DISINVESTMEMT

Danish Shaikh

Index
1) 2) 3) 4) 5) ") %) )) *) Definition Evolution Disinvestment Policy of India Facts and figures till 2004-05 urrent !trategies #aluation of P!$s #aluation &ec'ni(ues 'allenges in valuation +ig't valuation a,,roac'

10) Pro-lems associated .it' disinvestment ,olicy 11) onclusion

Definitions of Disinvestments:

a,ital investment s'rin/age caused -y a firm0s failure to maintain or re,lace ca,ital assets -eing used u, or -y t'e firm0s sale of ca,ital goods suc' as e(ui,ment1

Disinvestment is a ,rocess of transferring ,ro,erty from ,u-lic o.ners'i,1 23y 4ordnet Dictionary)

Disinvestment refers to t'e use of a concerted economic -oycott5 .it' s,ecific em,'asis on li(uidating stoc/5 to ,ressure a government to.ards ,olicy or regime c'ange1

&'e term also refers to t'e reduction of investment in firms5 industries or countries for reasons of ,olitical or social ,olicy1

Evolution of Disinvestments Policy

Disinvestment .as a term first used in t'e 1*)0s5 most commonly in t'e $nited !tates5 to refer to t'e use of a concerted economic -oycott designed to ,ressure t'e government of !out' 6frica into a-olis'ing its ,olicy of a,art'eid5 .'ic' .as still in force at t'at time1 In India since 1**1 t'e term is a,,lied to t'e ,rivati7ation of !tate-'eld assets8 t'e 9inister for Disinvestment is a a-inet-level ,ost1 &'e De,artment of Disinvestment .as formed on t'e10t' Decem-er 1***5 .it' a vie. to esta-lis'ing a systematic ,olicy1

DISINVESTMENT POLICY OF THE GOVERNMENT OF INDIA

T'e .'ole ,olicy of disinvestments 'as undergone a sea c'ange1 Initially5 it .as one of offering a ,art of t'e e(uity to various ,rivate sector ,layers -ot' domestic and foreign1 :o. it is one of outrig't sale of ma;ority s'ares to -e so called strategic ,artners5 .it' a clear commitment to ultimately off-load t'e rest of t'e s'ares after a time lag1 6nd .it' suc' a strategy5 t'e an<iety of t'e ,resent =ovt to -ridge t'e fiscal deficit is creating a situation of distress sale of P!$s to ,rivate 'ands1 &'erefore5 it is no longer disinvestments ,olicy5 -ut clear-cut ,olicy conclusive ,rivati7ation1 &'e .'ole ,rivati7ation ,rocess 'as -ecome an instrument of transferring ,u-lic ,ro,erty to ,rivate 'ands for a song muc' to t'e detriment of t'e national interest and t'e industrial economy of t'e country in ,articular1 6nd .it' t'e .'ole ,rocess5 corru,tion is .oven intrinsically1 &'e very conce,t of ,rivati7ation of ,u-lic sector units and more so t'e -lue c'i, ones5 in itself is a -an/ru,t
4

corru,t ,olicy ,erce,tion5 treac'ery .it' t'e nation and fraud on t'e ,eo,le of t'e country1

INTERIM B D!ET "##"$#% &'hand(asekha( !ove(nment)

> It 'as -een decided t'at =overnment .ould disinvest u, to 20 ,er cent of its e(uity in selected ,u-lic sector underta/ings5 in favour of mutual funds and financial or investment institutions in t'e ,u-lic sector1 &'e disinvestment5 .'ic' .ould -road -ase t'e e(uity5 im,rove management and en'ance t'e availa-ility of resources for t'ese enter,rises5 is also e<,ected to yield +s1 25500 crore to t'e e<c'e(uer in1**1-*21 &'e modalities and details of im,lementing t'is decision5 .'ic' are -eing .or/ed out5 .ould -e announced se,arately1>&'e ,olicy5 as enunciated -y t'e =overnment5 under t'e Prime 9inister !'ri 'andras'e/'ar .as to divest u, to 20? of t'e =overnment e(uity in selected P!Es in favour of ,u-lic sector institutional investors1 &'e o-;ective of t'e ,olicy .as stated to -e to -road--ase e(uity5 im,rove management5 and en'ance availa-ility of resources for t'ese P!Es and yield resources for t'e e<c'e(uer1

Indust(ial Policy Statement of %*th +uly, "##"

@In t'e case of selected enter,rises5 ,art of =overnment 'oldings in t'e e(uity s'are ca,ital of t'ese enter,rises .ill -e disinvested in order to ,rovide furt'er mar/et disci,line to t'e ,erformance of ,u-lic enter,rises >1

Bud-et s.eech: "##"$#%

>In order to raise resources5 encourage .ider ,u-lic ,artici,ation and ,romote greater accounta-ility5 u, to 20 ,er cent of =overnment e(uity in selected ,u-lic sector underta/ings .ould -e offered to mutual funds and investment institutions in t'e ,u-lic sector5 as also to .or/ers in t'ese firms>

Re.o(t of the 'ommittee on the Disinvestment of Sha(es in PSEs &Ran-a(a/an 'ommittee): 0.(il "##1
&'e +angara;an ommittee recommendations em,'asised t'e need for su-stantial disinvestment1 It stated t'at t'e ,ercentage of e(uity to -e divested could -e u, to 4*? for industries e<,licitly reserved for t'e ,u-lic sector1 It recommended t'at in e<ce,tional cases5 suc' as t'e enter,rises5 .'ic' 'ad a dominant mar/et s'are or .'ere se,arate identity 'ad to -e maintained for strategic reasons5 t'e target ,u-lic o.ners'i, level could -e /e,t at 2"?5 t'at is5 disinvestment could ta/e ,lace to t'e e<tent of %4?1 In all ot'er cases5 it recommended 100? divestment of =overnment sta/e1 Aolding of 51? or more e(uity -y t'e =overnment .as recommended only for " !c'edule industries5 namelyB I) ii) iii) iv) v) oal and Cignite 9ineral Dils 6rms5 ammunition and defence e(ui,ment 6tomic energy +adioactive minerals5 E

"

vi)

+ail.ay trans,ort

Ao.ever5 t'e =overnment did not ta/e any decision on t'e recommendations of t'e +angara;an ommittee1

Bud-et S.eech 2y 3inance Ministe( Sh(i P4 'hidam2a(am &"##5$#6) on %%nd +uly, "##5
@=overnment 'as a,,roved t'e ,ro,osal to esta-lis' a Disinvestment ommission1 6ny decision to disinvest .ill -e ta/en and im,lemented in a trans,arent manner1 +evenues generated from suc' disinvestment .ill -e utilised for allocations for education and 'ealt' and for creating a fund to strengt'en Pu-lic !ector Enter,rises1 &'e interim -udget for 1**"-*% too/ credit for +s1 5000 crore t'roug' disinvestment1 I ,ro,ose to ta/e credit for t'e same amount1F

Disinvestment 'ommission Recommendations: &3e24"##6$ 7ct4 "###)

Pursuant to t'e a-ove ,olicy of t'e $nited Front =overnment5 a Disinvestment ommission .as set u, in 1**"1 3y 6ugust 1***5 it made recommendations on 5) P!Es1 &'e recommendations indicated a s'ift from ,u-lic offerings to strategic G trade sales5 .it' transfer of management1

Bud-et S.eech 2y 3inance Ministe( Sh(i P4 'hidam2a(am &"##6$#8) on %8th 3e2(ua(y, "##6
@&'e ommission 'as o-served @&'e essence of a long-term disinvestment strategy s'ould -e not only to en'ance -udgetary recei,ts5 -ut also minimise -udgetary su,,ort to.ards un,rofita-le units .'ile ensuring t'eir long-term via-ility and sustaina-le levels of em,loyment in t'em1F =overnment agrees .it' t'is vie. and I .ould a,,eal to AonH-le 9em-ers to ta/e a ,ositive vie. of disinvestment1F

Bud-et S.eech 2y Sh(i 9ash:ant Sinha &"##8 $##) on &"st +une, "##8)
>=overnment 'as also decided t'at in t'e generality of cases5 t'e =overnment s'are'olding in ,u-lic sector enter,rises .ill -e -roug't do.n to 2",er cent1 In cases of ,u-lic sector enter,rises involving strategic considerations5 government .ill continue to retain ma;ority 'olding1 &'e interest of .or/ers s'all -e ,rotected in all cases>1

Bud-et S.eech 2y Sh(i 9ash:ant Sinha &"###$%;;;) on %6th 3e2(ua(y, "###

>=overnment0s strategy to.ards ,u-lic sector enter,rises .ill continue to encom,ass a ;udicious mi< of strengt'ening strategic units5 ,rivatising non-strategic ones t'roug' gradual disinvestment or strategic sale and devising via-le re'a-ilitation strategies for .ea/ units>1

St(ate-ic < Non$st(ate-ic 'lassification

Dn 1"t' 9arc' 1***5 t'e =overnment classified t'e Pu-lic !ector Enter,rises into strategic and non-strategic areas for t'e ,ur,ose of disinvestment1 It .as decided t'at t'e !trategic Pu-lic !ector Enter,rises .ould -e t'ose in t'e areas ofB 6rms and ammunitions and t'e allied items of defence e(ui,ment defence aircrafts and .ars'i,s8 6tomic energy 2e<ce,t in t'e areas related to t'e generation of nuclear ,o.er and a,,lications of radiation and radio-isoto,es to agriculture5 medicine and nonstrategic industries)8 +ail.ay trans,ort1 6ll ot'er Pu-lic !ector Enter,rises .ere to -e considered nonstrategic1 For t'e non-strategic Pu-lic !ector Enter,rises5 it .as decided t'at t'e reduction of =overnment sta/e to 2"? .ould not -e automatic and t'e manner and ,ace of doing so .ould -e .or/ed out on a case-to-case -asis1 6 decision in regard to t'e ,ercentage of disinvestment i1e15 =overnment sta/e going do.n to less t'an 51? or to 2"?5 .ould -e ta/en on t'e follo.ing considerationsB 4'et'er t'e industrial sector re(uires t'e ,resence of t'e ,u-lic sector as a countervailing force to ,revent concentration of ,o.er in ,rivate 'ands1 4'et'er t'e industrial sector re(uires a ,ro,er regulatory mec'anism to ,rotect t'e consumer interests -efore Pu-lic !ector Enter,rises are ,rivatised1

Exce(.ts f(om the 0dd(ess 2y the P(esident Sh(i =4 R4 Na(ayanan to the +oint Session of Pa(liament &3e2(ua(y, %;;")4
>&'e ,u-lic sector 'as ,layed a vital role in t'e develo,ment of our economy1 Ao.ever5 t'e nature of t'is role cannot remain fro7en to .'at it .as conceived fifty years ago - a time .'en t'e tec'nological landsca,e and t'e national and international economic environment .ere so very different1 &'e ,rivate sector in India 'as come of age5 contri-uting su-stantially to our nation-uilding ,rocess1 &'erefore5 -ot' t'e ,u-lic sector and ,rivate sector need to -e vie.ed as mutually com,lementary ,arts of t'e national sector1 &'e ,rivate sector must assume greater ,u-lic res,onsi-ilities ;ust as t'e ,u-lic sector needs to focus more on ac'ieving results in a 'ig'ly com,etitive mar/et1 4'ile some ,u-lic enter,rises are ma/ing ,rofits5 (uite a fe. 'ave accumulated 'uge losses1 4it' ,u-lic finances under intense ,ressure5 =overnments are ;ust not a-le to sustain t'em muc' longer1 6ccordingly5 t'e entre as .ell as several !tate =overnment is com,elled to em-ar/ on a ,rogramme of disinvestment1 &'e =overnmentHs a,,roac' to P!$s 'as a t'ree-fold o-;ectiveB revival of ,otentially via-le enter,rises8 closing do.n of t'ose P!$s t'at cannot -e revived8 and -ringing do.n =overnment e(uity in non-strategic P!$s to 2" ,ercent or lo.er1 Interests of .or/ers .ill -e fully ,rotected t'roug' attractive #+! and ot'er measures1 &'is ,rogramme 'as already ac'ieved some initial successes1 &'e =overnment 'as decided to disinvest a su-stantial ,art of its e(uity in enter,rises suc' as Indian 6irlines5 6ir India5 I&D 5 IP C5 #!:C5 9 5 36C D5 Aindustan Iinc5 and 9aruti $dyog14'ere necessary5 strategic ,artners .ould -e selected t'roug' a trans,arent ,rocess>1
10

Bud-et S.eech: %;;; > %;;" 2y Sh(i 9ash:ant Sinha on %#th 3e2(ua(y, %;;;4
@DisinvestmentGPrivati7ationGPu-lic !ector +estructuring J =overnmentHs ,olicy to.ards t'e ,u-lic sector is clear and unam-iguous1 Its main elements areB +estructure and revive ,otentially via-le P!$s8 lose do.n P!$s .'ic' cannot -e revived8 3ring do.n =overnment e(uity in all non-strategic P!$s &o 2"? or lo.er5 if necessary8

Fully ,rotect t'e interests of .or/ers1

=overnment 'ave recently esta-lis'ed a ne. De,artment for Disinvestment to esta-lis' a systematic ,olicy a,,roac' to disinvestment and ,rivati7ation and to give a fres' im,etus to t'is ,rogramme5 .'ic' .ill em,'asi7e increasingly on strategic sales of identified P!$s1 =overnment e(uity in all non-strategic P!$s .ill -e reduced to 2"? or less and t'e interests of t'e .or/ers .ill -e fully ,rotected1 &'e entire recei,t from disinvestment and ,rivati7ation .ill -e used for meeting e<,enditure in social sectors5 restructuring of P!$s and retiring ,u-lic de-t1F

Bud-et S.eech: %;;" > %;;% 2y Sh(i 9ash:ant Sinha on %8th 3e2(ua(y, %;;"4
@Dur ,u-lic sector 'as e<,anded in almost every area of economic activity1 In many .ays5 it 'as served t'e nation .ell8 ca,a-ility 'as -een develo,ed all round and a strong industrial -ase -uilt u,1 &'ese enter,rises must no. -e strengt'ened to com,ete and ,ros,er in t'e ne. environment1 Cast year I 'ad defined governmentHs ,olicy in t'is regard clearly1 =iven t'e advanced
11

stage of t'e ,rocess of disinvestment in many of t'ese com,anies5 I am em-oldened to ta/e credit for a recei,t of +s 12000 crore from disinvestment during t'e ne<t year1 6n amount of +s %000 crore out of t'is .ill -e used for ,roviding restructuring assistance to P!$s5 safety net to .or/ers and reduction of de-t -urden1 6 sum of 9rs1 5000 crore .ill -e used to ,rovide additional -udgetary su,,ort for t'e Plan ,rimarily in t'e social and infrastructure sectors1 &'is additional allocation for t'e ,lan .ill -e contingent u,on realisation of t'e antici,ated recei,ts1 In consultation .it' Planning ommission I s'all come u, .it' sectoral allocation ,ro,osals during t'e course of t'e year1>6dditional -udgetary su,,ort for t'e Plan5 ,rimarily in t'e social and infrastructure sectors 2contingent u,on realisation of t'e antici,ated recei,t1) 2114 E<cer,ts from t'e 6ddress -y t'e President !'ri K1 +1 :arayanan to t'e Loint !ession of Parliament 2Fe-ruary5 2002) @&'e Pu-lic sector 'as ,layed a lauda-le role in ena-ling our country to ac'ieve t'e national o-;ective of self-reliance1 Ao.ever5 t'e significantly c'anged economic environment t'at no. ,revails -ot' in India and glo-ally ma/es it im,erative for -ot' t'e ,u-lic sector and t'e ,rivate sector to -ecome com,etitive1 Cearning from our e<,erience5 es,ecially over t'e last decade5 it is evident t'at disinvestment in ,u-lic sector enter,rises is no longer a matter of c'oice5 -ut an im,erative1 &'e ,rolonged fiscal 'aemorr'age from t'e ma;ority of t'ese enter,rises cannot -e sustained any longer1 &'e disinvestment ,olicy and t'e trans,arent ,rocedures ado,ted for disinvestment 'ave no. -een .idely acce,ted and t'e s'ift in em,'asis from disinvestment of minority s'ares to strategic sale 'as yielded e<cellent results4 &'e =overnment 'as ta/en t.o ma;or initiatives to im,rove t'e safety net for t'e .or/ers of P!$s1 &'e first en'anced #+! -enefits in t'ose P!$s .'ere .age revision 'ad not ta/en ,lace in 1**2 or 1**%1 &'e second increased training o,,ortunities for self-em,loyment for .or/ers retiring under #+!1F

12

Exce(.ts f(om the Bud-et S.eech fo( %;;%$;1 of the 3inance Ministe( Sh(i 9ash:ant Sinha on %8th 3e2(ua(y, %;;%4
@4it' t'e streamlined ,rocedure for disinvestment and ,rivatisation5 I am 'a,,y to re,ort t'at t'e =overnment 'as no. com,leted strategic sales in % ,u-lic sector com,anies and some 'otels ,ro,erties of t'e Aotel or,oration of India 2A I) and t'e India &ourism Develo,ment or,oration 2I&D )1 &'e c'ange in a,,roac' from t'e disinvestment of small lots of s'ares to strategic sales of -loc/s of s'ares to strategic investors 'as im,roved t'e ,rice earning ratios o-tained1 4e e<,ect to com,lete t'e disinvestment in anot'er " com,anies and t'e remaining 'otels in A I and I&D t'is year1 Disinvestment recei,ts for t'e ,resent year are estimated at +s1 55000 crore e<cluding t'e s,ecial dividend from #!:C of +s1 15))% crore1 Encouraged -y t'ese results5 I am once again ta/ing credit for a recei,t of +s1 125000 crore from disinvestment ne<t year1F 211" Suo> Moto !tatement of Sh(i 0(un Shou(ie, 9inister of Disinvestment5 made in -ot' Aouses of Parliament on *t' Decem-er5 20021 &'e main o-;ective of disinvestment is to ,ut national resources and assets to o,timal use and in ,articular to unleas' t'e ,roductive ,otential in'erent in our ,u-lic sector enter,rises1 &'e ,olicy of disinvestment s,ecifically aims atB 9oderni7ation and $, gradation of Pu-lic !ector Enter,rises8 reation of ne. assets8 =enerating of em,loyment8 and +etiring of ,u-lic de-t1

13

=overnment .ould continue to ensure t'at disinvestment does not result in alienation of national assets5 .'ic'5 t'roug' t'e ,rocess of disinvestment5 remain .'ere t'ey are1 It .ill also ensure t'at disinvestment does not result in ,rivate mono,olies1 In order to ,rovide com,lete visi-ility to t'e =overnmentHs continued commitment of utili7ation of disinvestment ,roceeds for social and infrastructure sectors5 t'e =overnment .ould set u, a Disinvestment P(oceeds 3und1 &'is Fund .ill -e used for financing fres' em,loyment o,,ortunities and investment5 and for retirement of ,u-lic de-t1 For t'e disinvestment of natural asset com,anies5 t'e 9inistry of Finance and t'e 9inistry of Disinvestment .ill .or/ out guidelines1 &'e 9inistry of Finance .ill also ,re,are for consideration of t'e a-inet ommittee on Disinvestment a ,a,er on t'e feasi-ility and modalities of setting u, an 6sset 9anagement om,any to 'old manage and dis,ose t'e residual 'olding of t'e =overnment in t'e com,anies in .'ic' =overnment e(uity 'as -een disinvested to a strategic ,artner1 211% E<cer,ts from t'e 3udget !,eec' for 2003-04 of t'e 3inance Ministe( Sh(i +as:ant Sin-h on 2)t'Fe-ruary5 20031 I am confident t'at t'e ,ace of disinvestment .ill accelerate in t'e coming year1 I .is' to also state t'at details a-out t'e already announced Disinvestment Fund and 6sset 9anagement om,any5 to 'old residual s'ares ,ost disinvestment5 s'all -e finali7ed early in 2003-041disinvestment is not merely for mo-ili7ing revenues for t'e =overnment5 it is mainly for unloc/ing t'e ,roductive ,otential of t'ese underta/ings5 and for reorienting t'e =overnment5 a.ay from -usiness and to.ards t'e -usiness of governance1F &'e follo.ing ta-le indicates t'e actual disinvestments from 1**1*2 till date5 t'e met'odologies ado,ted for suc' disinvestments and t'e e<tent of disinvestment in different P!$sB

14

Disinvestment f(om "##"$#% to %;;*$;?, the methodolo-ies ado.ted

No. of transactions Target receipt Actual receipts in which (Rs. in Crore) (Rs. in Crore) equity sold

Year

Methodology

1 1! "

#$

"%&&

Minority shares sold in (ec 1 1 and )e* 1 " *y auction '&'$.$# +ethod in *undles of ,-ery good,. ,good, and ,a-erage, co+panies 1 1".#" /hares sold separately for each co+pany *y auction +ethod. 0quity of 1 co+panies sold *y open auction *ut proceeds recei-ed in #! %.

1 "! '

"

"%&&

1 '! #

'%&&

&.&&

1 #! %

1$

#&&&

/ale through auction +ethod. in which NR3s and other #2#'.1& persons legally per+itted to *uy. hold or sell equity. allowed to participate. 112.#2 0quities of # co+panies auctioned '$ .1$ 4(R (5/N6) in international +ar7et. 1&.&& 4(R (MTN6) in international +ar7et. 4(R (5/N6) 8 (o+estic offerings with the participation of %'$1.11 )33s (C9NC9R. 4A36). Cross purchase *y ' 9il sector co+panies i.e. 4A36. 9N4C : 39C 121&.1# 4(R;4A36. 5/N6!do+estic issue. <A6C9 restructuring. M)36=s strategic sale and others /trategic sale of <A6C9. 6>MC? Ta7eo-er ! @R6 (CR6). CAC6 (MR6). <RA6

1 %! 1 1 1! $ 1 $! 2

% 1 1

$&&& %&&& #2&&

1 2!

%&&&

!&&

1&&&&

"&&&!&1

1&&&&

12$1."1

15

"&&1!&" B

1".&&&

/trategic sale of CMC C %1D. ET6 C$#D. 5/N6 C "%D. 3<A C ''.%2D. AA6!! $#D. and sale of hotel properties of %1'"."% 3T(C : EC3? receipt fro+ surplus cash reser-es fro+ /TC and MMTC /trategic saleF EG6 ("1D). 3AC6 ("%D). EC3. 3T(C. MarutiF control pre+iu+ fro+ renunciation of rights issue. Aut ''#$. 2 9ption ! M)36 ("1D). /hares to e+ployees in EG6. CMC and 5/N6. >essop : Co. 6td.($"D /trategic /ale). EG6 (12. "D Call 9ption). through Au*lic 9ffer!Maruti ("$.%D). 3C3 6td. 1%%#$.#1 ( ."D). 3<A ("1D). 3AC6 ("2. #%D). CMC ("1."%D). (C3 ("&D). 4A36 (1&.D) and 9N4C ( . 1D) "$1#.2$ NTAC (%."%D 9ffer for /ale). 3AC6 (%D to 0+ployees) and 9N4C (&.&1D) <y sale of shares to Au*lic /ector )inancial 3nstitutions : Au*lic /ector <an7s on H(ifferential Aricing MethodH

"&&"!&' B

1".&&&

"&&'!&#

"

1#.%&&

"&&#!&%

'

#.&&&

"&&%!&1 Total 96800

1%1$.1& 49214.03

# Figures (inclusive of control premium, dividend/dividend tax, restructuring and transfer of surplus cash reserves prior to disinvestments)

1"

Realization through strategic sale during 1999-2000 to 2004-05

!r1 :o

:ame

Percentage of =overnment E(uity sold %4

+ealisation +s1 in crore

ProfitGCoss 9a/ing during t'e year of disinvestment Coss 9a/ing

1 a1

9odern Food Industries 2India) Ctd1 29FIC) 29FIC) P'ase II 3'arat 6luminium o1 Ctd1 9 Ctd1 9 Ctd1 N A&C Cagan Lute 9ac'inery or,oration I&D -1* AD&EC!

105145

1 -1 21 3a1 34 51

251**5 51 51

4410% )2"1*2 M 152 "10% Profit 9a/ing Profit 9a/ing

%4 %4

55 2153

Profit 9a/ing Coss 9a/ing

1%

"1 % )1 *1 101 111 121 131 141 151 1"1 1%1 1)1 1*1 201

Aotel 6gra 6s'o/ Aotel 3od'gaya 6s'o/ Aotel Aassan 6s'o/ &363+ 9amalla,uram Aotel 9adurai 6s'o/ Aotel 6s'o/ 3angalore O Puta- Aotel5 :e. Del'i Cod'i Aotel5 :e. Del'i C#PA5 $dai,ur Aotel 9anali 6s'o/ K63+5 Kovalam Aotel 6uranga-ad 6s'o/ Aotel 6ir,ort 6s'o/5 Kol/ata Aotel K'a;ura'o 6s'o/ Aotel #ariants 6s'o/

)*1*% )*1*% )*1*% )*1*% )*1*% )*1*% )*1*% )*1*% )*1*% )*1*% )*1*% )*1*% )*1*% )*1*% )*1*%

31"1 11)1 212% "113 41*% 3*141 3414" %11*3 "1%% 31"5 4013* 1"150 1*13* 211* )13)

Coss 9a/ing Coss 9a/ing Coss 9a/ing Coss 9a/ing Coss 9a/ing Coss 9a/ing Coss 9a/ing Coss 9a/ing Coss 9a/ing Coss 9a/ing Coss 9a/ing Coss 9a/ing Coss 9a/ing Coss 9a/ing Coss 9a/ing

1)

211 221 231 241 251

Aotel Kanis'/a5 :e. Del'i Aotel Indra,rast'a5 :e. Del'i 'andigar' Aotel ,ro;ect Aotel +an;it5 :e. Del'i A I - entaur Aotel Lu'u 3eac'5 9um-ai A I-Indo Ao//e Aotels Ctd12 entaur +a;gir) A I - entaur Aotel 6ir,ort5 9um-ai I3P o Ctd #ides' !anc'ar :igam Ctd1 Paradee, P'os,'ates Ctd1 Aindustan Iinc Ctd1

)*1*% )*1*% )*1*% )*1*% 100

*213% 4313* 1%12% 2*12) 153

Coss 9a/ing Coss 9a/ing Coss 9a/ing Coss 9a/ing Coss 9a/ing

2"1

100

"151

Profit 9a/ing

2%1 2)1 2*1 301 31 2a) 31 2-) 31 2c)

100 3315) 25 %4 2"

)3 11531") 3")*M 1511%0 445

Coss 9a/ing Profit 9a/ing Profit 9a/ing Coss 9a/ing Profit 9a/ing

Aindustan Iinc Ctd1 N

"11*

Aindustan Iinc Ctd1 NN

1)1*2

3231))

1*

32 331

9aruti $dyog Ctd1 Indian Petroc'emicals or,oration Ctd1 !tate &rading or,oration of India 99& Ctd1 Lesso, E o Ctd !(and Total

412 2"

1000 14*01)4

Profit 9a/ing Profit 9a/ing

341 35 3"

40 MMM "0 MMM %2 1)11) ";%?64"# Coss 9a/ing

The 3und$Bank desi-n in 7.e(ation

&'e Indian ruling ,olity5 of course5 cannot claim any originality in t'eir disastrous designs on t'e countryHs economy and 'er ,eo,le1 Eac' and every move is meticulously designed under t'e ,rescri,tion of t'e 4orld 3an/ and t'e I9F and at t'e -e'est of t'e im,erialist ,o.ers and t'e 9: s1 &'e 4orld 3an/ ,u-lication5 called Q+esearc' +e,ortH and titled @3ureaucrats in 3usinessF 'as already detailed out eac' and every ste,5 t'e Indian rulers 'ave -een ta/ing since 1**1to dismantle t'e ,u-lic sector net.or/ in t'e country including t'e various modalities of ,rivati7ation1 &'e ,u-lication also 'ad .ritten do.n .it' every detail t'e game ,lan to create do.n.ard ,ressure on .ages of t'e ,u-lic sector em,loyees5 drastically curtail .or/ersH rig'ts5 sto, industry-.ise .age settlement and to ma/e t'e P!$s an un'oly destination -y suita-le ,olicy engineering from =ovt level1

20

It is amusing to note t'at t'e current model of outrig't ,rivati7ation t'roug' Qstrategic disinvestmentsH aggressively ,ursued -y t'e =overnment 'as -een co,ied from t'e 4orld 3an/ ,rescri,tion1 &'e R+esearc' +e,ortH of t'e 4orld 3an/ 'as ,rescri-ed t'atB @If ,otential -uyers cannot ot'er.ise raise t'e funds5 t'e enter,rise can -e sold in trenc'es 2,assing management control immediately to ,rivate5 allo.ing t'em time to raise t'e funds to -uy out rest of t'e s'are gradually)1 4it' freedom to 'ire and fire5 .'ic' is an im,ortant factor in successful management contracts1F &'e message of t'e 4orld 3an/Hs guideline is loud and clearB tune your ,rivati7ation strategy to t'e advantage of t'e ,otential -uyers5 t'e foreign and Indian or,orate5 .it'out -ot'ering for t'e immense financial loss and 'arm to economic sovereignty caused to t'e country1 &'us it is clear t'at t'e offensive against t'e ,u-lic sector is not guided -y financial or managerial ,rudence -ut -ecause of t'e ideological ,osition ta/en -y I9FG43G4&D .it' ric' countries led -y $nited !tates ,us'ing from -e'ind5 t'at t'ere s'ould -e no ,u-lic sector any .'ere in t'e .orld1 Private oligarc'ies .ant com,lete command over t'e entire .orld economy and t'ey .ouldnHt tolerate even a to/en ,resence of P!$ on t'eir .ay1 &'e 3LP-led government is more t'an o-liging to meet t'eir dictates1

The Policy to @i.e out Pu2lic Secto(

$nder t'e on going drive of ,rivati7ation5 t'e =overnment 'as mainly targeted most of t'e -lue c'i, ,rofit ma/ing P!$s .'ic' .ere decorated .it' t'e classification of Q+atnasH1 Furt'er5 t'e most strategic sectors 'ave -een engulfed under t'e drive for ,rivati7ation1 :ota-le among t'em are oil E ,etroleum5 ,o.er5 telecom5 rail5 road and air trans,ort5 ,orts E doc/s5 air,orts and of course t'e financial sector1 &'e game ,lan is to com,letely erase t'e ,u-lic sector net.or/ from t'e industrial ma, of t'e country1
21

&'e creation of a se,arate Disinvestments 9inistry under t'e e<clusive c'arge of one a-inet 9inister clearly demonstrates t'e ,resent =overnmentHs ,oint of ,riority to com,letely destroy t'e ,u-lic sector1 &'is fact .as reflected in t'e -udget s,eec' 2200001) of t'e $nion Finance 9inister ,ronouncing t'at5 @=overnment 'ave recently esta-lis'ed a ne. De,artment for Disinvestments to esta-lis' a systematic ,olicy a,,roac' to disinvestments and ,rivati7ation and to give fres' im,etus to t'is ,rogrammed5 .'ic' .ill em,'asi7e increasingly on strategic sales of identified P!$s1F 6s noted a-ove5 .'en t'e =overnment is des,erately ta/ing ste,s to .i,e out ,u-lic sector from t'e country5 t'e mention in t'e agenda note t'at t'e =overnment strategy is5 @strengt'ening strategic units5 ,rivati7ing non-strategic onesF is not'ing -ut travesty of trut'1 &'e =overnment 'as refused to recogni7e t'e strategic im,ortance oft 'e P!Es in energy5 telecommunication and defense ,roduction sectors including t'e air,orts in ,rotecting t'e economic sovereignty and even security of t'e countryHs inde,endence1 &'ey 'ave identified t'ese P!$s as nonstrategic and selling t'em off c'aotically1 6nd after t'at tal/ing a-out strategic and non-strategic sectors is not'ing -ut e<treme 'y,ocrisy and self-dece,tion1 !imilarly it is not'ing -ut a stu,id argument t'at @,rice reali7ed t'roug' t'e sale of minority sta/es5 .as lo. as com,ared to ,rice reali7ed t'roug' strategic disinvestments SF It is -ut natural t'at conclusive ,rivati7ation is -ound to fetc' 'ig'er yields t'an off-loading of minority s'ares1 &'e ,rice differential is -ound to -e t'ere -et.een sim,le s'are 'olding and ac(uiring t'e o.ners'i, including .'ole sole control of t'e enter,rise and its management .'ic' in turn o,en u, 'ost of ,rivate commercial interest to t'e -uyer1 Dn t'e ot'er 'and5 t'e dangerous fall out of conclusive ,rivati7ation is also colossal1 +eali7ing 'ig'er ,rice -y so-called Qstrategic sale of P!$s is s'ort sig'ted and suicidal for t'e country1 &'erefore5 t'ere is no
22

rationale -e'ind t'e suicidal ste,s of strategic sale of P!$s5 ,articularly t'e -lue c'i,s ones1 &'e claim of t'e =overnment t'at @&'e concerns of t'e various sta/e'olders are ta/en care of t'roug' t'e !'are'oldersH 6greement 2!A6)5 !'are Purc'ase 6greement 2!P6) and Parent =uarantee 6greement 2P=6)F is not correct1 E<ce,t e<tending due and undue -enefits to t'e ,rivate -uyers5 t'e strategic sale cause immense 'arm to all J t'e nation5 t'e ,eo,le and of course t'e .or/men1 &'e !A6 is su,,osed to ,rotect t'e interest of t'e em,loyees and act against asset stri,,ing1 Cet us e<amine some concrete e<am,lesB

0sset St(i..in&'e &ata &eleservices Cimited 2&&!C) ac(uired 25 ,er cent sta/e of #ides' !anc'ar :igam Cimited 2#!:C) from t'e =overnment at a ,rice of +s11543*100 crore1 &'e om,any furt'er ac(uired anot'er 20 ,er cent sta/e of #!:C t'roug' o,en offer at a cost of +s115151100 crore1 :o. .it' 45 ,er cent sta/e1 &'e &&!C 'as -een 'anded over t'e total management control of t'e telecom giant1 #!:C is a classic e<am,le of ,re and ,ost ,rivati7ation asset stri,,ing1

Manual on Disinvestments < St(ate-ic Sale 0-(eement

Dn t'e -asis of t'e e<,erience of disinvestments in t'e last decade in more fait'ful tune .it' t'e 4orld 3an/ guidelines5 t'e $nion 9inistry of Disinvestments 'as -roug't out a @9anual on Privati7ationF1 3y t'e said manual5 t'e ,rocess of loot on national .ealt' t'roug' fast trac/ ,rivati7ation as ,rescri-ed -y t'e 4orld 3an/ 'as -een soug't to -e systemati7ed and legitimi7ed .it' dece,tive ,osture of trans,arency1 4'ile dealing at lengt' various met'ods of valuation of t'e P!$s under sale5 t'e manual
23

recommends a ,articular met'odTQt'e discounted cas' flo. met'odH 2D F)5 .'ic' ensure ,rice-fi<ing for t'e P!$s under sale at a lo. level5 .it'out any consideration of its 'uge asset -ase and re,lacement cost5 solely to t'e advantage of t'e ,ros,ective -uyers1 &'e said 9anual ,u-lis'ed -y t'e Disinvestments 9inistry 'as s(uarely discarded t'e 6sset valuation met'od5 .'ic' could ca,ture t'e real value of t'e 'uge national assets created -y t'e ,u-lic sector industries over a long ,eriod1 4'ile recommending t'e Discounted as' Flo. met'od 2D F)5 t'e 9anual .ent a ste, a'ead to advise t'at t'e ,ros,ective cas' flo. to t'e com,any under sale must also ca,ture for discount t'e future 2after sale) ,resuma-le cost for moderni7ation5 ca,ital-re,lacement5 mar/et etc1 t'at may -e incurred -y t'e ne. o.ner5 .'ic' .ould lead to assessment of t'e Qcas' flo.H at a lo.er level and facilitate lo. ,ricing to facilitate t'e ,ros,ective customer1 &'us5 it is crystal clear t'at t'e =overnment of t'e day is more concerned to ,rotect t'e interest t'e ,rivate ca,italist at t'e cost of t'e national asset1 It is not .it'out reason t'e om,troller E 6uditor =eneral 2 6=) 'as found @intrinsic faultF in t'e valuation met'od recommended -y t'e =ovtHs Disinvestments 9anual and commented5F 6s ,er international valuation standards5 de,reciated re,lacement cost 2i1e15 6sset #aluation met'od) .ould 'ave -een t'e most a,,ro,riate met'od1F &'e love and affection of t'e =overnment of t'e day at t'e centre for t'e ,rivate -usiness is furt'er e<,osed in yet anot'er document ,u-lis'ed -y t'e 9inistry of Disinvestments JQ$nderstanding &'e !trategic !ale 6greementH 6s if t'e under valuation and ot'er undue concessions granted .'ile transferring t'e national assets to t'e ,rivate -uyer for a song are not enoug'5 ,rovision 'as -een made to ,ay cas' Qre.ardH in t'e name of QPost losing 6d;ustmentH1 6n uni(ue sco,e 'as -een created -y t'e =overnment -y ,roviding for t'e -uyer to gra- money from t'e seller 2P!$s) J @During t'e data room visits and t'e due diligence
24

e<ercise -y t'e !trategic Partner5 t'e !trategic Partner gets t'e ,icture of t'e assets and lia-ilities of t'e com,any as on a certain date S &'e deal may actually close at a muc' later date S In t'e intervening ,eriod t'e com,any 'as -een functioning and t'e assetGlia-ility ,osition 'as undergone a c'ange @ &'e ,erce,tion of t'e =overnment5 in t'is matter5 'as got e<,ression in t'e statement of t'e Disinvestments 9inister 0(un Shou(ie to t'e Financial E<,ress on 0%103102 B @&'is means t'at t'e government could actually end u, ,aying ,rivate -idders to rid itself of loss-ma/ing P!$s1F :o. a concrete e<am,le is t'e sale of Paradi, P'os,'ates Ctd1 2PPC)1 PPC 'as -een conclusively ,rivati7ed and ,urc'ased -y t'e sole -idder Iuari-9aroc com-ine at a cost of +s11511% crore against t'e reserve ,rice of +s11%" crore1 &a/ing advantage of t'e Q,ost closing ad;ustmentH clause5 Iuari-Aaroe 'as claimed an amount of +s11*0 crore from t'e =overnment1 &'us5 t'e net outcome of t'e ,rivati7ation deal is t'e ,rivate -usiness com-ine got a P!$ ,lus a cas' gift of +s13*100 crore1 In t'e deal of 9odern Foods5 t'e Aindustan Cever also got some money under t'e same consideration1 !o also .as t'e case of I&D 'otels deal .'ere an amount of +s12%15 crore is -eing returned to t'e -uyers1

'u((ent Ta(-ets: The 'ash$(ich PS s

&'e motivated5 unfounded -lame of inefficiency attri-uted to t'e so-called Qsic/H and QuneconomicH P!$s are also not'ing -ut a ,loy to ;ustify t'e closure of suc' P!$s1 Aad t'at not -een so5 t'en .'y t'e most efficient and consistently ,rofit ma/ing oil P!$s are -eing ,rivati7ed -y ro--ing t'em of t'eir investi-le sur,lus1 It is evident t'at .'et'er loss ma/ing or ,rofit ma/ing5 good or -ad record of ,erformance5 t'e onslaug't of Fund-3an/ dictated ,olicy of closure5 and ,rivatisation of ,u-lic sector s'all s,are none1 It 'as -een a,tly said t'at5 @4'at is !'ourieHs argumentU P!$s are loss ma/ing5 t'erefore ,rofit-ma/ing P!$s s'ould -e t'e first to -e sold1 2&DI5 131)102)&'e =overnment 'as -een re,eatedly ,ro;ecting
25

t'e ,erformance records of t'e com,aratively .ea/ P!$s to ;ustify t'e ,rivatisation ,olicy1 Ao.ever5 t'e interesting fact is t'at t'e recent ,ast cases of ,rivatisation and t'e ones lined u, for t'e fort'coming ,eriod5 are all consistently ,rofit ma/ing cas'-ric' ,u-lic sector com,anies1 Indian Petroc'emicals or,oration Ctd 2IP C) 'as -een 'anded over to t'e +eliance Industries Ctd15 2+IC) o.n -y t'e 6m-anies1 4'ile +IC 'as ac(uired t'e controlling s'are of IP C at ,rice of +s1154*1100 crore5 at t'e time of ,rivatisation t'e IP C 'ad an amount of +s125*4"113 crore as reserve and sur,lus1 &'e !terile =rou, 'as ac(uired t'e e(uity and management control of Aindustan Iinc Cimited 2AIC) at a ,rice of +s1445100 crore and t'e P!$ 'as a reserve fund of +s1%3%100 crore and estimated asset -ase of around +s1105000100 crore1 In fact t'e P!$s .'ic' are under current ,rioriti7ed initiative of t'e =overnment for ,rivatisation are from among t'e to, ten ,rofit ma/ing ,u-lic sector com,anies .it' 'uge investi-le sur,lus and -elong to very im,ortant sectors of t'e economy namelyB Dil5 Po.er and &elecommunication1 &'e t.o cas' ric' ,rofit ma/ing Dil P!$s .'ic' are in t'e advanced stage of ,rivatisation are 3'arat Petroleum or,oration Ctd1 23P C) and Aindustan Petroleum or,oration Ctd 2AP C)1 &'ese t.o P!$s toget'er 'ave earned a ,rofit of +s115*0)113 crore in t'e year 2000-011

Valuation of Pu2lic Secto( nits fo( the .u(.ose of Disinvestment &'e ,rocess of disinvestment in India -egan in 1**25 under t'e aegis of ne. economic li-erali7ation ,olicy ,ut for.ard -y t'en Finance 9inister5 Dr1 9anmo'an !ing'1 Disinvestment .as su,,osed to -e t'e tool in t'e 'ands of government to im,rove t'e
2"

functioning and ,rofita-ility of ,u-lic sector enter,rises and also raise funds to mitigate its fiscal deficits1 Ao.ever5 over t'e ,ast decade5 t'is e<ercise 'as -een ,lagued -y criticisms and controversies and 'as not ac'ieved desired results for t'e government -ecause of ,olitical -ic/ering1

The enunciated !ove(nment of IndiaAs .olicy on disinvestment as .e( Economic Su(vey %;;" :as: 3ring do.n =overnment e(uity in all non-strategic P!$s to 2"? or lo.er5 if necessary1 +estructure and revive ,otentially via-le P!$s1 lose do.n P!$s .'ic' cannot -e revived5 Fully ,rotect interests of .or/ers1 &'ere 'ave -een several criticisms of t'e disinvestment ,rocess1 Dne is t'at valuations ,rocesses .ere unsound and t'at t'e government gave a.ay its sta/es too c'ea,ly8 t.o5 disinvestment 'as -een merely a revenue-raising affair for t'e government5 .it' little t'oug't -eing given to t'e re(uirements of t'e firms concerned8 t'irdly5 it is contended t'at t'e governmentHs reluctance to disinvest more t'an 51? and relin(uis' control over P!$s 'as meant t'at t'e government 'as -een una-le to attract suita-ly ,riced -ids5 as -idders do not -elieve t'e firmsH ,erformance .ould im,rove significantly .it' small government sta/es -eing offloaded1 6n im,ortant and ,er'a,s most critical issue in t'e ,rocess of disinvestments or ,rivati7ation of P!$s is valuation1 3e it disinvestments of 1**1-*2 or t'at of 36C D in 20015 valuation
2%

'as al.ays -een at t'e core of controversy1 &'is is so -ecause t'ere are several met'ods of valuation and different met'ods yield .idely varying results1 &'e criticality of t'e issue of valuation in disinvestment or ,rivati7ation can -e easily gauged from t'e fact t'at t'e value of 36C D as ,ut -y different ,eo,le differed as .idely as from +s11100 crore to +s15000 crore1

Valuation TechniBues &'e guidelines on valuation in t'e P!$s5 are ,rescri-ed in 'a,ter 1) of t'e manual titled >DI!I:#E!&9E:&B PDCI V E P+D ED$+E!>5 ,u-lis'ed -y t'e 9inistry of Disinvestment in 20011 &'e disinvestment ommission 'as ,rescri-ed four a,,roac'es to valuation of P!$s1

&'ese areB &'e Discounted as' Flo. met'od &'e 3alance !'eet met'od &ransaction 9ulti,le met'od &'e :et 6sset #alue met'od 4'ile t'e first t'ree are -usiness valuation met'odologies generally used for valuation of a going concern5 t'e last met'odology .ould -e relevant only for valuation of assets in case of li(uidation of a com,any1 Cet us discuss a-out eac' one of t'emB

2)

The Discounted 'ash 3lo: method: &'e Discounted as' Flo. 2D F) met'odology e<,resses t'e ,resent value of a -usiness as a function of its future cas' earnings ca,acity1 &'is met'odology .or/s on t'e ,remise t'at t'e value of a -usiness is measured in terms of future cas' flo. streams5 discounted to t'e ,resent time at an a,,ro,riate discount rate1 The Balance Sheet method: &'e 3alance s'eet or t'e :et 6sset #alue 2:6#) met'odology values a -usiness on t'e -asis of t'e value of its underlying assets1 &'is is relevant .'ere t'e value of t'e -usiness is fairly re,resented -y its underlying assets1 &'e :6# met'od is normally used to determine t'e minimum ,rice a seller .ould -e .illing to acce,t and5 t'us serves to esta-lis' t'e floor for t'e value of t'e -usiness1 T(ansaction Multi.le method: &'is met'od ta/es into account t'e value ,aid for similar transactions in t'e industry and -enc'mar/s it against certain ,arameters5 li/e earnings or sales1 &.o suc' ,arameters areB Earnings 3efore Interest5 &a<es5 De,reciation E 6morti7ations 2E3I&D6) 5 E !ales1 6lt'oug' t'e &ransaction 9ulti,les met'od ca,tures most value elements of a -usiness5 it does not ,ro,erly reflect t'e cas' flo.s generated -y a -usiness5 or ta/e into account t'e time value of money1 Ao.ever5 it is considered as a useful rule of t'um-5 in valuing -usinesses -y various valuation e<,erts1 6ccordingly5 one may 'ave to revie. a series of com,ara-le transactions to determine a range of a,,ro,riate ca,itali7ation factors to value a com,any as ,er t'is met'odology1 The Net 0sset Value method: &'e asset valuation met'odology essentially estimates t'e cost of re,licating t'e tangi-le assets of t'e -usiness1 &'e re,lacement cost ta/es into account t'e mar/et value of various assets or t'e e<,enditure re(uired to create t'e infrastructure e<actly similar to t'at of a com,any -eing valued1 !ince t'e re,lacement met'odology assumes t'e value of -usiness
2*

as if .e .ere setting a ne. -usiness5 t'is met'odology may not -e relevant in a going concern1 Instead it .ill -e more realistic if asset valuation is done on t'e -asis of t'e ne. -oo/ value of t'e assets1 &'e asset valuation is a good indicator of t'e entry -arrier t'at e<ists in a -usiness1 6lternatively5 t'is met'odology can also assume t'e amount .'ic' can -e reali7ed -y li(uidating t'e -usiness -y selling off all t'e tangi-le assets of a com,any and ,aying off t'e lia-ilities1

'hallen-es in valuation of Indian PS s W om,anies listed on stoc/ e<c'ange can -e assessed fairly on t'e -asis of mar/et ,rice of s'ares1 Ao.ever5 most of t'e P!$s are eit'er not listed on stoc/ e<c'ange or command e<tremely limited trade float1 W #aluation of P!$ is different from esta-lis'ing t'e ,rice for .'ic' it can -e sold1 =overnment can only reali7e .'at t'e -uyer is .illing to ,ay for t'e P!$1 W #aluation is a su-;ective figure arrived at -y t'e -idder -y leveraging 'is strengt's .it' t'e ,otential of t'e com,any1 W &'e ,rofita-ility of t'e P!$s as reflected t'roug' t'e ,rofit and loss account does not ade(uately reflect t'e earning ,otential of P!$s -ecause t'e P!$s 'ave generally -een run in un,rofessional manner1 W Pu-lic !ector underta/ings o.n not only 'uge -usiness assets -ut also 'ig'ly valua-le non--usiness assets li/e real estate5 residential com,le< and utilities li/e ,o.er ,lant etc1

30

W #aluing com,anies in India -ecomes even more difficult5 as t'ere is no data-an/ of transactions carried out in t'e ,ast1 In t'e $!5 t'e valuation re,ort of any ac(uisition 'as to -e filed .it' !ecurities and E<c'ange ommission 2!E )1

The Ri-ht Valuation 0..(oach 6ll of t'e a-ove met'ods 'ave t'eir o.n merits and demerits1 :o met'od .ill suffice in any ,articular case1 &'e valuation met'ods are -enc'mar/ figures and in no .ay can ,redict t'e e<act ,rice at .'ic' an entity can -e sold1 &'e -uyer .ill -e .illing to ,ay t'e ,rice de,ending on t'e synergy value t'at .ill result from im,rovements made .'en t'e com,anies are com-ined1 &'is value .ill accrue to t'e ac(uirerHs s'are'olders rat'er t'an to t'e targetHs s'are'olders1 &'e more t'e synergy value a ,articular ac(uisition can generate5 t'e 'ig'er t'e ma<imum ,rice an ac(uirer .ill -e interested in ,aying1 Price a -uyer .ould -e .illing to ,ay could -e a function of !ynergies e<,ected from ,ro,osed integration of &arget om,any In case of 9odern Foods de,ending on t'e valuation met'od5 t'e com,anyHs value oscillated -et.een +s 2) crore and +s %) crore1 Aindustan Cever5 'o.ever5 offered +s 125145 crore1 ACC (uoted t'e ,rice de,ending on t'e value t'ey t'oug't t'ey .ould derive from t'e com,any1 &'e value is a function of t'e individualHs ,erce,tion of t'e ris/5 t'e nature of financial resources availa-le to t'e ,urc'aser5
31

o,,ortunity5 and ot'er similar factors1 &'erefore5 t'e government in order to reali7e -etter ,roceeds from disinvestment s'ould consider follo.ing issues in futureB It is im,ortant to understand t'at ,rice is not value8 in fact5 t'e difference -et.een ,rice and value is t'e raison dHetre of investment valuation5 inde,endent of mar/et ,ricing1 31 &'e final value to -e ,aid -y ac(uirer .ill de,end on t'e controlling ,remium 'e is .illing to ,ay1 9ost foreign com,anies are not comforta-le .it' less t'an 51 ,ercent 'olding1 3ut t'e government isnHt offering 51 ,ercent in most strategic sales1 &'e government s'ould 'ave clear future ,olicy .'en going in for -ig-tic/et disinvestments li/e 6ir India1 For instance5 main assets of 6ir India are t'e -ilateral rig'ts1 4ill t'ese -ilateral rig'ts vest .it' 6ir India J if yes5 6ir IndiaHs valuation .ill -e 'ig'er1 Ao.ever5 no country in t'e .orld 'as committed all its -ilateral to one airline1 &'ese uncertainties .it' regard to future of t'e sector .ill ,revent -idders to (uote 'ig'er ,rices for 6ir India1 &'ere is no reason .'y t'e government s'ould continue to 'old a ,art of t'e e(uity in P!Es t'at are o,erating in non-core sectors1 &'is strategy leads to su--o,timal reali7ation of revenue and significant loss to t'e government1 In t'e cases of disinvestment involving transfer of control of management affairs to t'e ,rivate investor5 'ig'er .eig'tage 'as to -e given to t'e value of assets -ot' tangi-le and intangi-le and relatively lo.er value can -e assigned to fair mar/et ,rice1 4'ile disinvesting minority s'ares5 more .eig'tage .ill 'ave to -e given to mar/et ,rice1 In suc' case asset valuation a,,roac' needs to -e given lesser .eig'tage1 :onet'eless5 .'at is im,ortant is t'at5 not merely s'ould t'e value
32

derived -e un(uestiona-le on t'e -asis of .ell-esta-lis'ed e(uity valuation ,rinci,les5 -ut also t'e ,rocesses and met'odologies 2and t'e underlying assum,tions) ado,ted for deriving suc' value -e reasona-le1 &rans,arency in valuations is a must so as to avoid controversies.

P(o2lems associated :ith Disinvestments

6 num-er of ,ro-lems and issues 'ave -edeviled t'e disinvestment ,rocess1 &'e num-er of -idders for e(uity 'as -een small not only in t'e case of financially .ea/ P!$s5 -ut also in t'at of -etter,erforming P!$s1 3esides5 t'e government 'as often com,elled financial institutions5 $&I and ot'er mutual funds to ,urc'ase t'e e(uity5 .'ic' .as -eing unloaded t'roug' disinvestment1 &'ese organi7ations 'ave not -een very ent'usiastic in listing and trading of s'ares ,urc'ased -y t'em5 as it .ould reduce t'eir control over P!$s1 Instances of insider trading of s'ares -y t'em 'ave also come to lig't1 6ll t'is 'as led to lo. valuation or under ,ricing of e(uity1 Furt'er5 in many cases5 disinvestment 'as not really c'anged t'e o.ners'i, of P!$s5 as t'e government 'as retained a ma;ority sta/e in t'em1 &'ere 'as -een some a,,re'ension t'at disinvestment of P!$s mig't result in t'eU ro.ding outU Df ,rivate cor,orate 2t'roug' lo.ered su-scri,tion to t'eir s'ares) from t'e ,rimary ca,ital mar/et1 ontrary to t'e ,u-licity of t'e =overnment5 ,rivatisation of P!$s almost invaria-ly involves reduction of .or/men1 !uc'
33

reduction ta/es ,lace -ot' immediately -efore and after ,rivatisation5 as .e 'ave seen in t'e case of Qasset stri,,ingH in t'e #!:C1 &o cite an e<am,le of ,re-,rivatisation reduction of .or/men5 let ta/e t'e case of 3'arat Petroleum or,oration Ctd 23P C) and Aindustan Petroleum or,oration Ctd 2AP C)1 &'ese t.o P!Es 'ave dra.n ,lan to reduce t'e num-er of .or/men -y around 450001 In fact ever5 since t'e =overnment 'as launc'ed t'e ,rivatisation onslaug't5 t'e management of P!$s5 under orders from t'e =overnment 'as -een reducing t'e .or/men1 &'e Ca-our 9inistry note itself 'as mentioned5 @During last ten years5 t'e .or/force in t'e Pu-lic !ector $nderta/ings 'as reduced from 213 million to 11% millionF1 In 36C D5 most .idely noticed case of ,rivatisation5 several 'undred .or/men 'as -een retrenc'ed after ,rivatisation1 In IP C 400 'undred .or/men are -eing dislodged and furt'er @+eliance 'as identified 25000 e<cess staff at t'e #adoda ,lant alone1F !o far as t'e (uestion of .age revision is concerned5 t'e e<,erience of t'e P!$ .or/ers in ,rivati7ed com,anies is very -ad1 &'e drum -eating -y t'e 9inistry of Disinvestments citing t'e e<am,le of .age revision of t'e 36C D .or/ers is rat'er a case of de,rivation1 It is a case of mourning and not re;oicing1 &'e .age revision .as deli-erately /e,t ,ending -y t'e =overnment /ee,ing in mind t'e im,ending ,rivatisation1 Furt'er5 t'eFguaranteed -enefit of 20? of -asic ,ayF is one of t'e lo.est in a ,rofit ma/ing com,any li/e 36C D1 During its entire ,eriod in t'e ,u-lic sector5 36C D .or/ers never got suc' a ,altry .age rise1 In fact5 in many P!$s t'e .or/ers got guaranteed -enefit of more t'an )0? of -asic ,ay1 &'e e<-gratia ,ayment of +s155000 referred in t'e note of t'e 9inistry is in lieu of t'e un,aid .ages of t'e .or/ers on an average amounting to +s1155000 ,er .or/er and 'ence not gratis from t'e management1 &'e e<,erience .it' 9odern Foods5 I&D Aotels5 9aruti5 #!:C are more or less same1 &'e Aindustan Cever Ctd 2ACC) management 'as declared t'at t'e ac(uired 9odern Food em,loyee s'all continue to get less
34

,ay t'an t'e ACC em,loyees1 6n E<ecutive of t'e com,any 'as -een (uoted5 F.e .ill not ,ay a 9odern Foods em,loyee t'e same salary1 If5 'o.ever5 .e recruit a ne. em,loyee and ,ost 'im at 9odern Foods5 'e .ill get t'e same com,ensation as 'is Aindustan Cever counter,arts5F 6s is generally t'e case in t'e ,rivate sector5 ram,ant violation of la-our la.s and -latant refusal to trade rig'ts is seriously confronted -y t'e .or/ers in t'e ,ost ,rivatisation era1

'onclusion
Disinvestment ,lays an im,ortant role in revenue generation1 =ood disinvestment recei,ts can 'el, t'e government reduce fiscal deficit not only -y .ay of e(uity sale in P!$s -ut also for t'e su-se(uent ca, in government transfers to -leeding P!$s1 3ut 'as t'e government -een successful in t'is conte<t1 &rends in t'e ,ast fe. years 'ave dis,layed .ide and a-ysmal differences in disinvestment targets and actual recei,ts1 Vear 1***-2000 2000-2001 2001-2002 &argeted +ecei,ts 105000 105000 125000 6ctual +ecei,ts 1)2* 1)%0 5"32

Political 'urdles in disinvestment5 intervention of sta/e'olders and interest grou,s as .ell as ,oor state of P!$s 'ave all contri-uted to t'is ,erformance1 Efficient 9ar/et !tructure is also one of t'e im,ortant goals in t'e disinvestmentG,rivatisation ,rocess1 &'e government .ould see/ to esta-lis' a com,etitive mar/et .'ic' .ould result in driving do.n consumer ,rices 2telecom sector ,rivatisation in India) or it .ould try to ma<imi7e revenue -y divesting in a ,seudo mono,oly environment and using regulation to control rent see/ing -e'aviour 2+eliance ac(uisition of IP C)
35

-ut it cannot try to ma<imi7e -ot' revenue and mar/et structure1 &'e follo.ing case .ill e<,lain t'e contradiction in t'e t.o o-;ectives1 !olutions are not sim,le5 es,ecially .'ere sta/e'olders are many and come from all sections of t'e society8 .or/ers5 em,loyees5 management5 e(uity 'olders and consumers1 Furt'er t'is essay loo/s only at a single varia-le i1e1 mar/et structure and its relations'i, .it' disinvestment recei,ts1 !everal ot'er varia-les ,lay more im,ortant roles in t'e sc'eme of disinvestment1 &'e government s'ould study international -est ,ractices5 customi7e t'em to t'e Indian landsca,e and arrive at t'e rig't direction of t'e li-erali7ation ,rocess1

3"