Main objectives for setting up the Public Sector Enterprises Rapid economic growth Return on investment Redistribution of income

income Employment opportunities Balanced development Small-scale and ancillary industries

Promote import substitutions Industries reserved for PSUs prior to July 1991 1. Arms and Ammunition and allied items of defence equipment 2. Atomic energy 3. Iron and Steel 4. Heavy casting and forging of steel items 5. Heavy plant and machinery required for iron and steel production, for mining for machine tool manufacture and such other industries as may be specified by the Central Government. 6. Heavy electrical plant including large hydraulic and steam turbines 7. Coal and lignite 8. Minerals oils 9. Mining of iron ore, manganese ore, chrome ore, gypsum, sulphur, gold and diamond. 10. Mining and processing copper, lead, zinc, tin molybdenum and wolfram 11. Minerals specified in the Schedule to the Atomic Energy (Control of Production and Use) Order 1953. 12. Aircraft 13. Air transport 14. Rail transport 15. Ship building 16. Telephones and telephone cables, telegraph and wireless apparatus (excluding radio receiving sets) 17. Generation and distribution of electricity Industries reserved for PSUs since July 1991 1. Arms and Ammunition and allied items of defence equipment, defence aircraft and warship 1. Atomic Energy 1. Coal and Lignite 1. Mineral Oils

1. Mining of iron ore, manganese ore, chrome ore, gypsum, sulphur, gold and diamond 1. Mining of copper, lead, zinc, tin, molybdenum and wolfram 1. Minerals specified in the schedule to Atomic Energy (Control of production and use) Order, 1953 1. Railway Transport Industries reserved for PSUs since December 2002 Atomic Energy Minerals specified in schedule to atomic Energy (Control of Production and Use) Order, 1953

Railway Transport Primary objectives for privatising the PSEs Releasing large amount of public resources Reducing the public debt Transfer of Commercial Risk

Releasing other tangible and intangible resources Other benefits expected from privatisation Expose the privatised companies to market discipline Wider distribution of wealth Effect on the Capital Market

Increase in Economic Activity Privatization Process Disinvestment commission recommendations Consideration of the Cabinet Committee on Disinvestment (CCD) Selection of the Advisor through a competitive bidding process Receipt of the Expression of Interest (EOI) from advisors

Advertisement for inviting EOI from bidders Short-listing of bidders and signing of confidentiality undertaking

Due diligence, etc. by short-listed bidders Cabinet Committee on Disinvestment (CCD) Chaired by the Prime Minister Functions: To consider the advice of the Core Group of Secretaries To decide the price band To decide the final pricing Intervention in case of disagreement between the recommendations To approve the three-year rolling plan and the annual programme of disinvestment Core Group of Secretaries on Disinvestment (CGD) Headed by the Cabinet Secretary Functions: Supervises the implementation of the decisions of all strategic sales Monitors the progress of implementation of the CCD decisions. Makes recommendations to the CCD on disinvestment policy matters. Ministry Of DisinvestmentSet up in 1999 Assisted by Advisors Business Allocated to Ministry of Disinvestment All matters related to disinvestment Decisions on the recommendations of the Disinvestment Commission Implementation of disinvestment decisions Evolution of the Disinvestment Policy 1. Interim Budget 1991-92

Disinvestment Up to 20% of the Equity in selected PSEs undertaking was in favour of the Mutual Fund, Financial and Institutional Investor in

2. Industrial Policy Statement of 24th July 1991 Government didnt place restriction in class of investor nor the equity share capital

3. Budget 1992-93 Cap of 20% for disinvestment was reinstated and eligible investor modified to Institutional Investor, Mutual Fund and Workers in these Firms 4. Rangarajan Committee April 1993 It recommended 49% of PSEs Equity to be disinvested for industries explicitly reserved for the public sector Holding of 51% was recommended for only six industries.

5. The Common Minimum Programme 1996 Examine the public sector non-core strategic areas. Setting up of Disinvestment Commission Transparency

6. Disinvestment Commission Recommendations 1999 Disinvestment Commission was set up in 1996 August 1999, 58 PSEs were shifted from Public offering to Strategic/ Trade sales with transfer of management 7. Strategic & Non-strategic Classification March 1999 3 industries were strategic industries and rest all the industries were non strategic. Percentage of disinvestment change in government stake going down to less 51% or up to 26% would be case to case.

8. Budget 2000 - 2001 First time government was ready to reduce the stake below 26% in a Non Strategic PSEs.

9. Budget 2001 - 2002 Credit receipt of 12000 crore from disinvestment next year. 10. Suo Moto Statement of Shri Arun Shourie ,2002 Specific aim of Disinvestment Policy

 Disinvestment does not result in alienation of national assets Disinvestment Proceeds Fund Major Issues In Disinvestment Profitability: The return on investments in PSEs, at least for the last two decades, has been quite poor. The PSE Survey shows PSEs, as a whole, never earned post tax profits that exceeded 5% of total sales or 6% of capital employed,which is at least 3% points below the interest paid by the Government on its borrowings

Recurring Budgetary support to PSEs: Despite huge investment in the public sector, the Government is required to provide more funds every year that go into maintaining of the unviable / weak PSEs

Industrial Sickness in PSUs: To save the PSUs from sickness, the government has been sanctioning restructuring packages from time to time. As on 31.3.00 Profit & Loss A/C of 21 PSUs showed accumulated loss of 13959.57 crores.

Employee issues: Of the 1.6 million jobs added in the organized sector 1 million, or two thirds, were added in the private sector during the period 1991 to 2000. This indicates that the private sector has become the major source for incremental employment in the organized sector of the economy over the last decade

Methods of Disinvestment Parameters Pricing Target investor set Transaction costs Time involved Regulation Explanation

Optimisation / maximisation through competitive tension

Investors with strategic fit - techno-commercial credentia Low 6-10 months

Companies Act, SEBI Take-over code, Stock Excha clearance (for foreign investors)

Suitability Precedents Strategic Sale

Non-strategic Companies Companies where Government is willing to give significa

MFIL, BALCO, CMC, HTL, VSNL, IBP, HZL, PPL, IPC

Advantages Maximises price because of transfer of management rights Brings technical / marketing / financial / managerial expertise of the buyer to the company Increased value of residual Govt. shareholding Low cost and less regulation Disadvantages Time consuming Issues relating to management, land and labour etc. to be resolved

Disinvestment Commission's Recommendations 3 Methods of valuation approved by the Disinvestment Commission

1. Discounted cash flow 2. Relative valuation' approach 3. Net asset value' approach