dis invest ment & pay back period

dis invest ment & pay back period

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  Disinvestment & paybackperiod Presented by SAI KIRAN.B (12NA1E0036)
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  Introduction Investment anddisinvestment 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.
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  Disinvestment DEFINITION “Theaction of an organisation or government selling or liquidating an asset or subsidiary”
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  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
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  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
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  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.
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  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
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  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..
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   These committeesalso 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
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  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.
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  11 PAYBACK PERIOD:Definition Is the time required for a firm to recover its original investment.
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  12 FORMULA: PaybackPeriod 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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  13 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
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  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