful where intangibles are negligible
 Relative Valuation method
(Traded value of comparable companies) ; price to earnings (P/E) and price
to book value (P/B) ratios or sales multiples
 Asset Valuation method
(Cost of replacing tangible assets or the value which might be realized by
liquidation of the business)

9. LEGAL ISSUES
 96 disinvestment related lawsuits, including transfer petitions filed
between December, 1999, (when the DoD was established) & June,
2007.
 Out of which 3 important judgements of the Supreme Court :
 Bharat Aluminium Co. (BALCO) (December 2001)
 Centre for Public Interest Litigation and Others vs. Union of India and
Others in Hindustan Petroleum Corporation Ltd & Bharat Petroleum
Corp. Ltd (September 2003)
 All India Tourism &Development Corp. Ltd (ITDC) Workers Union &
Others viz. ITDC and Others (October 2006)
 In a nutshell, the Apex Court held that :
 Disinvestment essentially an economic policy decision of the GoI ;
hence beyond the domain of judicial scrutiny.
 For Statutory Corporations, amendment to the statutes concerned
needed to proceed with disinvestment.

10. NATIONAL INVESTMENT FUND (NIF)
 Constituted in 2005 with the objective of utilizing the income for
financing Social Sector Schemes (75%) & capital investment in profitable
& revivable CPSEs (25%).
 Corpus to come from disinvestments; to be maintained outside the
Consolidated Fund of India (CFI).
 One time exemption given during 2009-12 ; further extended up to
March 2013; Proceeds used for selected SSS such as National Rural
Employment Guarantee Scheme, Indira Awas Yojana, etc.
 From the fiscal year 2013-14, the proceeds to be channelized into NIF
and maintained as a ‘Public Account’ ; would be utilized for
Recapitalization of Public Sector Banks ( Rs. 14000 crore) and for
meeting the capital expenditure of India Railways ( Rs. 26000 crore).
(Source- Ministry of Finance, GoI : Parliament Questions (Lok Sabha),
Question No. 6169- National Investment Fund).

11. OBSERVATIONS
General
 A transition from the prevailing ideology of giving the public sector a
significant position to placing it along the commercial/competitive lines.
 Some countries privatized rapidly (Argentina & Czech Republic to name a
few) ; Indian commitment gradual - gaining useful experiences from within.
 Initial phase minority stakes sold ; only diilution of GoI equity.
 Starting 1999 emphasis on Strategic Sales.
 Latest ; 2004 onwards, no privatization only disinvestment.
Study specific
 Valuation methods adopted in India; analyzed both on the academic &
institutional front ; CAG’s Report 17 of 2006 (Strategic Sale of 9 PSUs during
1999-00 to 2002-03) highlighted :
 Each major assumption regarding the factors affecting valuation of a
PSU needed to be valid and justifiable.
 Essential preparatory work to be done before calling EoIs such as
resolving tax related litigation/ matters,etc.
 The ruling of the SC provided the much needed clarity keeping in view the
public debate that arose among the various sections of the society.

12. Contd…
 National Investment Fund-
 Setting up of such a fund first echoed in 2000-01 but established
only in 2005.
 Receipts realized on account of strategic sale of 9 PSUs examined in
CAG’s report accounted for as capital receipts in the CFI ; calling for
prompt operationalization of the fund.
 Furnishing the details of funds withdrawn & utilized for specific
purposes from time to time entails a more transparent mechanism
in this regard.

13. THANK YOU