TERM PAPER OF RESEARCH METHODOLOGY

TOPIC:-Impact on stock market by Governments PSU Disinvestment Plan. Conduct a secondary study and identify the various ways in which the disinvestment plans have had an impact on the stock markets.

Submitted by Bharti ROLL NO: 10 BATCH: 2007-2012 SECTION: E17B1

Submitted to

Mr. Ashwani Panesar

ACKNOWLEDGEMENT

The enthusiasm and remarkable co-operation shown by everyone, even remotely concerned with the preparation of this term paper all, we wish to extend our faithful thanks and acknowledgement to complete this to the H.O.D. Sir for providing us a very efficient staff, a good facility to complete our term paper, because our self are not so intelligent to complete this term paper. I express my deep gratitude to Respected Mr. Ashwani Panesar for his valuable inspiration and guidance given to us wherever we felt need at the height. He gave me, his appreciable ideas and views wherever we felt help. His experience helps us very much to make our term paper successful. Last but not the least, we pay our thanks to my colleague whose provide a necessary help in this term paper.

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ABSTRACT

In this Term Paper we will study the Government Public Sector Undertaking Disinvestment plan, reasons for disinvestment, problems of public sector undertaking, objectives of disinvestment, disinvestment plan in india and lastly the conclusion of this study. Here we are doing the secondary study on the topic Impact on stock market by Governments PSU Disinvestment Plan.

DISINVESTMENT OF PUBLIC SECTOR UNDERTAKING INTRODUTION Investment and disinvestment are two sides of the same coin. When we deal with the investment management, it automatically encompasses, disinvestment also, as what is investment for one is disinvestment for another, particularly in the secondary market. It investment is an art and science, the more so is the disinvestment process. Investment refers to conversion of money or cash into securities, debentures, bonds or any other claims on money. At the same time, disinvestment involves the conversion of money claims or securities into money or cash. DISINVESTMENT OF PSU Disinvestment is a wider term extending from dilution of the stake of the government to a level where there is no change in the control to dilution that results in the transfer of management. The transfer of ownership may occur when in an enterprise the dilution of government ownership is beyond 51 percent. The disinvestment implies that the government will sell to public or private enterprises / public institutes part of its holding in public sector enterprises. REASON BEHIND THE DISINVESTMENT The public sector in India at present is at cross roads. The new economic policy initiated in July 1991, clearly indicated that the public sector undertakings have shown a very negative rate of return on capital employed. On account of this phenomenon many public sector undertakings have become burden to the government. They are infact turning out to be liabilities to the government rather than being assets. This is a sector which the government clearly wants to get rid off. In this direction the government has adopted a new approach to reform and improve the public sector undertakings performance i.e 'Disinvestment policy'. This has gained lot of importance especially in latter part of 90s. At present the government seriously perceives the disinvestment policy as an active tool to reduce the burden to financing the public sector

undertakings. PROBLEMS OF PSU The most important criticism levied against public sector undertakings has been that in relation to the capital employed, the level of profits has been too low. Even the government has crticised the public sector undertakings on this count. Of the various factors responsible for low profits in the public sector undertakings, the following are particularly important :1. Price policy of public sector undertakings 2. Under utilization of capacity 3. Problem related to planning and construction of projects 4. Problems of labour, personnel and management 5. Lack of autonomy

The government in order to put an end to these problems, decided to disinvest its stake in the PSUs. The companies traditionally established as pillars of growth have now become a burden on the economy. Except few mighty oil and petroleum companies, almost all other PSUs are incurring losses. The national gross domestic product and gross national savings are also adversely effected by low returns from PSUs. About 10 to 15 % of the total gross domestic savings are reduced on account of low savings from PSUs. OBJECTIVES OF DISINVESTMENT
1. The following are the main objectives of disinvestment policy of the government. 2. To reduce the financial burden on government. 3. To improve public finances. 4. To introduce, competition and market discipline. 5. To find growth. 6. To encourage wider share of ownership. 7. To depoliticise essential services.

DISINVESTMENT PROCESS IN INDIA The following are the three methods adopted by the Government of India for disinvesting the Public sector undertakings. There are three broad methods involved, which are used in valuation of shares.

1. Net Asset Method: This will indicate the net assets of the enterprise as shown in the books of accounts. It shows the historical value of the assets. It is the cost price less depreciation provided so far on assets. It does not reflect the true position of profitability of the firm as it overlooks the value of intangibles such as goodwill, brands, distribution network and customer relationships which are important to determine the intrinsic value of the enterprise. This model is more suitable in case of liquidation than in case of disinvestment. 2. Profit Earning Capacity Value Method: The profit earning capacity is generally based on the profits actually earned or anticipated. It values a company on the basis of the underlying assets. This method does not consider or project the future cash flow. 3. Discounted Cash Flow Method: In this method the future incremental cash flows are forecasted and discounted into present value by applying cost of capital rate. The method indicates the intrinsic value of the firm and this method is considered as superior than other methods as it projects future cash flows and the 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, risk factors to which enterprises are exposed as well as value of its core assets. Out of these three methods the Discounted cash flow method is used widely though it is the most difficult. OBJECTIVE :- Government Public Sector Undertaking has a positive impact on the stock market. LITERATURE REVIEW
1. IMPACT OF CORPORATE GOVERNMENCE ON STOCK MARKET

PERFORMANCE Farah Rezwan, Reyan Zeenat Hai, Nogmaye Habiba The paper aims to establish a relationship between Corporate Governance and stock market performance. In doing so, several variables had been identified by a thorough review of literature. These variables were measured on the basis of their performance, in respect to developed and developing countries, in relation to Corporate Governance. The performance

measures were done by using data and graphical representations. The analysis recognized a significant relationship between corporate governance and stock market performance. Keywords:- Market Efficiency, Market Valuation
2. PSU STOCKS REACT POSITIVELY TO DISINVESTMENT PLAN

Shares of PSUs with more than 90 per cent Government stake gained between 10 and 20 per cent in Friday after the Cabinet decided to raise public shareholdings in the companies to at least 10 per cent. The Cabinet Committee on Economic Affairs on Thursday approved a mandatory minimum 10 per cent public ownership in all listed and profit making PSUs. The committee also approved listing of all the unlisted but profitable PSUs. This is a very positive move as it will bring more accountability and more transparency to the Government companies, said Mr Gopal Agrawal, Head of Equity, Mirae Asset AMC. All the PSU stocks registered gains after the stock market opened on Friday, but the gains were the most in those listed PSU with less than 10 per cent public shareholding. The stock of MMTC (Rs 10 face value) gained 20 per cent to close at Rs 36,146.85 on the BSE. Public holding in MMTC is less than one per cent, with the Government holding a 99.33 per cent stake. PSUs with more than 90 per cent Government holding that gained heavily on Friday were HMT (Government stake 98.88 per cent), Hindustan Copper (99.59), NMDC (98.38), State Trading Corporation of India (91.02), Rashtriya Chemicals and Fertilizers (92.50), and Engineers India Ltd (90.40). The BSE PSU index closed with a gain of 3.91 per cent on Friday while the Sensex rose only 0.59 per cent. But timing of the issues by the public sector companies would be vital to their success, said market experts. National Hydroelectric Power Corporations Rs 6,000-crore IPO had a subdued listing and its shares are trading below the issue price of Rs 36. However the stock bounced back on Friday and closed with a gain of 6 per cent on the BSE at Rs 32.65. They (IPOs) should be made at a time when the retail investor sentiment is good or else they might not be received well, Mr Hitesh Arawal, Head of Research at Angel Broking Ltd, said. Also if investor sentiment is not positive, then instead of fresh money coming into the system, retail investors might pull out from the secondary market to invest in the primary market. In that case the secondary market will be impacted and the IPOs might not fetch good valuations, Mr Agrawal said. The unlisted and profit-making PSUs that are strong candidates for listing include Nuclear Power Corporation, Coal India, BSNL, Rashtriya Ispat Nigam, North Eastern Electric Corporation, Satluj Jal Vidyut Nigam, said

market-men. The pricing of the IPOs of these companies should be reasonable for substantial retail investor interest, said Mr Agrawal.
3. PSU DISINVESTMENT MAY NOT REVIVE MARKET

The government decision to divest its stake in nine public sector undertakings (PSUs) to mop up Rs 10,000 crore in 1999-2000 is unlikely to revive domestic primary market, leading stock brokers and experts said today. "Disinvestment by government in public sector companies will not have impact on the primary market as these issues are not a regular feature and are completely different from issues offered by companies in the primary markets," Dutt Stock Broking, chief executive Ashu Dutt said. "Disinvestment is not the solution for reviving the primary market as investors might not come back to the market after subscribing to the shares of public sector companies," former SEBI member and director, Society for Capital Market Research and Development, LC Gupta said. The cabinet committee on disinvestment had cleared yesterday a disinvestment programme involving privatisation of India Tourism Development Corporation and part sale of government equity in Mahanagar Telephone NigamLtd , Indian Oil Corporation , Gas Authority of India Ltd and Videsh Sanchar Nigam Ltd . Other companies listed for disinvestment in 1999-2000 include Hindustan Zinc, Hindustan Latex, Madras Fertiliser and Central Electronics Ltd. Dutt said most of these PSUs were already listed on the stock markets and it would be difficult to offer these shares at a massive discount.Gupta said investors still have faith in PSUs and subscribe to their issues but whether they will have similar faith in private sector companies is doubtful.However, Prime Database managing director Prithvi Haldea said issues of these PSUs would get a good response from the investors - specially smaller ones -which could revive the markets.
4. DISINVESTMENT OF PSU: CAN IT BRING EFFICIENCY?

Debabrata Mitra It is apparently quite evident that the initiation of disinvestment mea- sures on countrys multi-modal logistics service provider, the Container Corporation of India has become very successful. The overall level of performance of Concor improved considerably which provides green signal to the government to go for second round of disinvestment. But before initiating another round of disinvestment the government should deeply consider the

recommendations of Rangarajan Committee on Privatisation. Disinvestments can lead to increase the efficiency through better utilisation of resources but reckless privatisation may not provide the ultimate solution for longer period of time. Efficiency may also be achieved by changing the quality of management and not only by changing the ownership. 5. PARTIAL PRIVATIZATION, CORPORATE GOVERNANCE AND THE ROLE OF STATE OWNED HOLDING COMPANIES Journal of the Asia Pacific Economy,Volume 13, Issue 1, 2008, Pages 63 88,Author: Choon-Yin Sam,DOI: 10.1080/13547860701731895 The success of privatized firms has been of interest to researchers in economics. In this study, we examine the role of a state-owned holding company (SOH), serving as a monitoring arm of the government to track the performance of the government-linked companies (GLCs). In the case where state assets are partially privatized, the holding company serves as a useful institution to mitigate the agency problem involving the government as the principal and the GLCs as agents. To play this role effectively, the holding company itself must be respected and well governed. In the first part of this paper, a simple framework is presented to put in context the specific role of the SOH and its relationship with the various stakeholders. Next, we turn to a case study, the Temasek Holdings Limited of Singapore, to gain a better understanding of the style of corporate governance of a holding company. Keywords:- corporate governance; privatization; Singapore; state-owned holding company
6. PSU DISINVESTMENT: INDIAS MISSION POSSIBLE!

Amit Singh Sisodiya and Ramana Pemmaraju On November 4, 2010, Coal India Limited (CIL) made a spectacular debut on bourses, giving a listing gain of a decent 40%. An outstanding show indeed, given the bouts of recent corrections in the market in the second half of 2010 which have taken the zing out of many an IPOs/FPOs this year. The phenomenal rise of the shares of CIL on the day of listing, nevertheless, provides further impetus to the government's much ambitious divestment

program in recent years. Through CIL's mega IPO, the largest ever so far, the central government raised Rs 15,000 cr. So far, since 2009, the central government has gone for IPOs/FPOs of close to a dozen PSUs, which include firms such as SJVN, NTPC, NHPC, NMDC, REC, United India, Engineers India, CIL, SCI, MOIL, and Punjab & Sind Bank, while FPOs of IOC, SAIL and ONGC are expected to hit the market during the last quarter of fiscal 2010-11. Given, the government plans to mop up Rs 40,000 cr during the current fiscal 2010-11 seems to be on track. One of the foremost objectives behind taking these unlisted firms public is broad-basing the investor base, particularly retail investors, whose participation remains very low even today. According to the Swarup Committee report, India had only 8 million retail investors who participated in the stock market in 2009. In contrast, in countries like South Korea and Taiwan, domestic individual investors contribute up to 70% of the daily trading volumes. Keywords:- The Analyst Magazine, PSU Disinvestment, India Mission Possible, Coal India Limited, Divestment Program, Government Plans, Domestic Individual Investors, Buoyant Stock Market, Disinvestment Pipeline, Public Sector Enterprises, Employee Stock Options, Private Sector Counterparts, Indian Oil Corporation. SENSEX REBOUND ON DISINVESTMENT PLANS Mohammed Sabir Government's plan to disinvest stake in profit-making public sector units had a positive impact on the bourses on Thursday. Intense buying activity in the last hour of trade saw indices ended a volatile session above psychological support levels. Home Minister P. Chidambaram after a meeting of the Cabinet Committee on Economic Affairs said, "all profitable central public sector undertakings should meet the mandatory listing of 10 percent public ownership."This gave bulls an upper hand as indices soared despite weak global markets. "Talk about the Government of India's directive to dilute stakes in PSUs and list other PSUs coupled with plans to continue the sops kept the buzz alive with major volatility witnessed through the day. While the GoI continues to talk about diluting their stake in PSUs (including the Navratnas), talk about the same being done at an opportune time when its fetches them the best price, could leave very little upside for investors as seen in case ofNHPC," said Vinay Pandit, vice president & head of research, IFIN (IFCI Financial

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Services). Bombay Stock Exchange's Sensex recovered 500 points from day's low to close at 16,063.90, up 151.77 points or 0.95 per cent from Wednesday. The 30-share index touched a high of 16092.38 towards close.National Stock Exchange's Nifty ended at 4765.55, up 54.75 points or 1.16 per cent. The index bounced back from intra-day low of 4610.60 to touch a high of 4733."This upmove could last for a few sessions with maximum target of around 4900 (+/- 50 points). There could be corrections even while reaching the target. However, as we said earlier after the short term upmove we may see a deeper correction taking Nifty all the way back to 4400 levels or even below," said IFCI Financial Services technical report.The BSE Midcap Index was up 2.02 per cent and BSE Smallcap Index moved 1.82 per cent higher. Amongst the sectoral indices, BSE Metal Index gained 2.93 per cent, BSE Realty Index moved 2.58 per cent higher and BSE Power Index advanced 2.56 per cent. 7. DISINVESTMENT IN PUBLIC SECTOR ENTERPRISE V. Gangadhar ,Dr. M. Yadagiri The new economic policy and economic reforms in India have given rise to significant focus for disinvestments or privatization of Public Enterprises. The basic objective of this process is to mitigate the budget deficit of the government on the one side and reduction of the burden of financing public enterprises through budgetary support on the other. The Government of India has taken several measures for disinvestment and had setup an administrative machinery to implement its disinvestments programme. This disinvestment process involves valuation of assets, selecting appropriate modalities, inviting bids and deciding appropriately based on the bids. The disinvestment in practice of the Central Government is not encouraging. The amount of proceeds realized is only 40.9% of the target of the disinvestments for the decade of 1991-2001. The performance of the disinvestments policy in relation to budget deficit and capital receipts is also not much significant. If government decides to dispose off 23 selected listed public sector enterprises for a 10% and 20% of equity can realize Rs.8,060.04 crores and 16,120.08 crores respectively. The overall performance of the Government with regard to disinvestment is not much appreciable. ANALYSIS After the Governments PSU Disinvestment plan the buyers of stock market are getting more benefit . Government's plan to disinvest stake in profit-making public sector units had a

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positive impact on the bourses. The crucial shift in the Government policy for disinvestment of PSU's was mainly attributable to poor perfonnance of these enterprises and burden of financing their requirements through budget allocations. In 1991 there were 236 operating public sector undertakings, of which only123 was profit making. The top 20 profit making PSU's accounted for 80% of the profits, implying that less than 10% of the PSU's were responsible for 80% of profits. The return on public sector investment for the year 1990-91 was a just over 2%. The basic charges against the public sector for its poor performance are as follows: (i) Low rate of ROI (ii) Declining contribution to national savings (iii) Poor capacity utilization (iv) Over staffing, bureaucratization leading to excessive delays and wastage of scarce resources. CONCLUSION The study on Disinvestment of public sector undertakings have revealed the following conclusions:
1. There is no clear-cut framework or policy for disinvestment in India. 2. The study of disinvestment for a period of 1991-92 to 2001-02 has revealed that a

very meager amount of disinvestment proceeds has been realized as against the target.
3. The entire proceeds of disinvestment are been used to mitigate the gap fiscal deficit

instead of using them for development of social sector & building infrastructure.
4. The government has not been concentrating on the timing of disinvestment as a result

most of the private sector investors are shying away form the process because of the unattractive offers made by the government.
5. There is no transparency in the entire process of disinvestment in India. 6. The government has done a little or more so failed to attract foreign suitors for the

disinvestment process in India. The study on disinvestment of Central PSU's, the procedures and proceeds realised have revealed the following conclusions:

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i) The Government has set up various procedures, Committees, Commissions and a Cabinet Rank Ministry for overseeing the disinvestment in Central Government PSU's in India, as per the policy program of disinvestment as stated in the New Economic Policy . ii) The study of disinvestment for a period of a decade from 1991-92 to 2000-2001 has revealed a very meager realisation of disinvestment proceeds as against a hefty target. iii) The primary objective of disinvestment is to mitigate the budget deficit was also not materialised, because the proceeds of disinvestments were widely fluctuated and not met target. In 3 out 10 years of the study, the disinvestment proceeds were above the target, but in the rest of the years it was far lower than the target. iv) The average proceeds of disinvestments as a percentage of deficits for the decade were nearly at 3.61 per cent and these were at 3.4 per cent of the total capital receipts. v) If Government disposes 10 per cent and 20 per cent of equity of 23 select listed PSU's, it can realise Rs.8,060.04 and Rs.16, 120.08 crores as per the prices on 13 th November, 2001. The agenda for the 30 PSU's is finalised and the action of the Government is also indicated for future disinvestment. SUGGESTIONS a) The government has to form a policy framework for the entire disinvestment process. b) The government should de-link the disinvestment process from the budgetary exercise. c) Government should stop setting up of the targets in every year annual budget and should have a long-term plan. d) A separate fund should be created for disinvestment and it should be kept under the control of president and the fund should be utilized for building infrastructure and developing the social sector. e) Timing of disinvestment is crucial and the government should follow a specific method or process in order to reap more chunks. f) The entire exercise of disinvestment should be audited by not less than two reputed auditing firms in order to have a fair and transparent picture of the entire process. g) Finally, the government should have an 'Yearly Action Plan' which should spell out the activities carried out in that particular year and at the end of the year an 'Action Taken Report' has to be submitted.

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17) Government of India, Economic Survey 2000-2001. 18) Roy. S. Dhankar: "PSU'S Dilemma What should we do now?", The Journal of I.P .E., Volume 17 ( (3 & 4) 19) Dr. A. G. Prasad: "Disinvestment Policy The APIDC A Trend Setter", Indian Journal of Commerce, Volume No.191, Part-II, June 1997. 20) C.Rangarajan: "Disinvestment Strategies and Issues" I.P.E., Journal, Volume 16 (1 & 2), 1993. 21) C.Rangarajan: "Disinvestment Strategiesand Issues", R.B.I. Bulletin, February 1997.

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