Submitted By :

Maskara Nikita (93) Mehta Richa (96) Mehta Trushi (97) Modi Payal (104) Narang Palak (110)

Meaning of Disinvestment
Disinvestment refers to the action of an organization

or the government in selling or liquidating an asset or subsidiary. In simple words, disinvestment is the withdrawal of capital from a country or corporation. Disinvestment involves sale of only part of equity holdings held by the government to private investors. Disinvestment process leads only to dilution of ownership and not transfer of full ownership. While, privatization refers to the transfer of ownership from government to private investors.

Motives of Disinvestment
A firm may sell businesses that are not part of its core

operations so that it can focus on what it does best.

Disinvestment is to obtain funds. When the sum of a firm's individual asset liquidation

values exceeds the market value of the firm's combined assets

To sell a part of a firm may be to create stability

OBJECTIVES OF DISINVESTMENT
To improve performance of units
To reduce budgetary deficits

To overcome the problem of political involvement in

PSUs
Enable the government to concentrate on Social

development
other objectives

TYPES OF DISINVESTMENT
OFFER FOR SALE TO PUBLIC AT FIXED PRICE: In this type of disinvestment, the government holds the sale of the equity shares to the public at large at a pre determined price. Examples:-MFIL, BALCO, CMC, HTL, IBP, HZL, PPL, and IPCL. STRATEGIC SALE: In this type, significant management rights are transferred to the investor i.e. majority of equity holdings are divested. Examples: -Offer of 1 million shares of VSNL, listing of ONGC IPO. INTERNATIONAL OFFERING: This is essentially targeted at the FII (foreign institutional investors). Ex:-GDR of VSNL, MTNL etc. ASSET SALE AND WINDING UP: This is normally resorted to in companies that are either sick or facing closure. This is done by the process of auction or tender. Ex:Auction of sick PSUs.

Methods of Disinvestment
Some firms use technology to facilitate

the process of divesting some divisions With Economic liberalization of the Indian economy, Ministry of Finance of India had set up a separate Department of Disinvestments.

METHODS ADOPTED IN INDIA

1.

NET ASSET METHOD: This will indicate the net assets of the enterprise as shown in the books of accounts. It showsthe historical value of the assets. 2. PROFIT EARNING CAPACITY VALUE METHOD: The profit earning capacity is generally based on the profits actually earned or anticipated. Itvalues a company on the basis of the underlying assets. This method does not consider orproject the future cash flow. 3. DISCOUNTED CASH FLOW METHOD: In this method the future incremental cash flows are forecasted and discounted into presentvalue by applying cost of capital rate. The method indicates the intrinsic value of the firm andthis method is considered as superior than other methods as it projects future cash flows andthe earning potential of the firm, takes into account intangibles such as brand equity,marketing & distribution network, the level of competition likely to be faced in future, riskfactors to which enterprises are exposed as well as value of its core assets.

Evolution of disinvestment policy in India

The policy of disinvestment has largely evolved

through the policy statements of Finance Ministers in their Budget Speeches In the Interim budget 1991-92, it was announced that Government would divest upto 20% of its equity in selected PSUs in favour of mutual funds, financial and institutional investors in public sector. In the budget speech of 1992-93, the cap of 20% was reinstated and the list of eligible investor was enlarged to include FIIs, employees and OCBs.

 In April, 1993, Rangrajan committee recommended to

divest upto 49% of PSEs equity for industries explicitly reserved for the public sector and over 74% in other industries. But Government did not take any decision on recommendations. In 1996, as per the Common Minimum Programme, the Budget Speech 1996-97 announced the setting up of Disinvestment Commission for 3 years. CMP also emphasized to add more transparency to disinvestment process and examine the non core areas of public sector. In the Budget Speech of 1998-99, it was announced that Government shareholding in CPSEs should be brought down to 26% on case to case basis, excluding strategic CPSEs where Government would retain majority shareholding. The interest of workers is to be protected in all cases.

 On 16th March, 1999, the Government classified

the PSEs into strategic and non strategic areas. It was decided that Strategic PSEs would be those in areas of: a) Arms and ammunition and the allied items of defence equipment, Defence aircrafts and warships; b) Atomic energy (except in the areas related to the generation of nuclear power and applications of radiation and radio-isotopes to agriculture, medicine and non-strategic industries); Railway transport. c) All other PSEs were to be considered non strategic.

Problems associated with Disinvestment

Poor performance of disinvestment in India Poor Management

Lack of environment creation

Some PSUs were not worth (Bharat Leather

Corporation, Scooters India Ltd)

Criticism
The common perception about the effectiveness

of divestment lies in the belief that institutional selling of a certain stock lowers its market value. Therefore, the company's networth becomes devalued and the owners of the company may lose substantial paper assets. In addition, institutional divestment may encourage other investors to sell their stocks for fear of lower prices, which in turn lowers prices even further. Finally, lower stock prices limits a corporation's ability to sell a portion of their stocks in order to raise funds to expand the business.

Advantages of Disinvestment policy

In the hands of the private sector, the public

sector companies would be run more efficiently. Most of the public sector companies are lossmaking and are a burden on public funds. Since the government is corrupt, the public sector companies are also corruptly managed. In the hands of the private sector, the public sector companies would be run more efficiently.

Disadvantages of Disinvestment policy

Unproductive use of disinvestment proceeds Disinvestment and Unemployment

Profit hungry private sector

Lower value of realization Privatization leads to concentration of wealth

Strategies of Disinvestment
The basic idea behind disinvestment is to sell the shares of the government in the public sector enterprises to external players. As mentioned earlier, the earliest shares were sold to financial institutions coming under the government itself. An interesting example is that of the Bonagigaon, Kochi and Madras refineries, wherein the shares were sold to another Central Public Sector Unit, the Indian Oil Corporation. The most common method adopted is, however, strategic sale. A strategic partner is identified by the government under this strategy and management control is transferred to this partner along with a bundle of shares. A typical tactic adopted towards privatization is the incremental method where shares are sold in steps. On the other hand token privatization is adopted in circumstances of acute budget deficit

wherein a lump of shares is sold off. Following the path of the Central Government, the state government have also set up their own disinvestment commissions and identified public sector units for disinvestment or complete closure.

Chronology of the evolution of disinvestment since 1991-92

Date 1991-92 Interim Budget

Event Government announced its intention to divest upto 20% of Government equity in selected CPSEs in favour of public sector institutional investors.

Industrial Policy In the case of selected enterprises, part of Government Statement dated 24-7-1991 Holdings in the equity share capital of the enterprises will be Disinvested in order to provide further market discipline to th Performance of public enterprises.

Rangarajan CommitteeIt emphasized the need for substantial disinvestmen April 1993 and stated that while the percentage of equity to be divested should not be more than 49% for industires explicity reserved for the public sector, it should be either 74% or 100% for others. In order to secure the presence of the public sector as a Countervailing force, the Government took the decision of not going for disinvestment of GAIL, IOC and ONGC, and retaining them as flagship companies.

Decision dated 23.6.2000

Disinvestment as a form of privatization

(i) Divestment of government-held equity
(ii) Promotion of joint ventures for further

expansion or through transfer of certain existing units/operations; (iii) Entering into management contracts with private professional groups or entrepreneurs; (iv) Nomination of private individuals on Board of Directors of PSEs even when their equity is insignificant (v) Contractualisation of operations

Hurdles in performance of Indian PSUs

The government hinders competition by blocking

entry of new firms, this is deeply damaging. The government is unable to obtain efficiency in utilising labour and capital; hence the GDP of the country is lowered. Investment in industries which are able to sell at low prices as capital is free and losses are reimbursed becomes a wastage. Government faces conflicts of interest between a regulatory function and an ownership function. Problem of corruption and misappropriations are all well known.

 The first phase being 1991-92 to 1995-96 where

TIMELINE

partial disinvestment was taken in piecemeal manner Second Phase 1996-97 to 1997-98, an effort to institutionalize the disinvestmentprocess was undertaken on a firm footing by constituting the DisinvestmentCommission. The third Phase 198-98-99 to 2007-08 where Department of Disinvestment (Now aMinistry) and National investment fund was formed to look after the disinvestmentprocess and the funds generated from it. Fourth phase, the Current one where government is planning to sell its stake