1. DISINVESTMENTS A PRIMER Presentation to Sr.PCS Officers U.P Academy of Administration & Management Prithvi Haldea PRIME Database 21 July 2010

2. Definition of Disinvestment Investment refers to the conversion of money or cash into securities. In reverse, disinvestment involves the conversion of securities into cash. It is also referred to as ‘divestment’ or ‘divestiture.’ In most contexts, disinvestment typically refers to sale by the government, partly or fully, of a government-owned enterprise.

3. Disinvestment v/s Privatisation These are often used interchangeably. There is, however, a vital difference between the two. Disinvestment may or may not result in Privatisation. When the government retains 26% shares, it would have disinvested, but would not have ‘privatised’, because with 26%, it can still stall all special resolutions for which three-fourths majority is required.

4. PSUs-The Background In 1947, when India became independent, there were various socio-economic problems which needed to be dealt with in a planned and systematic manner. India was primarily an agrarian economy with a weak industrial base, low level of savings, inadequate investments and lack of infrastructure facilities. There existed considerable inequalities in income and levels of employment, glaring regional imbalances in economic development and lack of trained manpower.

5. As such, the State’s intervention in all the sectors of the economy was desirable and inevitable since private sector neither had the resources, managerial and scientific skill, nor the will to undertake the risks associated with large, long- gestation investments. It became a pragmatic compulsion to use the public sector as an instrument for self-reliant economic growth. A large number of enterprises were also created out of "sick units" taken over from the private sector, inter alia, to protect the interests of the workers.

6. Disinvestment Policy- Background The new economic policy initiated in July 1991 clearly indicated that PSUs had shown a very negative rate of return on capital employed. Inefficient PSUs had become and were continuing to be a drag on the government’s resources turning to be more of liabilities to the government than being assets. Hence, the need for the government to get rid of these units and to concentrate on core activities was identified.

7. The government also took a view that it should move out of non-core businesses, especially the ones where the private sector had now entered in a significant way. Finally, disinvestment was also seen by the government to raise funds for meeting general/specific needs.

8. Benefits of Disinvestment For the Government Raising valuable resources for the government which could be used to bridge the fiscal deficit and also for various developmental projects. The government can focus more on core activities such as infrastructure, defense, education, healthcare, and law and order. For the PSUs Greater autonomy leading to higher efficiencies For the Markets and Economy Brings greater efficiencies for the economy and markets as a whole

9. For the Taxpayers Letting go of these assets is best in the long term interest of the tax payers Unlocking of shareholder (in this case the citizens of India) value For the Employees Greater opportunities and avenues for career growth Monetary gains through ESOPs and preferential issue of shares Pay rises, as has been seen in past divestments

10. Different Approaches to Disinvestments Complete Privatisation Complete privatisation is when 100% control of a company is passed on to a buyer. Most recently, this was done in 2003-04 (eg.18 hotel properties of ITDC and 3 hotel properties of HCI). Such sales have invited a lot of criticism as these are marred with allegations of favouritism.

11. Majority Disinvestment Government retains a minority stake in the company Historically, majority disinvestments have been typically made to strategic partners. These partners could be other CPSEs themselves (BRPL to IOC, MRL to IOC, KRL to BPCL). These can also be private entities (Modern Foods to Hindustan Lever, BALCO to Sterlite, CMC to TCS etc.). Such sales have also invited a lot of criticism for the same reason as that for Privatisation.

12. Minority Disinvestment The government retains a majority stake in the company. Examples of minority sales via auctioning to institutions go back into the early 90s (Andrew Yule & Co., CMC etc.) The present government’s policy is that all disinvestments would only be minority disinvestments via Public Offers. Several minority sales done via Public Offers (Power Grid, REC, NTPC, NHPC etc.)

13. Types of CPSE Disinvestments 1.Strategic Sale to Private Entity Transactions involving sale of shares held by the government in CPSEs, including subsidiaries of CPSEs, along with transfer of management control, to a strategic private partner identified through a process of competitive bidding and subsequent sales to the partner through call/put options

14. 2. Public Offer Transactions Involving sale of shares held by the government in CPSEs through a Public Offer

15. 3. CPSE to CPSE Sale Transactions involving sale of shares held by the Government in one CPSE to another CPSE

16. 4. Auction to Financial Investors Transactions involving sale of shares held by the government in CPSEs through an auction to defined financial investors/investor groups like public sector financial institutions

17. 5. Auction to Private Entities Transactions involving sale of shares held by the Government in CPSEs through an auction to private entities

18. 6. Sale To Employees Transactions involving sale of shares held by the government to employees of the respective CPSEs

19. Disinvestments- A Historical Perspective 1991-92 to 2000-01 The change process in India began in the year 1991-92, with 31 selected PSUs disinvested for Rs.3,038 crore. However, against an aggregate target of Rs 54,300 crore to be raised from PSU disinvestment from 1991-92 to 2000-01, the Government managed to raise just Rs 20,079 crore in a 10-year period.

20. The reasons for such low proceeds from disinvestment against the target were: - Unfavorable market conditions -Offers were not attractive for private sector investors -Lot of opposition on the valuation process -No clear-cut policy on disinvestment -Strong opposition from employee and trade unions -Lack of transparency in the process -Lack of political will

21. 2001-02 to 2003-04 This was the period when maximum number of disinvestments took place. These took the shape of either strategic sales (involving transfer of control and management to a private entity) or a public offer, with the government still retaining control of the management.

22. An amount of Rs. 5,921 crore was realized through strategic sale. Some of the companies which witnessed a strategic sale included: Bharat Aluminium Co.Ltd. CMC Ltd. Hindustan Zinc Ltd. Hotel Corp. of India Ltd. HTL Ltd. IBP Co.Ltd. India Tourism Development Corp.Ltd. Indian Petrochemicals Corp.Ltd. Marti Suzuki India Ltd. Modern Food Industries (India) Ltd.

23. In addition, public offers led to divestment proceeds of Rs. 15,128 crore. The total disinvestments proceeds in this 3-year period were Rs. 21,163 crore.

24. 2004-05 to 2008-09 The issue of PSU disinvestment remained a contentious one through this period, courtesy the Left. As a result, the disinvestment agenda stagnated. In this 5 year period, total receipts from disinvestments were only Rs. 8,516 crore and all through public offers.

25. 2009-10 onwards till date A stable (minus Left) government has led to a renewed thrust on disinvestments. The President of India’s address on 4th June 2009 stated: “Our people have every right to own part of the shares of public sector companies while the government retains majority shareholding and control. My government will develop a roadmap for listing and people-ownership of public sector undertakings while ensuring that government equity does not fall below 51%.”

26. The subsequent Union Budgets have also taken disinvestment on the agenda of the government. The government has also announced its intentions of raising the minimum public shareholding in listed companies to 25%. This, besides bringing more quality paper in the market, shall also lead to huge disinvestment. At current prices, this could mean Rs. 1,20,000 crore.

27. The government has started the process by selling minority stakes in listed and unlisted (profit- making) PSUs through public offers. There has also been 1 CPSE to CPSE sale. Till date (in just one and a quarter year), Rs. 24,615 crore has already been raised through disinvestments.

28. Total Disinvestments Proceeds till date Period No.Yrs. Amount (Rs.crore) 1991-92 to 2000-01 10 20079 2001-02 to 2003-04 3 21163 2004-05 to 2008-09 5 8516 2009-10 to present 1.25 24615 Total 19.25 74374

29. Summary of CPSE Disinvestments

30. Annual CPSE Disinvestment Target vs. Achievement

31. Disinvestments- The Road Ahead Given the current political and social compulsions, complete privatisation or majority sale have been discarded. Offloading a part of the government’s equity by way of a minority stake sale is the only workable option. Offloading minority stakes to private players would not make sense as valuations will be poor (since the government shall still retain control)

32. Hence, best route is minority stake sale via a Public Offer which has several benefits.

33. For the Government Benefit of capital appreciation, courtesy market valuation of the enterprise For the PSU Listing leads to better and timely disclosures, bringing in greater transparency and professionalism Greater efficiency by way of being accountable to outside shareholders and media/analysts

34. Listing provides an easier opportunity to raise capital from the market to fund new projects/undertake expansions/diversifications and for acquisitions. Listing raises a company's public profile with customers, suppliers, financial institutions and the media. A listed company is typically covered in analyst reports and may also be included in one or more of indices of the stock exchanges. Wide investor base also helps prevent market manipulations.

35. For the Markets and Economy PSU IPOs present the best opportunity of widening the retail investor base. (In UK, the shareholding population increased from 4% to 25%.) For the Employees Though there could be opposition from employees of some PSUs, this can be countered and also turned into a favourable situation by offering ESOPs/preferential issue of shares to them. This would provide tangible monetary benefits to them, and also make them an interested party in better performance of their companies.

36. CPSE Public Offerings First disinvestment by way of public offer took place in 1995-96. Since then, Rs. 45,105 crore has been raised through PSU disinvestments from the capital market.

37. Did you know? PSUs constitute 31% of the total market capitalisation of companies listed at BSE The PSU with the highest market capitalisation is ONGC at Rs. 2,82,417 crore (as on 30 June 2010) VSNL was the first PSU to be divested by way of a Public Offer in 1999-00 ONGC Public Offer (FPO) in 2004 was the largest ever by a PSU, raising Rs. 10,542 crore

38. NHPC Public Offer in 2009-10 has been the largest PSU IPO raising Rs. 6,039 crore Power Finance Corp.’s IPO in 2006-07 was the largest oversubscribed IPO, oversubscribed by 76.76 times Power Trading Corp.’s IPO in 2003-04 received the best-ever response from retail, with the retail portion getting oversubscribed by over 40 times

39. The maximum amount raised by PSUs from the capital market in any year was Rs. 31,082 crore in 2009-10. The maximum amount raised through disinvestments from capital market in any year was Rs. 21,306 crore also in 2009-10 The maximum number of applications received in an IPO/FPO since 2003-04 was in NTPC (14.40 lakhs) followed by NHPC (13.14 lakhs)

40. SLPE Disinvestments There has been only one SLPE disinvestment through public offers.

41. Disinvestments by SLPEs

42. Fresh Capital Raising by CPSEs In addition to disinvestments, CPSEs have also been raising fresh capital-either on a standalone basis or in conjunction with the disinvestment offer. Rs. 37,505 crore of fresh capital has been raised by various PSUs till date.

43. Year-wise Amounts raised in PSU Public Offers

44. Fresh Capital Raising by SLPEs SLPEs have also been raising fresh capital through public offers.

45. Public Offers by SLPEs

46. Some Arguments against Disinvestment The Government will forego dividends on the equity holdings by selling off its stakes. (CPSEs contributed Rs. 19,423 crore to the Central exchequer in 2007- 08 as dividends). Apart from generating a one-time sale amount, a lot of these part stake sales have also resulted in huge capital gains.

47. Only 0.5% of Indian households invest in equities. Thus, in case the public offer route is followed, it would imply transferring the common ownership of the PSUs by all Indians into the private ownership of 0.5% of Indians. While the current equity penetration remains low, it is precisely these PSU IPOs that present the best opportunity of widening the retail base.

48. Using funds made available from disinvestment to bridge the fiscal deficit is an unhealthy and a short term practice (selling ‘family silver’ to meet short term monetary requirements). Letting go of these assets is best in the long term interest of the tax payers as the current yield on these investments in abysmally low.

49. Profit making PSUs should not be disinvested as they are performing well in any which way. A good example against this criticism is BALCO which was a profit making company that earned the government an average dividend (over 8 years) of Rs. 5.69 crore every year on the equity sold. The government post- disinvestment, however, started getting Rs.82.65 crore every year. Similarly, Maruti gave average returns to the tune of Rs. 13 crore annually to the government and IPCL gave Rs. 16.24 crore on equity sold against Rs.242 crore and 149 crore respectively post- disinvestment.

50. Employees of PSUs would lose jobs These fears have been found to be imaginary.

51. Public Offer being the chosen approach for Disinvestments does not yield the best realisation and is a far too time consuming process. Auctioning to financial institutions (QIBs) should be the preferred modus operandi. The government should look at the greater good and sell these stakes by public offers to increase retail participation in the capital markets as well as to increase the depth and width of the capital markets. In any case, the loss is minimal as very small stakes are being sold.

52. The real gains for the government lie in the appreciation post-listing. Let us look at the PSU IPOs since 2004. The value of the government holding, courtesy the market, has gone up nearly 3 times from Rs. 80791 crore on the issue date to Rs.2,37,366 crore.

53. International Models of Disinvestment UK The Margaret Thatcher government, spread over 11 years, went on an aggressive disinvestment spree in the 1980s in the UK, borne out of the conviction that the government had no business to be in business. It let loose most of its stake at one go. British Telecom, British Airways, British Power, British Petroleum, British Gas, British Rail and Regional Water Boards are just a few examples.

54. During its first wave of large-scale privatisation, UK witnessed about 670 PSUs worth US$ 5.3 billion being privatised with the water companies fetching over US$10 billion, British Gas about US$13 billion, and British Petroleum over US$12 billion. Public offers were one of the frequently used techniques in the UK to transfer state assets and businesses to private ownership. The method was fairly successful, having increased the shareholding population from 4% to 25%. For example, British Telecom alone created 2.1 million shareholders in the UK, when privatised.

55. Eastern Europe With the UK having taken the lead, the former citadels of Socialism soon embraced the new mantra, breaking up state monopolies and selling them to private parties choosing to let market forces determine their future course.

56. Other Countries Germany privatised 13,500 companies by selling off its stake in a span of two years. Other countries like Taiwan, Hungary, Thailand, Philippines, Korea, Turkey, Poland, West Asia. Zambia, Vietnam and even China similarly marched ahead with the disinvestment program.

57. The future is bright… The potential is huge. PSUs are among the largest and most profitable organisations in India. Of the total of 247 CPSEs and their subsidiaries, only 47 are listed. With Public Offers having been defined as the preferred mode of Disinvestment, a large number of PSU IPOs/ FPOs can be expected in the future.

58. Imminent PSU IPOs/FPOs

59. Other PSU IPOs/FPOs

63. However… We are far removed from the objective: “Our people have every right to own part of the shares of public sector companies while the government retains majority shareholding and control. My government will develop a roadmap for listing and people-ownership of public sector undertakings while ensuring that government equity does not fall below 51%.”

64. Losses now even on PSUs !

65. Declining Retail Participation PSUs-IPOs & FPOs

66. Need a policy review investors Policy needs to be reviewed in terms of Reservations for retail Pricing for retail Distribution methods Coal India can get 1 crore investors

67. Thank you… prithvi@primedatabase.com