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Handout
Revision
Class #7 dipin@forumias.academy

PSU Reforms Disinvestment G Mergers

-

Niti
Aayog has submitted recommendations to the centre for
strategic disinvestment of Bus
cabinet in principle approval to the recommendations

gave
-

Rationale
Poor performance of Psus due to the
following reasons :

Lack of importance toprofit motive
under utilisation of capacity
location

inappropriate
no technical feasibility studies
cost
delay in
project completion and overruns

of professional management
Lack
recruitment and promotion policy
overstaffing defective ,

Lack of rational

pricing policy
political Interference

non competitiveness

Recommendations
Roogta Committee on reforms in Ps E C 2011 )
listing of
Govt should look at 50 CPSES in next 5
years
better corporate
governance

More
autonomy to Boards of BUS
better utilisation of resources and
transparency
-
fix tenure of CMDS

Vijay kelkar Committee Gold recommended monetizing surplus

land
gout .

Economic
Survey 2015-16 also recommended to use PSU lands
India initiatives
'
'

make
for
'

- in -

Steps taken

Disinvestment

Merger

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is investment

it is the process of selling

or
liquidating an asset or
subsidiary

objectives
to reduce fiscal deficit
to fund Social sector schemes
to competition
Introduce
to depoliticise operations
to encourage efficiency and professional management

Approaches
minority disinvestment -

gout retains > 51%

Majority disinvestment -

gout retains a
minority stake

strategic sale

According to Dpt of Disinvestment in the

strategic sale of
a
company
the transaction has two elements
-

transfer of majority shares

-
transfer of management and control

In
order to revive
Strategic sale of Psus the Dpt of Disinvestment
has been renamed as Dpt of Investment and Public Asset

Management
CDIPAM )

72,500
Target

Budget 2017

Govt fixed a
target of collecting crores
through
disinvestment in 2017-18

Govt plans to sell minority Stokes in 51 listed as well as unlisted

approved Ayog 's
Nih proposal for strategic
'

companies .
it also sale

in about 22 PSES ,
and closing certain loss making Psus
centre Is also planning He disinvestment of Air India

Disinvestment policy of present gout

public ownership of CPSES
Promote
retain majority shareholding

strategic disinvestment in identified CPSES

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challenges
labour and

opposition from employees ,
union political parties
CAG report in 2006 found that valuation of the companies
assets done wclhout due
"
"
were seriousness
the
amount realised through disinvestment were not paid to

concerned PSE
Lack of transparency and lack of proper policy on disinvestment
of Crony capitalism
'
'

issues

may affect the social objectives of the

Disinvestment of Air India

gout
Govt Is
planning for disinvestment of Air India .
based on
Nitiaayog
's

report

Facts
Air India has a total debt of Rs 52000 Crore

The Market share

of Air India Is 13 .

3 Y .
C May 2017 )
it has 118 aircraft ,
out of which It owns 77 planes

Rationale
Airline reported losses for 6
straight years ,
its debt Is
growing
unsustainably
bailed out ivcth $ by the
it was 5.8 billion in 2012
, gout
a
overstaffed and inefficient
domestic competition
increasing global
and
de .
link it from political pressures

lack of professionalism

challenges
Huge debt of Rs
52000 crore

its Prime properties has been mortgaged with banks
real estate
three subsidiaries
its are
profit Making MRO Unit CAIESD ,

ground handling unit CAHSL ) and Air India Charters Ltd .

there will be direct and indirect job loss

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Merger of PSBS

SBI merged with Its five associate banks and Bharatiya Manila Bank .

MOF also to banks to

four five
considering Merge few

15 more create -

global .
sized lenders .
( Canara Bank and Bank of Baroda are top contenders )

Facts
with SBI will have asset base of Rs 37 lakh crore Weth

merger ,

22,500 branches and Over 50 crore customers

Benefits
get economies of scale and reduction in the cost of doing business

address the technical
inefficiencies of Small banks
a improve the professional standards
help will to to International standards with innovative
,
merger gear up
products and services

-
expand geographical coverage
He

huge infrastructure financing

help in needs

funding
the
corporateSupport
sector in overseas acquisitions

end unhealthy and intense competition among PSB ,

volume
of interbank transactions will comedown which results
in
saving
time In clearing and reconciliation of accounts
help in norms under BASEL I '
a Meeting
For the and control will be
regulators , monitoring easier

challenges
India needs
may affect financial inclusion . more banks
- may
reduce competition
end regional focus

merger may
banks collapsed during Global Financial crisis

Even
large global
immediate issues like and
pension liability provisions
harmonisation of accounting policies
labour
opposition by employees and unions

It will result In immediate job losses

weakness of small banks
may get transferred to
bigger bank also

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merger of
oil Bus

Govt Is to India oil Psus

planning merge
Oil HPCL and GAIL
five big Companies are 10C , ONGC , BPCL ,
01L
,

Benefits
will while

A
large entity enjoy more benefits negotiating prices
the market
in
global
may
have
advantages in HE
itbidding process abroad because of
its size

this oil behemoth handle both upstream and downstream

can
process
under one roof

Consolidation will
provide economies of scale and value chain

integration
and trend the oil
Globally mergers acquisitions is the in
industry

challenges

creation of large monopoly affect market and competition
oil reduce risk consortium
Companies try to
forming by a

oil attract World

success In
discovery depends upon its ability to .

class
geologists and latest technology
to buy oil properties abroad it Is important to have gout support ,
.

as In the case of chinese companies

difficulty In blending companies ivcth different cultures
vast potential to impact energy security
as a
giant company will have

Twin balance sheet problem

Economic 2016-17 that of the critical

survey acknowledges one
'

the Problem
'

Indian Is
challenges confronting economy TBS

TBS
the balance sheet of PSB , and some
corporate houses are

weak and Is obstacle to investment and economic

an
reviving
growth

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Facts

Total NPA Is more than 9 lakh crore

RBI identified 12 accounts which account for 251 .

gross
NP As

a Infrastructure ,
Steel and textile sector have contributed most to
stressed loans

The reasons

over
leveraging of corporate during growth years

banks also financed this investment boom

global financial crisis affected growth
increased cost of borrowing
and environmental clearances

difficulty in
getting
land

issues
loan

evergreen ing
affects investment

willful defaulters

diversion of funds

problems from the banks side viz credit appraisal monitoring

,

their BASEL
banks are
struggling to meet lit norms

key elements needed far resolution

loss
recognition

Coordination
incentives
proper
recapitalisation

Steps taken

5125 refinancing infrastructure scheme

private Arcs
a strategic Debt Restructuring
Asset Quality Review

a scheme for sustainable

structuring of stressed Assets
mdradhanush plan
other measures

re capitalization of Ps Bs
-

msdvancy and bankruptcy Code

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bank -
PARA

Economic solo 17 Suggested Public Sector Asset Rehabilitation

survey Agency
-

PARA

PARA is set
up to buy bad loans of PSBS and then revive them or

them
suitably dispose off

Bad

Rationale

the measures to tackle NPA have not delivered
tangible results

limitations to recapitalisation of Ps Bs

fear of action by EDS and others Is

preventing bankers from
into
negotiated settlement with
getting companies

PARA could solve the problem of coordination

Benefits

banks clear their balance sheet

banks could Meet their BASEL II norms
could free up the capital and increased

It
thereby lending

the valuation of banks will increase

challenges

valuation of bad loans

Funding of PARA 1 bad bank

issue of moral hazard .
Ie banks may continue with their reckless

lending

Re .

capitalization of PSBS

Govt of India announced re .

capitalization of PSB , to boost

credit growth in the economy .

C Budget 2016-17 )

Rationale
banks lending capacities are
affected by poor asset quality
and weak capitalization

According to Moody 's Rs 1^2 lakh Crore capital infusion is

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required in 13 PSBS
by 2020

to III which starts from March

according BASEL norms ,
2019 ,

Indian banks need to maintain a minimum CAR of It 5%

wctih weak failed bank one has three options closure

merger
a or ;
, ,

and re .

capitalization .

Re .

capitalization Is
required because the true cost of a
banking
failure is Its effect on the larger economy

Budget 2016-17
govt announced plan to allocate
-
70,000 crore under the

lndradhanush plan introduced in 2015

- way forward

Governance reforms
Empowerment no -

interference from gout

Accountability

Public Debt
PDMA -

Management Authority
said that PDMC be

MOF has will upgraded to a
statutory
PDMA in about two years
PDMA

An independent authority to manage public debt or
gout borrowings
.

Govt has set PDML for interim Period to smoothen

up a an

the transition process

Need
Presently market borrowing Is
Managed by RBI but external
debt by central gout directly .
PDMA will consolidate internal and
external debt in a holistic manner

Management of public debt comes in Conflict with RBI 's

mandate control
to inflation

Being an
independent it puts .
some discipline on the gout debt process

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Corporate bond market Is not well developed in India

FSLRC report recommended a specialised agency for PDM

recommended Public debt be the anchor

Nik Singh Committee to new

for deciding fiscal policy

objectives of public debt management strategy

a
to ensure sustainable growth
prevent crowding out

to .

effect
to prevent welfare losses from taxation

Imposes burden on HE future generation

a to maintain stable Macro -
economic indicators

challenges
Govt 's debt management has a wider socio -
economic impact and ,

it broader outlook
requires

PDMA 's focus is only on Central gout
Govt being the
majority shareholder
of PSBS , conflict of interest
would still be present

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